Document:

<PAGE>

                                                                    EXHIBIT 4(o)

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                               GUARANTEE AGREEMENT

                                     BETWEEN

                          CITIZENS BANKING CORPORATION
                                  AS GUARANTOR

                                       AND

                         U.S. BANK NATIONAL ASSOCIATION
                              AS GUARANTEE TRUSTEE

                                   RELATING TO

                            CITIZENS FUNDING TRUST I

                         DATED AS OF SEPTEMBER [*], 2006

================================================================================

<PAGE>

                            CITIZENS FUNDING TRUST I

            Certain Sections of this Guarantee Agreement relating to
                         Sections 310 through 318 of the
                           Trust Indenture Act of 1939

<TABLE>
<CAPTION>
    SECTION OF                                                   SECTION OF
TRUST INDENTURE ACT                                          GUARANTEE AGREEMENT
-------------------                                          -------------------
<S>                                                          <C>
310 (a)...................................................   4.1(a)
    (b)...................................................   4.1(c), 2.8
    (c)...................................................   Inapplicable
311 (a)...................................................   2.2(b)
    (b)...................................................   2.2(b)
    (c)...................................................   Inapplicable
312 (a)...................................................   2.2(a)
    (b)...................................................   2.2(b)
313 ......................................................   2.3
314 (a)...................................................   2.4
    (b)...................................................   Inapplicable
    (c)...................................................   2.5
    (d)...................................................   Inapplicable
    (e)...................................................   1.1, 2.5, 3.2
    (f)...................................................   2.1, 3.2
315 (a)...................................................   3.1(d)
    (b)...................................................   2.7
    (c)...................................................   3.1(c)
    (d)...................................................   3.1(d)
316 (a)...................................................   1.1, 2.6, 5.4
    (b)...................................................   5.3, 5.7
    (c)...................................................   8.2
317 (a)...................................................   Inapplicable
    (b)...................................................   Inapplicable
318 (a)...................................................   2.1(b)
    (b)...................................................   2.1
    (c)...................................................   2.1(a)
</TABLE>

----------
Note: This reconciliation and tie sheet shall not, for any purpose, be deemed to
      be a part of the Guarantee Agreement and shall not affect the
      interpretation of any of its terms or provisions.

                                       -i-

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
ARTICLE I INTERPRETATION AND DEFINITIONS.................................     1
   SECTION 1.1. Interpretation...........................................     1
   SECTION 1.2. Definitions..............................................     2

ARTICLE II TRUST INDENTURE ACT...........................................     5
   SECTION 2.1. Trust Indenture Act; Application.........................     5
   SECTION 2.2. List of Holders..........................................     5
   SECTION 2.3. Reports by the Guarantee Trustee.........................     5
   SECTION 2.4. Periodic Reports to the Guarantee Trustee................     6
   SECTION 2.5. Evidence of Compliance with Conditions Precedent.........     6
   SECTION 2.6. Events of Default; Waiver................................     6
   SECTION 2.7. Events of Default; Notice................................     6
   SECTION 2.8. Conflicting Interests....................................     6

ARTICLE III POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE...........     6
   SECTION 3.1. Powers and Duties of the Guarantee Trustee...............     6
   SECTION 3.2. Certain Rights of Guarantee Trustee......................     8
   SECTION 3.3. Compensation; Indemnity; Fees............................     9

ARTICLE IV GUARANTEE TRUSTEE.............................................    10
   SECTION 4.1. Guarantee Trustee; Eligibility...........................    10
   SECTION 4.2. Appointment, Removal and Resignation of the Guarantee
                Trustee..................................................    10

ARTICLE V GUARANTEE......................................................    11
   SECTION 5.1. Guarantee................................................    11
   SECTION 5.2. Waiver of Notice and Demand..............................    11
   SECTION 5.3. Obligations Not Affected.................................    11
   SECTION 5.4. Rights of Holders........................................    12
   SECTION 5.5. Guarantee of Payment.....................................    12
   SECTION 5.6. Subrogation..............................................    12
   SECTION 5.7. Independent Obligations..................................    13

ARTICLE VI COVENANTS AND SUBORDINATION...................................    13
   SECTION 6.1. Subordination............................................    13
   SECTION 6.2. Pari Passu Guarantees....................................    13
</TABLE>

                                      -ii-

<PAGE>

<TABLE>
<S>                                                                         <C>
ARTICLE VII TERMINATION..................................................    13
   SECTION 7.1. Termination..............................................    13

ARTICLE VIII MISCELLANEOUS...............................................    13
   SECTION 8.1. Successors and Assigns...................................    13
   SECTION 8.2. Amendments...............................................    13
   SECTION 8.3. Notices..................................................    14
   SECTION 8.4. Benefit..................................................    15
   SECTION 8.5. Governing Law............................................    15
   SECTION 8.6. Counterparts.............................................    15
</TABLE>

                                      -iii-
<PAGE>

     THIS GUARANTEE AGREEMENT, dated as of September [*], 2006, is executed and
delivered by CITIZENS BANKING CORPORATION, a Michigan corporation (the
"Guarantor") having its principal office at 328 S. Saginaw Street, Flint,
Michigan 48502, and U.S. Bank National Association, a national banking
association, as trustee (the "Guarantee Trustee"), for the benefit of the
Holders (as defined herein) from time to time of the Capital Securities (as
defined herein) of CITIZENS FUNDING TRUST I, a Delaware statutory trust (the
"Issuer Trust").

                                   WITNESSETH:

     WHEREAS, pursuant to an Amended and Restated Trust Agreement, dated as of
September [*], 2006 (the "Trust Agreement"), among the Guarantor, as Depositor,
the Property Trustee, the Delaware Trustee and the Administrative Trustees named
therein and the Holders from time to time of undivided beneficial interests in
the assets of the Issuer Trust, the Issuer Trust is issuing $[*] aggregate
Liquidation Amount (as defined in the Trust Agreement) of its [*]% Enhanced
Trust Preferred Securities, Liquidation Amount $25 per Capital Security (the
"Capital Securities"), representing preferred undivided beneficial interests in
the assets of the Issuer Trust and having the terms set forth in the Trust
Agreement;

     WHEREAS, the Capital Securities will be issued by the Issuer Trust and the
proceeds thereof, together with the proceeds from the issuance of the Issuer
Trust's Common Securities (as defined below), will be used to purchase the
Junior Subordinated Debentures (as defined in the Trust Agreement) of the
Guarantor which will be deposited with U.S. Bank National Association, as
Property Trustee under the Trust Agreement, as trust assets;

     WHEREAS, as an incentive for the Holders to purchase the Capital
Securities, the Guarantor irrevocably and unconditionally agrees, to the extent
set forth herein, to pay to the Holders of the Capital Securities the Guarantee
Payments (as defined herein) and to make certain other payments on the terms and
conditions set forth herein.

     NOW, THEREFORE, in consideration of the purchase by each Holder of Capital
Securities, which purchase the Guarantor hereby agrees shall benefit the
Guarantor, the Guarantor executes and delivers this Guarantee Agreement to
provide as follows for the benefit of the Holders from time to time of the
Capital Securities:

                                    ARTICLE I
                         INTERPRETATION AND DEFINITIONS

     Section 1.1. Interpretation. In this Guarantee Agreement, unless the
context otherwise requires:

          (a) capitalized terms used in this Guarantee Agreement but not defined
in the preamble hereto have the respective meanings assigned to them in Section
1.2;

          (b) a term defined anywhere in this Guarantee Agreement has the same
meaning throughout;

<PAGE>

          (c) all references to "the Guarantee Agreement" or "this Guarantee
Agreement" are to this Guarantee Agreement as modified, supplemented or amended
from time to time;

          (d) all references in this Guarantee Agreement to Articles and
Sections are to Articles and Sections of this Guarantee Agreement unless
otherwise specified;

          (e) a term defined in the Trust Indenture Act has the same meaning
when used in this Guarantee Agreement unless otherwise defined in this Guarantee
Agreement or unless the context otherwise requires;

          (f) a reference to the singular includes the plural and vice-versa;
and

          (g) the masculine, feminine or neuter genders used herein shall
include the masculine, feminine and neuter genders.

     Section 1.2. Definitions. As used in this Guarantee Agreement, the terms
set forth below shall, unless the context otherwise requires, have the following
meanings:

     "Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that the Issuer Trust
shall not be deemed to be an Affiliate of the Guarantor. For the purposes of
this definition, "control," when used with respect to any specified Person,
means the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities, by contract
or otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.

     "Board of Directors" means either the board of directors of the Guarantor
or any committee of that board duly authorized to act hereunder.

     "Common Securities" means the securities representing common undivided
beneficial interests in the assets of the Issuer Trust.

     "Event of Default" means a default by the Guarantor on any of its payment
or other obligations under this Guarantee Agreement; provided, however, that,
except with respect to a default in payment of any Guarantee Payments, the
Guarantor shall have received notice of default and shall not have cured such
default within 30 days after receipt of such notice.

     "Guarantee Payments" means the following payments or distributions, without
duplication, with respect to the Capital Securities, to the extent not paid or
made by or on behalf of the Issuer Trust: (i) any accumulated and unpaid
Distributions (as defined in the Trust Agreement) required to be paid on the
Capital Securities, to the extent the Issuer Trust shall have funds on hand
available therefor at such time, (ii) the redemption price, including all
accumulated and unpaid Distributions to the date of redemption (the "Redemption
Price"), with respect to any Capital Securities called for redemption by the
Issuer Trust, to the extent the Issuer Trust shall have funds on hand available
therefor at such time, and (iii) upon a voluntary or involuntary termination,
winding up or liquidation of the Issuer Trust, unless Junior Subordinated
Debentures are distributed to the Holders, the lesser of (a) the aggregate of
the

                                      -2-

<PAGE>

Liquidation Amount of $25 per Capital Security plus accumulated and unpaid
Distributions on the Capital Securities to the date of payment to the extent
that the Issuer Trust shall have funds available therefor at such time and (b)
the amount of assets of the Issuer Trust remaining available for distribution to
Holders in liquidation of the Issuer Trust (in either case, the "Liquidation
Distribution").

     "Guarantee Trustee" means U.S. Bank National Association, until a Successor
Guarantee Trustee has been appointed and has accepted such appointment pursuant
to the terms of this Guarantee Agreement, and thereafter means each such
Successor Guarantee Trustee.

     "Holder" means any holder, as registered on the books and records of the
Issuer Trust, of any Capital Securities; provided, however, that in determining
whether the holders of the requisite percentage of Capital Securities have given
any request, notice, consent or waiver hereunder, "Holder" shall not include the
Guarantor, the Guarantee Trustee, or any Affiliate of the Guarantor or the
Guarantee Trustee.

     "Indenture" means the Indenture dated as of September [*], 2006, between
the Guarantor and U.S. Bank National Association, as trustee, as supplemented
and amended from time to time.

     "Junior Subordinated Debt" has the meaning specified in the Indenture.

     "List of Holders" has the meaning specified in Section 2.2(a).

     "Majority in Liquidation Amount of the Capital Securities" means, except as
provided by the Trust Indenture Act, a vote by the Holder(s), voting separately
as a class, of more than 50% of the Liquidation Amount of all then outstanding
Capital Securities issued by the Issuer Trust.

     "Officers' Certificate" means, with respect to any Person, a certificate
signed by the Chairman or a Vice Chairman of the Board of Directors of such
Person or the President or a Vice President of such Person, and by the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of
such Person, and delivered to the Guarantee Trustee. Any Officers' Certificate
delivered with respect to compliance with a condition or covenant provided for
in this Guarantee Agreement shall include:

          (a) a statement that each officer signing the Officers' Certificate
has read the covenant or condition and the definitions relating thereto;

          (b) a brief statement of the nature and scope of the examination or
investigation undertaken by each officer in rendering the Officers' Certificate;

          (c) a statement that each officer has made such examination or
investigation as, in such officer's opinion, is necessary to enable such officer
to express an informed opinion as to whether or not such covenant or condition
has been complied with; and

          (d) a statement as to whether, in the opinion of each officer, such
condition or covenant has been complied with.

                                      -3-

<PAGE>

     "Person" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company, limited
liability company, trust, unincorporated association, or government or any
agency or political subdivision thereof, or any other entity of whatever nature.

     "Responsible Officer" means, with respect to the Guarantee Trustee, any
Managing Director, any Director, any Vice President, any Assistant Vice
President, the Secretary, any Assistant Secretary, the Treasurer, any Associate,
any Assistant Treasurer, any Trust Officer or Assistant Trust Officer or any
other officer of the Corporate Trust Department of the Guarantee Trustee and
also means, with respect to a particular corporate trust matter, any other
officer to whom such matter is referred because of that officer's knowledge of
and familiarity with the particular subject.

