Document:

Exhibit 4.1

 

Execution Copy

 

SECURITIES
PURCHASE AGREEMENT

 

SECURITIES PURCHASE
AGREEMENT (this “Agreement”), dated as of May 26, 2006,
is by and between Earth Biofuels, Inc., a Delaware corporation (the “Company”), and each
purchaser listed on Exhibit A
attached hereto (individually, a “Purchaser” and, collectively, the “Purchasers”).

 

A.                                   Each Purchaser
wishes to purchase and the Company wishes to sell, upon the terms and subject
to the conditions stated in this Agreement, (i) an 8% Senior Note in the form attached
hereto as Exhibit B
(a “Note”
and, collectively, the “Notes”)
and (ii) a warrant in the form of Exhibit C hereto. The Notes will be
convertible under certain conditions into shares of the Company’s common stock,
par value $0.001 per share (the “Common Stock”). The Warrant issued to a
Purchaser will entitle the holder thereof to purchase a number of shares of
Common Stock equal to the 150% of the original principal amount of the Note
purchased by such Purchaser divided by ten dollars ($10.00).

 

B.                                     The shares of
Common Stock into which the Notes are convertible are referred to herein as the
“Conversion Shares”
and the shares of Common Stock into which the Warrants are exercisable are
referred to herein as the “Warrant
Shares”. The Notes, the Conversion Shares, the Warrants and the
Warrant Shares are collectively referred to herein as the “Securities”.

 

C.                                     The Company has
agreed to effect the registration of the Conversion Shares and the Warrant
Shares under the Securities Act of 1933, as amended (the “Securities Act”),
pursuant to a Registration Rights Agreement in the form attached hereto as
Exhibit D
(the “Registration
Rights Agreement”).

 

D.                                    The sale of the
Notes, the Warrants and the Warrant Shares to the Purchasers will be effected
in reliance upon the exemption from securities registration afforded by Section 4(2) of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 506
of Regulation D (“Regulation
D”) as promulgated by the Securities and Exchange Commission
(the “Commission”)
hereunder.

 

In consideration of the mutual promises made
herein and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the Company and each Purchaser hereby agree
as follows:

 

1.                                       PURCHASE
AND SALE OF NOTES AND WARRANTS; DEFINITIONS.

 

1.1                                 Purchase
of Notes and Warrants. Upon the terms and subject to the satisfaction or
waiver of the conditions set forth herein, the Company agrees to sell and each
Purchaser agrees to purchase (i) a Note with a principal amount equal to
the amount set forth opposite such Purchaser’s name on Exhibit A hereto
and (ii) a Warrant. The purchase price for the Note and Warrant being
purchased by a Purchaser (the “Purchase Price”) shall be equal to the principal amount
of such Note. The date on which the closing of the purchase and sale of the
Notes and Warrants occurs (the “Closing”) is hereinafter referred to as the “Closing Date”. The
Closing will be deemed to occur when (A) this Agreement and the other
Transaction Documents (as 

 

 

defined below) have been executed and delivered by the Company and each
Purchaser (which delivery may be effected by facsimile transmission), (B) each
of the conditions to the Closing described in Section 5 hereof has been
satisfied or waived as specified therein and (C) full payment of each
Purchaser’s Purchase Price has been made by such Purchaser to the Company by
wire transfer of immediately available funds against physical delivery by the
Company of duly executed instruments representing the Note and Warrant
purchased by such Purchaser at the Closing. Notwithstanding the foregoing, the
Company may sell, at any time after the Closing but on or prior to June 2,
2006, up to $5,000,000 of additional Notes and Warrants (a “Subsequent Closing”);
provided that the terms and
conditions of this Agreement and the other Transaction Documents shall be
subject to the “most favored nation” provision set forth in Section 4.21 of
this Agreement.

 

1.2                                 Certain
Definitions. When used herein, the following terms shall have the
respective meanings indicated:

 

“Affiliate” means, as to any Person (the “subject Person”), any
other Person (a) that directly or indirectly through one or more
intermediaries controls or is controlled by, or is under direct or indirect
common control with, the subject Person, (b) that directly or indirectly
beneficially owns or holds ten percent (10%) or more of any class of
voting equity of the subject Person, or (c) ten percent (10%) or more of
the voting equity of which is directly or indirectly beneficially owned or held
by the subject Person. For the purposes of this definition, “control” when used
with respect to any Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, through representation on such Person’s Board of
Directors or other management committee or group, by contract or otherwise.

 

“Approved Stock Plan” means any employee
benefit plan which has been approved by the Board of Directors of the Company
(including a majority of the independent members of the Board), pursuant to
which the Company’s securities may be issued to any employee, officer,
director or consultant for services provided to the Company.

 

“Business Day” means any day other than a
Saturday, a Sunday or a day on which the New York Stock Exchange is closed or
on which banks are authorized by law to close in New York, New York.

 

“Closing” and “Closing Date” have the respective
meanings specified in Section 1.1 hereof.

 

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

 

“Common Stock Equivalent” means, collectively,
Options and Convertible Securities.

 

“Convertible Securities” means any stock or securities (other than
Options) of the Company convertible into or exercisable or exchangeable for
Common Stock.

 

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“Conversion Price” has the meaning specified
in the Notes.

 

“Debt” means, as to any Person at any time: (a) all
indebtedness, liabilities and obligations of such Person for borrowed money; (b) all
indebtedness, liabilities and obligations of such Person to pay the deferred
purchase price of Property or services, except trade accounts payable of such
Person arising in the ordinary course of business that are not past due by more
than 90 days; (c) all capital lease obligations of such Person; (d) all
Debt of others guaranteed by such Person; (e) all indebtedness,
liabilities and obligations secured by a Lien (other than a Permitted Lien) existing
on Property owned by such Person, whether or not the indebtedness, liabilities
or obligations secured thereby have been assumed by such Person or are non-recourse
to such Person; (f) all reimbursement obligations of such Person (whether
contingent or otherwise) in respect of letters of credit, bankers’ acceptances,
surety or other bonds and similar instruments; and (g) all liabilities and
obligations of such Person to redeem or retire shares of capital stock of such
Person (other than the Company’s obligation to redeem the Securities under the
circumstances specified therein).

 

“Disclosure Documents” has the meaning
specified in Section 3.11
hereof.

 

“EDGAR” means the Commission’s Electronic Data
Gathering, Analysis, and Retrieval system

 

“Effective Date” has the meaning set forth in
the Registration Rights Agreement.

 

“Environmental Law” means all federal, state,
local or foreign laws relating to pollution or protection of human health or
the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous
Materials”) into the environment, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, as well as all authorizations,
codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued,
entered, promulgated or approved thereunder.

 

“ERISA” means the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder.

 

“Event of Default” has the meaning set forth
in the Notes.

 

“Exchange Act” means the Securities Exchange
Act of 1934, as amended (or any successor act), and the rules and
regulations thereunder (or respective successors thereto).

 

3

 

“Excluded Securities” means Common Stock or
Common Stock Equivalents issued or issuable: (i) in connection with any
Approved Stock Plan; (ii) upon exercise of any Options or conversion of
any Convertible Securities which are outstanding on the day immediately
preceding the Closing Date and are disclosed in a schedule to this
Agreement, provided that the terms of such Options or Convertible Securities
are not amended, modified or changed on or after the Closing Date; (iii) pursuant
to a bona fide firm commitment underwritten public offering with a
nationally-recognized investment banking firm which generates gross proceeds to
the Company in excess of $35,000,000 (other than an “at-the-market offering” as
defined in Rule 415(a)(4) under the Securities Act or an “equity line”
arrangement); (iv) in connection with any acquisition by the Company,
whether through an acquisition of stock or a merger of any business, assets or
technologies the primary purpose of which is not to raise equity capital in an
amount not to exceed, in the aggregate, 10% of the outstanding shares of Common
Stock in any calendar year; and (v) an anticipated issuance of no more
than 10 million shares of Common Stock to an agricultural conglomerate.

 

“Exercise Price” shall have the meaning
specified in the Warrants.

 

“GAAP” means generally accepted accounting
principles, applied on a consistent basis, as set forth in (i) opinions of
the Accounting Principles Board of the American Institute of Certified Public
Accountants, (ii) statements of the Financial Accounting Standards Board (iii) interpretations
of the Commission and the Staff of the Commission and each of their respective
successors and which are applicable in the circumstances as of the date in
question. Accounting principles are applied on a “consistent basis” when the
accounting principles applied in a current period are comparable in all
material respects to those accounting principles applied in a preceding period.

 

“Governing Documents” means, as of any date, (i) in
the case of a corporation, its certificate of incorporation and by-laws, (ii) in
the case of a partnership, its certificate of partnership and partnership
agreement, (iii) in the case of a limited liability company, its
certificate of organization and limited liability company operating agreement,
and (iv) any similar governing document of any such entity, in each such
case as amended through such date.

 

“Governmental Authority” means any nation or
government, any state, provincial or political subdivision thereof and any
entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.

 

“Governmental Requirement” means any law,
statute, code, ordinance, order, rule, regulation, judgment, decree,
injunction, franchise, license or other directive or requirement of any
federal, state, county, municipal, parish, provincial or other Governmental
Authority or any department, commission, board, court, agency or any other
instrumentality of any of them.

 

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“Insolvent” means, with respect to the Company,
that (i) the Company is unable to pay its debts and liabilities,
subordinated, contingent or otherwise, as such debts and liabilities become
absolute and matured, (ii) the Company intends to incur or believes that
it will incur debts that would be beyond its ability to pay as such debts
mature or (iii) the Company has unreasonably small capital with which to
conduct the business in which it is engaged as such business is now conducted
or is about to be conducted

 

“Intellectual Property” means any U.S. or
foreign patents, patent rights, patent applications, trademarks, trade names,
service marks, brand names, logos and other trade designations (including
unregistered names and marks), trademark and service mark registrations and
applications, copyrights and copyright registrations and applications,
inventions, invention disclosures, protected formulae, formulations, processes,
methods, trade secrets, computer software, computer programs and source codes,
manufacturing research and similar technical information, engineering know-how,
customer and supplier information, assembly and test data drawings or royalty
rights.

 

“Lien” means, with respect to any Property,
any mortgage or mortgage, pledge, hypothecation, assignment, deposit
arrangement, security interest, tax lien, financing statement, pledge, charge,
or other lien, charge, easement, encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever
on or with respect to such Property (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).

 

“Market Price” means, as of a particular date,
the lower of (i) the average of daily VWAP for each of the five (5) consecutive
Trading Days occurring immediately prior to (but not including) such date and (ii) the
daily VWAP on the Trading Day occurring immediately prior to (but not
including) such date.

 

“Material Adverse Effect” means an effect that
is material and adverse to (i) the consolidated business, operations,
properties, financial condition, prospects or results of operations of the
Company and its Subsidiaries taken as a whole or (ii) the ability of the
Company to perform its obligations under this Agreement or the other
Transaction Documents (as defined below).

 

“Material Contracts” means, as to the Company,
any agreement required pursuant to Item 601 of Regulation S-B or Item 601 of
Regulation S-K, as applicable, promulgated under the Securities Act to be filed
as an exhibit to any report, schedule, registration statement or
definitive proxy statement filed or required to be filed by the Company with
the Commission under the Exchange Act or any rule or regulation
promulgated thereunder, and any and all amendments, modifications, supplements,
renewals or restatements thereof.

 

 “NASD” means the
National Association of Securities Dealers, Inc.

 

“Obligations” means any and all indebtedness,
liabilities and obligations of the Company to the Purchaser evidenced by and/or
arising pursuant to this Agreement or the Notes, now existing or hereafter
arising, whether direct, indirect, related, unrelated, fixed,

 

5

 

contingent, liquidated, unliquidated, joint, several or joint and
several, including, without limitation, the obligations of the Company to repay
principal of the Notes, to pay interest on the Notes (including, without
limitation, interest accruing after any bankruptcy, insolvency, reorganization
or other similar filing) and to pay all fees, indemnities, costs and expenses
(including attorneys’ fees) provided for in this Agreement or the Notes.

 

“Options” means any rights, warrants or
options to subscribe for, purchase or receive Common Stock or Convertible
Securities.

 

“OTCBB” means the OTC Bulletin Board quotation
service operated by the Nasdaq Stock Market, Inc (“Nasdaq”).

 

“Pension Plan” means an employee benefit plan
(as defined in ERISA) maintained by the Company for employees of the Company or
any of its Affiliates.

 

“Permitted Liens” means the following:

 

(a)                                  encumbrances
consisting of easements, rights-of-way, zoning restrictions or other
restrictions on the use of real Property or imperfections to title that do not
(individually or in the aggregate) materially impair the ability of the Company
or any of its Subsidiaries to use such Property in its businesses, and none of
which is violated in any material respect by existing or proposed structures or
land use;

 

(b)                                 Liens
for taxes, assessments or other governmental charges (including without
limitation in connection with workers’ compensation and unemployment insurance)
that are not delinquent or which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject to such Liens, and for which
adequate reserves (as determined in accordance with GAAP) have been
established;

 

(c)                                  Liens
of mechanics, materialmen, warehousemen, carriers, landlords or other similar statutory
Liens securing obligations that are not yet due and are incurred in the
ordinary course of business or which are being contested in good faith by
appropriate proceedings, which proceedings have the effect of preventing the
forfeiture or sale of the Property subject to such Liens, for which adequate
reserves (as determined in accordance with GAAP) have been established and
which have been bonded over and omitted from the Title Policy;

 

(d)                                 purchase
money Liens to finance property or assets of the Company or any Subsidiary of
the Company acquired in the ordinary course of business; provided, however,
that (i) the related purchase money Debt shall not exceed the cost of such
property or assets (including the cost of design, development, improvement, production,
acquisition, construction, installation and integration) and shall not be
secured by any property or assets of the Company or any Subsidiary of the
Company other than the property and assets so acquired or constructed (and any
improvements 

 

6

 

thereto) and (ii) the Lien securing such
Debt shall be created within ten (10) days of such acquisition,
construction or improvement;

 

(e)                                  Liens
upon specific items of inventory or other goods and proceeds of any Person
securing such Person’s obligations in respect of bankers’ acceptances issued or
created for the account of such Person to facilitate the purchase, shipment or
storage of such inventory or other goods; and

 

(f)                                    Liens
encumbering deposits made to secure obligations arising from statutory,
regulatory, contractual, or warranty requirements of the Company or any of its
Subsidiaries, including rights of offset and set-off.

 

“Person” means any individual, corporation,
trust, association, company, partnership, joint venture, limited liability
company, joint stock company, Governmental Authority or other entity.

 

“Property” means property and/or assets of all
kinds, whether real, personal or mixed, tangible or intangible (including,
without limitation, all rights relating thereto).

 

“Principal Market” means the principal
exchange or market on which the Common Stock is listed or traded.

 

“Purchase Price” has the meaning specified in Section 1.1
hereof.

 

“Registrable Securities” has the meaning set
forth in the Registration Rights Agreement.

 

“Restricted Payment” means (a) any
dividend or other distribution (whether in cash, Property or obligations),
direct or indirect, on account of (or the setting apart of money for a
sinking or other analogous fund for the benefit of) any shares of any class of
capital stock of the Company or any of its Subsidiaries now or hereafter
outstanding, except a dividend payable solely in shares of that class of
stock to all of the holders of that class; (b) any redemption, exchange,
retirement, sinking fund or similar payment, purchase or other acquisition for
value, direct or indirect, of any shares of any class of capital stock of
the Company or any of its Affiliates now or hereafter outstanding, except the
Securities; (c) any prepayment of principal of, premium, if any, or
interest on, or any redemption, conversion, exchange, purchase, retirement,
sinking fund or defeasance of, any Debt (whether upon acceleration of such Debt
or otherwise) other than the Securities; and (d) any loan, advance or
payment to any officer, director or stockholder of the Company or any of its
Affiliates, exclusive of (i) reasonable compensation and reimbursements
paid to officers or directors in the ordinary course of business and (ii) the
scheduled repayment of principal and interest with respect to any loans made by
any such Affiliate to the Company and outstanding as of the date hereof and set
forth on Schedule 3.5
hereto; provided, however, that
the following shall not be deemed to constitute a Restricted Payment: (A) the
issuance of securities upon exercise or conversion of the Company’s Options 

 

7

 

or Convertible Securities under an Approved Stock Plan, and (B) the
issuance of equity securities to, or making payments under license, joint
venture or similar agreements with, persons with whom the Company has a joint
venture, strategic alliance or other commercial relationship in connection with
the operation of the Company’s business, and not in connection with a
transaction the purpose of which is to raise equity capital.

