10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

____________

FORM 10-Q

X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2007

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 000-28876

INTEGRATED BIOPHARMA, INC.

(Exact name of small business registrant in its charter)

Delaware	22-2407475
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

225 Long Ave., Hillside, NJ	07205
(Address of principal executive offices)	(Zip Code)

(888) 319-6962

(Registrant’s telephone number, including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered under Section 12(b) of the Exchange Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer X Smaller reporting company

Indicate by check whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

Applicable only to Corporate Issuers:

The number of shares outstanding of each of the Registrant’s classes of common equity, as of the latest practicable date:

Class	Outstanding at February 11, 2008
Common Stock, $0.002 par value	14,491,126 Shares

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
 
FORM 10-Q QUARTERLY REPORT
For the Three and Six Months Ended December 31, 2007
INDEX

		Page
	Part I. Financial Information
Item 1.	Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2007 and 2006 (unaudited)	2
	Condensed Consolidated Balance Sheets as of December 31, 2007 (unaudited) and June 30, 2007	3
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended December 31, 2007 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2007 and 2006 (unaudited)	5
	Notes to Condensed Consolidated Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51
	Part II. Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Submission of Matters to a Vote of Security Holders	55
Item 5.	Other Information	56
Item 6.	Exhibits	56
	Other
Signatures		57

Disclosure Regarding Forward-Looking StatementsCertain statements in the Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission, all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Integrated BioPharma, Inc. or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words, “plan”, “believe”, “expect”, “anticipate”, “intend”, “estimate”, “project”, “may”, “will”, “would”, “could”, “should”, “seeks”, or “scheduled to”, or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. The Company cautions investors that any forward-looking statements made by the Company are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements with respect to the Company, include, but are not limited to, the risks and uncertainties affecting its businesses described in Item 1 of the Company’s Annual Report filed on Form 10-K for the year ended June 30, 2007 and in registration statements and other securities filings by the Company.Although the Company believes that its plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of its forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and the Company does not have or undertake any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.

1

ITEM 1. FINANCIAL STATEMENTS

2 3 4 5

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Note 1. Principles of Consolidation and Basis of PresentationThe accompanying consolidated financial statements for the interim periods are unaudited and include the accounts of the Company and its subsidiaries, all of which are wholly-owned or majority owned with an offset to minority interest. All significant intercompany transactions and balances have been eliminated. The interim financial statements have been prepared in conformity with Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. However, all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the periods presented have been included. These financial statements should be read in conjunction with the financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 (“10-K”), as filed with the SEC. The June 30, 2007 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. The results of operations for the three and six months ended December 31, 2007 are not necessarily indicative of the results for the full fiscal year ending June 30, 2008 or for any other period.Integrated BioPharma, Inc., a Delaware corporation (together with its subsidiaries, the “Company” or “INB”), is engaged primarily in manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products; the manufacture and distribution of Paclitaxel, which is the primary chemotherapeutic agent in the treatment of breast cancer, Pharmaceutical technical services through its contract research organization; and the biotechnology business which uses its patented plant-based technology to produce vaccines and therapeutic antibodies. The Company’s customers are located primarily in the United States. The Nutraceutical segment includes InB:Manhattan Drug Company, Inc. (“Manhattan Drug”), which manufactures vitamins and nutritional supplements for sale to distributors, multilevel marketers and specialized health-care providers. AgroLabs, Inc., which distributes and markets products carrying the “Naturally” label and natural and organic product ingredients. The Vitamin Factory, which markets and sells private label Manhattan Drug products through mail order catalogs and the Internet. The Company also distributes fine natural chemicals through its wholly-owned subsidiary IHT Health Products, Inc. In fiscal year 2007, The Organic Beverage Company, formerly Bioscience Technologies, Inc, completed the acquisition of the Syzmo™ product from BevSpec, Inc. (“BevSpec”), which is a USDA organic energy drink.

6

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

The Pharmaceutical segment includes InB:Paxis Pharmaceuticals, Inc. (“Paxis”) and InB:Hauser Pharmaceutical Services, Inc. (“Hauser”). Paxis manufactures and distributes Paclitaxel, which is the primary chemotherapeutic agent in the treatment of breast cancer. Hauser is a contract research organization (“CRO”) which provides research, development manufacturing at testing services to the specialty chemical, Pharmaceutical and natural products industries.

The Biotechnologies segment includes InB:Biotechnologies, Inc. (“InB:Biotech”), which is focused on the discovery, development and commercialization of proprietary products from plants. The Company is developing its patented plant-based expression technologies for the production of vaccines, antibodies and other therapeutic proteins. InB:Biotech is also using plants as sources of novel, high quality nutritional supplements. InB:Biotech’s patented process for the hydroponic growth of edible plants causes them to accumulate high levels of important nutritional minerals. In November 2007, the Company entered into a seperation agreement with InB:Biotech whereby it intends to spin off to the Company's shareholders.

Principles of Consolidation. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, and any majority-owned investment. Intercompany transactions and accounts are eliminated in consolidation.

Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include:
 

7

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

·      sales returns and allowances;

·      trade marketing and merchandising;

·      allowance for doubtful accounts;

·      inventory valuation;

·      valuation and recoverability of long-lived and intangible assets, including goodwill, including the values assigned to acquired intangible assets;

·      income taxes and valuation allowance on deferred income taxes, and;

·      accruals for, and the probability of, the outcome of current litigation.

On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Nothing has come to our attention which would cause a change in these estimates.
 