     "Senior Indebtedness" means the principal, premium (if any) and interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Guarantor, whether or not such
claim for post-petition interest is allowed in such proceeding) on and of all
indebtedness and obligations (other than the Capital Securities, but including
any debentures, notes or other evidence of indebtedness issued under the
Indenture) of, or guaranteed or assumed by, the Guarantor that (i) are for
borrowed money (ii) are evidenced by bonds, debentures, notes or other similar
instruments, (iii) represent obligations to policyholders of insurance or
investment contracts, (iv) represent a reimbursement obligation with respect to
a letter of credit, banker's acceptance or similar facility, or (v) represent
the deferred purchase price of property or services, in each case, whether
outstanding on the date of issuance of the Capital Securities or thereafter
created, incurred, assumed or guaranteed, and all amendments, renewals,
extensions, modifications and refundings of such indebtedness and obligations,
unless in any such case the instrument by which such indebtedness or obligations
are created, incurred, assumed or guaranteed by the Guarantor, or are otherwise
evidenced, provides that they are subordinated, or are not superior, in right of
payment to the Securities; provided, however, that Senior Indebtedness shall not
include, as applicable:

          (1) any obligation of the Guarantor to any Subsidiary of the
     Guarantor,

          (2) any liability for Federal, state, local or other taxes owed or
     owing by the Guarantor or any Subsidiary of the Guarantor,

          (3) any accounts payable or other liability to trade creditors
     (including guarantees thereof or instruments evidencing such liabilities)

          (4) any obligations with respect to any capital stock of the
     Guarantor, or

          (5) any indebtedness which by its terms is expressly made equal in
     rank and payment with or subordinated to the Securities.

; provided further, that if any Senior Indebtedness is disallowed, avoided or
subordinated pursuant to the provisions of Section 548 of Title 11 of the United
States Code or any applicable state fraudulent conveyance law, such Senior
Indebtedness nevertheless will constitute Senior Indebtedness.

                                      -4-

<PAGE>

     "Successor Guarantee Trustee" means a successor Guarantee Trustee
possessing the qualifications to act as Guarantee Trustee under Section 4.1.

     "Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.

     Capitalized or otherwise defined terms used but not otherwise defined
herein shall have the meanings assigned to such terms in the Trust Agreement as
in effect on the date hereof.

                                   ARTICLE II
                               TRUST INDENTURE ACT

     Section 2.1. Trust Indenture Act; Application.

          (a) This Guarantee Agreement is subject to the provisions of the Trust
Indenture Act that are required to be part of this Guarantee Agreement and
shall, to the extent applicable, be governed by such provisions.

          (b) If and to the extent that any provision of this Guarantee
Agreement limits, qualifies or conflicts with the duties imposed by Sections 310
to 317, inclusive, of the Trust Indenture Act through the operation of Section
318(c) thereof, such imposed duties shall control. If any provision of this
Guarantee Agreement modifies or excludes any provision of the Trust Indenture
Act which may be so modified or excluded, the latter provision shall be deemed
to apply to this Guarantee Agreement as so modified or to be excluded, as the
case may be.

     Section 2.2. List of Holders.

          (a) The Guarantor shall furnish or cause to be furnished to the
Guarantee Trustee (i) semiannually, on or before June 30 and December 31 of each
year, commencing December 31, 2006, a list, in such form as the Guarantee
Trustee may reasonably require, of the names and addresses of the Holders (the
"List of Holders") as of a date not more than 15 days prior to the delivery
thereof, and (ii) at such other times as the Guarantee Trustee may request in
writing, within 30 days after the receipt by the Guarantor of any such request,
a List of Holders as of a date not more than 15 days prior to the time such list
is furnished, in each case to the extent such information is in the possession
or control of the Guarantor and is not identical to a previously supplied list
of Holders or has not otherwise been received by the Guarantee Trustee in its
capacity as such. The Guarantee Trustee may destroy any List of Holders
previously given to it on receipt of a new List of Holders.

          (b) The Guarantee Trustee shall comply with its obligations under
Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act.

     Section 2.3. Reports by the Guarantee Trustee. Not later than 60 days after
May 15 of each year, commencing May 15, 2007, the Guarantee Trustee shall
provide to the Holders such reports as are required by Section 313 of the Trust
Indenture Act, if any, in the form and in the manner provided by Section 313 of
the Trust Indenture Act. The Guarantee Trustee shall also comply with the
requirements of Section 313(d) of the Trust Indenture Act. The Guarantor will
notify the Guarantee Trustee if and when any Capital Securities are listed on
any stock exchange and of any delisting thereof.

                                      -5-

<PAGE>

     Section 2.4. Periodic Reports to the Guarantee Trustee. The Guarantor shall
provide to the Guarantee Trustee, the Securities and Exchange Commission and the
Holders such documents, reports and information, if any, as required by Section
314 of the Trust Indenture Act and the compliance certificate required by
Section 314 of the Trust Indenture Act, in the form, in the manner and at the
times required by Section 314 of the Trust Indenture Act.

     Section 2.5. Evidence of Compliance with Conditions Precedent. The
Guarantor shall provide to the Guarantee Trustee such evidence of compliance
with such conditions precedent, if any, provided for in this Guarantee Agreement
that relate to any of the matters set forth in Section 314(c) of the Trust
Indenture Act. Any certificate or opinion required to be given by an officer of
the Guarantor pursuant to Section 314(c)(1) may be given in the form of an
Officers' Certificate.

     Section 2.6. Events of Default; Waiver. The Holders of a Majority in
Liquidation Amount of the Capital Securities may, by vote, on behalf of the
Holders, waive any past Event of Default and its consequences. Upon such waiver,
any such Event of Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured, for every purpose of this
Guarantee Agreement, but no such waiver shall extend to any subsequent or other
default or Event of Default or impair any right consequent therefrom.

     Section 2.7. Events of Default; Notice.

          (a) The Guarantee Trustee shall, within 90 days after the occurrence
of an Event of Default, transmit by mail, first class postage prepaid, to the
Holders, notices of all Events of Default known to the Guarantee Trustee, unless
such defaults have been cured before the giving of such notice, provided, that,
except in the case of a default in the payment of a Guarantee Payment, the
Guarantee Trustee shall be protected in withholding such notice if and so long
as the Board of Directors, the executive committee or a trust committee of
directors and/or Responsible Officers of the Guarantee Trustee in good faith
determines that the withholding of such notice is in the interests of the
Holders.

          (b) The Guarantee Trustee shall not be deemed to have knowledge of any
Event of Default unless the Guarantee Trustee shall have received written
notice, or a Responsible Officer charged with the administration of this
Guarantee Agreement shall have obtained written notice, of such Event of
Default.

     Section 2.8. Conflicting Interests. The Trust Agreement and the Indenture
shall be deemed to be specifically described in this Guarantee Agreement for the
purposes of clause (i) of the first proviso contained in Section 310(b) of the
Trust Indenture Act.

                                   ARTICLE III
               POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE

     Section 3.1. Powers and Duties of the Guarantee Trustee.

          (a) This Guarantee Agreement shall be held by the Guarantee Trustee
for the benefit of the Holders, and the Guarantee Trustee shall not transfer
this Guarantee Agreement to any Person except a Holder exercising his or her
rights pursuant to Section 5.4(iv) or to a

                                      -6-

<PAGE>

Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of
its appointment to act as Successor Guarantee Trustee. The right, title and
interest of the Guarantee Trustee shall automatically vest in any Successor
Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its
appointment hereunder, and such vesting and cessation of title shall be
effective whether or not conveyancing documents have been executed and delivered
pursuant to the appointment of such Successor Guarantee Trustee.

          (b) If an Event of Default has occurred and is continuing, the
Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the
Holders.

          (c) The Guarantee Trustee, before the occurrence of any Event of
Default and after the curing of all Events of Default that may have occurred,
shall undertake to perform only such duties as are specifically set forth in
this Guarantee Agreement, and no implied covenants shall be read into this
Guarantee Agreement against the Guarantee Trustee. In case an Event of Default
has occurred (that has not been cured or waived pursuant to Section 2.6), the
Guarantee Trustee shall exercise such of the rights and powers vested in it by
this Guarantee Agreement, and use the same degree of care and skill in its
exercise thereof, as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.

          (d) No provision of this Guarantee Agreement shall be construed to
relieve the Guarantee Trustee from liability for its own negligent action, its
own negligent failure to act or its own willful misconduct, except that:

               (i) prior to the occurrence of any Event of Default and after the
     curing or waiving of all such Events of Default that may have occurred:

                    (A) the duties and obligations of the Guarantee Trustee
          shall be determined solely by the express provisions of this Guarantee
          Agreement, and the Guarantee Trustee shall not be liable except for
          the performance of such duties and obligations as are specifically set
          forth in this Guarantee Agreement; and

                    (B) in the absence of bad faith on the part of the Guarantee
          Trustee, the Guarantee Trustee may conclusively rely, as to the truth
          of the statements and the correctness of the opinions expressed
          therein, upon any certificates or opinions furnished to the Guarantee
          Trustee and conforming to the requirements of this Guarantee
          Agreement; but in the case of any such certificates or opinions that
          by any provision hereof or of the Trust Indenture Act are specifically
          required to be furnished to the Guarantee Trustee, the Guarantee
          Trustee shall be under a duty to examine the same to determine whether
          or not they conform to the requirements of this Guarantee Agreement;

               (ii) the Guarantee Trustee shall not be liable for any error of
     judgment made in good faith by a Responsible Officer of the Guarantee
     Trustee, unless it shall be proved that the Guarantee Trustee was negligent
     in ascertaining the pertinent facts upon which such judgment was made;

               (iii) the Guarantee Trustee shall not be liable with respect to
     any action taken or omitted to be taken by it in good faith in accordance
     with the direction of the

                                      -7-

<PAGE>

     Holders of not less than a Majority in Liquidation Amount of the Capital
     Securities relating to the time, method and place of conducting any
     proceeding for any remedy available to the Guarantee Trustee, or exercising
     any trust or power conferred upon the Guarantee Trustee under this
     Guarantee Agreement; and

               (iv) no provision of this Guarantee Agreement shall require the
     Guarantee Trustee to expend or risk its own funds or otherwise incur
     personal financial liability in the performance of any of its duties or in
     the exercise of any of its rights or powers, if the Guarantee Trustee shall
     have reasonable grounds for believing that the repayment of such funds or
     liability is not reasonably assured to it under the terms of this Guarantee
     Agreement or adequate indemnity against such risk or liability is not
     reasonably assured to it.

     Section 3.2. Certain Rights of Guarantee Trustee.

          (a) Subject to the provisions of Section 3.1:

               (i) The Guarantee Trustee may conclusively rely and shall be
     fully protected in acting or refraining from acting upon any resolution,
     certificate, statement, instrument, opinion, report, notice, request,
     direction, consent, order, bond, debenture, note, other evidence of
     indebtedness or other paper or document reasonably believed by it to be
     genuine and to have been signed, sent or presented by the proper party or
     parties.

               (ii) Any direction or act of the Guarantor contemplated by this
     Guarantee Agreement shall be sufficiently evidenced by an Officers'
     Certificate unless otherwise prescribed herein.

               (iii) Whenever, in the administration of this Guarantee
     Agreement, the Guarantee Trustee shall deem it desirable that a matter be
     proved or established before taking, suffering or omitting to take any
     action hereunder, the Guarantee Trustee (unless other evidence is herein
     specifically prescribed) may, in the absence of bad faith on its part,
     request and conclusively rely upon an Officers' Certificate which, upon
     receipt of such request from the Guarantee Trustee, shall be promptly
     delivered by the Guarantor.

               (iv) The Guarantee Trustee may consult with legal counsel of its
     selection, and the advice or opinion of such legal counsel with respect to
     legal matters shall be full and complete authorization and protection in
     respect of any action taken, suffered or omitted to be taken by it
     hereunder in good faith and in accordance with such advice or opinion. Such
     legal counsel may be legal counsel to the Guarantor or any of its
     Affiliates and may be one of its employees. The Guarantee Trustee shall
     have the right at any time to seek instructions concerning the
     administration of this Guarantee Agreement from any court of competent
     jurisdiction.

               (v) The Guarantee Trustee shall be under no obligation to
     exercise any of the rights or powers vested in it by this Guarantee
     Agreement at the request or direction of any Holder, unless such Holder
     shall have provided to the Guarantee Trustee such security and indemnity
     reasonably satisfactory to the Guarantee Trustee, against the costs,
     expenses (including attorneys' fees and

                                      -8-

<PAGE>

     expenses) and liabilities that might be incurred by it in complying with
     such request or direction, including such reasonable advances as may be
     requested by the Guarantee Trustee; provided that, nothing contained in
     this Section 3.2(a)(v) shall be taken to relieve the Guarantee Trustee,
     upon the occurrence of an Event of Default, of its obligation to exercise
     the rights and powers vested in it by this Guarantee Agreement.

               (vi) The Guarantee Trustee shall not be bound to make any
     investigation into the facts or matters stated in any resolution,
     certificate, statement, instrument, opinion, report, notice, request,
     direction, consent, order, bond, debenture, note, other evidence of
     indebtedness or other paper or document, but the Guarantee Trustee, in its
     discretion, may make such further inquiry or investigation into such facts
     or matters as it may see fit.

               (vii) The Guarantee Trustee may execute any of the trusts or
     powers hereunder or perform any duties hereunder either directly or by or
     through its agents or attorneys, and the Guarantee Trustee shall not be
     responsible for any misconduct or negligence on the part of any such agent
     or attorney appointed with due care by it hereunder.