 

“SEC Documents” has the meaning specified in Section 3.11 hereof.

 

“Securities” has the meaning specified in the
preamble to this Agreement.

 

“Security Agreement” has the meaning specified
in the preamble to this Agreement.

 

“Subordinated Debt” means Debt of the Company
which meets each of the following requirements: 
(a) such Debt is wholly unsecured or any Liens securing such Debt
constitute Permitted Liens; and (b) such Debt is contractually
subordinated, as to payment and liquidation, to the payment in full of the
Notes and the Obligations on such terms and pursuant to written agreements in
such form and substance as are reasonably satisfactory to Purchasers
holding at least fifty percent (50%) of the aggregate principal amount of the
Notes outstanding on the date such Debt is incurred (the “Subordinated Debt Documents”).

 

“Subsidiary” means, with respect to any
Person, any corporation or other entity of which at least a majority of the
outstanding shares of stock or other ownership interests having by the terms
thereof ordinary voting power to elect a majority of the board of directors (or
Persons performing similar functions) of such corporation or entity
(irrespective of whether or not at the time, in the case of a corporation,
stock of any other class or classes of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at
the time directly or indirectly owned or controlled by such Person or one or
more of its Subsidiaries or by such Person and one or more of its Subsidiaries.

 

“Termination Date” means the first date on
which there are no Notes or Obligations outstanding.

 

“Trading Day” means any day on which the
Common Stock is purchased and sold on the Principal Market.

 

“Transaction Documents” means (i) this
Agreement, (ii) the Notes, (iii) the Warrants, (iv) the
Registration Rights Agreement, and (vii) all other agreements, documents
and other instruments executed and delivered by or on behalf of the Company or
its officers at the Closing.

 

“VWAP” on a Trading Day means the volume
weighted average price of the Common Stock for such Trading Day on the
Principal Market as reported by Bloomberg Financial Markets or, if Bloomberg
Financial Markets is not then reporting such prices, by a comparable reporting
service of national reputation selected by the Holders and reasonably
satisfactory to the Company. If VWAP cannot be calculated for the Common Stock
on such 

 

8

 

Trading Day on any of the foregoing bases, then the Company shall
submit such calculation to an independent investment banking firm of national
reputation reasonably acceptable to the Purchasers, and shall cause such
investment banking firm to perform such determination and notify the
Company and the Purchasers of the results of determination no later than two (2) Business
Days from the time such calculation was submitted to it by the Company. All
such determinations shall be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period.

 

1.3                                 Other Definitional
Provisions. All definitions contained in this Agreement are equally
applicable to the singular and plural forms of the terms defined. The words “hereof”, “herein” and “hereunder” and words
of similar import referring to this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement.

 

2.                                       PURCHASERS REPRESENTATIONS AND
WARRANTIES.

 

Each Purchaser represents and warrants to the
Company, with respect to itself only, and agrees with the Company, that:

 

2.1                                 No Public Sale or
Distribution. Such Purchaser is acquiring the Note and the Warrant being
purchased by it in the ordinary course of business for its own account and not
with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales that are registered under the
Securities Act or are exempt from the requirement to be registered thereunder.
Such Purchaser does not presently have any agreement, arrangement or
understanding, directly or indirectly, with any Person to distribute or effect
any distribution of any of the Securities (or any securities which are
derivatives thereof) to or through any person or entity; provided, however,
that in making such representations, such Purchaser does not agree to hold any
of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to an
effective registration statement or an exemption under the Securities Act.

 

2.2                                 Accredited
Purchaser Status. Such Purchaser is an “accredited Purchaser” as that term
is defined in Rule 501(a) of Regulation D.

 

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

 

2.4                                 Information.
Such Purchaser and its advisors, if any, have been furnished with all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Securities which have been requested by
such Purchaser. Such Purchaser and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by 

 

9

 

such Purchaser or its advisors, if any, or its representatives shall
modify, amend or affect such Purchaser’s right to rely on the Company’s
representations and warranties contained herein. Such Purchaser understands that
its investment in the Securities involves a high degree of risk and is able to
afford a complete loss of such investment. Such Purchaser has sought such
accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Securities.

 

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

 

2.6                                 Transfer or Resale.
Such Purchaser understands that, except as provided in the Registration Rights
Agreement: (i) the Securities have not been and are not being registered
under the Securities Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Purchaser shall have delivered to the
Company an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that the Securities to be sold, assigned or transferred may be
sold, assigned or transferred pursuant to an exemption from such registration,
or (C) such Purchaser provides the Company with reasonable assurance that
such Securities can be sold, assigned or transferred pursuant to Rule 144
promulgated under the Securities Act, as amended (or a successor rule thereto)
(“Rule 144”);
(ii) any sale of the Securities made in reliance on Rule 144 may be
made only in accordance with the terms of Rule 144 and, further, if Rule 144
is not applicable, any resale of the Securities under circumstances in which
the seller (or the Person through which the sale is made) may be deemed to
be an underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the Commission thereunder; and (iii) neither the Company
nor any other Person is under any obligation to register the Securities under
the Securities Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder. Notwithstanding the foregoing, the
Securities may be pledged in connection with a bona fide margin account or
other loan secured by the Securities and such pledge of Securities shall not be
deemed to be a transfer, sale or assignment of the Securities hereunder, and no
Purchaser effecting a pledge of Securities shall be required to provide the
Company with an opinion of counsel otherwise make deliver any notice or
document to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, this Section 2.6; provided, that in order to make any sale,
transfer or assignment of Securities, such Purchaser and its pledgee must make
such disposition in accordance with or pursuant to a registration statement or
an exemption under the Securities Act.

 

2.7                                 Legends. Such Purchaser understands that
until the certificates or other instruments representing the Securities have
been registered under the Securities Act, the stock certificates representing
the Securities, except as set forth below, shall bear any legend required by
the “blue sky” laws of any state and a restrictive legend in substantially the
following form (and a stop-transfer order may be placed against
transfer of such stock certificates):

 

10

 

THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED
UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A
UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR
FINANCING ARRANGEMENT SECURED BY THE SECURITIES WITHOUT DELIVERY OF ANY SUCH
OPINION.

 

The legend set forth above shall be removed
and the Company shall issue a certificate without such legend to the holder of
the Securities upon which it is stamped or issue to such holder by electronic
delivery at the applicable balance account at DTC, if (i) such Securities
are registered for resale under the Securities Act, (ii) in connection
with a sale, assignment or other transfer other than to an Affiliate or
partner, shareholder or member of such holder, such holder provides the Company
with an opinion of counsel reasonably satisfactory to the Company, in a
customary and acceptable form, to the effect that such sale, assignment or
transfer of the Securities may be made without registration under the
Securities Act, or (iii) such holder provides the Company with reasonable
assurance that the Securities can be sold, assigned or transferred pursuant to Rule 144.

 

If the Company shall fail for any reason to
issue to the holder of the Securities within a period of three (3) Business
Days after the occurrence of any of (i) through (iii) above (the “Delivery Period”), a
certificate without such legend or by electronic delivery at the applicable
balance account at DTC, and if on or after such Trading Day the holder
purchases (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by the holder of such Securities that the
holder anticipated receiving without legend from the Company (a “Buy-In”), then the
Company shall, within three (3) Business Days after such Delivery Period,
and at the holder’s request and in the holder’s discretion, either (i) pay
cash to the holder in an amount equal to the holder’s total Purchase Price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased (the “Buy-In
Price”), at which point the Company’s obligation to deliver such
unlegended Securities shall terminate, or (ii) promptly honor its
obligation to deliver to the holder such unlegended Securities as provided
above and pay cash to the holder in an amount equal to the excess (if any) of
the Buy-In Price over the product of (A) the number of shares of Common
Stock sold times (B) the Market Price of the Common Stock on last
day of the Delivery Period.

 

2.8                                 Validity;
Enforcement. This Agreement and the Registration Rights Agreement have been
duly and validly authorized, executed and delivered on behalf of such Purchaser
and, when executed by all of the parties thereto (including such Purchaser),
shall constitute the legal, valid and binding obligations of such Purchaser
enforceable against such 

 

11

 

Purchaser in accordance with their respective terms, except as such
enforceability may be limited by general principles of equity or to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors’ rights and remedies.

 

2.9                                 No Conflicts.
The execution, delivery and performance by such Purchaser of this Agreement and
the Registration Rights Agreement and the consummation by such Purchaser of the
transactions contemplated hereby and thereby will not (i) result in a
violation of the Governing Documents of such Purchaser or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which such Purchaser is a party, or (iii) result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws) applicable to such Purchaser,
except, in the case of clauses (ii) and (iii) above, for such conflicts,
defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect.

 

2.10                           Residency. Such Purchaser is a resident of
the jurisdiction specified below its address on Exhibit A.

 

2.11                           Short Sales; Trading
Restriction. Neither such Purchaser nor any person trading on its behalf or
at its direction has sold, purchased or established a short position in the
Company’s securities (including through the purchase or sale of derivative securities)
at any time since the time such Purchaser was first informed of the
transactions contemplated hereby by the Company or any placement agent acting
on behalf of the Company. Until the Initial Maturity Date (as defined in the
Notes) neither such Purchaser nor any person trading on its behalf or at its
direction will sell, purchase or establish a short position in the Company’s
securities.

 

3.                                      REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.

 

The Company represents and warrants to each Purchaser, and agrees with
each Purchaser, that:

 

3.1                                 Organization and
Qualification. Each of the Company and its Subsidiaries is a corporation or
other legal entity duly organized and validly existing in good standing under
the laws of the jurisdiction in which it is incorporated or organized, and has
the requisite power and authority (corporate or otherwise) to own its
properties and to carry on its business as now being conducted. Each of the
Company and its Subsidiaries is duly qualified as a foreign corporation to do business
and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. The Company has no
Subsidiaries except as set forth on Schedule 3.1.

 

3.2                                 Authorization;
Enforcement; Validity. The Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement
and the other Transaction Documents, including without limitation its
obligation to issue the Notes 

 

12

 

and Warrants in accordance with the terms hereof. The execution and
delivery of the Transaction Documents by the Company and the consummation by
the Company of the transactions contemplated hereby and thereby, including
without limitation the issuance of the Notes and the Warrants and the
reservation for issuance and issuance of Conversion Shares and Warrant Shares,
have been duly authorized by the Company’s Board of Directors and no further
consent or authorization is required by the Company, its Board of Directors or
its stockholders. This Agreement and the other Transaction Documents have been
duly executed and delivered by the Company, and constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

 

3.3                                 Issuance of
Securities. The Notes and the Warrants are duly authorized and, upon
issuance in accordance with the terms of this Agreement, will be validly issued
and free from all taxes, Liens and charges with respect to the issue thereof.
The Conversion Shares and the Warrant Shares are duly authorized and, upon
issuance in accordance with the terms of the Notes and the Warrants,
respectively, will be validly issued, fully paid and non-assessable and free
from all taxes, Liens and charges with respect to the issue thereof. The
issuance by the Company of the Securities is exempt from registration under the
Securities Act.

 

3.4                                 No Conflicts.
The execution, delivery and performance of the Transaction Documents by the
Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes
and Warrants and the reservation for issuance and issuance of the Conversion
Shares or the Warrant Shares) will not (i) result in a violation of the
Governing Documents of the Company or any of its Subsidiaries or (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company or any of its
Subsidiaries is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the Principal
Market) applicable to the Company or any of its Subsidiaries or by which any
property or asset of the Company or any of its Subsidiaries is bound or
affected.

 

3.5                                 Consents.
Except for filings and approvals required by the Principal Market, the filing
by the Company of a Form D in accordance with Regulation D, and any
filings to be made with state securities regulatory authorities, the Company is
not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court, governmental agency or any regulatory
or self-regulatory agency or any other Person in order for it to execute,
deliver or perform any of its obligations under or contemplated by the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. The Company and its Subsidiaries are unaware of any facts or
circumstances that might prevent the Company from obtaining or effecting any of
the registration, application or filings pursuant to the preceding sentence.
The Company is not in violation of the listing requirements of the Principal
Market and 

 

13

 

has no knowledge of any facts that would reasonably lead to delisting
or suspension of the Common Stock in the foreseeable future.

 

3.6                                 Acknowledgment
Regarding Purchaser’s Purchase of Securities. The Company acknowledges and
agrees that each Purchaser is acting solely in the capacity of an arm’s length
Purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and that no Purchaser is (i) an officer or
director of the Company, (ii) an Affiliate of the Company or (iii) to
the knowledge of the Company, a “beneficial owner” of more than 10% of the
Common Stock (as defined for purposes of Rule 13d-3 of the Exchange Act).
The Company further acknowledges that under no circumstances is any Purchaser
acting or to be deemed to be acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Transaction Documents
and the transactions contemplated hereby and thereby, and has not received or
relied on any advice given by a Purchaser or any of its representatives or
agents in connection with the Transaction Documents and the transactions
contemplated hereby and thereby. The Company further represents to each
Purchaser that the Company’s decision to enter into the Transaction Documents
has been based solely on the independent evaluation by the Company and its
representatives.

 

3.7                                 No General
Solicitation; Placement Agent’s Fees. Neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf, has engaged in any form of
general solicitation or general advertising (within the meaning of Regulation
D) in connection with the offer or sale of the Securities. The Company shall be
responsible for the payment of any placement agent’s fees, financial advisory
fees, or brokers’ commissions (other than for Persons engaged by any Purchaser
or its investment advisor, if any) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each
Purchaser harmless against, any liability, loss or expense (including, without
limitation, attorney’s fees and out-of-pocket expenses) arising in connection
with any such claim. The Company acknowledges that it has engaged Cowen and
Company as its exclusive placement agent (the “Agent”) in connection with the sale of
the Securities. Other than the Agent, the Company has not engaged any placement
agent or other agent in connection with the sale of the Securities.

 

3.8                                 No Integrated
Offering. None of the Company, its Subsidiaries, any of their respective
Affiliates, or any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the Securities Act or cause the offer and sale of the
Securities pursuant to this Agreement and the Transaction Documents to be
integrated with prior offerings by the Company for purposes of the Securities
Act in a manner that would make unavailable the exemption from registration
afforded by Section 4(2) of the Securities Act or Rule 506 of
Regulation D promulgated under the Securities Act, or any applicable
stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated. None of the Company, its
Subsidiaries, their respective affiliates or any Person acting on their behalf
will take any action or steps referred to 

 

14

 

in the preceding sentence that would require registration of any of the
Securities under the Securities Act or cause the offering of the Securities to
be so integrated with other offerings.

 

3.9                                 Dilutive Effect.
The Company acknowledges that the issuance of Conversion Shares upon conversion
of the Notes and the issuance of Warrant Shares upon exercise of the Warrants may result
in dilution of the outstanding shares of Common Stock, which dilution may be
substantial under certain market conditions. The Company understands and
acknowledges that its obligation to issue Conversion Shares and Warrants Share
is absolute and unconditional regardless of the dilutive effect that any such
issuance may have on the ownership interests of other stockholders of the
Company. The Company acknowledges and agrees that such Purchaser may enter
into short sales in the Company’s securities to the extent permitted by this
Agreement and applicable law, and that such transactions may result in
selling pressure on the outstanding shares of Common Stock.

 

3.10                           Application of Takeover
Protections; Rights Agreement. The Company and its Board of Directors have
taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any
distribution under a rights agreement) or other similar anti-takeover provision
under its Governing Documents or the laws of the State of Delaware which is or
could become applicable to any Purchaser as a result of the transactions
contemplated by this Agreement, including, without limitation, the Company’s
issuance of the Securities and any Purchaser’s ownership of the Securities. The
Company has not adopted a shareholder rights plan or similar arrangement
relating to accumulations of beneficial ownership of Common Stock or a change
in control of the Company. Except as set forth on Schedule 3.10, the transactions and
obligations of the Company contemplated by the Transaction Documents, including
without limitation, the issuance and sale of the Securities, will not trigger
any preemptive or anti-dilution rights (including without limitation pursuant
to any “reset” or similar provisions) or rights of first refusal or first
offer, or any other rights that would allow or permit the holders of the
Company’s securities or other Persons to purchase shares of Common Stock or
other securities of the Company.