Revenue Recognition. For product sales, the Company recognizes revenue when the product’s title and risk of loss transfers to the customer. The Company believes this revenue recognizing practice is appropriate because the Company’s sales policies meet the four criteria of SAB 104 which are: (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred, (iii) the seller’s price to the buyer is fixed and determinable and (iv) collectability is reasonably assured. The Company’s sales policy is to require customers to provide purchase orders establishing selling prices and shipping terms. The Company evaluates the credit risk of each customer and establishes an allowance of doubtful accounts for any credit risk. Sales returns and allowances are estimated upon shipment. The Company recognizes income in its Hauser subsidiary upon monthly customer invoicing. The invoice amount is based upon time and materials spent in the month.

8

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Shipping and Handling Costs. Shipping and handling costs are included in cost of sales.

Trade Marketing and Merchandising. In order to support the Company’s proprietary Nutraceutical product lines, various promotional activities are conducted through the retail trade, distributors or directly with consumers, including in-store display and product placement programs, feature price discounts, coupons, and other similar activities. The Company regularly reviews and revises, when it deems necessary, estimates of costs to the Company for these promotional programs based on estimates of what will be redeemed by the retail trade, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expense and actual performance are generally not material and are recognized as a change in management’s estimate in a subsequent period.

Earnings Per Share. In accordance with FASB Statement No. 128, “Earnings Per Share,” basic earnings per common share are based on weighted average number of common shares outstanding. Diluted earnings per share amounts are based on the weighted average number of common shares outstanding, plus the incremental shares that would have been outstanding upon the assumed exercise of all potentially dilutive stock options, warrants and convertible preferred stock, subject to anti-dilution limitations.

During the six months ended December 31, 2007 and 2006, options and warrants to purchase 2,443,852 and 4,398,818 shares of common stock, respectively were outstanding but were not included in the computation of diluted earnings per share as they were anti-dilutive as a result of net losses applicable to common shareholders during the periods.

During the three and six months ended December 31, 2006, Convertible Series B Preferred Stock in the amount of 250,000 common share equivalents were not included in the computation of diluted earnings per share as they were anti-dilutive as a result of net losses applicable to common shareholders.

During the three months ended December 31, 2007 and 2006, options and warrants to purchase 2,540,567 shares and 1,493,500 shares of common stock, respectively were outstanding but were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares.

9

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Recent Accounting Pronouncements. In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation was effective as of July 1, 2007. The adoption of FIN 48, did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows for the three and six months ended December 31, 2007.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 17, 2007 and interim periods within those fiscal years. The Company does not expect SFAS 157 to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. The Company does not expect SFAS 159 to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

10

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

 
In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF Issue 07-3) that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF Issue 07-3 is effective for the Company with respect to new arrangements entered into beginning July 1, 2008. Currently the Company does not expect EITF Issue 07-3 to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

Note 2. Acquisition

In March 2007, we entered into an Asset Purchase Agreement (the "Agreement") with our wholly-owned subsidiary The Organic Beverage Company (“TOBC”) (formerly, Bioscience Technologies, Inc.), BevSpec, Inc., a Texas corporation ("BevSpec"), the shareholders of BevSpec (the "Shareholders") and certain other parties (together with the Shareholders, the "Seller Parties") pursuant to which TOBC acquired substantially all of the assets and business of BevSpec (the "Transferred Assets") and assumed certain payment obligations of BevSpec (the "Payment Obligations"). We paid approximately $308 to specified parties to satisfy the Payment Obligations. In addition, we issued 185,000 shares of our common stock (the "Share Consideration") to the Seller Parties. The Agreement was effective as of February 28, 2007. The Share Consideration is subject to a twelve-month lock-up and shall be held in escrow for such time to satisfy any indemnification obligations of the Seller Parties. The Seller Parties indemnification obligations for any breach of the Seller Parties representations and warranties in the Agreement are limited to the aggregate value of the Share Consideration held in escrow. The Seller Parties representations and warranties shall survive for a period of one year following the date of the Agreement.
 

11

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

The purchased assets include trademarks, copyrights, trade secrets, artwork, graphics, marketing materials, formulas for the acquired product lines, labels, customer lists, websites, goodwill, inventories and certain books and records. Pursuant to the terms of the Agreement the purchase price for the Transferred Assets was valued at approximately $1,445 and was paid with the issuance of 185,000 shares of the Company’s common stock valued at $1,103, based on the volume weighted average share price for five days prior to and subsequent from the date of the acquisition, and the assumption of approximately $342 in assumed liabilities and associated costs of the acquisition. Approximately $552 of the purchase price was allocated to intellectual property, $414 was allocated to trade names, $300 was allocated to deferred tax assets, and $179 was allocated to license agreements. The acquired intangible assets will be amortized ranging from a period of two to fifteen years.

Note 3. Other Intangible Assets

Other intangible assets with indefinite lives are tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Application of the impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, and determination of the fair value of each reporting unit.

Other intangible assets consist of intellectual property, trademarks, license fees, and unpatented technology. The carrying amount of other intangible assets as of December 31, 2007 and June 30, 2007 is as follows:
 

12

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Amortization expense recorded on the intangible assets for the three and six months ended December 31, 2007 and 2006 was $148 and $94, and $326 and $188, respectively. Amortization expense is recorded on the straight-line method over periods ranging from 2 years to 20 years based on contractual or estimated lives and is included in selling and administrative expenses.
 

As of December 31, 2007, the Company owes a remaining balance of $1,150 under its intellectual property acquisition agreement, as amended, with the Center for Molecular Biotechnology of Fraunhofer USA, Inc. entered into in January 2004, which has a maximum purchase price of $3,600. The remaining purchase price will be paid in the fiscal years ending June 30, 2008 and 2009, $800 and $350, respectively. These amounts are included in accrued expenses at December 31, 2007.