               (viii) Whenever in the administration of this Guarantee Agreement
     the Guarantee Trustee shall deem it desirable to receive instructions with
     respect to enforcing any remedy or right or taking any other action
     hereunder, the Guarantee Trustee (A) may request instructions from the
     Holders, (B) may refrain from enforcing such remedy or right or taking such
     other action until such instructions are received, and (C) shall be
     protected in acting in accordance with such instructions.

          (b) No provision of this Guarantee Agreement shall be deemed to impose
any duty or obligation on the Guarantee Trustee to perform any act or acts or
exercise any right, power, duty or obligation conferred or imposed on it in any
jurisdiction in which it shall be illegal, or in which the Guarantee Trustee
shall be unqualified or incompetent in accordance with applicable law, to
perform any such act or acts or to exercise any such right, power, duty or
obligation. No permissive power or authority available to the Guarantee Trustee
shall be construed to be a duty to act in accordance with such power and
authority.

     Section 3.3. Compensation; Indemnity; Fees. The Guarantor agrees:

          (a) to pay to the Guarantee Trustee from time to time such
compensation as shall be agreed in writing for all services rendered by it
hereunder (which compensation shall not be limited by any provisions of law in
regard to the compensation of a trustee of an express trust);

          (b) except as otherwise expressly provided herein, to reimburse the
Guarantee Trustee upon request for all reasonable expenses, disbursements and
advances incurred or made by the Guarantee Trustee in accordance with any
provision of this Guarantee Agreement (including the reasonable compensation and
the expenses and disbursements of its agents and counsel), except any such
expense, disbursement or advance as may be attributable to its negligence or bad
faith; and

                                      -9-

<PAGE>

          (c) to indemnify the Guarantee Trustee and its directors, officers,
agents and employees for, and to hold it harmless against, any and all loss,
liability, damage, claim or expense, including taxes, incurred without
negligence or bad faith on the part of the Guarantee Trustee, arising out of or
in connection with the acceptance or administration of this Guarantee Agreement,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its powers or
duties hereunder. The Guarantee Trustee will not claim or exact any lien or
charge on any Guarantee Payments as a result of any amount due to it under this
Guarantee Agreement;

          (d) in no event shall the Trustee be responsible or liable for
special, indirect, or consequential loss or damage of any kind whatsoever
(including, but not limited to, loss of profit) irrespective of whether the
Trustee has been advised of the likelihood of such loss or damage and regardless
of the form of action;

          (e) the rights, privileges, protections, immunities and benefits given
to the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and each agent, custodian and other Person employed to act hereunder;
and

          (f) the Trustee may request that the Company deliver a certificate
setting forth the names of individuals and/or titles of officers authorized at
such time to take specified actions pursuant to this Indenture.

     The provisions of this Section 3.3 shall survive the termination of this
Guarantee Agreement or the earlier resignation or removal of the Guarantee
Trustee.

                                   ARTICLE IV
                                GUARANTEE TRUSTEE

     Section 4.1. Guarantee Trustee; Eligibility.

          (a) There shall at all times be a Guarantee Trustee which shall:

               (i) not be an Affiliate of the Guarantor; and

               (ii) be a Person that is eligible pursuant to the Trust Indenture
     Act to act as such and has a combined capital and surplus of at least
     $50,000,000, and shall be a corporation meeting the requirements of Section
     310(a) of the Trust Indenture Act. If such corporation publishes reports of
     condition at least annually, pursuant to law or to the requirements of the
     supervising or examining authority, then, for the purposes of this Section
     4.1 and to the extent permitted by the Trust Indenture Act, the combined
     capital and surplus of such corporation shall be deemed to be its combined
     capital and surplus as set forth in its most recent report of condition so
     published.

          (b) If at any time the Guarantee Trustee shall cease to be eligible to
so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in
the manner and with the effect set out in Section 4.2(c).

          (c) If the Guarantee Trustee has or shall acquire any "conflicting
interest" within the meaning of Section 310(b) of the Trust Indenture Act, the
Guarantee Trustee and Guarantor shall in all respects comply with the provisions
of Section 310(b) of the Trust Indenture Act.

     Section 4.2. Appointment, Removal and Resignation of the Guarantee Trustee.

          (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed
or removed without cause at any time by the Guarantor.

          (b) The Guarantee Trustee shall not be removed until a Successor
Guarantee Trustee has been appointed and has accepted such appointment by
written instrument executed by such Successor Guarantee Trustee and delivered to
the Guarantor.

                                      -10-

<PAGE>

          (c) The Guarantee Trustee appointed hereunder shall hold office until
a Successor Guarantee Trustee shall have been appointed or until its removal or
resignation. The Guarantee Trustee may resign from office (without need for
prior or subsequent accounting) by an instrument in writing executed by the
Guarantee Trustee and delivered to the Guarantor, which resignation shall not
take effect until a Successor Guarantee Trustee has been appointed and has
accepted such appointment by instrument in writing executed by such Successor
Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee
Trustee.

          (d) If no Successor Guarantee Trustee shall have been appointed and
accepted appointment as provided in this Section 4.2 within 60 days after
delivery of an instrument of resignation or removal, the Guarantee Trustee
resigning or being removed may petition, at the expense of the Guarantor, any
court of competent jurisdiction for appointment of a Successor Guarantee
Trustee. Such court may thereupon, after prescribing such notice, if any, as it
may deem proper, appoint a Successor Guarantee Trustee.

                                    ARTICLE V
                                    GUARANTEE

     Section 5.1. Guarantee. The Guarantor irrevocably and unconditionally
agrees to pay in full to the Holders the Guarantee Payments (without duplication
of amounts theretofore paid by or on behalf of the Issuer Trust), as and when
due, regardless of any defense, right of set-off or counterclaim which the
Issuer Trust may have or assert, except the defense of payment. The Guarantor's
obligation to make a Guarantee Payment may be satisfied by direct payment of the
required amounts by the Guarantor to the Holders or by causing the Issuer Trust
to pay such amounts to the Holders.

     Section 5.2. Waiver of Notice and Demand. The Guarantor hereby waives
notice of acceptance of this Guarantee Agreement and of any liability to which
it applies or may apply, presentment, demand for payment, any right to require a
proceeding first against the Guarantee Trustee, the Issuer Trust or any other
Person before proceeding against the Guarantor, protest, notice of nonpayment,
notice of dishonor, notice of redemption and all other notices and demands.

     Section 5.3. Obligations Not Affected. The obligations, covenants,
agreements and duties of the Guarantor under this Guarantee Agreement shall in
no way be affected or impaired by reason of the happening from time to time of
any of the following:

          (a) the release or waiver, by operation of law or otherwise, of the
performance or observance by the Issuer Trust of any express or implied
agreement, covenant, term or condition relating to the Capital Securities to be
performed or observed by the Issuer Trust;

          (b) the extension of time for the payment by the Issuer Trust of all
or any portion of the Distributions (other than an extension of time for payment
of Distributions that results from the extension of any interest payment period
on the Junior Subordinated Debentures as provided in the Indenture), Redemption
Price, Liquidation Distribution or any other sums payable under the terms of the
Capital Securities or the extension of time for the performance of any other
obligation under, arising out of, or in connection with, the Capital Securities;

                                      -11-

<PAGE>

          (c) any failure, omission, delay or lack of diligence on the part of
the Holders to enforce, assert or exercise any right, privilege, power or remedy
conferred on the Holders pursuant to the terms of the Capital Securities, or any
action on the part of the Issuer Trust granting indulgence or extension of any
kind;

          (d) the voluntary or involuntary liquidation, dissolution, sale of any
collateral, receivership, insolvency, bankruptcy, assignment for the benefit of
creditors, reorganization, arrangement, composition or readjustment of debt of,
or other similar proceedings affecting, the Issuer Trust or any of the assets of
the Issuer Trust;

          (e) any invalidity of, or defect or deficiency in, the Capital
Securities;

          (f) the settlement or compromise of any obligation guaranteed hereby
or hereby incurred; or

          (g) any other circumstance whatsoever that might otherwise constitute
a legal or equitable discharge or defense of a guarantor (other than payment of
the underlying obligation), it being the intent of this Section 5.3 that the
obligations of the Guarantor hereunder shall be absolute and unconditional under
any and all circumstances.

     There shall be no obligation of the Holders to give notice to, or obtain
the consent of, the Guarantor with respect to the happening of any of the
foregoing.

     Section 5.4. Rights of Holders. The Guarantor expressly acknowledges that:
(i) this Guarantee Agreement will be deposited with the Guarantee Trustee to be
held for the benefit of the Holders; (ii) the Guarantee Trustee has the right to
enforce this Guarantee Agreement on behalf of the Holders; (iii) the Holders of
a Majority in Liquidation Amount of the Capital Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of this Guarantee Agreement or
exercising any trust or power conferred upon the Guarantee Trustee under this
Guarantee Agreement; and (iv) any Holder may institute a legal proceeding
directly against the Guarantor to enforce its rights under this Guarantee
Agreement, without first instituting a legal proceeding against the Guarantee
Trustee, the Issuer Trust or any other Person.

     Section 5.5. Guarantee of Payment. This Guarantee Agreement creates a
guarantee of payment and not of collection. This Guarantee Agreement will not be
discharged except by payment of the Guarantee Payments in full (without
duplication of amounts theretofore paid by the Issuer Trust) or upon
distribution of Junior Subordinated Debentures to Holders as provided in the
Trust Agreement.

     Section 5.6. Subrogation. The Guarantor shall be subrogated to all rights
(if any) of the Holders against the Issuer Trust in respect of any amounts paid
to the Holders by the Guarantor under this Guarantee Agreement and shall have
the right to waive payment by the Issuer Trust pursuant to Section 5.1;
provided, however, that the Guarantor shall not (except to the extent required
by mandatory provisions of law) be entitled to enforce or exercise any rights
which it may acquire by way of subrogation or any indemnity, reimbursement or
other agreement, in all cases as a result of payment under this Guarantee
Agreement, if, at the time of any such payment, any amounts are due and unpaid
under this Guarantee Agreement. If any

                                      -12-

<PAGE>

amount shall be paid to the Guarantor in violation of the preceding sentence,
the Guarantor agrees to hold such amount in trust for the Holders and to pay
over such amount to the Holders.

     Section 5.7. Independent Obligations. The Guarantor acknowledges that its
obligations hereunder are independent of the obligations of the Issuer Trust
with respect to the Capital Securities and that the Guarantor shall be liable as
principal and as debtor hereunder to make Guarantee Payments pursuant to the
terms of this Guarantee Agreement notwithstanding the occurrence of any event
referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof.

                                   ARTICLE VI
                           COVENANTS AND SUBORDINATION

     Section 6.1. Subordination. The obligations of the Guarantor under this
Guarantee Agreement will constitute unsecured obligations of the Guarantor and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Guarantor. The obligations of the Guarantor under this Guarantee
Agreement do not constitute Senior Indebtedness.

     Section 6.2. Pari Passu Guarantees. The obligations of the Guarantor under
this Guarantee Agreement shall rank pari passu with the obligations of the
Guarantor under any similar guarantee agreements issued by the Guarantor on
behalf of the holders of preferred or capital securities issued by any Citizens
Trust (as defined in the Indenture).

                                   ARTICLE VII
                                   TERMINATION

     Section 7.1. Termination. This Guarantee Agreement shall terminate and be
of no further force and effect upon (i) full payment of the Redemption Price of
all Capital Securities, (ii) the distribution of Junior Subordinated Debentures
to the Holders in exchange for all of the Capital Securities or (iii) full
payment of the amounts payable in accordance with the Trust Agreement upon
liquidation of the Issuer Trust. Notwithstanding the foregoing, this Guarantee
Agreement will continue to be effective or will be reinstated, as the case may
be, if at any time any Holder must restore payment of any sums paid with respect
to Capital Securities or this Guarantee Agreement.

                                  ARTICLE VIII
                                  MISCELLANEOUS

     Section 8.1. Successors and Assigns. All guarantees and agreements
contained in this Guarantee Agreement shall bind the successors, assigns,
receivers, trustees and representatives of the Guarantor and shall inure to the
benefit of the Holders of the Capital Securities then outstanding. Except in
connection with a consolidation, merger or sale involving the Guarantor that is
permitted under Article VIII of the Indenture and pursuant to which the
successor or assignee agrees in writing to perform the Guarantor's obligations
hereunder, the Guarantor shall not assign its obligations hereunder.

     Section 8.2. Amendments. Except with respect to any changes which do not
adversely affect the rights of the Holders in any material respect (in which
case no consent of the Holders

                                      -13-

<PAGE>

will be required), this Guarantee Agreement may only be amended with the prior
approval of the Holders of not less than a Majority in Liquidation Amount of the
Capital Securities. The provisions of Article VI of the Trust Agreement
concerning meetings of the Holders shall apply to the giving of such approval.