 

3.11                           Commission Documents;
Financial Statements. The Company is subject to the reporting requirements
of the Exchange Act and, except as set forth on Schedule 3.11, has filed with the
Commission all reports, schedules, registration statements and definitive proxy
statements that the Company was required to file with the Commission on and
after October 7, 2005 (collectively, the “SEC Documents”). The Company is not
aware of any event occurring or expected to occur on or prior to the Closing
Date (other than the transactions effected hereby) that would require the
filing of, or with respect to which the Company intends to file, a Form 8-K
after the Closing. Each SEC Document, as of the date of the filing thereof with
the Commission, complied in all material respects with the requirements of the
Securities Act or Exchange Act, as applicable, and the rules and
regulations promulgated thereunder and, as of the date of such filing (or if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing), such SEC Document (including all exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain an untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. All 

 

15

 

documents required to be filed as exhibits to the SEC Documents have
been filed as required. Except as set forth in SEC Documents filed and
available to the public on EDGAR at least five (5) Business Days prior to
the date of this Agreement (the “Disclosure Documents”), the Company has no
liabilities, contingent or otherwise, other than liabilities incurred in the
ordinary course of business which, under GAAP, are not required to be reflected
in the financial statements included in the Disclosure Documents and which, individually
or in the aggregate, are not material to the consolidated business or financial
condition of the Company and its Subsidiaries taken as a whole. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the
Commission with respect thereto. Such financial statements have been prepared
in accordance with GAAP consistently applied at the times and during the
periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto, or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end adjustments). No other
information provided by or on behalf of the Company to the Purchasers which is
not included in the Commission Documents, including, without limitation, the
information referred to in Section 2.4
of this Agreement, contains any untrue statement of a material fact or omits to
state any material fact necessary in order to make the statements therein, in
the light of the circumstance under which they are or were made, not
misleading.

 

3.12                           Absence of Certain
Changes. Except as disclosed in Schedule 3.12, since December 31,
2005, there has been no material adverse change or development in the business,
properties, operations, condition (financial or otherwise), results of
operations or prospects of the Company or its Subsidiaries. Except as disclosed
in Schedule 3.12,
since December 31, 2005, the Company has not (i) declared or paid any
dividends, (ii) sold any assets, individually or in the aggregate, in
excess of $100,000 outside of the ordinary course of business or (iii) effected
capital expenditures, individually or in the aggregate, in excess of $100,000.
The Company has not taken any steps to seek protection pursuant to any
bankruptcy law nor does the Company have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings or any
actual knowledge of any fact which would reasonably lead a creditor to do so.
The Company is not, as of the date hereof, and will not be, after giving effect
to the transactions contemplated by this Agreement or the Transaction
Documents, Insolvent.

 

3.13                           No Undisclosed Events,
Liabilities, Developments or Circumstances. No event, liability,
development or circumstance has occurred or exists with respect to the Company
or its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that would be required to have been
disclosed by the Company as of the date hereof under applicable securities laws
and which has not been publicly announced.

 

3.14                           Conduct of Business;
Regulatory Permits. Neither the Company nor any of its Subsidiaries is in
violation of any term of or in default under its Governing Documents. To the
best knowledge of the Company, neither the Company nor any Subsidiary is in
violation of 

 

16

 

any judgment, decree or order or any statute, ordinance, rule or
regulation applicable to the Company or its Subsidiaries, and neither the
Company nor any of its Subsidiaries will conduct its business in violation of
any of the foregoing, except in each case for possible violations which would
not, individually or in the aggregate, have a Material Adverse Effect. The
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate federal, state or foreign regulatory
authorities necessary to conduct their respective businesses, except where the
failure to possess such certificates, authorizations or permits would not have,
individually or in the aggregate, a Material Adverse Effect, and neither the
Company nor any such Subsidiary has received any notice of proceedings relating
to the revocation or modification of any such certificate, authorization or
permit.

 

3.15                           Foreign Corrupt Practices.
Neither the Company, nor any of its Subsidiaries, nor any director, officer,
agent, employee or other Person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf of, the
Company (i) used any corporate funds for any unlawful contribution, gift,
entertainment or other unlawful expenses relating to political activity; (ii) made
any direct or indirect unlawful payment to any foreign or domestic government
official or employee from corporate funds; (iii) violated or is in
violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977,
as amended; or (iv) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment to any foreign or domestic
government official or employee.

 

3.16                           Sarbanes-Oxley Act.
The Company is in compliance with any and all requirements of the
Sarbanes-Oxley Act of 2002 that are effective as of the date hereof and
applicable to the Company, and any and all applicable rules and
regulations promulgated by the Commission thereunder that are effective as of
the date hereof, except where such noncompliance would not have, individually
or in the aggregate, a Material Adverse Effect.

 

3.17                           Transactions With
Affiliates. Except as set forth in the Company’s Annual Report on Form 10-KSB
for the year ended December 31, 2005 or the Form 10-QSB for the
quarter ended March 31, 2006, none of the officers, directors or employees
of the Company is presently a party to any transaction with the Company or any
of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

 

3.18                           Equity Capitalization;
Registration Rights. As of the date hereof, the authorized capital stock of
the Company consists of (x) 250,000,000 shares of Common Stock, of which as of
the date hereof, 207,376,623 shares are issued and outstanding; 10,320,810
shares are reserved (or to be reserved) for issuance pursuant to the Company’s
employee incentive plan and other options and warrants outstanding and other
securities exercisable or exchangeable for, or convertible into, shares of
Common Stock and (y) 15,000,000 shares of preferred stock, of which as of the
date hereof, no shares are issued and outstanding. All of such outstanding
shares 

 

17

 

have been, or upon issuance will be, validly issued and are fully paid
and non-assessable. Except as set forth on Schedule 3.18: (i) no shares of the
Company’s capital stock are subject to preemptive rights or any other similar
rights or any Liens suffered or permitted by the Company; (ii) there are
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any shares of capital
stock of the Company or any of its Subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its Subsidiaries; (iii) there
is no outstanding Debt of the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is or may become bound; (iv) there
are no agreements or arrangements (except the Registration Rights Agreement)
under which the Company or any of its Subsidiaries is obligated to register the
sale of any of their securities under the Securities Act (including “piggy-back”
registration rights); (v) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to redeem a security of the Company or any of its
Subsidiaries; (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities; (vii) the Company does not have any stock appreciation
rights or “phantom stock” plans or agreements or any similar plan or agreement;
and (viii) the Company and its Subsidiaries have no liabilities or
obligations required to be disclosed in the Disclosure Documents (as defined
herein) but not so disclosed in the SEC Documents. The Company has furnished or
made available to each Purchaser upon such Purchaser’s request, true, correct
and complete copies of the Company’s Certificate of Incorporation, as amended
and as in effect on the date hereof, and the Company’s Bylaws, as amended and
as in effect on the date hereof, and the terms of all securities convertible
into, or exercisable or exchangeable for, shares of Common Stock and the
material rights of the holders thereof in respect thereto. Schedule 3.18
sets forth the shares of Common Stock owned beneficially or of record and
Common Stock Equivalents (as defined below) held by each director and executive
officer of the Company.

 

3.19                           Debt and Other Contracts.
Except as disclosed in Schedule 3.19,
neither the Company nor any of its Subsidiaries (i)  has maintained a Lien
securing obligations in any material amounts, either singly or in the
aggregate; (ii) is a party to any contract, agreement or instrument, the
violation of which, or default under which, by the other parties to such
contract, agreement or instrument would result in a Material Adverse Effect, (iii) is
in violation of any term of or in default under any contract, agreement or
instrument relating to any Debt, except where such violations and defaults
would not result, individually or in the aggregate, in a Material Adverse
Effect, or (iv) is a party to any contract, agreement or instrument
relating to any Debt, the performance of which, in the judgment of the Company’s
officers, has or is reasonably expected to have a Material Adverse Effect.

 

18

 

3.20                           Absence of Litigation.
Except as set forth on Schedule 3.20,
there is no action, suit, proceeding, inquiry or investigation before or by the
Principal Market, any court, public board, government agency, self-regulatory
organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company, the Common Stock or any of its Subsidiaries
or any of the Company’s or the Company’s Subsidiary’s officers or directors,
whether of a civil or criminal nature or otherwise. The matters set forth on Schedule 3.20, if determined adversely to the Company
or any Subsidiary, would not have a Material Adverse Effect.

 

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

 

3.22                           Employee Relations. (i) Neither
the Company nor any of its Subsidiaries is a party to any collective bargaining
agreement or employs any member of a union. The Company and its Subsidiaries
believe that their relations with their employees are good. No executive
officer of the Company (as defined in Rule 501(f) of the Securities
Act) has notified the Company that such officer intends to leave the Company or
otherwise terminate such officer’s employment with the Company. No executive
officer of the Company, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of each such executive
officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters. The Company and its
Subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting labor, employment and employment practices and
benefits, terms and conditions of employment and wages and hours, except where
failure to be in compliance would not, either individually or in the aggregate,
reasonably be expected to result in a Material Adverse Effect.

 

3.23                           Title. The Company
and its Subsidiaries have good and marketable title in fee simple to all real
property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each
case free and clear of all Liens and defects except for Permitted Liens and
except as disclosed on Schedule 3.23.
Any real property and facilities held under lease by the Company and any of its
Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
Subsidiaries.

 

19

 

3.24                           Intellectual Property
Rights. The Company and its Subsidiaries own or possess adequate rights or
licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, governmental authorizations, trade secrets and other
intellectual property rights (“Intellectual Property Rights”) necessary to conduct
their respective businesses as now conducted. None of the Company’s
Intellectual Property Rights have expired or terminated, or are expected to
expire or terminate within three years from the date of this Agreement. The
Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim,
action or proceeding being made or brought, or to the knowledge of the Company,
being threatened, against the Company or any of its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable security measures to protect the secrecy, confidentiality and value
of all of their Intellectual Property Rights.

 

3.25                           Environmental Laws.
The Company and its Subsidiaries (i) are in compliance with any and all
Environmental Laws, (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct their
respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the
foregoing clauses (i), (ii) and (iii), the failure to so comply could be
reasonably expected to have, individually or in the aggregate, a Material
Adverse Effect.

 

3.26                           Subsidiary Rights.
The Company or one of its Subsidiaries has the unrestricted right to vote, and
(subject to limitations imposed by applicable law) to receive dividends and
distributions on, all capital securities of its Subsidiaries as owned by the
Company or such Subsidiary.

 

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

 

3.28                           Internal Accounting and
Disclosure Controls. The Company and each of its Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain asset and liability
accountability, (iii) access to assets or incurrence of liabilities is
permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at 

 

20

 

reasonable intervals and appropriate action is taken with respect to
any difference. Other than as described in the Annual Report on Form 10-KSB
filed with the Commission for the fiscal year ended December 31, 2005, the
Company does not currently maintain disclosure controls and procedures (as such
term is defined in Rule 13a-14 under the Exchange Act) that are effective
in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the Commission, including, without limitation, controls and procedures
designed in to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act is accumulated
and communicated to the Company’s management, including its principal executive
officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions regarding required disclosure.
Specifically, the independent auditors for the Company identified deficiencies
in the Company’s controls related to valuation and recording of fixed assets.

 

3.29                           Off Balance Sheet
Arrangements. There is no transaction, arrangement, or other relationship
between the Company and an unconsolidated or other off balance sheet entity
that is required to be disclosed by the Company in its Exchange Act filings and
is not so disclosed or that otherwise would be reasonably likely to have a
Material Adverse Effect.

 

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

 

3.31                           Transfer Taxes. On
the Closing Date, all stock transfer or other taxes (other than income or
similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Purchaser hereunder will be, or
will have been, fully paid or provided for by the Company, and all laws
imposing such taxes will be or will have been complied with.

 

3.32                           Disclosure. The
Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their respective agents or counsel with any
information that constitutes or could reasonably be expected to constitute
material, nonpublic information. The Company understands and confirms that each
of the Purchasers will rely on the foregoing representations in effecting
transactions in securities of the Company. All disclosure provided to the
Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the schedules to this Agreement, furnished by or
on behalf of the Company are true and correct and do not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading. Each press release issued by the
Company since October 7, 2005 did not at the time of release contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not 

 

21

 

misleading. No event or circumstance has occurred or information exists
with respect to the Company or any Subsidiary or either of its or their
respective business, properties, prospects, operations or financial conditions,
which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed (assuming for this purpose that the Company’s reports
filed under the Exchange Act are being incorporated into an effective
registration statement filed by the Company under the Securities Act). The
Company acknowledges and agrees that no Purchaser makes or has made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 2.

 

3.33                           Reporting Company;
Listing. The Company’s Common Stock is registered pursuant to Section 12(g) of
the Exchange Act and is eligible for trading on the OTCBB. Without limiting the
generality of the foregoing, the Company is not in violation of any of the
rules, regulations or requirements of Nasdaq as they relate to trading of the
Common Stock on the OTCBB and has no knowledge of any facts or circumstances
that would reasonably be expected to result in a suspension of the Common Stock
from trading on the OTCBB in the foreseeable future. Since December 31,
2005, (i) the Common Stock has been eligible for quotation on the OTCBB, (ii) trading
in the Common Stock has not been suspended by the Commission or Nasdaq and (iii) the
Company has received no communication, written or oral, from the Commission or
Nasdaq that it does not satisfy such requirements or that such eligibility is
in any way threatened.

 

3.34                           Form SB-2. The
Company is eligible to register the Conversion Shares and Warrant Shares for
resale in a secondary offering by each Purchaser on a registration statement on
Form SB-2 under the Securities Act. To the Company’s knowledge, there
exist no facts or circumstances (including without limitation any required
approvals or waivers of any circumstances that may delay or prevent the
obtaining of accountant’s consents) that could reasonably be expected to
prohibit or delay the preparation and filing of a registration statement on Form SB-2
that will be available for the resale of all Conversion Shares and Warrant
Shares by each Purchaser.

 

3.35                           Investment Company Status.
The Company is not, and immediately after receipt of payment for the Notes and
the Warrants issued under this Agreement will not be, an “investment company”
or an entity “controlled”
by an “investment
company” within the meaning of the Investment Company Act of
1940, as amended (the “Investment
Company Act”), and shall conduct its business in a manner so
that it will not become subject to the Investment Company Act.

 

3.36                           Customers and Suppliers.
The Company and its Subsidiaries maintain relationships with their material
customers and suppliers on commercially reasonable terms. To the Company’s
knowledge, no customer or supplier of the Company or any of its Subsidiaries
has any plan or intention to terminate any agreement or arrangement with the
Company or such Subsidiary, which termination would reasonably be expected to
have a Material Adverse Effect.

 

22

 

3.37                           No Other Agreements. The
Company has not, directly or indirectly, entered into any agreement with or
granted any right to any Purchaser relating to the terms or conditions of the
transactions contemplated by the Transaction Documents, except as expressly set
forth in the Transaction Documents.

 

4.                                       COVENANTS AND ACKNOWLEDGEMENTS OF THE
PARTIES.

 

4.1                                 Best Efforts.
Each party shall use its best efforts to satisfy timely the terms and
conditions of this Agreement.

 

4.2                                 Form D and
Blue Sky; Other Filings and Consents. The Company agrees to file a Form D
in respect of the Securities as required under Regulation D and to provide a
copy thereof to each Purchaser promptly after such filing. The Company, as
promptly as reasonably practicable after the date hereof, shall take such
action as the Company shall reasonably determine is necessary in order to
obtain an exemption for or to qualify the Securities for sale to the Purchasers
at the Closing pursuant to this Agreement under applicable securities or “Blue
Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall promptly thereafter provide evidence of any such
action so taken to the Purchasers. The Company shall make all filings and
reports relating to the offer and sale of the Securities required under
applicable securities or “Blue Sky” laws of the states of the United States
following the Closing Date. The Company undertakes as promptly as reasonably
practicable after the date hereof to (i) make such filings and apply for
such registrations, or (ii) use its reasonable best efforts to obtain, as
applicable, all such consents, authorizations and orders, in each such case,
which are required to be made or obtained by the Company pursuant to applicable
law, rule or regulation in order to consummate the transactions
contemplated by this Agreement and the other Transaction Documents.