13

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

The estimated annual amortization expense for intangible assets for the five succeeding fiscal years is as follows:
 

Note 4. Inventories

Inventories are stated at the lower of cost or market using the first-in, first-out method and consist of the following as of December 31, 2007 and June 30, 2007:
 

14

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Note 5. Property and Equipment

Property and equipment consists of the following as of December 31, 2007 and June 30, 2007:

Note 6. Revolving and Term Credit Facilities and Restricted Cash

As of December 31, 2007 and June 30, 2007, the Company had net borrowings aggregating $7,500 and $6,000 under its $15,000 revolving credit facility (“Revolving Credit Facility”) with Amalgamated Bank (the “Bank”). As of December 31, 2007 and June 30, 2007, the Company also had $9,000 and $10,000, respectively, outstanding under its five-year term note (“Term Note”), entered into in April 2007, (collectively “Credit Facilities”) with the Bank. On September 27, 2007, the Company and the Bank amended the Revolving Credit Facility, to extend the maturity from October 31, 2007 to December 31, 2007, to amend the quarterly interest rates under the Credit Facilities to equal LIBOR plus a spread that varies depending on the Company’s covenant ratio of non-GAAP financial information and to cap the amount available under the Revolving Credit Facility to $7,500. For the period from June 30, 2007 until compliance with the December 31, 2007 amended debt covenants, the interest rate will be LIBOR plus 3.0%.

15

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

 
E. Gerald Kay, the Company’s Chief Executive Officer, Chairman of the Board and a significant shareholder, has a personal guaranty for $4,500, which could be reduced to $3,000 if the borrowings are permanently reduced to $6,000 and the Company remains in compliance with its covenants for a three consecutive quarterly testing periods. Also, E. Gerald Kay, pledged $1,500 of liquid assets, as defined in the amended agreement. Furthermore, Carl DeSantis, a significant shareholder and Director of the Company, has a personal guaranty in the amount $1,500. The Credit Facilities are also secured by a first priority lien on the Company’s accounts receivable, equipment, inventory and certain deposit accounts.

The interest rate under the Revolving Credit Facility is equal to, at the Company’s option, either (1), the lender’s publicly announced base rate, or (2) currently, 3.0% plus the applicable LIBOR rate. Interest is payable monthly, quarterly or semi-annually, at the Company’s election, in arrears not later than the end of each such period. As of December 31, 2007 and June 30, 2007, the weighted average interest rate was 7.14% and 6.90%, and the Company had accrued and unpaid interest of approximately $183 and $64, respectively. The Revolving Credit Facility also has a commitment fee equal to 0.50% per annum calculated on the unused amount of the facility. As of December 31, 2007 and June 30, 2007, the Company had approximately $43 and $22 in accrued and unpaid commitment fees, respectively.
 
As of December 31, 2007 and June 30, 2007 the weighted-average interest rate under the Term Note was 7.74% and 7.64% and the Company had accrued and unpaid interest of approximately $225 and $190, respectively. The Term Note requires that all principal be repaid in $1,000 semi-annual payments beginning October 4, 2007. In December 2007, the Company and the Bank agreed to pay principal in equal monthly installments of $167 and interest on a monthly basis.
 

16

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

The Credit Facilities also contain covenants restricting our ability to, among other things: (1) incur or guarantee additional debt; (2) make any investments (other than in the ordinary course of business); (3) engage in any asset sales or dispose of any assets (other than in the ordinary course of business); (4) engage in transactions with affiliates; (5) incur liens; and (6) declare or pay dividends on its common stock and to maintain a minimum deposit balance with the lender (unless certain revenue and EBITDA thresholds are met). As of December 31, 2007 and 2006, the Company has $2,000 on deposit with the lender to satisfy this covenant.

The Credit Facilities also provides for customary events of default, including non-payment defaults and covenant defaults. As of December 31, 2007, the Company was in technical default with its other loan covenants consequently, in December 2007, the Company and the Bank entered into a letter of understanding which included, among other things, that the Company repay the Term Note in monthly installments of $167, including accrued and unpaid interest and extending the due date of the revolving credit facility from December 31, 2007 to January 31, 2008 at which time the Bank would permit the Company to use $2,000 of the existing Restricted Cash collateral at the Bank and the balance of $5,500 to come from additional capital in the form of Convertible Preferred Stock as the form of repayment, as described in Note 13. Subsequent Events.
 

In February 2008, the Company and the Bank agreed that it would repay in its entirety the outstanding principal and interest under its Credit Facilities of approximately $16,600 with proceeds that the Company will receive upon the completion of the Company’s contemplated Securities Purchase Agreements described in Note 13. Subsequent Events. The Bank will also release the $2,000 of Restricted Cash the Bank is currently holding as collateral. As of December 31, 2007, the Term Note has been classified as a current liability.

17

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Note 7. Significant Risks and Uncertainties

(a) Concentrations of Credit Risk-Cash. The Company maintains balances at several financial institutions. Deposits at each institution are insured by the Federal Deposit Insurance Corporation up to $100. At December 31, 2007, the Company’s uninsured cash balances, including restricted cash, were approximately $4,407.

(b) Concentrations of Credit Risk-Receivables. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk of its customers, establishes an allowance for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowances is limited. The Company does not require collateral in relation to its trade accounts receivable credit risk. The amount of the allowance for uncollectible accounts and other allowances was $111 and $99 at December 31, 2007 and June 30, 2007, respectively.

(c) Major Customers. For the six months ended December 31, 2007 approximately 26% or $6,742 and 30% or $7,907 of revenues were derived from two customers. For the six months ended December 31, 2006 approximately 32% or $10,959, 27% or $9,003 and 17% or $5,829 of revenues, respectively, were derived from three customers, which are among the two customers for the six months ended December 31, 2007. For the three months ended December 31, 2007 and 2006, approximately 31% or $4,205, 27% or $3,667 and 19% or $2,549 of revenues and approximately 36% or $7,483, 27% or $5,661 and 17% or $3,557 of revenues, respectively, were derived from the same three customers. The loss of any of these customers would have an adverse affect on the Company’s operations. Accounts receivable from these three customers comprised approximately 77.7% of total accounts receivable at December 31, 2007.
 