     Section 8.3. Notices. Any notice, request or other communication required
or permitted to be given hereunder shall be in writing, duly signed by the party
giving such notice, and delivered, telecopied or mailed by first class mail as
follows:

          (a) if given to the Guarantor, to the address set forth below or such
other address, facsimile number or to the attention of such other Person as the
Guarantor may give notice to the Holders:

               Citizens Banking Corporation
               328 South Saginaw Street
               Flint, Michigan 48502
               Facsimile No.: (810) 768-4725
               Attention: Thomas W. Gallagher

          (b) if given to the Issuer Trust, in care of the Guarantee Trustee, at
the Issuer Trust's (and the Guarantee Trustee's) address set forth below or such
other address as the Guarantee Trustee on behalf of the Issuer Trust may give
notice to the Holders:

               Citizens Funding Trust I
               c/o Citizens Banking Corporation
               328 South Saginaw Street
               Flint, Michigan 48502
               Facsimile No.: (810) 768-4725
               Attention: Thomas W. Gallagher

     with a copy to:

               U.S. Bank National Association
               100 Wall Street, Suite 1600
               New York, NY 10005
               Facsimile No.: (212) 361-6153
               Attn: Corporate Trust Services

          (c) if given to any Holder, at the address set forth on the books and
records of the Issuer Trust.

     All notices hereunder shall be deemed to have been given when received in
person, telecopied with receipt confirmed, or mailed by first class mail,
postage prepaid, except that if a notice or other document is refused delivery
or cannot be delivered because of a changed address of which no notice was
given, such notice or other document shall be deemed to have been delivered on
the date of such refusal or inability to deliver.

                                      -14-

<PAGE>

     Section 8.4. Benefit. This Guarantee Agreement is solely for the benefit of
the Holders and is not separately transferable from the Capital Securities.

     Section 8.5. Governing Law. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.

     Section 8.6. Counterparts. This instrument may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.

 [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK; SIGNATURE PAGE FOLLOWS.]

                                      -15-

<PAGE>

     IN WITNESS WHEREOF, the undersigned have executed this Guarantee Agreement
as of the date first above written.

                                        CITIZENS BANKING CORPORATION

                                        By:
                                            ------------------------------------
                                        Name:

                                        Title:

                                        U.S. BANK NATIONAL ASSOCIATION,
                                        as Guarantee Trustee

                                        By:
                                            ------------------------------------
                                        Name:

                                        Title:

                                      -16-exv10w1

 

Exhibit 10.1

INVESTMENT AGREEMENT

INVESTMENT AGREEMENT (this “AGREEMENT”), dated as of September 15, 2006 by and between Save the
World Air, Inc. a Nevada corporation (the “Company”), and Dutchess Private Equities Fund, LP, a
Delaware limited partnership (the “Investor”).

WHEREAS, the parties desire that, upon the terms and subject to the conditions contained herein,
the Investor shall invest up to Ten Million dollars ($10,000,000) to purchase the Company’s Common
Stock, $.001 par value per share (the “Common Stock”);

WHEREAS, such investments will be made in reliance upon the provisions of Section 4(2) under the
Securities Act of 1933, as amended (the “1933 Act”), Rule 506 of Regulation D, and the rules and
regulations promulgated thereunder, and/or upon such other exemption from the registration
requirements of the 1933 Act as may be available with respect to any or all of the investments in
Common Stock to be made hereunder; and

WHEREAS, contemporaneously with the execution and delivery of this Agreement, the parties hereto
are executing and delivering a Registration Rights Agreement substantially in the form attached
hereto (the “Registration Rights Agreement”) pursuant to which the Company has agreed to provide
certain registration rights under the 1933 Act, and the rules and regulations promulgated
thereunder, and applicable state securities laws.

NOW THEREFORE, in consideration of the foregoing recitals, which shall be considered an integral
part of this Agreement, the covenants and agreements set forth hereafter, and other good and
valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company
and the Investor hereby agree as follows:

SECTION 1. DEFINITIONS.

     As used in this Agreement, the following terms shall have the following meanings specified or
indicated below, and such meanings shall be equally applicable to the singular and plural forms of
such defined terms.

     “1933
Act” shall have the meaning set forth in the preamble of this agreement.

     “1934
Act” shall mean the Securities Exchange Act of 1934, as it may be amended.

     “Affiliate” shall have the meaning specified in Section 5(H), below.

     “Agreement” shall mean this Investment Agreement.

1

 

     “Best Bid” shall mean the highest posted bid price of the Common Stock during a given
period of time.

     “By-laws” shall have the meaning specified in Section 4(C).

     “Certificate of Incorporation” shall have the meaning specified in Section 4(C).

     “Closing” shall have the meaning specified in Section 2(G).

     “Closing Date” shall mean no more than seven (7) Trading Days following the Put
Notice Date.

     “Common Stock” shall have the meaning set forth in the preamble of this Agreement.

     “Control”
or “Controls” shall have the meaning specified in Section 5(H).

     “Effective Date” shall mean the date the SEC declares effective under the 1933 Act
the Registration Statement covering the Securities.

     “Environmental Laws” shall have the meaning specified in Section 4(M).

     “Equity Line Transaction Documents” shall mean this Agreement, the Registration
Rights Agreement.

     “Execution Date” shall mean the date indicated in the preamble to this Agreement.

     “Indemnities” shall have the meaning specified in Section 11.

     “Indemnified
Liabilities” shall have the meaning specified in Section 11.

     “Ineffective Period” shall mean any period of time that the Registration Statement or
any Supplemental Registration Statement (as defined in the Registration Rights Agreement between
the parties) becomes ineffective or unavailable for use for the sale or resale, as applicable, of
any or all of the Registrable Securities (as defined in the Registration Rights Agreement) for any
reason (or in the event the prospectus under either of the above is not current and deliverable)
during any time period required under the Registration Rights Agreement.

     “Investor” shall have the meaning indicated in the preamble of this Agreement.

     “Material Adverse Effect” shall have the meaning specified in Section 4(A).

2

 

     “Maximum Common Stock Issuance” shall have the meaning specified in Section
2(H).

     “Minimum Acceptable Price” with respect to any Put Notice Date shall mean
seventy-five percent (75%) of the lowest closing bid prices for the ten (10) Trading Day period
immediately preceding each Put Notice Date.

     “Open
Market Adjustment Amount” shall have the meaning specified
in Section 2(I).

     “Open
Market Purchase” shall have the meaning specified in Section 2(I)

     “Open
Market Share Purchase” shall have the meaning specified in Section 2(I).

     “Open Period” shall mean the period beginning on and including the Trading Day
immediately following the Effective Date and ending on the earlier to occur of (i) the date which
is thirty-six (36) months from the Effective Date; or (ii) termination of the Agreement in
accordance with Section 9, below.

     “Pricing Period” shall mean the period beginning on the Put Notice Date and ending on
and including the date that is five (5) Trading Days after such Put Notice Date.

     “Principal Market” shall mean the American Stock Exchange, Inc., the National
Association of Securities Dealers, Inc. Over-the-Counter Bulletin Board, the NASDAQ National
Market System or the NASDAQ SmallCap Market, whichever is the principal market on which the Common
Stock is listed or quoted.

     “Prospectus” shall mean the prospectus, preliminary prospectus and supplemental
prospectus used in connection with the Registration Statement.

     “Purchase Amount” shall mean the total amount being paid by the Investor on a
particular Closing Date to purchase the Securities.

     “Purchase Price” shall mean ninety-seven percent (97%) of the lowest closing Best Bid
price of the Common Stock during the Pricing Period.

     “Put” shall have the meaning set forth in Section 2(B)(1) hereof.

     “Put Amount” shall have the meaning set forth in Section 2(B)(1) hereof.

     “Put Notice” shall mean a written notice sent to the Investor by the Company stating
the Put Amount in U.S. dollars the Company intends to sell to the Investor pursuant to the terms
of the Agreement and stating the current number of Shares issued and outstanding on such date.

3

 

     “Put Notice Date” shall mean the Trading Day, as set forth below, immediately
following the day on which the Investor receives a Put Notice, however a Put Notice shall be deemed
delivered on (a) the Trading Day it is received by facsimile or otherwise by the Investor if such
notice is received prior to 9:00 am Eastern Time, or (b) the immediately succeeding Trading Day if
it is received by facsimile or otherwise after 9:00 am Eastern Time on a Trading Day. No Put Notice
may be deemed delivered on a day that is not a Trading Day.

     “Put Restriction” shall mean the days between the beginning of the Pricing Period and
Closing Date. During this time, the Company shall not be entitled to deliver another Put Notice.

     “Put
Shares Due” shall have the meaning specified in Section 2(I).

     “Registration Period” shall have the meaning specified in Section 5(C), below.

     “Registration Rights Agreement” shall have the meaning set forth in the recitals,
above.

     “Registration Statement” means the registration statement of the Company filed under
the 1933 Act covering the Common Stock issuable hereunder.

     “Related Party” shall have the meaning specified in Section 5(H).

     “Resolution” shall have the meaning specified in Section 8(E).

     “SEC” shall
mean the U.S. Securities & Exchange Commission.

     “SEC Documents” shall have
the meaning specified in Section 4(F).

     “Securities” shall mean the shares of Common Stock issued pursuant to the terms of the
Agreement.

     “Shares” shall mean the shares of the Company’s Common Stock.

     “Subsidiaries”
shall have the meaning specified in Section 4(A).

     “Trading Day” shall mean any day on which the Principal Market for the Common Stock
is open for trading, from the hours of 9:30 am until 4:00 pm.

SECTION 2. PURCHASE AND SALE OF COMMON STOCK.

(A) PURCHASE AND SALE OF COMMON STOCK. Subject to the terms and conditions set forth herein, the
Company shall issue and sell to the Investor, and

4

 

the Investor shall purchase from the Company, up to that number of Shares having an aggregate
Purchase Price of Ten Million dollars ($10,000,000).

(B) DELIVERY OF PUT NOTICES.

(I) Subject to the terms and conditions of the Transaction Documents, and from time to time during
the Open Period, the Company may, in its sole discretion, deliver a Put Notice to the Investor
which states the dollar amount (designated in U.S. Dollars) (the “Put Amount”), which the Company
intends to sell to the Investor on a Closing Date (the “Put”). The Put Notice shall be in the form
attached hereto as Exhibit C and incorporated herein by reference. The amount that the Company
shall be entitled to Put to the Investor (the “Put Amount”) shall be equal to, at the Company’s
sole election, either: (A) Two Hundred percent (200%) of the average daily volume (U.S. market
only) of the Common Stock for the Ten (10) Trading Days prior to the applicable Put Notice Date,
multiplied by the average of the three (3) daily closing bid prices immediately preceding the Put
Date, or (B) two hundred fifty thousand dollars ($250,000). During the Open Period, the Company
shall not be entitled to submit a Put Notice until after the previous Closing has been completed.
The Purchase Price for the Common Stock identified in the Put Notice
shall be equal to ninety-seven percent (97%) of the lowest closing Best Bid price of the Common Stock during the Pricing Period.

(C) COMPANY’S RIGHT TO WITHRDRAWL. The Company shall reserve the
right, but not the obligation, to withdraw that portion of the Put that is below the
Minimal Acceptable Price, by submitting to the Investor, in writing, a notice to
cancel that portion of the Put. Any shares above the Minimal Acceptable price
due to the Investor shall be carried out by the Company under the terms of this
Agreement.

(D) INTENTIONALLY OMITTED

(E) CONDITIONS TO INVESTOR’S OBLIGATION TO PURCHASE SHARES.
Notwithstanding anything to the contrary in this Agreement, the Company shall
not be entitled to deliver a Put Notice and the Investor shall not be obligated to
purchase any Shares at a Closing (as defined in Section 2(G)) unless each of the
following conditions are satisfied:

     (I) a Registration Statement shall have been declared effective and shall
remain effective and available for the resale of all the Registrable Securities (as
defined in the Registration Rights Agreement) at all times until the Closing with
respect to the subject Put Notice;

     (II) at all times during the period beginning on the related Put Notice Date
and ending on and including the related Closing Date, the Common Stock shall
have been listed on the Principal Market and shall not have been suspended
from trading thereon for a period of two (2) consecutive Trading Days during the
Open Period and the Company shall not have been notified of any pending or

5

 

threatened proceeding or other action to suspend the trading of the Common Stock;

     (III) the Company has complied with its obligations and is otherwise not in
breach of or in default under, a material provision of this Agreement, the
Registration Rights Agreement or any other agreement executed in connection
herewith which has not been cured prior to delivery of the Investor’s Put Notice
Date;

     (IV) no injunction shall have been issued and remain in force, or action
commenced by a governmental authority which has not been stayed or
abandoned, prohibiting the purchase or the issuance of the Securities; and

     (V) the issuance of the Securities will not violate any shareholder approval
requirements of the Principal Market.

If any of the events described in clauses (I) through (V) above occurs during a Pricing Period,
then the Investor shall have no obligation to purchase the Put Amount of Common Stock set forth in
the applicable Put Notice.

(F) RESERVED

(G) MECHANICS OF PURCHASE OF SHARES BY INVESTOR. Subject to the
satisfaction of the conditions set forth in Sections 2(E), 7 and 8, the closing of the
purchase by the Investor of Shares (a “Closing”) shall occur on the date which is
no later than seven (7) Trading Days following the applicable Put Notice Date
(each a “Closing Date”). Prior to each Closing Date, (I) the Company shall deliver
to the Investor pursuant to this Agreement, certificates representing the Shares
to be issued to the Investor on such date and registered in the name of the
Investor; and (II) the Investor shall deliver to the Company the Purchase Price to
be paid for such Shares, determined as set forth in Sections 2(B). In lieu of
delivering physical certificates representing the Securities and provided that the
Company’s transfer agent then is participating in The Depository Trust Company
(“DTC”) Fast Automated Securities Transfer (“FAST”) program, upon request of
the Investor, the Company shall use commercially reasonable efforts to cause its
transfer agent to electronically transmit the Securities by crediting the account of
the Investor’s prime broker (as specified by the Investor within a reasonably in
advance of the Investor’s notice) with DTC through its Deposit Withdrawal Agent
Commission (“DWAC”) system.