 

4.3                                 Reporting Status.
Until the date on which the Holders (as defined in the Registration Rights
Agreement) have sold all Registrable Securities to the public pursuant to an
effective registration statement or Rule 144 (the “Reporting Period”),
the Company shall timely file all reports required to be filed with the
Commission pursuant to the Exchange Act, and the Company shall not terminate
its status as an issuer required to file reports under the Exchange Act even if
the Exchange Act or the rules and regulations thereunder would otherwise
permit such termination.

 

4.4                                 Use of Proceeds.
The Company will use the proceeds from the sale of the Notes and Warrants as
specified on Schedule 4.4
 hereof.

 

4.5                                 Financial
Information. The Company agrees to send the following to each Purchaser
during the Reporting Period (i) unless the following are filed with the
Commission and are available to the public through EDGAR, within one (1) Business
Day after the filing thereof with the Commission, a copy of its Annual Reports
on Form 10-KSB or 10-K, its Quarterly Reports on Form 10-QSB or 10-Q,
any Current Reports on Form 8-K and any registration 

 

23

 

statements (other than on Form S-8) or amendments filed pursuant
to the Securities Act, (ii) on the same day as the release thereof,
facsimile copies of all press releases issued by the Company or any of its
Subsidiaries, and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.

 

4.6                                 Listing. The
Company shall promptly secure the listing of all of the Registrable Securities
upon each national securities exchange and automated quotation system, if any,
upon which shares of Common Stock are then listed (subject to official notice
of issuance) and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Registrable Securities from time to
time issuable under the terms of the Transaction Documents. The Company shall
maintain the Common Stock’s authorization for listing on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4.6.

 

4.7                                 Fees. Subject
to Section 8
below, at the Closing, the Company shall reimburse the Purchasers for their
legal and due diligence expenses in connection with the preparation, execution
and performance of this Agreement and the transactions contemplated hereby up
to a maximum of $50,000, which amount (to the extent not already paid by the
Company) shall be withheld from the Purchase Price payable by the Purchasers at
the Closing. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or broker’s commissions (other than for
Persons engaged by any Purchaser) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold each
Purchaser harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney’s fees and out-of-pocket expenses) arising in
connection with any claim relating to any such payment. Except as otherwise set
forth in the Transaction Documents, each party to this Agreement shall bear its
own expenses in connection with the sale of the Securities to the Purchasers.

 

4.8                                 Pledge by Purchaser.
The Company acknowledges and agrees that the Securities may be pledged by
a Purchaser in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, and no Purchaser effecting a pledge of Securities shall
be required to provide the Company with any notice thereof or otherwise make
any delivery to the Company pursuant to this Agreement or any other Transaction
Document, including, without limitation, Section 2.6 of this Agreement; provided
that a Purchaser and its pledgee shall be required to comply with the
provisions of Section 2.6
of this Agreement in order to effect a sale, transfer or assignment of
Securities to such pledgee. The Company hereby agrees to execute and deliver
such documentation as a pledgee of the Securities may reasonably request
in connection with a pledge of the Securities to such pledgee by a Purchaser.

 

24

 

4.9                                 Disclosure of
Transactions and Other Material Information. On or before 8:30 a.m.,
New York City Time, on the first Business Day following the Closing Date, the
Company shall file a Current Report on Form 8-K describing the terms of
the transactions contemplated by the Transaction Documents in the form required
by the Exchange Act, and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this Agreement)
and the Registration Rights Agreement) as exhibits to such filing (including
all attachments, the “8-K
Filing”). The Company acknowledges, agrees and represents that
from and after the date of the 8-K Filing, no Purchaser shall be in possession
of any material, nonpublic information received from the Company, any of its
Subsidiaries or any of its respective officers, directors, employees or agents,
that is not disclosed in the 8-K Filing. The Company shall not, and shall cause
each of its Subsidiaries and each of their respective officers, directors,
employees and agents, not to, provide any Purchaser with any material,
nonpublic information regarding the Company or any of its Subsidiaries from and
after the date of the 8-K Filing without the express written consent of such
Purchaser. In the event of a breach of the foregoing covenant by the Company,
and provided that the Company shall have failed (following proper written
request therefor) to make an appropriate public disclosure consistent with the requirements
of Regulation FD under the Exchange Act, any Subsidiary, or its each of
respective officers, directors, employees and agents, in addition to any other
remedy provided herein or in the Transaction Documents, a Purchaser shall have
the right to make a public disclosure, in the form of a press release,
public advertisement or otherwise, of such material, nonpublic information
without the prior approval by the Company, its Subsidiaries, or any of its or
their respective officers, directors, employees or agents. No Purchaser shall
have any liability to the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees, shareholders or agents for any such
disclosure. Subject to the foregoing, neither the Company nor any Purchaser
shall issue any press releases or any other public statements with respect to
the transactions contemplated hereby; provided, however, that the Company shall
be entitled, without the prior approval of any Purchaser, to make any press
release or other public disclosure with respect to such transactions (i) in
substantial conformity with the 8-K Filing and contemporaneously therewith and (ii) as
is required by applicable law and regulations, including the applicable rules and
regulations of the Principal Market (provided that in the case of clause (i) each
Purchaser shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release).

 

4.10                           Intentionally Left Blank

 

4.11                           Corporate Existence.
Until the date on which there are no Notes or Warrants outstanding, the Company
shall maintain its corporate existence and shall not sell all or substantially
all of the Company’s assets, except in the event of a merger or consolidation
or sale of all or substantially all of the Company’s assets, where the
surviving or successor entity in such transaction (i) assumes the Company’s
obligations hereunder and under the agreements and instruments entered into in
connection herewith and (ii) is a publicly traded corporation whose common
stock is quoted on or listed for trading on The Nasdaq National Market, the New
York Stock Exchange or the American Stock Exchange.

 

25

 

4.12                           Reservation of Common
Stock. The Company shall, on or before the Closing Date, authorize and
reserve for issuance, free from any preemptive rights, a number of shares of
Common Stock (the “Reserved
Amount”) equal to no less than one hundred and fifty percent
(150%) of the maximum number of shares of Common Stock issuable upon (A) conversion
of the outstanding Notes in full at the Conversion Price then in effect and (B) exercise
of the outstanding Warrants in full at the Exercise Price then in effect, in
each such case without regard to any limitation or restriction on such
conversion or exercise that may be set forth in the Notes or the Warrants.
In the event that, as a result of an adjustment to the Conversion Price of the
Notes or the Exercise Price for the Warrants (pursuant to anti-dilution
adjustments or otherwise), the Reserved Amount is less than 125% of the number
of shares of Common Stock then issuable upon conversion of all of the Notes and
exercise of all of the Warrants then outstanding (without regard to any
limitation or restriction on such conversion or exercise that may be set
forth in the Notes or the Warrants), the Company shall take action (including
without limitation seeking stockholder approval for the authorization or
reservation of additional shares of Common Stock) as soon as practicable (but
in no event later than the tenth (10th) business day or, in the
event that stockholder approval is required, the sixtieth (60th) day
following such date) to increase the Reserved Amount to no less than 150% of
the number of shares of Common Stock into which such outstanding Notes are then
convertible and such outstanding Warrants are exercisable. The Company shall
not reduce the number of shares reserved for issuance hereunder without
obtaining the written consent of the holders of two-thirds (2/3) of the
Registrable Securities. The initial Reserved Amount shall be allocated pro rata among the Purchasers based on the
principal amount of the Notes issued to each Purchaser at the Closing. Each
increase in the Reserved Amount shall be allocated pro rata among the Holders based on the amount of
Registrable Securities into which all of the Notes and Warrants held by such
Holder at the time of such increase are convertible or exercisable (without
regard to any limitation on such conversion or exercise). In the event that a
Holder shall sell or otherwise transfer any of such Holder’s Notes, each
transferee shall be allocated a pro rata
portion of such transferor’s Reserved Amount. Any portion of the Reserved
Amount which remains allocated to any person or entity which does not hold any
Notes shall be reallocated to the remaining Holders pro rata based on the amount of Registrable Securities into
which all of the outstanding Notes and Warrants at the time of such increase
are convertible or exercisable (without regard to any limitation on such
conversion or exercise).

 

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

 

4.14                           Limitation on Debt, Liens.
During the period beginning on the date of this Agreement and ending on the
Termination Date, the Company shall refrain, and shall ensure that each of its
Subsidiaries refrains, from (A) incurring any Debt (including without
limitation by issuing any Debt securities) or increasing the amount of any
existing line of credit or other Debt facility beyond the amount outstanding on
the date hereof or (B) granting, establishing or maintaining any Lien on
any of its assets, including without limitation any pledge of securities owned
or held by it (including without limitation any securities issued by any such
Subsidiary), other than Permitted Liens. Notwithstanding the foregoing, the
Company and/or its Subsidiaries 

 

26

 

may incur Debt for purposes of effecting one or more acquisitions
(by means of purchase of all or substantially all of the assets of another
entity), provided that the
aggregate amount of such new Debt shall not exceed $3 million and provided further, that such new Debt shall
be unsecured Subordinated Debt. and subject to the “most favored nation”
provision in Section 4.21
(such Debt, the “Permitted Subordinated Debt”).

 

4.15                           Restricted Payments. During
the period beginning on the date of this Agreement and ending on the
Termination Date, the Company will not, nor will it permit any Subsidiary of
the Company to, make any Restricted Payments, except that:

 

(a)                                  the Company may make
regularly scheduled payments of principal and interest accrued on any
Subordinated Debt if and to the extent (but only if and to the extent)
permitted by the express terms of the documents governing such Subordinated
Debt; and

 

(b)                                 Subsidiaries of the
Company may make Restricted Payments to the Company;

 

provided, however, that no Restricted Payment may be
made pursuant to clause (a) or (b) above if an Event of Default (or
an event or circumstance that, with the giving of notice or lapse of time or
both, would constitute an Event of Default) exists at the time or would exist
as a result of such Restricted Payment.

 

4.16                           Disposition of Property.
During the period beginning on the date of this Agreement and ending on the
Termination Date, the Company will not, nor will it permit any Subsidiary of
the Company to, sell, lease, assign, transfer or otherwise dispose of any of
its Property, except (i) dispositions of inventory by the Company and its
Subsidiaries in the ordinary course of business and (ii) expenditures of
money (including, without limitation, money held in deposit accounts) made in
the ordinary course of business or for the purpose of making Restricted
Payments expressly permitted in accordance with this Agreement.

 

4.17                           Certain Transactions.
During the period beginning on the date of this Agreement and ending on the
Termination Date, and except as may be expressly permitted or required by
the Transaction Documents, the Company will not, nor will it permit any
Subsidiary of the Company to, create or otherwise cause or permit to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of the Company or any Subsidiary of the Company to (a) pay
dividends or make any other distribution to the Company or any Subsidiary of
the Company in respect of capital stock or with respect to any other interest
or participation in, or measured by, its profits, (b) pay any Debt owed to
the Company or any Subsidiary of the Company, (c) make any loan or advance
or capital contribution to the Company or any Subsidiary of the Company, (d) sell,
lease or transfer any of its Property, or (e) grant a Lien on any of its
Properties.

 

4.18                           Modification of Certain
Agreements. During the period beginning on the date of this Agreement and
ending on the Termination Date, the Company will not, nor will it permit any of
the Company Subsidiaries to, consent to or implement any termination,

 

27

 

amendment, modification, supplement or waiver of (a) the
certificate or articles of incorporation, articles of organization, bylaws,
regulations or other constituent documents of the Company or any such Company
Subsidiary or (b) any Material Contract to which it is a party; provided, however,
that any of such documents may be amended or modified if and to the extent
that such change or modification is necessary in order to carry out the intent
of any Transaction Document.

 

4.19                           Intentionally Left Blank

 

4.20                           Issuance Limitation. During
the period beginning on the date of this Agreement and ending on the
Termination Date, the Company shall not issue, sell or exchange, or agree or
obligate itself to issue, sell or exchange or reserve, agree to or set aside
for issuance, sale or exchange, (1) any Common Stock or Common Stock
Equivalents, (2) any other equity security of the Company, including
without limitation shares of preferred stock, (3) any other security of
the Company which by its terms is convertible into or exchangeable or
exercisable for preferred stock or other equity security; provided, however,
that the foregoing shall not apply to any Excluded Security.

 

4.21                           Most Favored Nation. The
Company hereby represents and covenants that none of the terms offered to any
Person in a Subsequent Closing or Permitted Subordinated Debt transaction will
be more favorable than the terms offered to the Purchasers under this Agreement
or any of the other Transaction Documents, and in the event that any of the
terms in a Subsequent Closing or Permitted Subordinated Debt transaction are
more favorable than the terms contained in this Agreement or any of the other
Transaction Documents, the applicable terms of this Agreement and the other
Transaction Documents shall be, without any further action by the Purchasers or
the Company, deemed amended and modified in a manner that is economically and
legally equivalent to the more favorable terms contained in such Subsequent
Closing or Permitted Subordinated Debt transaction, as the case may be. Notwithstanding
the foregoing, the Company agrees, at its expense, to take such other actions
(such as entering into amendments to the Transaction Documents) as the
Purchasers may reasonably request to further effectuate the foregoing.

 

5.                                       TRANSFER AGENT INSTRUCTIONS.

 

On or prior to the Closing Date, the Company
shall execute and deliver irrevocable written instructions to the transfer
agent for its Common Stock (the “Transfer Agent”), and provide each Purchaser
with a copy thereof, directing the Transfer Agent (i) to issue
certificates representing Conversion Shares upon conversion of the Notes and
receipt of a valid Conversion Notice (as defined in the Notes) from a
Purchaser, in the amount specified in such Conversion Notice, in the name of
such Purchaser or its nominee, (ii) to issue certificates representing Warrant
Shares upon exercise of the Warrants and (iii) to deliver such
certificates to such Purchaser no later than the close of business on the third
(3rd) business day following the related Conversion Date (as defined in the
Notes) or Exercise Date (as defined in the Warrant), as the case may be. Such
certificates may bear legends pursuant to applicable provisions of this
Agreement or applicable law. The Company shall instruct the transfer agent
that, in lieu of delivering physical certificates representing shares of Common
Stock to an Purchaser upon 

 

28

 

conversion of the Notes, or exercise of the Warrants, and as long as
the Transfer Agent is a participant in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program, and such Purchaser has not informed the Company
that it wishes to receive physical certificates therefor, and no restrictive
legend is required to appear on any physical certificate if issued, the
transfer agent may effect delivery of Conversion Shares or Warrant Shares,
as the case may be, by crediting the account of such Purchaser or its
nominee at DTC for the number of shares for which delivery is required
hereunder within the time frame specified above for delivery of certificates. The
Company represents to and agrees with each Purchaser that it will not give any
instruction to the Transfer Agent that will conflict with the foregoing
instruction or otherwise restrict such Purchaser’s right to convert the Notes
or to receive Conversion Shares in accordance with the terms of the Notes or to
exercise the Warrant or to receive Warrant Shares upon exercise of the Warrants.
In the event that the Company’s relationship with the Transfer Agent should be
terminated for any reason, the Company shall use its best efforts to cause the
Transfer Agent to continue acting as transfer agent pursuant to the terms
hereof until such time that a successor transfer agent is appointed by the
Company and receives the instructions described above.

 

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

 

The obligation of the Company hereunder to
issue and sell a Note and Warrant to each Purchaser at the Closing is subject
to the satisfaction, on or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company’s sole benefit
and may be waived by the Company at any time in its sole discretion by
providing each Purchaser with prior written notice thereof:

 

6.1                                 Such Purchaser shall
have executed and delivered to the Company this Agreement, the Registration
Rights Agreement, each other Transaction Document to which it is a party.

 

6.2                                 Such Purchaser shall
have tendered to the Company the Purchase Price (less the amounts withheld
pursuant to Section 4.7)
for the Note and Warrant being purchased by such Purchaser at the Closing by
wire transfer of immediately available funds pursuant to wire instructions
provided by the Company prior to the Closing Date.