18

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

(d) Other Business Risks. The Company insures it business and assets against insurable risks, to the extent that it deems appropriate, based upon an analysis of the relative risks and costs. The Company believes that the risk of loss from non-insurable events would not have a material adverse effect on the Company’s operations as a whole.
 
The raw materials used by the Company are primarily commodities and agricultural-based products. Raw materials used by the Company in the manufacture of its Nutraceutical products are purchased from independent suppliers. Raw materials are available from numerous sources and the Company believes that it will continue to obtain adequate supplies.
 
Of the employees located in the Company’s New Jersey facility, approximately 58% the employees are covered by a union contract, which expires August 31, 2010.

Note 8. Commitments and Contingencies

(a) Leases
 
Related Party Leases. Warehouse and office facilities are leased from Vitamin Realty Associates, L.L.C., a limited liability company, which is 90% owned by the Company’s chairman, president and principal stockholder and certain family members and 10% owned by an employee of the Company. The lease provides for minimum annual rental payments of $324 through May 31, 2015 plus increases in real estate taxes and building operating expenses. On July 1, 2004, the Company leased an additional 24,810 square feet of warehouse space on a month-to month basis. For the three and six months ended December 31, 2007 and 2006, rent expense on this lease was $162 and $170, and $358 and $357, respectively, and is included in both manufacturing and selling and administrative expenses.

19

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Other Lease Commitments. The Company has entered into certain non-cancelable operating lease agreements expiring through May 31, 2015, for to office and warehouse space, equipment and vehicles. Total rent expense, including real estate taxes and maintenance charges, was approximately $449 and $424 for the three months ended December 31, 2007 and 2006, respectively, and approximately $885 and $835 for the six months ended December 31, 2007 and 2006, respectively. Rent expense is stated net of sublease income of approximately $19 and $7 and $40 and $14, for the three and six months ended December 31, 2007 and 2006, respectively and is included in both cost of sales and selling and administrative expenses.

The minimum rental commitment for long-term non-cancelable leases is as follows:
 

20

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

(b) Intellectual Property Agreement. In connection with the acquisition in January 2004 of intellectual property developed by the Center for Molecular Biotechnology of Fraunhofer USA, Inc. (or “CMB”), the Company entered into a technology transfer agreement, whereby the Company agreed to pay up to a maximum of $3,000 for certain technology developed by CMB over a five-year period. In addition to the technology transfer agreement, the Company entered into a research agreement, which requires several milestone payments related to achieving certain flu vaccine studies and our ongoing Anthrax studies. In December 2007, the Company further amended the agreement to the maximum purchase price of $3,600. During fiscal year 2007, the Company amended their existing amended technology transfer and research agreement with CMB, to commercialize the developed process, production techniques and methodologies of the proprietary technology and intellectual property for external applications external. This amendment requires CMB to continue to conduct research to enhance, improve and expand the existing intellectual property, and for this research the Company has committed to make non-refundable payments of $2,000 per year for five years, aggregating to $10,000, beginning November 2009. In addition, the Company will make royalty payments to CMB based on receipts derived by the Company from sales of products utilizing the proprietary technology for a period of fifteen years. In turn, CMB shall pay the Company royalty payments for all receipts, if any, realized by CMB sales, licensing or commercialization of the intellectual property acquired by them for the same fifteen year period. Furthermore, CMB has agreed to expend at a minimum, an additional $2.0 million per year in the same timeframe as the Company for research and development on the intellectual property. During the fiscal year ended June 30, 2006, the Company amended their agreement with CMB to expand the scope of the technology transfer agreement and increased the amount of the purchase commitment. A director of the Company is also a managing director of CMB.
 
As of December 31, 2007 and June 30, 2007, the Company has made payments of approximately $2,450, for the purchase commitment of $3,600, of which $1,150 is accrued, $800 is to be paid in fiscal year 2008, with the remaining to be paid in the fiscal year 2009.
 

21

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

(c) Legal Proceedings. NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and Integrated BioPharma, Inc., pending in the Supreme Court for the State of New York, New York County. Plaintiffs NatEx Georgia LLC and Vasili Patarkalishvili commenced this action on July 19, 2004, alleging claims for breach of contact, fraud and breach of the implied duty of good faith and fair dealing arising out of an alleged failure by Paxis to provide information necessary for NatEx to perform under the parties' July 2003 agreements by which NatEx had agreed to supply Paclitaxel extract. The complaint sought damages of more than $5,000. By order dated January 6, 2006, the Court granted in part Defendants' motion to dismiss. The Court dismissed all of the claims against all defendants, except for the breach of contract claim against Paxis. Plaintiffs filed a notice of appeal of that decision. On April 17, 2007, the Supreme Court, Appellate Division, First Department dismissed Plaintiffs' appeal for failure to perfect. Certain of the Defendants, including the Company, filed counter-claims against Plaintiffs for breach of the July 2003 agreement with NatEx and to collect on a $1,300 note. By order dated June 7, 2007, the Court granted summary judgment in favor Paxis on Plaintiffs' remaining claim, and granted summary judgment in favor of Defendants on their counterclaims against Plaintiffs. The Court subsequently entered judgment in favor of Paxis, dismissing Plaintiffs' complaint and in favor of the Company and against NatEx Georgia LLC in the amount of $1,300, plus interest, due on the Promissory Note. At a hearing on August 15, 2007, the Court granted Defendants' application to recover attorneys' fees from NatEx Georgia LLC and Vasili Patarkalishvili in the amount of $304. At this time the Company is unable to estimate the amount, if any, or timing of possible recovery of the judgments against Natex or Mr. Patarkalishvili.
 