The Company understands that a delay in the issuance of Securities beyond the Closing Date could
result in economic damage to the Investor. After the Effective Date, as compensation to the
Investor for such loss, the Company agrees to make late payments to the Investor for late issuance
of Securities (delivery of Securities after the applicable Closing Date) in accordance with the
following schedule (where “No. of Days Late” is defined as the number of trading days beyond the
Closing Date, with the Amounts being cumulative.):

6

 

	 	 	 	 	 
	LATE PAYMENT FOR EACH	 	 
	NO. OF DAYS LATE	 	$10,000 WORTH OF COMMON STOCK
	1
	 	$	100	 
	2
	 	$	200	 
	3
	 	$	300	 
	4
	 	$	400	 
	5
	 	$	500	 
	6
	 	$	600	 
	7
	 	$	700	 
	8
	 	$	800	 
	9
	 	$	900	 
	10
	 	$	1,000	 
	Over 10
	 	$1,000 + $200 for each
	 
	 	Business Day late beyond 10 days

The Company shall make any payments incurred under this Section in immediately available
funds upon demand by the Investor. Nothing herein shall limit the Investor’s right to pursue
actual damages for the Company’s failure to issue and deliver the Securities to the Investor,
except that such late payments shall offset any such actual damages incurred by the Investor,
and any Repurchase Adjustment Amount, as set forth below.

(H) OVERALL LIMIT ON COMMON STOCK ISSUABLE. Notwithstanding anything contained herein to the
contrary, if during the Open Period the Company becomes listed on an exchange that limits the
number of shares of Common Stock that may be issued without shareholder approval, then the
number of Shares issuable by the Company and purchasable by the Investor, shall not exceed
that number of the shares of Common Stock that may be issuable without shareholder approval
(the “Maximum Common Stock Issuance”). If such issuance of shares of Common Stock could cause
a delisting on the Principal Market, then the Maximum Common Stock Issuance shall first be
approved by the Company’s shareholders in accordance with applicable law and the By-laws and
Amended and Restated Certificate of Incorporation of the Company, if such issuance of shares
of Common Stock could cause a delisting on the Principal Market. The parties understand and
agree that the Company’s failure to seek or obtain such shareholder approval shall in no way
adversely affect the validity and due authorization of the issuance and sale of Securities or
the Investor’s obligation in accordance with the terms and conditions hereof to purchase a
number of Shares in the aggregate up to the Maximum Common Stock Issuance limitation, and
that such approval pertains only to the applicability of the Maximum Common Stock Issuance
limitation provided in this Section 2(H).

(I) LIMITATION ON AMOUNT OF OWNERSHIP. Notwithstanding anything to the contrary in this
Agreement, in no event shall the Investor be entitled to purchase that number of Shares,
which when added to the sum of the number of shares of Common Stock beneficially owned (as
such term is defined under Section 13(d) and Rule 13d-3 of the 1934 Act), by the Investor,
would exceed

7

 

4.99% of the number of shares of Common Stock outstanding on the Closing Date, as determined in
accordance with Rule 13d-1(j) of the 1934 Act.

(J) If, by the third (3rd) business day after the Closing Date, the Company fails to deliver any
portion of the shares of the Put to the Investor (the “Put Shares Due”) and the Investor purchases,
in an open market transaction or otherwise, shares of Common Stock necessary to make delivery of
shares which would have been delivered if the full amount of the shares to be delivered to the
Investor by the Company (the “Open Market Share Purchase”) , then the Company shall pay to the
Investor, in addition to any other amounts due to Investor pursuant to the Put, and not in lieu
thereof, the Open Market Adjustment Amount (as defined below). The “Open Market Adjustment Amount”
is the amount equal to the excess, if any, of (x) the Investor’s total purchase price (including
brokerage commissions, if any) for the Open Market Share Purchase minus (y) the net proceeds (after
brokerage commissions, if any) received by the Investor from the sale of the Put Shares Due. The
Company shall pay the Open Market Adjustment Amount to the Investor in immediately available funds
within five (5) business days of written demand by the Investor. By way of illustration and not in
limitation of the foregoing, if the Holder purchases shares of Common Stock having a total purchase
price (including brokerage commissions) of $11,000 to cover an Open Market Purchase with respect to
shares of Common Stock it sold for net proceeds of $10,000, the Open Market Purchase Adjustment
Amount which the Company will be required to pay to the Holder will be $1,000.

SECTION 3. INVESTOR’S REPRESENTATIONS, WARRANTIES AND COVENANTS.

The Investor represents and warrants to the Company, and covenants, that:

(A) SOPHISTICATED INVESTOR. The Investor has, by reason of its business
and financial experience, such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of this type
that it is capable of (I) evaluating the merits and risks of an investment in the
Securities and making an informed investment decision; (II) protecting its own
interest; and (III) bearing the economic risk of such investment for an indefinite
period of time.

(B) AUTHORIZATION; ENFORCEMENT. This Agreement has been duly and
validly authorized, executed and delivered on behalf of the Investor and is a valid
and binding agreement of the Investor enforceable against the Investor in
accordance with its terms, subject as to enforceability to general principles of
equity and to applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.

(C) SECTION 9 OF THE 1934 ACT. During the term of this Agreement, the
Investor will comply with the provisions of Section 9 of the 1934 Act, and the

8

 

rules promulgated thereunder, with respect to transactions involving the Common Stock. The
Investor agrees not to sell the Company’s stock short, either directly or indirectly through its
affiliates, principals or advisors, the Company’s common stock during the term of this Agreement.

(D) ACCREDITED INVESTOR. Investor is an “Accredited Investor” as that term
is defined in Rule 501 (a) of Regulation D of the 1933 Act.

(E) NO CONFLICTS. The execution, delivery and performance of the
Transaction Documents by the Investor and the consummation by the Investor of
the transactions contemplated hereby and thereby will not result in a violation of
Partnership Agreement or other organizational documents of the Investor.

(F) OPPORTUNITY TO DISCUSS. The Investor has received all materials
relating to the Company’s business, finance and operations which it has
requested. The Investor has had an opportunity to discuss the business,
management and financial affairs of the Company with the Company’s
management.

(G) INVESTMENT PURPOSES. The Investor is purchasing the Securities for its
own account for investment purposes and not with a view towards distribution
and agrees to resell or otherwise dispose of the Securities solely in accordance
with the registration provisions of the 1933 Act (or pursuant to an exemption from
such registration provisions).

(H) NO REGISTRATION AS A DEALER. The Investor is not and will not be required to be registered as
a “dealer” under the 1934 Act, either as a result of its execution and performance of its
obligations under this Agreement or otherwise.

(I) GOOD STANDING. The Investor is a Limited Partnership, duly organized, validly existing and in
good standing in the State of Delaware.

(J) TAX LIABILITIES. The Investor understands that it is liable for its own tax liabilities.

(K) REGULATION M. The Investor will comply with Regulation M under the 1934 Act, if applicable.

SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

Except as set forth in the Schedules attached hereto, or as disclosed on the Company’s SEC
Documents, the Company represents and warrants to the Investor that:

(A) ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Nevada, and has the requisite corporate
power and authorization to own its

9

 

properties and to carry on its business as now being conducted. Both the Company and the companies
it owns or controls (“Subsidiaries”) are duly qualified to do business and are 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. As used in this Agreement, “Material
Adverse Effect” means any material adverse effect on the business, properties, assets, operations,
results of operations, financial condition or prospects of the Company and its Subsidiaries, if
any, taken as a whole, or on the transactions contemplated hereby or by the agreements and
instruments to be entered into in connection herewith, or on the authority or ability of the
Company to perform its obligations under the Transaction Documents (as defined in Section 1 and
4(B), below).

(B) AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER
INSTRUMENTS.

     (I) The Company has the requisite corporate power and authority to enter
into and perform this Agreement, the Registration Rights Agreement, and each of
the other agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction
Documents”), and to issue the Securities in accordance with the terms hereof
and thereof.

     (II) The execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby
and thereby, including without limitation the reservation for issuance and the
issuance of the Securities pursuant to this Agreement, have been duly and
validly 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
shareholders.

     (III) The Transaction Documents have been duly and validly executed and
delivered by the Company.

     (IV) The Transaction Documents constitute the valid and binding
obligations of the Company enforceable against the Company in accordance with
their terms, except as such enforceability may be limited by general principles of
equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation or similar laws relating to, or affecting generally, the enforcement of
creditors’ rights and remedies.

(C) CAPITALIZATION. As of the date hereof, the authorized capital stock of the
Company consists of 200,000,000 shares of Common Stock, $.001 par value per
share, of which as of the date hereof, 39,340,119 shares are issued and
outstanding; no shares of Preferred Stock are authorized or issued or
outstanding; 31,536,171 shares of common stock are reserved for issuance

10

 

pursuant to options, warrants and other convertible securities; and an additional 1,614,000 shares
of common stock will have been reserved for issuance pursuant to options, warrants and other
convertible securities on or before the date of the filing of the Registration Statement with the
SEC. All of such outstanding shares have been, or upon issuance will be, validly issued, fully
paid and non-assessable.

Except as disclosed in the Company’s publicly available filings with the SEC:

(I) no shares of the Company’s capital stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company; (II) there are no
outstanding debt securities; (III) there are no outstanding shares of capital stock, options,
warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the Company or any of
its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or
any of its Subsidiaries is or may become bound to issue additional shares of capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries, except that the Company may be
obligated to issue a warrant to its distributor in China exercisable for up to 1,000,000 shares of
common stock, with the exact amount depending upon the number of units ordered by the distributor
over a five-year period commencing upon the execution of the related distribution agreement; (IV)
there are no agreements or arrangements under which the Company or any of its Subsidiaries is
obligated to register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement), except that the Company (A) has granted piggyback registration
rights to the Company’s former public relations firm with respect to 41,665 shares of common stock,
(B) is presently negotiating the granting of piggyback registration rights with the bankruptcy
trustee under the Company’s former royalty agreement with respect to its ZEFS technology with
respect to 50,000 shares of common stock, and (C) is presently negotiating the granting of S-8
registration rights to one consultant for 450,000 shares of common stock issuable upon the exercise
of options; (V) there are no outstanding securities 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 as described in this Agreement; (VII) the Company does not have any
stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement;
and (VIII) there is no dispute as to the classification of any shares of the Company’s capital
stock.

11

 

     The Company has furnished to the Investor, or the Investor has had access through EDGAR
to, true and correct copies of the Company’s Amended and Restated Certificate of Incorporation, as
in effect on the date hereof (the “Certificate of Incorporation”), and the Company’s By-laws, as in
effect on the date hereof (the “By-laws”), and the terms of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof in respect thereto.

(D) ISSUANCE OF SHARES. The Company has reserved, or will have reserved
on or before the date of the filing of the Registration Statement with the SEC,
7,000,000 Shares for issuance pursuant to this Agreement, which Shares will
have been duly authorized and reserved for issuance (subject to adjustment
pursuant to the Company’s covenant set forth in Section 5(F) below) pursuant to
this Agreement. Upon issuance in accordance with this Agreement, the
Securities will be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issue thereof. In the event the
Company cannot register a sufficient number of Shares for issuance pursuant to
this Agreement, the Company will use its best efforts to authorize and reserve for
issuance the number of Shares required for the Company to perform its
obligations hereunder as soon as reasonably practicable.

(E) NO CONFLICTS. The execution, delivery and performance of the Equity Line
Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby will not (I) result
in a violation of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of preferred stock of the
Company or the By-laws; or (II) conflict with, or constitute a material default (or
an event which with notice or lapse of time or both would become a material
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, contract, indenture
mortgage, indebtedness or instrument to which the Company or any of its
Subsidiaries is a party, or to the Company’s knowledge result in a violation of any
law, rule, regulation, order, judgment or decree (including United States federal
and state securities laws and regulations and the rules and regulations of the
Principal Market or principal securities exchange or trading market on which the
Common Stock is traded or listed) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected. Except as disclosed in Schedule 4(e), neither
the Company nor its Subsidiaries is in violation of any term of, or in default under,
the Certificate of Incorporation, any Certificate of Designations, Preferences and
Rights of any outstanding series of preferred stock of the Company or
the By-laws or their organizational charter or by-laws, respectively, or any contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, except for possible conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations that would not individually or in the
aggregate have or constitute a Material Adverse Effect. The business of the

12

 

Company and its Subsidiaries is not being conducted, and shall not be conducted, in
violation of any law, statute, ordinance, rule, order or regulation of any governmental authority
or agency, regulatory or self-regulatory agency, or court, except for possible violations the
sanctions for which either individually or in the aggregate would not have a Material Adverse
Effect. Except as specifically contemplated by this Agreement and as required under the 1933 Act or
any securities laws of any states, to the Company’s knowledge, the Company is not required to
obtain any consent, authorization, permit or order of, or make any filing or registration (except
the filing of a registration statement as outlined in the Registration Rights Agreement between the
Parties) with, any court, governmental authority or agency, regulatory or self-regulatory agency or
other third party in order for it to execute, deliver or perform any of its obligations under, or
contemplated by, the Transaction Documents in accordance with the terms hereof or thereof. All
consents, authorizations, permits, orders, filings and registrations which the Company is required
to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date
hereof and are in full force and effect as of the date hereof. Except as disclosed in Schedule
4(e), the Company and its Subsidiaries are unaware of any facts or circumstances which might give
rise to any of the foregoing. The Company is not, and will not be, in violation of the listing
requirements of the Principal Market as in effect on the date hereof and on each of the Closing
Dates and is not aware of any facts which would reasonably lead to delisting of the Common Stock by
the Principal Market in the foreseeable future.