 

6.3                                 The representations
and warranties of such Purchaser shall be true and correct in all material
respects as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a
specific date), and such Purchaser shall have performed, satisfied and complied
in all material respects with the covenants, agreements and conditions required
by this Agreement to be performed, satisfied or complied with by such Purchaser
at or prior to the Closing Date.

 

29

 

7.                                       CONDITIONS TO EACH PURCHASER’S OBLIGATION TO PURCHASE.

 

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

 

7.1                                 The Company shall have
executed and delivered to such Purchaser (i) this Agreement, (ii) a
Note, (iii) a Warrant, (iv) the Registration Rights Agreement, and (v) each
other Transaction Document.

 

7.2                                 The Company shall have
delivered to such Purchaser a copy of the Irrevocable Transfer Agent
Instructions, which instructions shall have been delivered to and acknowledged
in writing by the Company’s transfer agent.

 

7.3                                 The Company shall have
delivered to such Purchaser a certificate evidencing the incorporation or
organization and good standing of the Company and each of its operating
Subsidiaries in such entity’s state of incorporation or organization issued by
the Secretary of State of such state as of a date within ten (10) days of
the Closing Date.

 

7.4                                 The Common Stock (A) shall
be listed on the Principal Market and (B) shall not have been suspended,
as of the Closing Date, by the Commission or the Principal Market from trading
on the Principal Market nor shall suspension by the Commission or the Principal
Market have been threatened, as of the Closing Date, either (x) in writing by
the Commission or the Principal Market or (y) by falling below the minimum
listing maintenance requirements of the Principal Market.

 

7.5                                 The Company shall have
delivered to such Purchaser a certificate, signed by the Secretary or an
Assistant Secretary of the Company, attaching (i) the Certificate of
Incorporation and By-Laws of the Company, and (ii) resolutions passed by
its Board of Directors, or a duly authorized committee thereof, to authorize
the transactions contemplated hereby and by the other Transaction Documents,
and certifying that such documents are true and complete copies of the
originals and that such resolutions have not been amended or superseded, it
being understood that such Purchaser may rely on such certificate as a
representation and warranty of the Company made herein.

 

7.6                                 The representations
and warranties of the Company shall be true and correct as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all respects with the
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Purchaser shall have received a certificate, executed by the
Chief Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably
requested by such Purchaser.

 

30

 

7.7                                 The Company shall have
delivered to such Purchaser a letter from the Company’s transfer agent
certifying the number of shares of Common Stock outstanding as of a date within
five days of the Closing Date.

 

7.8                                 The Company shall have
obtained all governmental, regulatory or third party consents and approvals, if
any, necessary for the sale of the Notes and Warrants.

 

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

 

8.                                       TERMINATION.

 

In the event that the Closing shall not have
occurred with respect to a Purchaser on or before five (5) days from the
date hereof due to the Company’s or such Purchaser’s failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the non-breaching party’s
failure to waive such unsatisfied condition(s)), the non-breaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party.

 

9.                                       MISCELLANEOUS.

 

9.1                                 Governing Law;
Jurisdiction; Jury Trial. All questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of New York, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of New
York or any other jurisdictions) that would cause the application of the laws
of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim that
it is not personally subject to the jurisdiction of any such court, that such
suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees
that such service shall constitute good and sufficient service of process and
notice thereof. Nothing contained herein shall be deemed to limit in any way
any right to serve process in any manner permitted by law. EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A
JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

31

 

9.2                                 Counterparts.
This Agreement may be executed in two or more identical counterparts, all
of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party; provided, that any
party may deliver an executed copy of this Agreement to any other party by
facsimile transmission, in which case this Agreement as so delivered shall be
deemed duly executed and delivered and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original.

 

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

 

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

 

9.5                                 Entire Agreement;
Amendments. This Agreement supersedes all other prior oral or written
agreements between the Purchasers, the Company, their affiliates and Persons
acting on their behalf with respect to the matters discussed herein, and this
Agreement and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor any Purchaser makes any representation, warranty, covenant or
undertaking with respect to such matters. This Agreement and the other
Transaction Documents constitute the entire agreement between the parties with
regard to the subject matter hereof and thereof, superseding all prior agreements
or understandings, whether written or oral, between or among the parties. Except
as expressly provided herein, neither this Agreement nor any term hereof may be
amended or waived except pursuant to a written instrument executed by the
Company and the holders of at least two-thirds (2/3) of the Registrable
Securities into which all of the Notes and Warrants then outstanding are
convertible or exercisable (without regard to any limitation on such conversion
or exercise), and no provision hereof may be waived other than by a
written instrument signed by the holders of at least two-thirds (2/3) of the
Registrable Securities into which all of the Notes and Warrants then
outstanding are convertible or exercisable (without regard to any limitation on
such conversion or exercise). Any waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.

 

9.6                                 Notices. Any
notices, consents, waivers or other communications required or permitted to be
given under the terms of this Agreement must be in writing and will be deemed
to have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

 

32

 

	
  if to the Company:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Earth Biofuels, Inc.

  	
   

  
	
   

  	
  3001 Knox Street, Suite 403,

  	
   

  
	
   

  	
  Dallas, Texas 75205

  	
   

  
	
   

  	
  Telephone: 214.389.9800

  
	
   

  	
  Facsimile: 
  214.389.9806

  
	
   

  	
  Attention: 
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  
	
  with a copy (for informational purposes
  only) to:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  	
   

  
	
   

  	
  Telephone: 214.706.4200

  
	
   

  	
  Facsimile: 
  214.706.4242

  
	
   

  	
  Attention: 
  Roger A. Crabb, Esq.

  

 

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

 

9.7                                 Successors and
Assigns. This Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and assigns, including any
purchasers of Notes or Warrants. The Company shall not assign this Agreement or
any rights or obligations hereunder, including by merger or consolidation,
without the prior written consent of the Registrable Securities into which all
of the Notes and Warrants then outstanding are convertible or exercisable
(without regard to any limitation on such conversion or exercise). A Purchaser may assign
some or all of its rights hereunder without the consent of the Company, in
which event such assignee shall be deemed to be a Purchaser hereunder in
respect of such assigned rights.

 

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

 

9.9                                 Survival.
Unless this Agreement is terminated under Section 8, the representations
and warranties of the Company and the Purchasers contained in Sections 2 and 3,
the agreements and covenants set forth in Sections 4, 5 and 9 shall survive the
Closing and the 

 

33

 

delivery and exercise of Securities, as applicable. Each Purchaser
shall be responsible only for its own representations, warranties, agreements
and covenants hereunder.

 

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

 

9.11                           Indemnification.

 

(a) In consideration of each Purchaser’s
execution and delivery of the Transaction Documents and acquiring the
Securities thereunder and in addition to all of the Company’s other obligations
under the Transaction Documents, the Company will indemnify and hold each
Purchaser and its directors, managers, officers, shareholders, members, partners,
employees and agents (each, an “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and expenses,
including all judgments, amounts paid in settlements, court costs and
reasonable attorneys’ fees and costs of investigation (collectively, “Losses”) that any
such Purchaser Party may suffer or incur as a result of or relating to (A) any
breach of any of the representations, warranties, covenants or agreements made
by the Company in this Agreement or in the other Transaction Documents or (B) any
cause of action, suit or claim brought or made against such Purchaser Party by
a third party (including for these purposes a derivative action brought on
behalf of the Company) and arising out of or resulting from (i) the
execution, delivery, performance or enforcement of the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby, (ii) any
transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, or (iii) the
status of such Purchaser or holder of the Securities as a Purchaser. If any
action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party
shall promptly notify the Company in writing, and the Company shall have the
right to assume the defense thereof with counsel of its own choosing. Any
Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of
such counsel shall be at the expense of such Purchaser Party except to the
extent that (i) the employment thereof has been specifically authorized by
the Company in writing, (ii) the Company has failed after a reasonable
period of time following such Purchaser Party’s written request that it do so,
to assume such defense and to employ counsel or (iii) in such action there
is, in the reasonable opinion of such separate counsel, a material conflict on
any material issue between the position of the Company and the position of such
Purchaser Party. The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by an Purchaser Party effected
without the Company’s prior written consent, which shall not be unreasonably
withheld or delayed; or (ii) to the extent, but only to the extent that a
loss, claim, damage or liability is attributable to such Purchaser Party’s
wrongful actions or omissions, or gross negligence or to such Purchaser Party’s
breach of any of the representations, warranties, covenants or agreements made
by such Purchaser in this Agreement or in the other Transaction Documents.

 

34

 

(b)                                 If the indemnification
provided for in Section 9.11(a) is judicially determined to be
unavailable to a Purchaser Party in respect of any Losses incurred by them,
then, in lieu of indemnifying such Purchaser Party hereunder, the Person from
whom indemnification is sought hereunder shall contribute to the amount paid or
payable by such Purchaser Party as a result of such Losses (and expense
relating thereto): (A) in such proportion as is appropriate to reflect the
relative benefits to the applicable Purchaser Party, on the one hand, and the
Person providing indemnification hereunder, on the other hand, of transactions
contemplated by this Agreement or (B) if the allocation provided by clause
(A) above is not available, in such proportion as is appropriate to
reflect not only the relative benefits referred to in such clause (A) but
also the relative fault of each of the applicable Persons, as well as any other
relevant equitable considerations.

 

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

 

9.13                           Remedies. The Company
and each Purchaser and its permitted successors and assigns shall have all
rights and remedies set forth in this Agreement and the Transaction Documents
and all rights and remedies which they may have under any law or in
equity. The Company and each Purchaser and its permitted successors and assigns
shall be entitled to enforce such rights specifically, to recover damages by
reason of any breach of any provision of this Agreement or the Transaction
Documents and to exercise all other rights granted by law or in equity, if
available. Furthermore, the Company recognizes that in the event that it fails
to perform, observe, or discharge any or all of its obligations under the
Transaction Documents, any remedy at law may prove to be inadequate relief
to the Purchasers. The Company therefore agrees that the Purchasers shall be
entitled to seek temporary and permanent injunctive relief in any such case
without the necessity of proving actual damages and without posting a bond or
other security.

 

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

 

9.15                           Payment Set Aside. To
the extent that the Company makes a payment or payments to the Purchasers
hereunder or pursuant to any of the other Transaction Documents or the Purchasers
enforce or exercise their rights hereunder or thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or 

 

35

 

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.

 

9.16                           Independent Nature of
Purchasers’ Obligations and Rights. The obligations of each Purchaser under
any Transaction Document are several and not joint with the obligations of any
other Purchaser, and no Purchaser shall be responsible in any way for the
performance of the obligations of any other Purchaser under any Transaction
Document. Nothing contained herein or in any other Transaction Document, and no
action taken by any Purchaser pursuant hereto or thereto, shall be deemed to
constitute the Purchasers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Purchasers are in
any way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and the Company
acknowledges that the Purchasers are not acting in concert or as a group with
respect to such obligations or the transactions contemplated by the Transaction
Documents. Each Purchaser confirms that it has independently participated in
the negotiation of the transaction contemplated hereby with the advice of its
own counsel and advisors. Each Purchaser shall be entitled to independently
protect and enforce its rights, including, without limitation, the rights
arising out of this Agreement or out of any other Transaction Documents, and it
shall not be necessary for any other Purchaser to be joined as an additional
party in any proceeding for such purpose.

 

[Signature Page Follows]

 

36

 

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

 

 

	
   

  	
  COMPANY:

  
	
   

  	
   

  	
   

  
	
   

  	
  EARTH BIOFUELS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

 

	
   

  	
  PURCHASER:

  
	
   

  	
   

  
	
   

  	
  INVESTOR NAME  

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  

 

37

 

Schedule 3.1

 

	
  Subsidiary

  	
   

  	
  State of Incorporation / Organization

  
	
  Earth Biofuels Operating, Inc.,

  	
   

  	
  Mississippi corporation

  
	
  Durant Biofuels, LLC

  	
   

  	
  Oklahoma limited liability company

  
	
  The Wing Sail Company

  	
   

  	
  Texas corporation

  
	
  Earth Biofuels Technology Company, LLC

  	
   

  	
  Texas limited liability company

  

 

Schedule 3.10

 

	
  Entity

  	
   

  	
  Anti-Dilution Rights

  	
   

  	
  Offer Rights

  
	
  K
  Street

  	
   

  	
   

  	
   

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

  
	
  Marc
  Weill

  Tom Groos

  Joshua Cohen

  	
   

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

  	
   

  	
   

  

 

Schedule 3.11

 

None.

 

Schedule 3.12

 

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

 

Schedule 3.17

 

	
  Affiliate of the Company

  	
   

  	
  Outstanding Debt

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  $

  	
  1,245,507.00

  	
   

  
	
  Blackwell
  Star Cars (Bruce Blackwell)

  	
   

  	
  $

  	
  140,000.00

  	
   

  
	
  DGMAC, LLC
  (Dennis McLaughlin)

  	
   

  	
  $

  	
  81,478,.91

  	
   

  

 

Schedule 3.18

 

(i) None.

 

(ii) Outstanding options, etc.:

 

38

 

	
  Entity

  	
   

  	
  Options

  	
   

  	
  Reserved Shares

  	
   

  
	
  Peter
  Bell

  	
   

  	
  Warrant

  	
   

  	
  3,000,000
  shares

  	
   

  
	
  Greenwich
  Power, LLC

  	
   

  	
  Convertible
  Note

  Warrant

  	
   

  	
  920,810
  shares

  920,810 shares

  	
   

  
	
  K
  Street

  	
   

  	
  Securities
  Purchase Agreement

  	
   

  	
  6,400,000
  shares

  	
   

  
	
  Marc
  Weill

  	
   

  	
  Confidential
  Term Sheet for Convertible Promissory Note

  	
   

  	
  2,000,000
  shares aggregate

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

  	
   

  
	
  Tom
  Groos

  	
   

  	
  Confidential
  Term Sheet for Convertible Promissory Note

  	
   

  	
   

  	
   

  
	
  Joshua
  Cohen

  	
   

  	
  Confidential
  Term Sheet for Convertible Promissory Note

  	
   

  	
   

  	
   

  

 

(iii) Outstanding debt

 

	
  Current Liabilities

  	
   

  	
  Consolidated

  	
   

  
	
  Account
  Payable (aggregate)

  	
   

  	
  $

  	
  981,958.50

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  $

  	
  1,245,507.00

  	
   

  
	
  Blackwell
  Star Cars

  	
   

  	
  $

  	
  140,000.00

  	
   

  
	
  DGMAC, LLC
  (Dennis McLaughlin)

  	
   

  	
  $

  	
  81,478,.91

  	
   

  
	
  MAC
  Partners, LP

  	
   

  	
  $

  	
  83,995.45

  	
   

  
	
  Tom Groos

  	
   

  	
  $

  	
  250,000.00

  	
   

  
	
  Marc Weill

  	
   

  	
  $

  	
  250,000.00

  	
   

  
	
  Joshua Cohen

  	
   

  	
  $

  	
  500,000.00

  	
   

  
	
  Quarles

  	
   

  	
  $

  	
  19,000.00

  	
   

  
	
  Southern Bio
  Fuels, LLC

  	
   

  	
  $

  	
  1,100,053.93

  	
   

  
	
  Greenwich
  Power, LLC

  	
   

  	
  $

  	
  1,000,000.00

  	
   

  

 

(iv)

 

	
  Entities with Registration
  Rights

  	
   

  	
  Filing Deadline

  
	
  Greenwich
  Power, LLC

  	
   

  	
  No
  earlier than August 31, 2006

  
	
  K
  Street

  	
   

  	
  August
  31, 2006

  
	
  Marc
  Weill

  	
   

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

  
	
  Tom
  Groos

  	
   

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

  
	
  Joshua
  Cohen

  	
   

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

  

 

(v) None.

(vi) None.

(vii) None.

(viii) None.

 

Table
of Beneficial Ownership

 

	
  Name of Beneficial Owner

  	
   

  	
  Number of Shares

  Beneficially Owned(1)

  	
   

  	
  Percent of

  Outstanding Shares(1)

  	
   

  
	
  Apollo
  Resources International, Inc.