(d) Paxis Purchase Agreement. In connection with the Company’s acquisition of Paxis from Trade Investment Services, LLC (“TIS”), which funded Paxis’ and Natex’s development, TIS has the right to receive twenty-five (25%) of the after-tax profits of Paxis until TIS has received an additional $49.5 million. At this time, the Company is unable to estimate the amount or timing of any potential contingent payments.

22

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

E. Gerald Kay, the Chief Executive Officer and a majority shareholder of INB; Robert Kay, the brother of E. Gerald Kay, a director and shareholder of INB; and Carl DeSantis, a director and shareholder of INB, each own one-third (1/3) of the equity of TIS.
 

(e) Consulting Agreement. In May 2007, the Company engaged Merriman Curhan Ford & Co., a financial advisor, to assist the Company with their review of a possible divestiture. In connection with the agreement, the Company issued 30,000 restricted shares of the Company’s common stock. The agreement was terminated in September 2007. (See Note 10. Equity Transactions).

Note 9. Related Party Transactions

The Company has a consulting agreement with Eugene Kay, a former employee of the Company and a brother of E. Gerald Kay, the Company’s Chairman of the Board. This agreement is on a month-to-month basis for $1 per month. The total consulting expense recorded per this verbal agreement was $3 and $6 for both the three and six month periods ended December 2007 and 2006, respectively. The Company has another consulting agreement with EVJ, LLC, a limited liability company controlled by Robert Kay, a director of the Company, the Chairman of its subsidiary, InB: Paxis, and a brother of E. Gerald Kay and Eugene Kay. This agreement was assumed by and became a liability of the Company as a part of the Company's acquisition of Paxis Pharmaceuticals Inc. in fiscal year ended June 30, 2004. The total consulting expense under this agreement was $30 and $60 for both the three and six month periods ended December 31, 2007 and 2006, respectively.

23

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

In September 2007, the Company entered into a Consultancy Agreement (the “Agreement”) with three individuals (the “Consultants”), two of whom are also employees of CDS International Holding, Inc., an entity controlled by a significant shareholder and director of the Company. The Agreement is for one year, subject to termination by the Company for any reason with three months notice and will automatically renew at the end of each one-year term unless cancelled in writing by either party with one months written notice. The Company is to pay the Consultants $15 per month (the Agreement was modified in December 2007 to increase the monthly payment to $25 per month effective January 2008) and grant an aggregate of 500,000 in stock options and/or restricted stock awards under the Company’s Stock Option Plan (the “Stock Compensation”) and participate in any Company bonus program adopted by the Company’s Board of Directors. The Stock Compensation is an annual award and each award will vest one-third on the grant date and one-third on each of the first and second anniversaries on each September 1 after the grant date. In the three and six months ended December 31, 2007, the Company paid $15 and $45, respectively in cash payments and recognized non cash compensation expense of $567 in the three and six months ended December 31, 2007.
 
See Note 8(a) - Leases for related party lease transactions.

Note 10. Equity Transactions
 

(a) Stock Option Plan and Warrants. There were 690,800 stock options and no warrants issued in the six months ended December 31, 2007 and no stock options or warrants issued in the six months ended December 31, 2006.

(b) Restricted Stock Award. There were 735,000 restricted stock award units issued in the six months ended December 31, 2007.

In May 2007, the Company entered into a separate one-year financial advisor agreement (the “Engagement”), whereby it issued 30,000 shares of restricted stock of the Company to the financial advisor. As such, on the effective date, the Company recognized prepaid consulting expenses of $173 with a corresponding increase in equity. In September 2007, the Company terminated the Engagement with the financial advisor and charged off the remaining prepaid balance of approximately $151 to consulting fee expense during the six months ended December 31, 2007.

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INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

The shares of common stock have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and were issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated there under. These shares of common stock may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.

Note 11. Income Taxes

As of December 31, 2007 the Company's effective tax benefit rate changed from 20% to 14%. This change in the effective rate is primarily a result of an additional valuation allowance of $1,383 million closing the fiscal year 2008 as a result of the impending spin-off of the Biotechnologies segment, for which the Company's carry-forward losses will not be able to be utilized.

Note 12. Segment Information

The basis for presenting segment results generally is consistent with overall Company reporting. The Company reports information about its operating segments in accordance with Financial Accounting Standard Board Statement No. 131, “Disclosure About Segments of an Enterprise and Related Information,” which establishes standards for reporting information about a company’s operating segments.

The Company has divided its operations into three reportable segments as follows: Nutraceuticals, Pharmaceuticals and Biotechnologies. The international sales, concentrated primarily in Europe, for the three and six months ended December 31, 2007 and 2006 were $2,410 and $4,611, and $4,217 and $8,470, respectively.

Financial information relating to the three and six months ended December 31, 2007 and 2006 operations by business segment is as follows:

25

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

26

INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(Unaudited)

Note 13. Subsequent Events

On February 19, 2008, the Company entered into two Securities Purchase Agreements relating to a private placement of securities to two investors, one of whom is an affiliate of Carl DeSantis, a director of the Company, which when consummated will result in gross proceeds of $17,500 to the Company.  The Company expects to consummate the private placement in the near future following satisfaction of customary closing conditions.  The private placement involves the sale of (i) 6,000 shares of newly designated Series C Convertible Preferred Stock (the “Series C Preferred”) with a stated value of $1 per share, (ii) $4,500 in principal amount of 9.5% Convertible Promissory Notes (the “Convertible Notes”), and (iii) $7,000 in principal amount of 8.0% Promissory Notes (the “Notes” and, together with the Series C Preferred and the Convertible Notes, the “Securities”). The Notes and the Convertible Notes will be secured by a pledge of substantially all of the Company's assets. The Company expects to use approximately $16,400 of the proceeds of the private placement to retire in full its credit facilities with Amalgamated Bank and expects to use the remaining balance of $1,100 plus a release of the $2,000 of restricted cash in the aggregate, of approximately $3,100 for general working capital purposes.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION AND RESULTS OF OPERATION

Certain statements set forth under this caption constitute “forward-looking statements.” See “Disclosure Regarding Forward-Looking Statements” on page 1 of this Report for additional factors relating to such statements. The following discussion should also be read in conjunction with the Condensed Consolidated Financial Statements of the Company and Notes thereto included elsewhere herein and the Company’s Annual Report on Form 10-K.