(F) SEC DOCUMENTS; FINANCIAL STATEMENTS. As of the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The
Company has delivered to the Investor or its representatives, or they have had access through EDGAR
to, true and complete copies of the SEC Documents. As of their respective filing dates, the SEC
Documents complied in all material respects with the requirements of the 1934 Act and the rules and
regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made, not misleading. 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 SEC with respect thereto. Such financial statements have
been prepared in accordance with generally accepted accounting principles, by a firm that is a
member of the Public Companies Accounting Oversight Board (“PCAOB”) consistently applied, during
the periods involved (except (I) as may be otherwise indicated in such financial statements or the
notes thereto, or (II) in

13

 

the case of unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the financial position
of the Company as of the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other written information provided by or on behalf of the Company to the Investor
which is not included in the SEC Documents, including, without limitation, information referred to
in Section 4(D) of this Agreement, contains any untrue statement of a material fact or omits to
state any material fact necessary to make the statements therein, in the light of the circumstance
under which they are or were made, not misleading. Neither the Company nor any of its Subsidiaries
or any of their officers, directors, employees or agents have provided the Investor with any
material, nonpublic information which was not publicly disclosed prior to the date hereof and any
material, nonpublic information provided to the Investor by the Company or its Subsidiaries or any
of their officers, directors, employees or agents prior to any Closing Date shall be publicly
disclosed by the Company prior to such Closing Date.

(G) ABSENCE OF CERTAIN CHANGES. Except as otherwise set forth in the SEC Documents, the Company
does not intend to change the business operations of the Company in any material way. The Company
has not taken any steps, and does not currently expect to take any steps, to seek protection
pursuant to any bankruptcy law nor does the Company or its Subsidiaries have any knowledge or
reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings.

(H) ABSENCE OF LITIGATION AND/OR REGULATORY PROCEEDINGS. Except as set forth in the SEC Documents,
there is no action, suit, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending or, to the knowledge of the
executive officers of Company or any of its Subsidiaries, threatened against or affecting the
Company, the Common Stock or any of the Company’s Subsidiaries or any of the Company’s or the
Company’s Subsidiaries’ officers or directors in their capacities as such, in which an adverse
decision could have a Material Adverse Effect.

(I) ACKNOWLEDGMENT REGARDING INVESTOR’S PURCHASE OF SHARES. The Company acknowledges and agrees
that the Investor 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. The Company
further acknowledges that the Investor is not acting as a financial advisor or fiduciary of the
Company (or in any similar capacity) with respect to the Equity Line Transaction Documents and the
transactions contemplated hereby and thereby and any advice given by the Investor or any of its
respective representatives or agents in connection with the Equity Line Transaction Documents and
the transactions contemplated hereby and thereby is merely incidental to the Investor’s purchase
of the Securities, and is not being relied on

14

 

by the Company. The Company further represents to the Investor that the Company’s decision
to enter into the Equity Line Transaction Documents has been based solely on the independent
evaluation by the Company and its representatives.

(J) NO UNDISCLOSED EVENTS, LIABILITIES, DEVELOPMENTS OR CIRCUMSTANCES. Except as set forth in the
SEC Documents, as of the date hereof, no event, liability, development or circumstance has occurred
or exists, or to the Company’s knowledge is contemplated to occur, with respect to the Company or
its Subsidiaries or their respective business, properties, assets, prospects, operations or
financial condition, that would be required to be disclosed by the Company under applicable
securities laws on a registration statement filed with the SEC relating to an issuance and sale by
the Company of its Common Stock and which has not been publicly announced.

(K) EMPLOYEE RELATIONS. Neither the Company nor any of its Subsidiaries is involved in any union
labor dispute nor, to the knowledge of the Company or any of its Subsidiaries, is any such dispute
threatened. Neither the Company nor any of its Subsidiaries is a party to a collective bargaining
agreement, and the Company and its Subsidiaries believe that relations with their employees are
good. No executive officer (as defined in Rule 501(f) of the 1933 Act) has notified the Company
that such officer intends to leave the Company’s employ or otherwise terminate such officer’s
employment with the Company.

(L) INTELLECTUAL PROPERTY RIGHTS. The Company and its Subsidiaries own or possess adequate rights
or licenses to use all trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective businesses as now
conducted. Except as set forth in the SEC Documents, none of the Company’s trademarks, trade names,
service marks, service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, government authorizations, trade secrets or other intellectual
property rights necessary to conduct its business as now or as proposed to be conducted have
expired or terminated, or are expected to expire or terminate within two (2) years from the date of
this Agreement. The Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademark, trade name rights, patents, patent rights,
copyrights, inventions, licenses, service names, service marks, service mark registrations, trade
secret or other similar rights of others, or of any such development of similar or identical trade
secrets or technical information by others and, except as set forth in the SEC Documents, there is
no claim, action or proceeding being made or brought against, or to the Company’s knowledge, being
threatened against, the Company or its Subsidiaries regarding trademark, trade name, patents,
patent rights, invention, copyright, license, service names, service marks, service mark
registrations, trade secret or other infringement; and the Company and its Subsidiaries are unaware
of any facts or circumstances which might give rise to

15

 

any of the foregoing. The Company and its Subsidiaries have taken commercially reasonable
security measures to protect the secrecy, confidentiality and value of all of their intellectual
properties.

(M) ENVIRONMENTAL LAWS. The Company (I) is, to the knowledge of the management and directors of
the Company, in compliance with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants (“Environmental Laws”); (II) has, to the
knowledge of the management and directors of the Company, received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its business; and (III) is
in compliance, to the knowledge of the management and directors of the Company, with all terms and
conditions of any such permit, license or approval where, in each of the three (3) foregoing
cases, the failure to so comply would have, individually or in the aggregate, a Material Adverse
Effect.

(N) TITLE. The Company and its Subsidiaries have good and marketable title to all personal
property owned by them which is material to the business of the Company and its Subsidiaries, in
each case free and clear of all liens, encumbrances and defects except such as are described in
the SEC Documents or such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the Company or any of its
Subsidiaries. Any real property and facilities held under lease by the Company or 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.

(O) INSURANCE. Each of the Company’s Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as management of the Company
reasonably believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any of its Subsidiaries has been refused any
insurance coverage sought or applied for and neither the Company nor its Subsidiaries 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.

(P) REGULATORY PERMITS. The Company and its Subsidiaries have in full force and effect all
certificates, approvals, authorizations and permits from the appropriate federal, state, local or
foreign regulatory authorities and comparable foreign regulatory agencies, necessary to own, lease
or operate their respective properties and assets and conduct their respective businesses, and
neither the Company nor any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, approval,

16

 

authorization or permit, except for such certificates, approvals, authorizations or permits which
if not obtained, or such revocations or modifications which, would not have a Material Adverse
Effect.

(Q) INTERNAL ACCOUNTING CONTROLS. The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (I) transactions are
executed in accordance with management’s general or specific authorizations; (II) transactions are
recorded as necessary to permit preparation of financial statements in conformity with generally
accepted accounting principles by a firm with membership to the PCAOB and to maintain asset
accountability; (III) access to assets is permitted only in accordance with management’s general
or specific authorization; and (IV) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with respect to any
differences.

(R) NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any of its Subsidiaries is
subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule
or regulation which in the judgment of the Company’s officers has or is expected in the future to
have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any
contract or agreement which in the judgment of the Company’s officers has or is expected to have a
Material Adverse Effect.

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

(T) CERTAIN TRANSACTIONS. Except as set forth in the SEC Documents filed at least ten (10) days
prior to the date hereof and except for arm’s length transactions pursuant to which the Company
makes payments in the ordinary course of business upon terms no less favorable than the Company
could obtain from disinterested third parties and other than the grant of stock options disclosed
in the SEC Documents, none of the officers, directors, or employees of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (other than for services as
employees, officers and directors), including any contract, agreement or other arrangement
providing for the

17

 

furnishing of services to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any officer, director or such employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an officer, director,
trustee or partner.

(U) DILUTIVE EFFECT. The Company understands and acknowledges that the number of shares of Common
Stock issuable upon purchases pursuant to this Agreement will increase in certain circumstances
including, but not necessarily limited to, the circumstance wherein the trading price of the Common
Stock declines during the period between the Effective Date and the end of the Open Period. The
Company’s executive officers and directors have studied and fully understand the nature of the
transactions contemplated by this Agreement and recognize that they have a potential dilutive
effect on the shareholders of the Company. The Board of Directors of the Company has concluded, in
its good faith business judgment, and with full understanding of the implications, that such
issuance is in the best interests of the Company. The Company specifically acknowledges that,
subject to such limitations as are expressly set forth in the Equity Line Transaction Documents,
its obligation to issue shares of Common Stock upon purchases pursuant to this Agreement is
absolute and unconditional regardless of the dilutive effect that such issuance may have on the
ownership interests of other shareholders of the Company.

(V) LOCK-UP. The Company shall cause its officers, insiders, directors, and affiliates or other
related parties under control of the Company, to refrain from selling Common Stock during each
Pricing Period.

(W) NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting
on its 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 Common Stock to be offered as
set forth in this Agreement.

(X) NO BROKERS, FINDERS OR FINANCIAL ADVISORY FEES OR COMMISSIONS. No brokers, finders or financial
advisory fees or commissions will be payable by the Company, it’s agents or Subsidiaries, with
respect to the transactions contemplated by this Agreement, except as otherwise provided for in
Section 12(M) of this Agreement.

SECTION 5. COVENANTS OF THE COMPANY

(A) BEST EFFORTS. The Company shall use commercially reasonable efforts to
timely satisfy each of the conditions set forth in Section 7 of this Agreement.

(B) BLUE SKY. The Company shall, at its sole cost and expense, on or before
each of the Closing Dates, take such action as the Company shall reasonably
determine is necessary to qualify the Securities for, or obtain exemption for the

18

 

Securities for, sale to the Investor at each of the Closings pursuant to this Agreement under
applicable securities or “Blue Sky” laws of such states of the United States, as reasonably
specified by the Investor, and shall provide evidence of any such action so taken to the Investor
on or prior to the Closing Date.

(C) REPORTING STATUS. Until the first of the following occurs, the Company
shall file all reports required to be filed with the SEC pursuant to the 1934 Act,
and the Company shall not terminate its status, or take an action or fail to take
any action, which would terminate its status as a reporting company under the
1934 Act: (i) this Agreement terminates pursuant to Section 9 and the Investor
has the right to sell all of the Securities without restrictions pursuant to Rule
144(k) promulgated under the 1933 Act, or such other exemption; or (ii) the date
on which the Investor has sold all the Securities and this Agreement has been
terminated pursuant to Section 9.

(D) USE OF PROCEEDS. The Company will use the proceeds from the sale of
the Shares (excluding amounts paid by the Company for fees as set forth in the
Transaction Documents) for general corporate and working capital purposes and
acquisitions or assets, businesses or operations or for other purposes that the
Board of Directors, in its good faith deem to be in the best interest of the
Company.

(E) FINANCIAL INFORMATION. During the Registration Period, the Company
agrees to make available to the Investor via EDGAR or other electronic means
the following documents and information on the forms set forth: (I) within five (5)
Trading Days after the filing thereof with the SEC, a copy of its Annual Reports
on Form 10-KSB, its Quarterly Reports on Form 10-QSB, any Current Reports on
Form 8-K and any Registration Statements or amendments filed pursuant to the
1933 Act; (II) copies of any notices and other information made available or given
to the shareholders of the Company generally, contemporaneously with the
making available or giving thereof to the shareholders; and (III) within two (2)
calendar days of filing or delivery thereof, copies of all documents filed with, and
all correspondence sent to, the Principal Market, any securities exchange or
market, or the National Association of Securities Dealers, Inc., unless such
information is material nonpublic information.

(F) RESERVATION OF SHARES. Subject to the following sentence, the
Company shall take all action necessary to at all times have authorized, and
reserved for the purpose of issuance, a sufficient number of shares of Common
Stock to provide for the issuance of the Securities to the Investor as required
hereunder. In the event that the Company determines that it does not have a
sufficient number of authorized shares of Common Stock to reserve and keep
available for issuance as described in this Section 5(F), the Company shall use
commercially reasonable efforts to increase the number of authorized shares of
Common Stock by seeking shareholder approval for the authorization of such
additional shares.