  	
   

  	
  129,381,182

  	
   

  	
  62

  	
  %

  
	
  Dennis G. Mc
  Laughlin, III

  	
   

  	
  2,389,927

  	
   

  	
  1.15

  	
  %

  
	
  Tommy
  Johnson

  	
   

  	
  1,507,659

  	
   

  	
  .7

  	
  %

  
	
  Morgan
  Freeman

  	
   

  	
  3,000,000

  	
   

  	
  1.4

  	
  %

  
	
  William O.
  Luckett, Jr.

  	
   

  	
  1,500,989

  	
   

  	
  .7

  	
  %

  
	
  Willie
  Nelson

  	
   

  	
  6,000,000

  	
   

  	
  2.8

  	
  %

  
	
  Bruce
  Blackwell

  	
   

  	
  1,500,000

  	
   

  	
  .7

  	
  %

  
	
  Darren Miles

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
	
  Kit Chambers

  	
   

  	
  0

  	
   

  	
  0

  	
   

  
	
  Officers and
  directors as a group (8 persons)

  	
   

  	
  15,898,575

  	
   

  	
  7.6

  	
  %

  

 

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

 

39

 

Schedule 3.19

 

(i) None.

 

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

 

	
  Party

  	
   

  	
  Contract, Agreement or Instrument

  
	
  Dickerson
  Petroleum, Inc.

  	
   

  	
  Management
  Agreement (Grenada Property)

  
	
  System
  Management Solutions, Inc.

  	
   

  	
  Major
  Fuel Supplier

  
	
  Elbow
  River Marketing, LP

  	
   

  	
  Major
  Fuel Supplier

  

 

(iii) None.

 

(iv) None.

 

Schedule 3.20

 

None.

 

Schedule 3.23

 

None.

 

Schedule 4.4

 

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

 

40

 

Exhibit A

 

SCHEDULE OF
PURCHASERS

 

	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  
	
  Purchaser

  	
   

  	
  Address

  	
   

  	
  Jurisdiction

  of

  Residence

  	
   

  	
  Principal

  Amount of

  Note

  	
   

  	
  Purchase Price

  	
   

  	
  Legal Representative’s

  Address

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Evolution Master Fund Ltd. SPC, Segregated Portfolio M

  	
   

  	
  Walker House, Mary Street

  P.O. Box 908 GT
George Town, Cayman Island

  	
   

  	
  Cayman Islands

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  $

  	
  5,000,000

  	
   

  	
  Mazzeo Song LLP

  708 Third Avenue
19th Floor
NY, NY 10017
Robert Mazzeo Song LLP Tel:  212-599-0700
Fax: 
  212-599-8400

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
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  Evolution Capital Management, LLC

  1132 Bishop Street,

  Suite 1880

  Honolulu, Hawaii 96813
Attn: 
  Richard Chisholm 

  Tel:  808-441-4917

  Fax:  808-441-4946

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
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41Exhibit 4.2

 

THIS NOTE AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAW, AND
MAY NOT BE OFFERED FOR SALE OR SOLD UNLESS A REGISTRATION STATEMENT UNDER SUCH
ACT AND APPLICABLE STATE SECURITIES LAWS SHALL BE EFFECTIVE WITH RESPECT
THERETO, OR AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT AND
APPLICABLE STATE SECURITIES LAWS IS AVAILABLE IN CONNECTION WITH SUCH OFFER OR SALE.

 

THIS NOTE DOES NOT REQUIRE PHYSICAL SURRENDER
HEREOF IN ORDER TO EFFECT A PARTIAL PAYMENT, REDEMPTION OR CONVERSION HEREOF.
ACCORDINGLY, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE
PRINCIPAL AMOUNT SHOWN BELOW.

 

EARTH
BIOFUELS, INC.

 

8% SENIOR CONVERTIBLE NOTE

 

	
  New York, New York

  	
   

  	
  $5,000,000

  	
   

  
	
  Issue Date: May 26, 2006

  	
   

  	
   

  

 

FOR
VALUE RECEIVED, EARTH BIOFUELS, INC., a Delaware corporation (the “Company”), hereby
promises to pay to the order of EVOLUTION MASTER FUND, LTD or its permitted
successors or assigns (the “Holder”) the sum of FIVE MILLION AND 00/100 DOLLARS
($5,000,000) in same day funds, on or before the Maturity Date (as defined
below). Upon the occurrence of the Conversion Trigger Event (as defined below),
the Holder may convert principal of and interest accrued on this Note into
shares (“Conversion
Shares”) of the Company’s common stock, par value $.001 per
share (the “Common Stock”),
on the terms set forth herein.

 

The Company
has issued this Note pursuant to a Securities Purchase Agreement, dated as of
May 26, 2006 (the “Securities
Purchase Agreement”). The Notes issued by the Company pursuant
to the Securities Purchase Agreement, including this Note, are collectively
referred to herein as the “Notes”.

 

 

The following
terms shall apply to this Note:

 

1.             DEFINITIONS.

 

“Approved Stock Plan”
means any employee benefit plan which has been approved by the Board of
Directors of the Company (including a majority of the independent members of
the Board), pursuant to which the Company’s securities may be issued to any
employee, officer, director or consultant for services provided to the Company.

 

“Business Day” means
any day other than a Saturday, a Sunday or a day on which the New York Stock
Exchange is closed or on which banks are authorized by law to close in New
York, New York.

 

“Change of Control”
means the existence or occurrence of any of the following: (a) the sale,
conveyance or disposition of all or substantially all of the assets of the
Company; (b) the effectuation of a transaction or series of transactions in
which more than fifty percent (50%) of the voting power of the Company is
disposed of; (c) the consolidation, merger or other business combination of the
Company with or into any other entity, immediately following which the prior
stockholders of the Company fail to own, directly or indirectly, at least fifty
percent (50%) of the surviving entity; (d) a transaction or series of
transactions in which any Person or group acquires more than fifty percent
(50%) of the voting equity of the Company; and (e) the Continuing Directors do
not at any time constitute at least a majority of the Board of Directors of the
Company.

 

“Common Stock Equivalent”
means, collectively, Options and Convertible Securities.

 

“Continuing Director”
means at any date a member of the Company’s Board of Directors (i) who was a
member of such board on the date of the Securities Purchase Agreement or (ii)
who was nominated or elected by at least a majority of the directors who were
Continuing Directors at the time of such nomination or election or whose
election to the Company’s Board of Directors was recommended or endorsed by at
least a majority of the directors who were Continuing Directors at the time of
such nomination or election or such lesser number comprising a majority of a
nominating committee if authority for such nominations or elections has been
delegated to a nominating committee whose authority and composition have been
approved by at least a majority of the directors who were continuing directors
at the time such committee was formed.

 

“Conversion Price”
means, as of any date, the lower of the Fixed Conversion Price and the Floating
Conversion Price on such date, subject to adjustment as provided herein.

 

“Conversion Trigger Event”
means that, as of the Initial Maturity Date, this Note has not been repaid in
full either (i) in cash or (ii) through an Exchange effected in accordance with
Section 2(c)
below.

 

“Convertible Securities” means any stock or securities (other than
Options) of the Company convertible into or exercisable or exchangeable for
Common Stock.

 

2

 

“Debt” means as to any
Person at any time: (a) all indebtedness, liabilities and obligations of such
Person for borrowed money; (b) all indebtedness, liabilities and obligations of
such Person to pay the deferred purchase price of Property or services, except
trade accounts payable of such Person arising in the ordinary course of
business that are not past due by more than 90 days; (c) all capital lease
obligations of such Person; (d) all Debt of others guaranteed by such Person;
(e) all indebtedness, liabilities and obligations secured by a Lien (other than
a Permitted Lien) existing on Property owned by such Person, whether or not the
indebtedness, liabilities or obligations secured thereby have been assumed by
such Person or are non-recourse to such Person; (f) all reimbursement
obligations of such Person (whether contingent or otherwise) in respect of
letters of credit, bankers’ acceptances, surety or other bonds and similar
instruments; and (g) all liabilities and obligations of such Person to redeem
or retire shares of capital stock of such Person (other than the Company’s
obligation to redeem the Securities under the circumstances specified therein).
Debt shall not include any liability for (i) federal, state, local or other
taxes imposed by a Governmental Authority, (ii) endorsements of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business or (iii) any indebtedness that has been fully and finally
defeased in accordance with the terms of the documents governing such
indebtedness.

 

“Default Interest Rate”
means the lower of sixteen (16%) and the maximum rate permitted by applicable
law or by the applicable rules or regulations of any governmental agency or of
any stock exchange or other self-regulatory organization having jurisdiction
over the Company or the trading of its securities.

 

“Exchange” means that
all outstanding principal of and interest (and other amounts) accrued on this
Note have been exchanged for the securities issued in a New Offering on a
dollar-for-dollar basis and otherwise with the same terms granted to other
purchasers in the New Offering.

 

“Fixed Conversion Price”
means the greater of (i) the Floor Price and (ii) seventy five percent (75%) of
the Market Price on the Initial Maturity Date; in either case, subject to
adjustment as provided herein.

 

“Floating Conversion Price”
means, as of any date, the greater of (i) the Floor Price and (ii) seventy five
percent (75%) of the Market Price on such date; in either case, subject to
adjustment as provided herein.

 

“Floor Price” means
the least of (i) $1.00, (ii) the lowest floor price for any conversion or exercise
price in any other security of the Company issued after the date hereof, and
(iii) the lowest per share consideration for which the Company issues or sells,
or in accordance with Section
5(e)(ii) is deemed to have issued or sold, any shares of Common
Stock.

 

“Governmental Authority”
means any nation or government, any state, provincial or political subdivision
thereof and any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government, including without
limitation any stock exchange, securities market or self-regulatory
organization.

 

3

 

“Initial Maturity Date”
means the ninetieth (90th) calendar day following the Issue Date.

 

“Issue Date” means the
date on which this Note is issued pursuant to the Securities Purchase
Agreement.

 

“Lien” and “Permitted Lien” shall
have the respective meanings set forth in the Securities Purchase Agreement.

 

“Liquidation Event”
means the (x) institution of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar proceedings in
connection therewith, relative to the Company, the Company Subsidiaries or to
its or their creditors, as such, or to its or their assets, or (y) the
dissolution or other winding up of the Company or the Company Subsidiaries,
whether voluntary or involuntary and whether or not involving insolvency or
bankruptcy proceedings, or (z) any assignment for the benefit of creditors or
any marshalling of the material assets or material liabilities of the Company
or any Company Subsidiary.

 

“Major Transaction”
means a merger, consolidation, business combination, tender offer, exchange of
shares, recapitalization, reorganization, redemption or other similar event, as
a result of which shares of Common Stock shall be changed into the same or a
different number of shares of the same or another class or classes of stock or
securities or other assets of the Company or another entity or the Company
shall sell all or substantially all of its assets.

 

“Market Price” means,
as of a particular date, the lower of (i) the average of daily VWAP for each of
the five (5) consecutive Trading Days occurring immediately prior to (but not
including) such date and (ii) the daily VWAP on the Trading Day occurring
immediately prior to (but not including) such date.

 

“Maturity Date” means
the Initial Maturity Date and, if the Holder exercises the Maturity Extension
Option, the Subsequent Maturity Date.

 

“Maturity Extension Option”
has the meaning set forth in Section 2(b) below.

 

“New Offering” means a
private offering and sale by the Company of its equity securities with gross
cash proceeds to the Company of at least forty million dollars ($40,000,000).

 

“Obligations” shall
have the meaning set forth in Section 2(a) below.

 

“Options” means any
rights, warrants or options to subscribe for, purchase or receive Common Stock
or Convertible Securities.

 

4

 

“Person” means any
individual, corporation, trust, association, company, partnership, joint
venture, limited liability company, joint stock company, Governmental Authority
or other entity.

 

“Principal Market”
means the principal securities exchange or market on which the Common Stock is
listed or traded.

 

“Registrable Securities”
has the meaning set forth in the Registration Rights Agreement.

 

“Registration Rights Agreement”
means the agreement between the Holder and the Company pursuant to which the
Company has agreed to register the shares of Common Stock issuable under the
Notes and the Warrants.

 

“Registration Statement”
means the Registration Statement (as defined in the Registration Rights
Agreement) covering the resale of the Conversion Shares issuable under this
Note.

 

“Subsequent Maturity Date”
means the one hundred and eightieth (180th) calendar day following
the Issue Date.

 

“Trading Day” means a
Business Day on which shares of Common Stock is purchased and sold on the
Principal Market.

 

“VWAP” on a Trading
Day means the volume weighted average price of the Common Stock for such
Trading Day on the Principal Market as reported by Bloomberg Financial Markets
or, if Bloomberg Financial Markets is not then reporting such prices, by a
comparable reporting service of national reputation selected by the Holders and
reasonably satisfactory to the Company. If VWAP cannot be calculated for the
Common Stock on such Trading Day on any of the foregoing bases, then the
Company shall submit such calculation to an independent investment banking firm
of national reputation reasonably acceptable to the Investors, and shall cause
such investment banking firm to perform such determination and notify the
Company and the Investors of the results of determination no later than two (2)
Business Days from the time such calculation was submitted to it by the Company.
All such determinations shall be appropriately adjusted for any stock dividend,
stock split or other similar transaction during such period.

 

“Warrants” means the
warrants issued pursuant to the Securities Purchase Agreement.

 

All
definitions contained in this Note are equally applicable to the singular and
plural forms of the terms defined. The words “hereof”, “herein” and “hereunder”
and words of similar import referring to this Note refer to this Note as a
whole and not to any particular provision of this Note. Any capitalized term
used but not defined herein has the meaning specified in the Securities
Purchase Agreement.

 

5

 

2.             MATURITY DATE; EXTENSION OF MATURITY.

 

(a)           Initial Maturity Date. On the
Initial Maturity Date, and subject to the Maturity Extension Option (as defined
below), the Company shall pay to the Holder all principal of and interest (and
other amounts) accrued on this Note (collectively, the “Obligations”) either
(i) in cash or (ii) through an Exchange in accordance with Section 2(c) below.

 

(b)           Subsequent Maturity Date;
Extension. In the event that the Company does not pay the entire amount of
the Obligations on the Initial Maturity Date either (i) in cash or (ii) through
an Exchange, the Holder shall have the option to extend the Maturity Date as to
all or any part of the Obligations from the Initial Maturity Date to the
Subsequent Maturity Date (the “Maturity Extension Option”). If the Holder exercises the
Maturity Extension Option, the Obligations shall become due on the Subsequent
Maturity Date instead of the Initial Maturity Date, and Interest (and any other
amounts) shall continue to accrue hereon through the full and final payment
(through cash or an Exchange) of all Obligations. In order to exercise the
Maturity Extension Option, the Holder must deliver written notice thereof no
later than the fifth (5th) Business Day prior to the Initial
Maturity Date specifying the amount of Obligations to which the Maturity
Extension Option applies. If the Holder does not exercise the Maturity
Extension Option, the Obligations shall be deemed due and payable on the
Initial Maturity Date. Any Obligations (including accrued and unpaid Interest) not
paid in full when due shall bear interest at the Default Interest Rate from the
due date through the date on which payment in full is made.

 

(c)           Exchange. In order to pay the
Obligations through an Exchange, the Company must deliver written notice thereof
at least five (5) Business Days prior to the date on which the Exchange is to
be effected (the “Exchange
Date”). On the Exchange Date, this Note shall be automatically
exchanged for a portion of the securities issued in a New Offering, such
Exchange to be effected on a dollar-for-dollar basis so that each dollar of
Obligations (including all Interest accrued through the Exchange Date) shall be
deemed payment for the securities issued in the New Offering on the same terms
and conditions granted to other purchasers in the New Offering. Unless and
until an Exchange occurs (or payment in full of all Obligations is made in
cash), the Holder shall have all of its rights and remedies hereunder
(including without limitation its right to convert this Note if the Conversion
Trigger Event has occurred) through the Exchange Date (or the date on which
payment in full is made).

 

(d)           Remedies for Non-payment. Until
all Obligations have been paid in full, either in cash or through an Exchange
effected in accordance with Section 2(c) above, the Holder shall have all rights and
remedies set forth in this Note and the other Transaction Documents and which
it may otherwise have under any law or in equity with respect to amounts due
and unpaid hereunder. The Holder and its permitted successors and assigns shall
be entitled to enforce such rights specifically, to recover damages by reason
of any non-payment of the Obligations when due or the breach of any provision
of this Note or the Transaction Documents and to exercise all other rights
granted by law or in equity, if available. The Company recognizes and agrees
that in the event that it fails to perform, observe, or discharge any or all of
its obligations under this Note, any remedy at law may prove to be inadequate
relief to the Holder and, therefore, the Holder shall be entitled to seek
temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages and without posting a bond or other
security.