The Company is engaged primarily in the manufacturing, distributing, marketing and sales of vitamins, nutritional supplements and herbal products; the manufacture and distribution of paclitaxel, which is the primary chemotherapeutic agent in the treatment of breast cancer; and Pharmaceutical technical services through its contract research organization. The Company’s customers are located primarily throughout the United States.

Business Outlook

Our future results of operations and the other forward-looking statements contained in this Form 10-Q, including this MD&A, involve a number of risks and uncertainties—in particular, the statements regarding our goals and strategies, new product introductions, plans to cultivate new businesses, pending divestitures, future economic conditions, revenue, pricing, gross margin and costs, the tax rate, and pending legal proceedings. We are focusing on efforts to improve operational efficiency and reduce spending that may result in several actions that could have an impact on expense levels and gross margin. In addition to the various important factors discussed above, a number of other important factors could cause actual results to differ significantly from our expectations. See the risks described in “Risk Factors” in Part II, Item 1A of this Form 10-Q.
 
For the remaining six months of fiscal year 2008, we expect consolidated net sales to be between $25.0 million and $29.0 million, compared to $26.4 million in the remaining six months of fiscal year 2007. Historically, our net sales of our proprietary Nutraceutical product line have been lower in the second half of the fiscal year than in the first half of the fiscal year; however we are optimistic that our sales over the remaining six months of this fiscal year will be at least equal to our first six months results, as we have hired sales and consulting professionals to assist us in expanding our market, customer base, promotion of our products and strategically developing and launching new natural fruit juice products. In addition, we remain optimistic with our Syzmo™ product line as sales indicators and feedback from our ongoing sales and marketing efforts suggest a high demand for an organic energy drink unique from other energy drinks currently being offered.
 
/

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Our financial results are substantially dependent on net sales of our Nutraceutical product lines. Net sales is partly a function of the mix of branded proprietary Nutraceutical products, contract manufactured products, our Syzmo™ product and other Nutraceutical and Pharmaceutical products sold and services rendered, all of which are difficult to forecast. The varied sales price among our products and promotional support in the form of consumer coupons or other sales price allowances, along with the mix of products sold affects the average selling price that we will realize and has a large impact on our revenue and gross margins. Net sales is affected by the timing of new product introductions and the demand for and market acceptance of our products; actions taken by our competitors, including new product offerings and introductions, marketing programs and pricing pressures, and our response to such actions; our ability to respond quickly to consumer tastes and needs; and the availability of sufficient raw materials and production lead-time from suppliers to meet demand. Factors that could cause demand to be different from our expectations include customer acceptance of our products and our competitors products; changes in customer order patterns, including order returns; changes in the level of inventory at customers; and changes in business and economic conditions, including conditions in the credit market that could affect consumer confidence and result in lower than expected demand for our products.
 
We believe that we have the product offerings and introductions, facilities, personnel, and competitive and financial resources in place for business success; however, future revenue, costs, gross margins, and profits are all influenced by a number of factors, including those discussed above, all of which are inherently difficult to forecast.

Critical Accounting Policies and Estimates

Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The most significant estimates include:
 

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·      sales returns and allowances;

·      trade marketing and merchandising;

·      allowance for doubtful accounts;

·      inventory valuation;

·      valuation and recoverability of long-lived and intangible assets and goodwill, including the values assigned to acquired intangible assets;

·      income taxes and valuation allowance on deferred income taxes, and;

·      accruals for, and the probability of, the outcome of current litigation.

On a continual basis, management reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. There have been no material changes in the calculation of these estimates since the audited financial statements at June 30, 2007.
 

Allowances for Doubtful Accounts and Sales Returns

The Company makes judgments as to its ability to collect outstanding receivables and provides allowances for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. The Company continuously monitors payments from its customers and maintains allowances for doubtful accounts for estimated losses in the period they become known.

The Company’s return policy is to only accept returns for defective products. If defective products are returned, it is the Company’s agreement with its customers that the Company cure the defect and reship the product. The policy is that when the product is shipped the Company makes an estimate of any potential returns or allowances.
 

If the historical data the Company uses to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected. In recording any additional allowances, a respective charge against income is reflected in the general and administrative expenses, and would reduce the operating results in the period in which the increase is recorded.

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We performed a sensitivity analysis to determine the impact of fluctuations in our estimates for our allowance for doubtful accounts. As of December 31, 2007, the allowance for doubtful accounts was $0.1 million. If this amount were in error by plus or minus one percent of the account receivable balance, the impact would be an additional $0.1 million of income or expense.

Inventory Valuation

Inventories are stated at the lower of cost or market (“LCM”), which reflects management’s estimates of net realizable value. The inventory amounts are composed primarily of inventory items in both the Nutraceutical and Pharmaceutical segments of business. As a result of our Nutraceutical inventory being manufactured primarily on a purchase order basis, the quantity of both raw materials and finished goods inventory provides for minimal risk for potential overstock or obsolescence. Pharmaceutical inventory is valued at market values, which is lower than our cost basis.

Mail order inventory is expiration date sensitive. The Company reviews this inventory and considers sales levels (by SKU), term to expiration date, potential for retesting to extend expiration date and evaluates potential for obsolescence or overstock.