19

 

(G) LISTING. The Company shall promptly secure and maintain the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) on the Principal Market
and each other national securities exchange and automated quotation system, if any, upon which
shares of Common Stock are then listed or quoted (subject to official notice of issuance) and
shall maintain, such listing of all Registrable Securities from time to time issuable under the
terms of the Equity Line Transaction Documents. 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 (excluding suspensions of not more than one (1)
trading day resulting from business announcements by the Company). The Company shall promptly
provide to the Investor copies of any notices it receives from the Principal Market regarding the
continued eligibility of the Common Stock for listing on such automated quotation system or
securities exchange. The Company shall pay all fees and expenses in connection with satisfying its
obligations under this Section 5(G).

(H) TRANSACTIONS WITH AFFILIATES. The Company shall not, and shall cause each of its Subsidiaries
not to, enter into, amend, modify or supplement, or permit any Subsidiary to enter into, amend,
modify or supplement, any agreement, transaction, commitment or arrangement with any of its or any
Subsidiary’s officers, directors, persons who were officers or directors at any time during the
previous two (2) years, shareholders who beneficially own 5% or more of the Common Stock, or
Affiliates or with any individual related by blood, marriage or adoption to any such individual or
with any entity in which any such entity or individual owns a 5% or more beneficial interest (each
a “Related Party”), except for (I) customary employment arrangements and benefit programs on
reasonable terms, (II) any agreement, transaction, commitment or arrangement on an arms-length
basis on terms no less favorable than terms which would have been obtainable from a disinterested
third party other than such Related Party, or (III) any agreement, transaction, commitment or
arrangement which is approved by a majority of the disinterested directors of the Company. For
purposes hereof, any director who is also an officer of the Company or any Subsidiary of the
Company shall not be a disinterested director with respect to any such agreement, transaction,
commitment or arrangement. “Affiliate” for purposes hereof means, with respect to any person or
entity, another person or entity that, directly or indirectly, (I) has a 5% or more equity interest
in that person or entity, (II) has 5% or more common ownership with that person or entity, (III)
controls that person or entity, or (IV) is under common control with that person or entity.
“Control” or “Controls” for purposes hereof means that a person or entity has the power, directly
or indirectly, to conduct or govern the policies of another person or entity.

(I) FILING OF FORM 8-K. On or before the date which is four (4) Trading Days after the Execution
Date, the Company shall file a Current Report on Form 8-K with the SEC describing the terms of the
transaction contemplated by the Equity

20

 

Line Transaction Documents in the form required by the 1934 Act, if such filing is required.

(J) CORPORATE EXISTENCE. The Company shall use commercially reasonable efforts to preserve and
continue the corporate existence of the Company.

(K) NOTICE OF CERTAIN EVENTS AFFECTING REGISTRATION; SUSPENSION OF RIGHT TO MAKE A PUT. The Company
shall promptly notify the Investor upon the occurrence of any of the following events in respect of
a Registration Statement or related prospectus in respect of an offering of the Securities: (I)
receipt of any request for additional information by the SEC or any other federal or state
governmental authority during the period of effectiveness of the Registration Statement for
amendments or supplements to the Registration Statement or related prospectus; (II) the issuance by
the SEC or any other federal or state governmental authority of any stop order suspending the
effectiveness of any Registration Statement or the initiation of any proceedings for that purpose;
(III) receipt of any notification with respect to the suspension of the qualification or exemption
from qualification of any of the Securities for sale in any jurisdiction or the initiation or
notice of any proceeding for such purpose; (IV) the happening of any event that makes any statement
made in such Registration Statement or related prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that requires the making of
any changes in the Registration Statement, related prospectus or documents so that, in the case of
a Registration Statement, it will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the statements therein
not misleading, and that in the case of the related prospectus, it will not contain any untrue
statement of a material fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading; and (V) the Company’s reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate, and the Company shall promptly make
available to Investor any such supplement or amendment to the related prospectus. The Company shall
not deliver to Investor any Put Notice during the continuation of any of the foregoing events in
this Section 5(K).

(L) REIMBURSEMENT. If (I) the Investor becomes involved in any capacity in any action, proceeding
or investigation brought by any shareholder of the Company, in connection with or as a result of
the consummation of the transactions contemplated by the Equity Line Transaction Documents, or if
the Investor is impleaded in any such action, proceeding or investigation by any person (other
than as a result of a breach of the Investor’s representations and warranties set forth in this
Agreement); or (II) the Investor becomes involved in any capacity in any action, proceeding or
investigation brought by the SEC against or involving the Company or in connection with or as a
result of the consummation of the transactions contemplated by the Equity Line Transaction

21

 

Documents (other than as a result of a breach of the Investor’s representations and warranties
set forth in this Agreement), or if this Investor is impleaded in any such action, proceeding or
investigation by any person, then in any such case, the Company will reimburse the Investor for its
reasonable legal and other expenses (including the cost of any investigation and preparation)
incurred in connection therewith, as such expenses are incurred. In addition, other than with
respect to any matter in which the Investor is a named party, the Company will pay to the Investor
the charges, as reasonably determined by the Investor, for the time of any officers or employees of
the Investor devoted to appearing and preparing to appear as witnesses, assisting in preparation
for hearings, trials or pretrial matters, or otherwise with respect to inquiries, hearing, trials,
and other proceedings relating to the subject matter of this Agreement. The reimbursement
obligations of the Company under this section shall be in addition to any liability which the
Company may otherwise have, shall extend upon the same terms and conditions to any affiliates of
the Investor that are actually named in such action, proceeding or investigation, and partners,
directors, agents, employees, attorneys, accountants, auditors and controlling persons (if any), as
the case may be, of Investor and any such affiliate, and shall be binding upon and inure to the
benefit of any successors of the Company, the Investor and any such affiliate and any such person.

(M) TRANSFER AGENT. Upon effectiveness of the Registration Statement, and for so long as the
Registration Statement is effective, the Company shall deliver instructions to its transfer agent
to issue Shares to the Investor that are covered for resale by the Registration Statement free of
restrictive legends.

SECTION 6. INTENTIONALLY OMITTED

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

The obligation hereunder of the Company to issue and sell the Securities to the Investor is
further subject to the satisfaction, at or before each Closing Date, of each of the following
conditions set forth below. These conditions are for the Company’s sole benefit and may be waived
by the Company at any time in its sole discretion.

(A) The Investor shall have executed this Agreement and the Registration Rights
Agreement and delivered the same to the Company.

(B) The Investor shall have delivered to the Company the Purchase Price for the
Securities being purchased by the Investor between the end of the Pricing Period
and the Closing Date via a Put Settlement Sheet (hereto attached as Exhibit D).
After receipt of confirmation of delivery of such Securities to the Investor, the
Investor, by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company will disburse the funds constituting the
Purchase Amount.

22

 

(C) No statute, rule, regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions contemplated by this
Agreement.

SECTION 8. FURTHER CONDITIONS OF THE INVESTOR’S OBLIGATION TO PURCHASE.

The obligation of the Investor hereunder to purchase Shares is subject to the satisfaction, on or
before each Closing Date, of each of the following conditions set forth below.

(A) The Company shall have executed the Equity Line Transaction Documents
and delivered the same to the Investor.

(B) The Common Stock shall be authorized for quotation on the Principal Market
and trading in the Common Stock shall not have been suspended by the
Principal Market or the SEC, at any time beginning on the date hereof and
through and including the respective Closing Date (excluding suspensions of not
more than one (1) Trading Day resulting from business announcements by the
Company, provided that such suspensions occur prior to the Company’s delivery
of the Put Notice related to such Closing).

(C) The representations and warranties of the Company shall be true and correct
in all material respects as of the date when made and as of the applicable
Closing Date as though made at that time (except for (I) representations and
warranties that speak as of a specific date and (II) with respect to the
representations made in Sections 4(g), (h) and (j) and the third sentence of
Section 4(k) hereof, events which occur on or after the date of this Agreement
and are disclosed in SEC filings made by the Company at least ten (10) Trading
Days prior to the applicable Put Notice Date) and the Company shall have
performed, satisfied and complied with the covenants, agreements and
conditions required by the Equity Line Transaction Documents to be performed,
satisfied or complied with by the Company on or before such Closing Date,
except where the failure to do so would not constitute a Material Adverse Effect.
The Investor may request an update as of such Closing Date regarding the
representation contained in Section 4(C) above.

(D) The Company shall have executed and delivered to the Investor the
certificates representing, or have executed electronic book-entry transfer of, the
Securities (in such denominations as the Investor shall request) being purchased
by the Investor at such Closing.

(E) The Board of Directors of the Company shall have adopted resolutions
consistent with Section 4(B)(II) above (the “Resolutions”) and such Resolutions
shall not have been amended or rescinded prior to such Closing Date.

23

 

(F) Reserved

(G) No statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement.

(H) The Registration Statement shall be effective on each Closing Date and no stop order
suspending the effectiveness of the Registration statement shall be in effect or to the Company’s
knowledge shall be pending or threatened. Furthermore, on each Closing Date (I) neither the
Company nor the Investor shall have received notice that the SEC has issued or intends to issue a
stop order with respect to such Registration Statement or that the SEC otherwise has suspended or
withdrawn the effectiveness of such Registration Statement, either temporarily or permanently, or
intends or has threatened to do so (unless the SEC’s concerns have been addressed and Investor is
reasonably satisfied that the SEC no longer is considering or intends to take such action), and
(II) no other suspension of the use or withdrawal of the effectiveness of such Registration
Statement or related prospectus shall exist.

(I) At the time of each Closing, the Registration Statement (including information or documents
incorporated by reference therein) and any amendments or supplements thereto shall not contain any
untrue statement of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or which would require public
disclosure or an update supplement to the prospectus.

(J) If applicable, the shareholders of the Company shall have approved the issuance of any Shares
in excess of the Maximum Common Stock Issuance in accordance with Section 2(H) or the Company
shall have obtained appropriate approval pursuant to the requirements of Nevada law and the
Company’s Articles of Incorporation and By-laws.

(K) The conditions to such Closing set forth in Section 2(E) shall have been satisfied on or
before such Closing Date.

(L) The Company shall have certified to the Investor the number of Shares of Common Stock
outstanding when a Put Notice is given to the Investor. The Company’s delivery of a Put Notice to
the Investor constitutes the Company’s certification of the existence of the necessary number of
shares of Common Stock reserved for issuance of such Shares.

SECTION 9. TERMINATION. This Agreement shall terminate upon any of the following events:

24

 

(I) when the Investor has purchased an aggregate of Ten Million dollars
($10,000,000) in the Common Stock of the Company pursuant to this Agreement;
or,

(II) on the date which is thirty-six (36) months after the Effective Date.

SECTION 10. SUSPENSION

This Agreement shall be suspended upon any of the following events, and shall remain suspended
until such event is rectified:

     (I) the trading of the Common Stock is suspended by the SEC, the
Principal Market or the NASD for a period of two (2) consecutive Trading Days
during the Open Period; or,

     (II) The Common Stock ceases to be registered under the 1934 Act or
listed, quoted or traded on the Principal Market. Immediately upon the
occurrence of one of the above-described events, the Company shall send
written notice of such event to the Investor.

SECTION 11. INDEMNIFICATION.

In consideration of the parties mutual obligations set forth in the Transaction Documents,
each of the parties (in such capacity, an “Indemnitor”) shall defend, protect, indemnify and hold
harmless the other and all of the other party’s shareholders, officers, directors, employees,
counsel, and direct or indirect investors and any of the foregoing person’s agents or other
representatives (including, without limitation, those retained in connection with the transactions
contemplated by this Agreement) (collectively, the “Indemnitees”) from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages,
and reasonable expenses in connection therewith (irrespective of whether any such Indemnitee is a
party to the action for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by any Indemnitee as a
result of, or arising out of, or relating to (I) any misrepresentation or breach of any
representation or warranty made by the Indemnitor or any other certificate, instrument or document
contemplated hereby or thereby; (II) any breach of any covenant, agreement or obligation of the
Indemnitor contained in the Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby; or (III) any cause of action, suit or claim brought or made against
such Indemnitee by a third party and arising out of or resulting from the execution, delivery,
performance or enforcement of the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, except insofar as any such misrepresentation, breach or
any untrue statement, alleged untrue statement, omission or alleged omission is made in reliance
upon and in conformity with information furnished to Indemnitor which is specifically intended for
use in the preparation of any such Registration

25

 

Statement, preliminary prospectus, prospectus or amendments to the prospectus. To the extent that
the foregoing undertaking by the Indemnitor may be unenforceable for any reason, the Indemnitor
shall make the maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law. The indemnity provisions contained herein
shall be in addition to any cause of action or similar rights Indemnitor may have, and any
liabilities to which the Indemnitor or the Indemnitees may be subject.

SECTION 12. GOVERNING LAW; DISPUTES SUBMITTED TO ARBITRATION.

(A) ARBITRATION. All disputes arising under this agreement shall be governed
by and interpreted in accordance with the laws of the Commonwealth of
Massachusetts, without regard to principles of conflict of laws. The parties to this
agreement will submit all disputes arising under this agreement to arbitration in
Boston, Massachusetts before a single arbitrator of the American Arbitration
Association (“AAA”). The arbitrator shall be selected by application of the rules
of the AAA, or by mutual agreement of the parties, except that such arbitrator
shall be an attorney admitted to practice law in the Commonwealth of
Massachusetts. No party to this agreement will challenge the jurisdiction or
venue provisions as provided in this section. No party to this agreement will
challenge the jurisdiction or venue provisions as provided in this section. Nothing
contained herein shall prevent the party from obtaining an injunction.