 

6

 

3.             INTEREST.

 

This Note
shall bear interest on the unpaid principal amount hereof (“Interest”) at an
annual rate equal to eight percent (8%); provided,
however, that if a New Offering is not completed within sixty (60)
calendar days following the Issue Date, Interest shall be computed at an annual
rate of twelve percent (12%), such computation to be retroactive to the Issue
Date as though Interest had accrued from such date at an annual rate of twelve
percent. Interest shall be computed on the basis of a 360-day year and
calculated using the actual number of days elapsed since the Issue Date, and if
not timely paid as provided herein, compounded monthly until paid.

 

4.             CONVERSION.

 

(a)           Right
to Convert. If the Conversion Trigger Event occurs, the Holder shall have
the right to convert, at any time thereafter and from time to time until the
Obligations are paid in full, (i) all or any part of the outstanding and unpaid
principal amount of this Note and (ii) at the Holder’s option, in its sole discretion,
all or any part of unpaid Interest (and any other amounts) accrued hereon, into
such number of fully paid and non-assessable Conversion Shares as is determined
in accordance with the terms hereof (a “Conversion”).

 

(b)           Conversion Notice. In order to
convert principal of (and, if the Holder so elects, Interest accrued on) this
Note, the Holder shall send by facsimile transmission, at any time prior to
5:00 p.m., eastern time, on the Business Day on which the Holder wishes to
effect such Conversion (the “Conversion Date”), a properly completed notice of
conversion to the Company, in the form set forth on Annex I hereto,
stating the amount of principal (and accrued Interest, if applicable) to be
converted and a calculation of the number of shares of Common Stock issuable
upon such Conversion (a “Conversion
Notice”). The Conversion Notice shall also state the name or
names (with address) in which the shares of Common Stock that are issuable on
such conversion shall be issued. The Holder shall not be required to physically
surrender this Note to the Company in order to effect a Conversion. The Company
shall maintain a record showing, at any given time, the unpaid principal amount
of this Note and the date of each Conversion or other payment of principal hereof.
The Holder shall amend Annex
II hereto upon any such Conversion or payment of principal to
reflect the unpaid principal amount hereof. In the case of a dispute as to the
number of Conversion Shares issuable upon a Conversion (including without
limitation as a result of adjustments to the Fixed Conversion Price made in
accordance with Section
4 below), the Company shall promptly issue to the Holder the
number of Conversion Shares that are not disputed and shall submit the disputed
calculations to a certified public accounting firm of national recognition
(other than the Company’s independent accountants) within two (2) Business Days
of receipt of the Holder’s Conversion Notice. The Company shall use its best
efforts to cause such accountants to calculate the Fixed Conversion Price as
provided herein and to notify the Company and the Holder of the results in
writing no later than two (2) Business Days following the day on which such
accountant received the disputed calculations (the “Dispute Procedure”).
Such accountant’s calculation shall be deemed conclusive absent manifest error.
The fees of any such accountant shall be borne by the party whose calculations
are most at variance with those of such accountant.

 

(c)           Number of Conversion Shares;
Conversion Price. The number of Conversion Shares to be delivered by the
Company pursuant to a Conversion shall be equal to the principal amount of
(and, if the Holder so elects, Interest and any other amounts accrued on) this
Note being converted divided by the Conversion Price in effect on the
Conversion Date.

 

7

 

(d)           Delivery of Common Stock Upon
Conversion. Upon receipt of a Conversion Notice, the Company shall, no
later than the close of business on the third (3rd) Business Day following the
Conversion Date set forth in such Conversion Notice (the “Delivery Date”),
issue and deliver or cause to be delivered to the Holder the number of
Conversion Shares determined pursuant to Section 3(c) above, provided, however,
that any Conversion Shares that are the subject of a Dispute Procedure shall be
delivered no later than the close of business on the third (3rd) Business Day
following the determination made pursuant thereto. The Company shall effect
delivery of Conversion Shares to the Holder, as long as the Company’s
designated transfer agent or co-transfer agent in the United States for the
Common Stock (the “Transfer
Agent”) participates in the Depository Trust Company (“DTC”) Fast Automated
Securities Transfer program (“FAST”), by crediting the account of the Holder or its
nominee at DTC (as specified in the applicable Conversion Notice) with the
number of Conversion Shares required to be delivered, no later than the close
of business on such Delivery Date. In the event that the Transfer Agent is not
a participant in FAST or if the Holder so specifies in a Conversion Notice or
otherwise in writing on or before the Conversion Date, the Company shall effect
delivery of Conversion Shares by delivering to the Holder or its nominee
physical certificates representing such Conversion Shares, no later than the
close of business on such Delivery Date. If any Conversion would create a
fractional Conversion Share, such fractional Conversion Share shall be
disregarded and the number of Conversion Shares issuable upon such Conversion,
in the aggregate, shall be the nearest whole number of Conversion Shares. Conversion
Shares delivered to the Holder shall not contain any restrictive legend unless
such legend is required pursuant to the terms of the Securities Purchase
Agreement.

 

(e)           Failure to Deliver Conversion
Shares.

 

(i)            In the event that the Company fails
for any reason to deliver to the Holder the number of Conversion Shares
specified in a Conversion Notice (without any restrictive legend to the extent
permitted by the terms of the Securities Purchase Agreement) on or before the
second (2nd) Business Day following the Delivery Date therefor (a “Conversion Default”),
the Holder shall have the right to receive from the Company an amount equal to
(i) (N/365) multiplied by (ii) the principal amount of, and any Interest
accrued on, this Note represented by the Conversion Shares which remain the
subject of such Conversion Default multiplied by (iii) the Default
Interest Rate, where “N” equals the number of days elapsed between the original
Delivery Date of such Conversion Shares and the date on which such Conversion
Default has been cured. In the event that shares of Common Stock are purchased
by or on behalf of the Holder in order to make delivery on a sale effected in
anticipation of receiving Conversion Shares upon a Conversion, the Holder shall
have the right to receive from the Company, in addition to the foregoing
amounts, (i) the aggregate amount paid by or on behalf of the Holder for such
shares of Common Stock minus (ii) the aggregate amount of net proceeds,
if any, received by the Holder from the sale of the Conversion Shares issued by
the Company pursuant to such Conversion. Amounts payable under this Section 4(e)(i) shall
be paid to the Holder in immediately available funds on or before the fifth
(5th) Business Day following written notice from the Holder to the Company
specifying the amount owed to it by the Company pursuant to this Section 4(e)(i).

 

(ii)           In addition to its rights under Section 4(e)(i)
above, upon a Conversion Default, the Conversion Price applicable to the
applicable Conversion shall be automatically be adjusted to the lower of (i)
the Conversion Price in effect on the Conversion Date and (ii) the lowest
Conversion Price occurring from the first date of such Conversion Default

 

8

 

through the date on which all Conversion
Shares to which the Holder is entitled have been delivered in accordance with
the terms of this Note. The Holder shall have the right to pursue all other
remedies available to it at law or in equity (including, without limitation, a
decree of specific performance and/or injunctive relief).

 

(f)            Limitations on Right to Convert.
In no event shall the Holder be permitted to convert principal of or Interest
on this Note if, upon such conversion, (x) the number of Conversion Shares to
be issued pursuant to such Conversion plus (y) the number of shares of
Common Stock beneficially owned by the Holder (other than Common Stock which
may be deemed beneficially owned except for being subject to a limitation on
conversion or exercise analogous to the limitation contained in this Section 4(f)) would
exceed 4.99% of the number of shares of Common Stock then issued and outstanding,
it being the intent of the Company and the Holder that the Holder not be deemed
at any time to have the power to vote or dispose of greater than 4.99% of the
number of shares of Common Stock issued and outstanding at any time. Nothing
contained herein shall be deemed to restrict the right of the Holder to convert
such excess principal amount at such time as such Conversion will not violate
the provisions of this Section4(f).
As used herein, beneficial ownership shall be determined in accordance with
Section 13(d) of (i) Securities Exchange Act of 1934, as amended, and the rules
thereunder. To the extent that the limitation contained in this Section4(f)(i)
applies (and without limiting any rights the Company may otherwise have), the
Company may rely on the Holder’s determination of whether this Note is
convertible pursuant to the terms hereof, the Company shall have no obligation
whatsoever to verify or confirm the accuracy of such determination, and the
submission of a Conversion Notice by the Holder shall be deemed to be the
Holder’s representation that this Note is convertible pursuant to the terms
hereof. The Company shall have no liability to any person if the Holder’s
determination of whether this Note is convertible pursuant to the terms hereof
is incorrect. The holders of Common Stock are to be deemed third-party
beneficiaries of the limitation imposed hereby and, accordingly, this Section 4(f) may not
be amended without the consent of the holders of a majority of the shares of
Common Stock then outstanding; provided,
however, that the Holder shall
have the right, upon sixty (60) days’ prior written notice to the Company, to
waive the provisions of this Section 4(f)(i) in the event that either a Fundamental
Change or Liquidation Event is announced or occurs, without obtaining such
consent.

 

5.             ADJUSTMENTS TO FIXED CONVERSION PRICE.

 

(a)           Stock Splits, Stock Interests, Etc.
If, at any time on or after the Issue Date, the number of outstanding shares of
Common Stock is increased by a stock split, stock dividend, combination,
reclassification or other similar event, the Conversion Price shall be
proportionately reduced, or if the number of outstanding shares of Common Stock
is decreased by a reverse stock split, combination, reclassification or other
similar event, the Fixed Conversion Price shall be proportionately increased.
In such event, the Company shall notify the Company’s transfer agent of such
change on or before the effective date thereof.

 

(b)           Major Transactions. If, at any
time after the Issue Date, any Major Transaction shall occur, then the Holder
shall thereafter have the right to receive upon Conversion, in lieu of the
shares of Common Stock otherwise issuable, such shares of stock, securities
and/or other property as would have been issued or payable upon such Major
Transaction with respect to or in exchange for the number of shares of Common
Stock which would have been issuable upon

 

9

 

Conversion had such Major Transaction not
taken place (without giving effect to any limitations on such Conversion
contained in this Note or the Securities Purchase Agreement). The Company shall
not effect any Major Transaction unless (i) the Holder has received written
notice of such transaction at least thirty (30) days prior thereto (which
period shall be increased to sixty one (61) days if, at such time, without
giving effect to the limitation on conversion contained in Section 4(f)(i)
hereof, the Holder would beneficially own more than 4.9% of the Common Stock
then outstanding, and the Holder has notified the Company in writing of such
circumstance) but in no event later than fifteen (15) days prior to the record
date for the determination of stockholders entitled to vote with respect
thereto; provided, however, that the Company shall publicly
disclose the material terms of any such Major Transaction on or before the date
on which it delivers notice of a Major Transaction to the Holder, and (ii) the
resulting successor or acquiring entity (if not the Company) assumes by written
instrument (in form and substance reasonable satisfactory to the Holder) the
obligations of the Company under this Note (including, without limitation, the
obligation to make payments of Interest accrued but unpaid through the date of
such consolidation, merger or sale and accruing thereafter). The above
provisions shall apply regardless of whether or not there would have been a
sufficient number of shares of Common Stock authorized and available for
issuance upon conversion of this Note as of the date of such transaction, and
shall similarly apply to successive Major Transactions.

 

(c)           Distributions. If, at any time
after the Issue Date, the Company declares or makes any distribution of cash or
any other assets (or rights to acquire such assets) to holders of Common Stock,
including without limitation any dividend or distribution to the Company’s
stockholders in shares (or rights to acquire shares) of capital stock of a
subsidiary) (a “Distribution”),
the Company shall deliver written notice of such Distribution (a “Distribution Notice”)
to the Holder at least fifteen (15) days prior to the earlier to occur of (i)
the record date for determining stockholders entitled to such Distribution (the
“Record Date”)
and (ii) the date on which such Distribution is made (the “Distribution Date”)(the
earlier of such dates being referred to as the “Determination Date”). Upon receipt of
the Distribution Notice, the Holder shall promptly (but in no event later than
three (3) Business Days) notify the Company whether it has elected (A) to
receive the same amount and type of assets (including, without limitation,
cash) being distributed as though the Holder were, on the Determination Date, a
holder of a number of shares of Common Stock into which this Note is
convertible as of such Determination Date (such number of shares to be
determined without giving effect to any limitations on such conversion) or (B)
upon any exercise of this Note on or after the Distribution Date, to reduce the
Conversion Price applicable to such conversion by reducing the Conversion Price
in effect on the Business Day immediately preceding the Record Date by an
amount equal to the fair market value of the assets to be distributed divided
by the number of shares of Common Stock as to which such Distribution is to
be made, such fair market value to be reasonably determined in good faith by
the independent members of the Company’s Board of Directors. Upon receipt of
such election notice from the Holder, the Company shall timely effectuate the
transaction or adjustment contemplated in the foregoing clause (A) or (B), as
applicable. If the Holder does not notify the Company of its election pursuant
to the preceding sentence on or prior to the Determination Date, the Holder
shall be deemed to have elected clause (A) of the preceding sentence.

 

In the
Distribution Notice to the Holder, the Company shall indicate whether the
Company has elected (A) to deliver to the Holder the same amount and type of
assets (including, without limitation, cash) being distributed as though the
Holder were, on the Determination Date, a holder of

 

10

 

a number of shares of Common Stock into which
this Note is convertible as of such Determination Date (such number of shares
to be determined without giving effect to any limitations on such conversion)
or (B) upon any Conversion of this Note on or after the Distribution Date, to
reduce the Fixed Conversion Price applicable to such Conversion by reducing the
Fixed Conversion Price in effect on the Business Day immediately preceding the
Record Date by an amount equal to the fair market value of the assets to be
distributed divided by the number of shares of Common Stock as to which
such Distribution is to be made, such fair market value to be reasonably
determined in good faith by the independent members of the Company’s Board of
Directors. If the Company does not notify the Holders of its election pursuant
to the preceding sentence on or prior to the Determination Date, the Company
shall be deemed to have elected clause (A) of the preceding sentence.

 

(d)           Convertible Securities; Options.
If, at any time after the Issue Date, the Company issues Convertible Securities
or Options to the record holders of the Common Stock, whether or not such
Convertible Securities or Options are immediately convertible, exercisable or
exchangeable, then the Holders shall be entitled, upon any Conversion of this
Note after the date of record for determining stockholders entitled to receive
such Convertible Securities or Options (or if no such record is taken, the date
on which such Convertible Securities or Options are issued), to receive the
aggregate number of Convertible Securities or Options which the Holder would
have received with respect to the shares of Common Stock issuable upon such
conversion (without giving effect to any limitations on such Conversion
contained in this Note or the Securities Purchase Agreement) had the Holder
been the holder of such shares of Common Stock on the record date for the
determination of stockholders entitled to receive such Convertible Securities
or Options (or if no such record is taken, the date on which such Convertible
Securities or Options were issued).

 

(e)           Dilutive Issuances.

 

(i)            Adjustment Upon Dilutive Issuance.
If, at any time after the Issue Date, the Company issues or sells, or in
accordance with Section
5(e)(ii) is deemed to have issued or sold, any shares of Common
Stock for no consideration or for a consideration per share less than the Fixed
Conversion Price on the date of such issuance or sale (or deemed issuance or
sale) (a “Dilutive
Issuance”), then the Fixed Conversion Price shall be adjusted so
as to equal the consideration received or receivable by the Company (on a per
share basis) for the additional shares of Common Stock so issued, sold or
deemed issued or sold in such Dilutive Issuance (which, in the case of a deemed
issuance or sale, shall be calculated in accordance with Section 5(e)(ii)
below). Notwithstanding the foregoing, no adjustment shall be made pursuant
hereto if such adjustment would result in an increase in the Fixed Conversion
Price.