The Company preformed a sensitivity analysis to determine the impact of fluctuations in our estimates for inventory allowances. If our estimates used to value inventory were in error by plus or minus one percent of the total inventory balance, the impact would be an additional $0.1 million of income or expense.

Long Lived Assets

Purchased intangibles consisting of patents and unpatented technological expertise, intellectual property, license fees and trade names purchased as part of business acquisitions are presented net of related accumulated amortization and are being amortized on a straight-line basis over the remaining useful lives.

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The Company records impairment losses on other intangible assets when events and circumstances indicated that such assets might be impaired and the estimated fair value of the asset is less than its recorded amount in accordance with Statement of Financial Accounting Standards (“SFAS”) No 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company reviews the value of its long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable or that the useful lives of these assets are no longer appropriate. Conditions that would necessitate an impairment assessment include material adverse changes in operations, significant adverse differences in actual results in comparison with initial valuation forecasts prepared at the time of acquisition, a decision to abandon certain acquired products, services, or marketplaces, or other significant adverse changes that would indicate the carrying amount of the recorded asset might not be recoverable.

Goodwill and Other Intangible Assets - The Financial Accounting Standards Board (“FASB”) has issued Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite lives no longer be amortized against earnings, but instead tested for impairment at least annually based on a fair-value approach as described in SFAS 142.
 
Intangible assets with finite lives are amortized over their estimated useful lives. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to future cash flows. The carrying value of intangible assets with finite lives is evaluated whenever events or circumstances indicate that the carrying value may not be recoverable. The carrying value is not recoverable when the projected undiscounted future cash flows are less than the carrying value. Tests for impairment or recoverability require significant management judgment, and future events affecting cash flows and market conditions could result in impairment losses.
 

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General – The Company recognizes revenue in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104. The Company recognizes product sales revenue when title and risk of loss have transferred to the customer, when estimated provisions for product returns, rebates, chargebacks and other sales allowances are reasonably determinable, and when collectibility is reasonably assured. Accruals for these items are presented in the condensed consolidated financial statements as reductions to sales. The Company’s net sales represent gross sales invoiced to customers, less certain related charges for discounts, returns, rebates, chargebacks and other allowances. Cost of sales includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are affected by, among other things, changes in the relative sales mix among the Company’s products, as well as gross margins of acquired entities.
 
Operating results in all periods presented reflect the impact of acquisitions. The timing of those acquisitions and the changing mix of businesses as acquired companies are integrated into the Company may affect the comparability of results from one period to another.

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Results of Operations

The following table sets forth the income statement data of the Company as a percentage of net sales for the periods indicated:

34

For the six month period ended December 31, 2007 compared to the six month period ended December 31, 2006

Sales, net. Sales, net, for the six months ended December 31, 2007 and 2006 were $26.3 million and $33.7 million, respectively, a decrease of $7.4 million or 22.0%. The decrease is comprised of the following:
 

For the six months ended December 31, 2007, approximately 64% of total net sales were derived from three customers as compared 76% of total net sales for the six months ended December 31, 2006. The loss of any of these customers would have an adverse affect on our operations. We continue to expand our customer base by expanding from selling our proprietary branded Nutraceutical products primarily to “club” stores to the retail sales segment and expanding our sales in the international market.

35

Sales, net for the Nutraceutical segment for the six months ended December 31, 2007 and 2006 were $23.3 million and $30.3 million, respectively, a decrease of approximately $7.0 million or 23.2%. This decrease is, in part, the result of a decrease in sales from our branded proprietary Nutraceutical product line of approximately $3.1 million in part due to fewer promotional programs at our club stores as compared to the six months ended December 31, 2006. In addition the Company’s contract manufacturing products sales decreased approximately $4.0 million, primarily due to lower international reorders from our customers. The Syzmo™ product generated net sales of approximately $0.1 million, and the remaining Nutraceutical product lines were mainly flat, as compared to the prior period.

Pharmaceuticals sales for the six months ended December 31, 2007 were $2.5 million compared to $3.0 million, a decrease of $0.5 million or 17.3% from the comparable period. This decrease is primarily due to decreased sales of approximately $1.0 million of the Company’s Contract Research Organization (CRO) business in the six months ended December 31, 2007 compared to the six months ended December 31, 2006. This was off-set by increased net sales in our Approved Pharmaceutical Ingredients (API) business of approximately $0.5 million in the six months ended December 31, 2007 compared to the six months ended December 31, 2006.

Our Biotechnologies Segment did not significantly contribute to our net sales and gross profits in the six months ended December 31, 2007 and 2006.

Cost of sales. Cost of sales decreased by $2.0 million to $20.6 million for the six months ended December 31, 2007 as compared to $22.6 million for the six months ended December 31, 2006. Cost of sales increased as a percentage of sales to 78.4% for the six months ended December 31, 2007 as compared to 67.0% for the six months ended December 31, 2006. This increase in costs of sales as a percentage of net sales was mainly a result of a $2.4 million, or approximately 9% of net sales, of write-offs for certain inventory items in our Nutraceutical segment’s business lines. Of the write-off of $2.4 million, $1.6 million is related to changes in the Company’s packaging and design, discontinuation of certain product lines and valuation adjustments on certain new products in our Naturally branded product lines. The remaining $0.8 million write-off is a result of abandoning a focused marketing campaign to increase sales of our private labeled nutritional supplement products through e-commerce and mail publication, to expand business with new and existing customers by offering new products and formulas in our contract manufacturing product line of business. Costs of sales also increased as a percentage of net sales as a result of lower sales volumes for our businesses with fixed manufacturing costs in both the Nutraceutical and Pharmaceutical segments.
 