(B) LEGAL FEES; AND MISCELLANEOUS FEES. Except as otherwise set forth
in the Transaction Documents, each party shall pay the fees and expenses of its
advisers, counsel, the accountants and other experts, if any, and all other
expenses incurred by such party incident to the negotiation, preparation,
execution, delivery and performance of this Agreement. Any attorneys’ fees and
expenses incurred by either the Company or the Investor in connection with the
preparation, negotiation, execution and delivery of any amendments to this
Agreement or relating to the enforcement of the rights of any party, after the
occurrence of any breach of the terms of this Agreement by another party or any
default by another party in respect of the transactions contemplated hereunder,
shall be paid on demand by the party which is determined, pursuant to Section
12(A), to have breached the Agreement and/or defaulted, as the case may be.
The Company shall pay all stamp and other taxes and duties levied in connection
with the issuance of any Securities.

(C) COUNTERPARTS. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original
signature.

26

 

(D) HEADINGS; SINGULAR/PLURAL. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the interpretation of,
this Agreement. Whenever required by the context of this Agreement, the
singular shall include the plural and masculine shall include the feminine.

(E) 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.

(F) ENTIRE AGREEMENT; AMENDMENTS. This Agreement is the FINAL
AGREEMENT between the Company and the Investor with respect to the terms
and conditions set forth herein, and, the terms of this Agreement may not be
contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the Parties. No provision of this Agreement may be amended
other than by an instrument in writing signed by the Company and the Investor,
and no provision hereof may be waived other than by an instrument in writing
signed by the party against whom enforcement is sought. The execution and
delivery of the Equity Line Transaction Documents shall not alter the force and
effect of any other agreements between the Parties, and the obligations under
those agreements.

(G) NOTICES. Any notices 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 (1) day
after deposit with a nationally recognized overnight delivery service, in each case
properly addressed to the party to receive the same. The addresses and
facsimile numbers for such communications shall be:

If to the Company:

Save the World Air, Inc. 

5125 Lankershim Blvd. North Hollywood, CA 91601

Telephone: (818) 487-8000

Facsimile: (818) 487-8003

27

 

with a copy to:

Lance Jon Kimmel, Esq.

SEC Law Firm

11693 San Vicente Boulevard

Suite 357

Los Angeles, CA 90049

Telephone: (310)557-3059

Facsimile: (310)388-1320

If to the Investor:

Dutchess Private Equities Fund, LP,

50 Commonwealth Avenue, Suite 2

Boston, MA 02116

Telephone: (617) 301-4700

Facsimile: (617) 249-0947

Each party shall provide five (5) days prior written notice to the other party of any change in
address or facsimile number.

(H) NO ASSIGNMENT. This Agreement may not be assigned.

(I)   NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto
and is not for the benefit of, nor may any provision hereof be enforced by, any other person,
except that the Company acknowledges that the rights of the Investor may be enforced by its
general partner.

(J)   SURVIVAL. The representations and warranties of the Company and the Investor contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4 and 5, the indemnification
provisions set forth in Section 11 and the nondisclosure provisions set forth in Section 13, shall
survive each of the Closings and the termination of this Agreement.

(K)   PUBLICITY. The Company and the Investor shall consult with each other in issuing any press
releases or otherwise making public statements with respect to the transactions contemplated hereby
and no party shall issue any such press release or otherwise make any such public statement without
the prior consent of the other party, which consent shall not be unreasonably withheld or delayed,
except that no prior consent shall be required if such disclosure is required by law, in which such
case the disclosing party shall provide the other party with prior notice of such public statement.
Notwithstanding the foregoing, the Company shall not publicly disclose the name of the Investor
without the prior consent of the Investor, except to the extent required by law. The Investor
acknowledges that this Agreement and all or part of the Transaction Documents may be deemed to be
“material contracts” as that term is defined by Item

28

 

601(b)(10) of Regulation S-B, and that the Company may therefore be required to file such
documents as exhibits to reports or registration statements filed under the 1933 Act or the 1934
Act. The Investor further agrees that the status of such documents and materials as material
contracts shall be determined solely by the Company, in consultation with its counsel.

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

(M) PLACEMENT AGENT. The Company agrees to pay Spencer Clarke LLC, a registered broker dealer eight
percent (8%) of the Put Amount on each draw toward the fee. The Investor shall have no obligation
with respect to any fees or with respect to any claims made by or on behalf of other persons or
entities for fees of a type contemplated in this Section that may be due in connection with the
transactions contemplated by the Transaction Documents. The Company shall indemnify and hold
harmless the Investor, their employees, officers, directors, agents, and partners, and their
respective affiliates, from and against all claims, losses, damages, costs (including the costs of
preparation and attorney’s fees) and expenses incurred in respect of any such claimed or existing
fees, as such fees and expenses are incurred.

(N) NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language
chosen by the parties to express their mutual intent, and no rules of strict construction will be
applied against any party, as the parties mutually agree that each has had a full and fair
opportunity to review this Agreement and seek the advice of counsel on it.

(O) REMEDIES. The Investor shall have all rights and remedies set forth in this Agreement and the
Registration Rights Agreement and all rights and remedies which such holders have been granted at
any time under any other agreement or contract and all of the rights which the Investor has by law.
Any person having any rights under any provision of this Agreement shall be entitled to enforce
such rights specifically (without posting a bond or other security), to recover damages by reason
of any default or breach of any provision of this Agreement, including the recovery of reasonable
attorneys fees and costs, and to exercise all other rights granted by law.

(P) PAYMENT SET ASIDE. To the extent that the Company makes a payment or payments to the Investor
hereunder or under the Registration Rights Agreement or the Investor enforces or exercises its
rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be

29

 

refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other
person under any law (including, without limitation, any bankruptcy law, state or federal law,
common law or equitable cause of action), then to the extent of any such restoration the
obligation or part thereof originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such enforcement or setoff had not
occurred.

(Q) PRICING OF COMMON STOCK. For purposes of this Agreement, the bid price of the Common Stock
shall be as reported on Bloomberg.

SECTION 13. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.

(a) The Company shall not disclose non-public information to the Investor, its
advisors, or its representatives.

(b) Nothing herein shall require the Company to disclose non-public information
to the Investor or its advisors or representatives, and the Company represents
that it does not disseminate non-public information to any investors who
purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose the
specific event or circumstance) of which it becomes aware, constituting non-
public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities), which,
if not disclosed in the prospectus included in the Registration Statement would
cause such prospectus to include a material misstatement or to omit a material
fact required to be stated therein in order to make the statements, therein, in light
of the circumstances in which they were made, not misleading. Nothing
contained in this Section 13 shall be construed to mean that such persons or
entities other than the Investor (without the written consent of the Investor prior to
disclosure of such information) may not obtain non-public information in the
course of conducting due diligence in accordance with the terms of this
Agreement and nothing herein shall prevent any such persons or entities from
notifying the Company of their opinion that based on such due diligence by such
persons or entities, that the Registration Statement contains an untrue statement
of material fact or omits a material fact required to be stated in the Registration
Statement or necessary to make the statements contained therein, in light of the
circumstances in which they were made, not misleading.

* * *

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SIGNATURE PAGE OF INVESTMENT AGREEMENT

Your signature on this Signature Page evidences your agreement to be bound by the terms and
conditions of the Investment Agreement and the Registration Rights Agreement as of the date first
written above.

The undersigned signatory hereby certifies that he has read and understands the Investment
Agreement, and the representations made by the undersigned in this Investment Agreement are true
and accurate, and agrees to be bound by its terms.

	 	 	 	 	 
	 

	 	 	 	 
	DUTCHESS PRIVATE EQUITIES FUND, L.P.	 	 
	BY ITS GENERAL PARTNER,	 	 
	DUTCHESS CAPITAL MANAGEMENT, LLC	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 	 	 
	 
	 	 	 	 
	Douglas H. Leighton, Managing Member	 	 
	 
	 	 	 	 
	SAVE THE WORLD AIR, INC.	 	 
	 
	 	 	 	 
	By
	 	 	,	 
	 

	 	 	 	 
	       Eugene E. Eichler, Chief Executive Officer	 	 

31

 

LIST OF EXHIBITS

	 	 	 
	EXHIBIT A

	 	Registration Rights Agreement
	EXHIBIT B

	 	Opinion of Company’s Counsel
	EXHIBIT C

	 	Put Notice
	EXHIBIT D

	 	Put Settlement Sheet

32

 

EXHIBIT A

Registration Rights Agreement

33

 

EXHIBIT B

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

Date:                     

[TRANSFER AGENT]

          Re: Save the World Air, Inc. 

Ladies and Gentlemen:

     We are counsel to Save the World Air, Inc., a Nevada corporation (the “Company”), and
have represented the Company in connection with that certain Investment Agreement (the “Investment
Agreement”) entered into by and among the Company and Duchess Private Equities Fund, LP (the
“Holder”), pursuant to which the Company has agreed to issue to the Holder shares of the Company’s
common stock, $.001 par value per share (the “Common Stock”) on the terms and conditions set forth
in the Investment Agreement. Pursuant to the Investment Agreement, the Company also has entered
into a Registration Rights Agreement with the Holder (the “Registration Rights Agreement”)
pursuant to which the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of Common Stock issued or
issuable under the Investment Agreement under the Securities Act of 1933, as amended (the “1933
Act”). In connection with the Company’s
obligations under the Registration Rights Agreement,
on
            , 2006, the
Company filed a Registration Statement on Form SB-2 (File
No. 333-          ) (the
“Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to the
Registrable Securities which names the Holder as a selling shareholder thereunder.

     In
connection with the foregoing, we advise you that
[a member of the SEC’s staff has advised
us by telephone that the SEC has entered an order declaring the Registration Statement effective]
[the Registration Statement has become effective] under the
1933 Act at [enter the time of
effectiveness] on [enter the date of effectiveness] and to the best of our knowledge,
after telephonic inquiry of a member of the SEC’s staff, no stop order suspending its effectiveness
has been issued and no proceedings for that purpose are pending before, or threatened by, the SEC
and the Registrable Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.

	 	 	 
	 

	 	Very truly yours,
	 

	 	[Company Counsel]

34

 

EXHIBIT C

Date:

RE: Put
Notice Number                   

Dear Mr. Leighton,

This is to inform you that as of today, Save the World Air, Inc., a Nevada corporation (the
“Company”), hereby elects to exercise its right pursuant to the Investment Agreement to require
Dutchess Private Equities Fund, LP to purchase shares of its common stock. The Company hereby
certifies that:

The amount of this put is $                    .

The Pricing Period runs from                      until                     .

The current number of shares issued and outstanding as of the Company are:

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 

The number of shares currently available for issuance on the SB-2 for the Equity Line are:

	 	 	 	 	 
	 

	 	 	 	 
	 	 	 

Regards,

	 	 	 
	 

	 	 
	 	 	 
	Eugene E. Eichler, Chief Executive Officer
	 	 
	Save the World Air, Inc.
	 	 

35

 

EXHIBIT D

PUT SETTLEMENT SHEET

Date:

Dear Mr. Eichler,

Pursuant to the Put given by Save the World Air, Inc. to Dutchess Private
Equities Fund, L.P. on                                          200  _, we are now submitting the
amount of common shares for you to issue to Dutchess.

Please have a certificate bearing no restrictive legend totaling                     
shares issued to Dutchess Private Equities Fund, LP immediately and send via DWAC to the following
account:

xxxxxx

If not
DWAC eligible, please send FedEx Priority Overnight to:
 XXXXXX

Once these shares are received by us, we will have the funds wired to the Company.

Regards,

Douglas H. Leighton, Managing Member

DUTCHESS PRIVATE EQUITIES FUND, L.P.

BY ITS GENERAL PARTNER,

DUTCHESS CAPITAL MANAGEMENT, LLC

36

 

	 	 	 
	DATE	 	PRICE
	Date of Day 1

	 	Closing Bid of Day 1
	Date of Day 2

	 	Closing Bid of Day 2
	Date of Day 3

	 	Closing Bid of Day 3
	Date of Day 4

	 	Closing Bid of Day 4
	Date of Day 5

	 	Closing Bid of Day 5

	 	 	 
	 

	 	LOWEST 1 (ONE) CLOSING BID IN PRICING PERIOD
	 
	 	 
	 

	 	PUT AMOUNT
	 
	 	 
	 

	 	AMOUNT WIRED TO COMPANY
	 
	 	 
	 

	 	PURCHASE PRICE (97)% (NINETY-SEVEN PERCENT))
	 
	 	 
	 

	 	AMOUNT OF SHARES DUE

The undersigned has completed this Put as of this                     day of                                         ,
200                 .

	 	 	 
	 

	 	 
	SAVE THE WORLD AIR, INC.
	 	 
	 
	 	 
	 	 	 
	 
	 	 
	Eugene E. Eichler, Chief Executive Officer
	 	 

37

 

SCHEDULE 4(e) CONFLICTS

None

38

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