 

(ii)           Effect On Fixed Conversion Price
Of Certain Events. For purposes of determining the adjusted Fixed
Conversion Price under Section
5(e)(i), the following will be applicable:

 

(A)          Issuance Of Options. If the
Company issues or sells any Options, whether or not immediately exercisable,
and the price per share for which Common Stock is issuable upon the exercise of
such Options (and the price of any conversion of Convertible Securities, if
applicable) is less than the Fixed Conversion Price in effect on the date of
issuance or sale of such Options, then the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion, exercise or

 

11

 

exchange of
Convertible Securities, if applicable) shall, as of the date of the issuance or
sale of such Options, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of the preceding
sentence, the “price per share for which Common Stock is issuable upon the
exercise of such Options” shall be determined by dividing (x) the total amount,
if any, received or receivable by the Company as consideration for the issuance
or sale of all such Options, plus the minimum aggregate amount of additional
consideration, if any, payable to the Company upon the exercise of all such
Options, plus, in the case of Convertible Securities issuable upon the
exercise of such Options, the minimum aggregate amount of additional
consideration payable upon the conversion, exercise or exchange thereof
(determined in accordance with the calculation method set forth in Section 5(e)(ii)(B)
below) at the time such Convertible Securities first become convertible,
exercisable or exchangeable, by (y) the maximum total number of shares of
Common Stock issuable upon the exercise of all such Options (assuming full
conversion, exercise or exchange of Convertible Securities, if applicable). No
further adjustment to the Fixed Conversion Price shall be made upon the actual
issuance of such Common Stock upon the exercise of such Options or upon the
conversion, exercise or exchange of Convertible Securities issuable upon
exercise of such Options. To the extent that shares of Common Stock or
Convertible Securities are not delivered pursuant to such Options, upon the
expiration or termination of such Options, the Fixed Conversion Price shall be
readjusted to the Fixed Conversion Price that would then be in effect had the
adjustments made upon the issuance of such Options been made on the basis of
delivery of only the number of shares of Common Stock actually delivered.

 

(B)           Issuance Of Convertible Securities.
If the Company issues or sells any Convertible Securities, whether or not
immediately convertible, exercisable or exchangeable, and the price per share
for which Common Stock is issuable upon such conversion, exercise or exchange
is less than the Fixed Conversion Price in effect on the date of issuance or
sale of such Convertible Securities, then the maximum total number of shares of
Common Stock issuable upon the conversion, exercise or exchange of all such
Convertible Securities shall, as of the date of the issuance or sale of such
Convertible Securities, be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. If the Convertible Securities so
issued or sold do not have a fluctuating conversion or exercise price or
exchange ratio, then for the purposes of the immediately preceding sentence,
the “price per share for which Common Stock is issuable upon such conversion,
exercise or exchange” shall be determined by dividing (A) the total amount, if
any, received or receivable by the Company as consideration for the issuance or
sale of all such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the conversion,
exercise or exchange thereof (determined in accordance with the calculation
method set forth in this Section
5(e)(ii)(B)) at the time such Convertible Securities first
become convertible, exercisable or exchangeable, by (B) the maximum total
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of all such Convertible Securities. If the Convertible Securities so
issued or sold have a fluctuating conversion or exercise price or exchange
ratio (a “Variable Rate
Convertible Security”), then for purposes of the first sentence
of this Section
5(e)(ii)(B), the “price per share for which Common Stock is
issuable upon such conversion, exercise or exchange” shall be deemed to be the
lowest price per share which would be applicable (assuming all holding period
and other conditions to any discounts

 

12

 

contained in
such Variable Rate Convertible Security have been satisfied) if the conversion
price of such Variable Rate Convertible Security on the date of issuance or sale
thereof were equal to the actual conversion price on such date (or such higher
minimum conversion price if such Variable Rate Convertible Security is subject
to a minimum conversion price) (the “Assumed Variable Market Price”), and,
further, if the conversion price of such Variable Rate Convertible Security at
any time or times thereafter is less than or equal to the Assumed Variable
Market Price last used for making any adjustment under this Section 5(e) with
respect to any Variable Rate Convertible Security, the Fixed Conversion Price
in effect at such time shall be readjusted to equal the Fixed Conversion Price
which would have resulted if the Assumed Variable Market Price at the time of
issuance of the Variable Rate Convertible Security had been equal to the actual
conversion price of such Variable Rate Convertible Security existing at the
time of the adjustment required by this sentence; provided, however, that if the conversion or exercise price
or exchange ratio of a Convertible Security may fluctuate solely as a result of
provisions designed to protect against dilution, such Convertible Security
shall not be deemed to be a Variable Rate Convertible Security. No further
adjustment to the Fixed Conversion Price shall be made upon the actual issuance
of such Common Stock upon conversion, exercise or exchange of such Convertible
Securities.

 

(C)           Change In Option Price Or
Conversion Rate. If there is a change at any time in (x) the amount of
additional consideration payable to the Company upon the exercise of any
Options; (y) the amount of additional consideration, if any, payable to the
Company upon the conversion, exercise or exchange of any Convertible
Securities; or (z) the rate at which any Convertible Securities are convertible
into or exercisable or exchangeable for Common Stock (in each such case, other
than under or by reason of provisions designed to protect against dilution),
the Fixed Conversion Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding provided
for such changed additional consideration or changed conversion, exercise or
exchange rate, as the case may be, at the time initially issued or sold.

 

(D)          Calculation Of Consideration
Received. If any Common Stock, Options or Convertible Securities are issued
or sold for cash, the consideration received therefor will be the amount
received by the Company therefor. In case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration part or all of which shall be
other than cash, including in the case of a strategic or similar arrangement in
which the other entity will provide services to the Company, purchase services
from the Company or otherwise provide intangible consideration to the Company,
the amount of the consideration other than cash received by the Company
(including the net present value of the consideration expected by the Company
for the provided or purchased services) shall be the fair market value of such
consideration. In case any Common Stock, Options or Convertible Securities are
issued in connection with any merger or consolidation in which the Company is
the surviving corporation, the amount of consideration therefor will be deemed
to be the fair market value of such portion of the net assets and business of
the non-surviving corporation as is attributable to such Common Stock, Options
or Convertible Securities, as the case may be. The independent members of the
Company’s Board of

 

13

 

Directors
shall calculate reasonably and in good faith, using standard commercial
valuation methods appropriate for valuing such assets, the fair market value of
any consideration.

 

(iii)          Exceptions To Adjustment Of Fixed
Conversion Price. Notwithstanding the foregoing, no adjustment to the Fixed
Conversion Price shall be made pursuant to this Section 5(e) upon the issuance of any
Excluded Securities.

 

 (iv)         Notice
Of Adjustments. Upon the occurrence of each adjustment or readjustment of
the Fixed Conversion Price pursuant to this Section 5(e) resulting in a change in
the Fixed Conversion Price by more than one percent (1%), or any change in the
number or type of stock, securities and/or other property issuable upon
Conversion of this Note, the Company, at its expense, shall promptly compute
such adjustment, readjustment or change and prepare and furnish to the Holder a
certificate setting forth such adjustment, readjustment or change and showing
in detail the facts upon which such adjustment, readjustment or change is based.
The Company shall, upon the written request at any time of the Holder, furnish
to the Holder a like certificate setting forth (i) such adjustment,
readjustment or change, (ii) the Fixed Conversion Price at the time in effect
and (iii) the number of shares of Common Stock and the amount, if any, of other
securities or property which at the time would be received upon Conversion of
this Note.

 

6.             EVENTS OF DEFAULT; ACCELERATION.

 

(a)           Acceleration. In the event
that an Event of Default (as defined below) or a Change of Control occurs, the
Holder shall have the right, upon written notice to the Company (an “Acceleration Notice”),
to require that all or any portion of the unpaid principal amount of this Note,
plus all accrued and unpaid Interest (and any other amounts) thereon, be
immediately paid in full in cash. The Acceleration Notice shall specify the
date on which all Obligations must be paid, (the “Acceleration Date”), which date may be
the Business Day on which the Acceleration Notice is delivered to the Company,
and the amount of principal and Interest (and other amounts) to be accelerated.
The Holder must deliver an Acceleration Notice no later than the close of business
on the Business Day immediately following the first Business Day on which an
Event of Default is no longer continuing; provided,
however, that with respect to a
Change of Control, the Holder must deliver an Acceleration Notice no later than
the close of business on the third (3rd) Business Day following the
date on which the Change of Control is effected or when it is publicly
announced, whichever is later.

 

(b)  Payment. Upon delivery of an
Acceleration Notice to the Company, the Company shall pay all outstanding
Obligations in full on the Acceleration Date. If the Company fails to pay the
Obligations in full on the Acceleration Date, the Holder shall be entitled to
interest thereon at the Default Interest Rate from the Acceleration Date until
the date on which all Obligations have been paid in full.

 

(c)           Events of Default. Each of the
following events shall be deemed an “Event of Default”:

 

(i)            a Liquidation Event occurs or is
publicly announced;

 

14

 

(ii)           the Company breaches or provides
notice of its intent to breach, in a material respect, any covenant or other
material term or condition of this Note (including without limitation any
payment obligation thereunder) or any other Transaction Document, including but
not limited to the Company’s failure to deliver Conversion Shares and Warrant
Shares on or before the required delivery date therefor, and such breach
continues for a period of three (3) Business Days following written notice
thereof from the Holder;

 

(iii)          any representation or warranty made by
the Company in this Note or any other Transaction Document was inaccurate or
misleading in any material respect as of the date such representation or
warranty was made; and

 

(iv)          a default occurs or is declared, or
any amounts are accelerated, under or with respect to any instrument that
evidences Debt of the Company or any of its Subsidiaries in a principal amount
exceeding $100,000.

 

7.             PREPAYMENT.

 

The Company
shall be entitled to prepay principal of and interest (and any other amounts)
accrued on this Note, either in cash or through an Exchange in accordance with Section  2(c), at any time
without the prior written consent of the Holder; provided, however, that if the Holder exercises the Maturity
Extension Option, the Company may not prepay this Note prior to the Subsequent
Maturity Date without the prior consent of the Holder, which consent may be
withheld for any reason (or no reason) in the Holder’s sole discretion.

 

8.             MISCELLANEOUS.

 

(a)           Failure
to Exercise Rights not Waiver. No failure or delay on the part of the
Holder in the exercise of any power, right or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise of any such
power, right or privilege preclude any other or further exercise thereof. All
rights and remedies of the Holder hereunder are cumulative and not exclusive of
any rights or remedies otherwise available. In the event that the Company does
not pay any amount of the Obligations when such amount becomes due (either in
cash or through an Exchange in accordance with Section  2(c)), the Company shall bear all costs
incurred by the Holder in collecting such amount, including without limitation
reasonable legal fees and expenses.

 

(b)           Notices.
Any notices, consents, waivers or other communications required or permitted to
be given under the terms of this Note must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon
receipt, when sent by facsimile (provided confirmation of transmission is
mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with an overnight courier
service, in each case properly addressed to the party to receive the same. The
addresses and facsimile numbers for such communications shall be:

 

	
   

  	
  if to the Company:

  
	
   

  	
   

  	
   

  
	
   

  	
  Earth Biofuels, Inc.

  
	
   

  	
  3001 Knox Street, Suite 403,

  
					

 

15

 

	
   

  	
  Dallas, Texas 75205

  
	
   

  	
  Telephone:

  	
  214.389.9800

  
	
   

  	
  Facsimile:

  	
  214.389.9806

  
	
   

  	
  Attention:

  	
  Dennis McLaughlin

  
	
   

  	
   

  	
   

  
	
   

  	
  with a copy (for informational purposes
  only) to:

  
	
   

  	
   

  	
   

  
	
   

  	
  Scheef & Stone, LLP

  
	
   

  	
  Telephone:

  	
  214.706.4200

  
	
   

  	
  Facsimile:

  	
  214.706.4242

  
	
   

  	
  Attention:

  	
  Roger A. Crabb, Esq.

  
						

 

and if to the Holder, to the address and
facsimile number as to which the Holder has notified the Company in writing.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date,
recipient facsimile number and an image of the first page of such transmission
or (C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

 

(c)           Amendments.
No amendment, modification or other change to, or waiver of any provision of,
this Note may be made unless such amendment, modification or change is (A) set
forth in writing and is signed by the Company and the Holder and (B) agreed to
in writing by the holders of at least sixty-six percent (66%) of the unpaid
principal amount of the Notes, it being understood that, notwithstanding
anything to the contrary contained in any Note, upon the satisfaction of the
conditions described in (A) and (B) above, each Note (including any Note held
by the Holder who did not execute the agreement specified in (B) above) shall
be deemed to incorporate any amendment, modification, change or waiver effected
thereby as of the effective date thereof.

 

(d)           Transfer
of Note. The Holder may sell, transfer or otherwise dispose of all or any
part of this Note (including without limitation pursuant to a pledge) to any
person or entity as long as such sale, transfer or disposition is the subject
of an effective registration statement under the Securities Act of 1933, as
amended, and applicable state securities laws, or is exempt from registration
thereunder, and is otherwise made in accordance with the applicable provisions
of the Securities Purchase Agreement. From and after the date of any such sale,
transfer or disposition, the transferee hereof shall be deemed to be the holder
of a Note in the principal amount acquired by such transferee, and the Company
shall, as promptly as practicable, issue and deliver to such transferee a new
Note identical in all respects to this Note, in the name of such transferee.
The Company shall be entitled to treat the original Holder as the holder of
this entire Note unless and until it receives written notice of the sale,
transfer or disposition hereof.

 

(e)           Lost
or Stolen Note. Upon receipt by the Company of evidence of the loss, theft,
destruction or mutilation of this Note, and (in the case of loss, theft or
destruction) of indemnity or security reasonably satisfactory to the Company,
and upon surrender and cancellation of the Note, if mutilated, the Company
shall execute and deliver to the Holder a new Note identical in all respects to
this Note.

 

16

 

(f)            Governing
Law. This Note shall be governed by and construed in accordance with the
laws of the State of New York applicable to contracts made and to be performed
entirely within the State of New York.

 

(g)           Successors and Assigns. The
terms and conditions of this Note shall inure to the benefit of and be binding
upon the respective successors (whether by merger or otherwise) and permitted
assigns of the Company and the Holder. The Company may not assign its rights or
obligations under this Note except as specifically required or permitted
pursuant to the terms hereof.

 

(h)           Usury. This Note is subject to
the express condition that at no time shall the Company be obligated or required
to pay interest hereunder at a rate which could subject the Holder to either
civil or criminal liability as a result of being in excess of the maximum
interest rate which the Company is permitted by applicable law to contract or
agree to pay. If by the terms of this Note, the Company is at any time required
or obligated to pay interest hereunder at a rate in excess of such maximum
rate, the rate of interest under this Note shall be deemed to be immediately
reduced to such maximum rate and the interest payable shall be computed at such
maximum rate and all prior interest payments in excess of such maximum rate
shall be applied and shall be deemed to have been payments in reduction of the
principal balance of this Note.

 

[Signature
Page to Follow]

 

17

 

IN WITNESS
WHEREOF, the Company has caused this Note to be signed in its name by its duly
authorized officer on the date first above written.

 

EARTH BIOFUELS, INC.

 

 

	
  By:

  	
   

  	
   

  
	
  Name:

  
	
  Title:

  

 

18

 

ANNEX I

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert
principal of the 8% Senior Convertible Note (the “Note”) issued by EARTH BIOFUELS, INC.
(the “Company”)
into shares of common stock (“Common Stock”) of the Company according to the terms and
conditions of the Note. Capitalized terms used herein and not otherwise defined
shall have the respective meanings set forth in the Note.

 

 

	
   

  	
  Date of Conversion:

  	
   

  
	
   

  	
   

  
	
   

  	
  Principal Amount of

  
	
   

  	
  Note to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
  Amount of Interest

  
	
   

  	
  to be Converted:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Number of Shares of

  
	
   

  	
  Common Stock to be Issued:

  	
   

  
	
   

  	
   

  
	
   

  	
  Name of Holder:

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
							

 

Holder Requests Delivery to be made:
(check one)

 

o                                    By
Delivery of Physical Certificates to the Above Address

 

o                                    Through
Depository Trust Corporation

(Account
                                                      )

 

 

ANNEX II

 

Schedule of

Decreases

of Principal Amount

 

	
  Principal

  	
   

  	
  Amount of

  	
   

  	
   

  	
   

  
	
  Balance

  	
   

  	
  Decrease

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  $

  	
  5,000,000

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