36 The cost of sales for our Nutraceutical segment decreased from $20.2 million to $17.4 million or $2.8 million the six months ended December 31, 2006 and 2007, respectively. As a percentage of net sales, the cost of sales increased 8.0%, from 66.4% for the six months ended December 31, 2006 to 74.4% for the six months ended December 31, 2007. This increase is primarily a result of approximately a $2.4 million of write-offs for certain inventory items. Of the write-off of $2.4 million, $1.6 million is related to changes in the Company’s packaging and design, discontinuation of certain product lines and valuation adjustments on certain new products in our Naturally branded product lines. The remaining $0.8 million write-off is a result of abandoning a focused marketing campaign to increase sales of our private labeled nutritional supplement products through e-commerce and mail publication, to expand business with new and existing customers by offering new products and formulas in our contract manufacturing product line of business. The remaining increase in the cost of sales as a percentage of net sales is due to the decline in net sales volumes for our contract manufacturing products of approximately $4.0 million. A majority of our manufacturing costs for our contract manufacturing business is fixed, which will increase the cost of sales as a percentage of sales as there are fewer sales to spread the fixed costs over.
 
The Pharmaceutical segment cost of sales was $2.2 million and $2.3 million for the six months ended December 31, 2007 and 2006, respectively. As a percentage of net sales, the cost of sales increased 12.1%, from 76.0% to 88.1% for the six months ended December 31, 2006 and 2007, respectively. This increase is due to lower sales in our CRO business, which resulted in an increased cost of sales as the majority of the costs are fixed and associated to salaries and employee benefits and excess manufacturing capacity in our API business. If our net sales continue to grow in our API business, we will be able to absorb more of our manufacturing costs, thereby decreasing our cost of goods sold on future sales. 37

Selling and Administrative Expenses.Selling and administrative expenses were $10.8 million for the six months ended December 31, 2007, an increase of $2.1 million or 24.1% as compared with $8.7 million for the six months ended December 31, 2006. As a percentage of sales, net, selling and administrative expenses were 41.2% for the six months ended December 31, 2007 and 25.9% for the prior comparable period.
 

Selling and administrative expenses for our Nutraceuticals segment were $7.8 million for the six months ended December 31, 2007, an increase of $1.9 million or 31.2% as compared with $6.0 million for the six months ended December 31, 2006. As a percentage of Nutraceutical sales, net, selling and administrative expenses were 33.5% for the six months ended December 31, 2007 and 19.6% for the prior comparable period.
 
During the six months ended December 31, 2007, selling and administrative expenses in our Nutraceutical Segment related to business lines we acquired or divested during fiscal year 2007 added additional costs of approximately $1.7 million. The Organic Beverage Company (TOBC) increased the Nutraceuticals segment’s total selling and administrative expenses for the six months ended December 31, 2007 by $1.6 million, which was partially offset by a decrease in Micro Nutrition, Inc.’s selling and administrative expenses of $0.1 million included in the results for the six months ended December 31, 2006.
 
Excluding the selling and administrative expenses related to business lines acquired or divested during the fiscal year ended June 30, 2007, our selling and administrative expenses in our Nutraceuticals Segment increased $0.3 million from the prior comparable period. This increase is a result of approximately $0.8 million of increased stock compensation expense, off-set by $0.1 million reduction in salaries and employee benefits, $0.1 million reduction in royalty and commission expense as a result of decreased sales, and $0.3 million due to reduced insurance, tradeshows and travel related costs and other office related expenses.
 

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The Pharmaceutical selling and administrative expenses remained flat at approximately $2.0 million for the six months ended December 31, 2007 as compared to the six months ended December 31, 2006.
 
The Biotechnologies selling and administrative expenses increased by approximately $0.2 million to $1.0 million for the six months ended December 31, 2007 as compared to $0.8 million for the six months ended December 31, 2006. The increase in the current fiscal period is primarily due to the write-off of an investment of $0.3 million and increased salary and employee benefits of $0.1 million, off-set by lower research and development costs of $0.2 million.

Other expense, net. Other expense, net increased approximately $0.4 million for the six months ended December 31, 2007 as compared to the six months ended December 31, 2006. This is primarily attributable to, an increase in interest expense due to the increased average total of outstanding obligations for the period ending December 31, 2007 as compared to December 31, 2006. In addition, interest income decreased for the six months ended December 31, 2007 as compared to 2006 due to lower average cash and cash equivalents balances.

Federal and state income tax, net. Federal and state income tax changed from a tax expense of $1.0 million for the six months ended December 31, 2006 to a tax benefit of $0.8 million for the six months ended December 31, 2007. Our effective tax rate decreased from 44.0% to (13.6)%. The dollar amount change and the decrease in our effective tax rates are primarily a result of our operating loss of $5.7 million for the six months ended December 31, 2007 as compared to operating income of $2.2 million for the six ended December 31, 2006. Additionally, in the six months ended December 31, 2007, our net operating loss carry-forward increased $1.8 million, this was off-set by an increase in our valuation allowance of $1.4 million as a result of the impending spin-off of the Biotechnologies segment, for which the carry-forward losses will not be able to be utilized prior to the spin-off. The remaining net increase of $0.4 million is primarily a result of the changes in the inventory valuation allowances.

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Net (loss) income. The Company’s net loss for the six months ended December 31, 2007 was $5.0 million as compared to net income of $1.3 million for the six months ended December 31, 2006. This decrease of approximately $6.3 million is primarily the result of a decrease in gross profit in our Nutraceuticals and Pharmaceutical segment of approximately $5.1 million and $0.4 million, respectively, an increase in selling and administrative expenses of $2.1 million primarily attributable to the Nutraceuticals segment, and an increase in other expense of approximately $0.4 million primarily attributable to increased interest expenses, off-set in part by a federal and state income tax benefit of approximately $0.8 million, mainly attributable to the increase in our deferred tax assets, as a result of our operating losses for the six months ended December 31, 2007.

For the three month period ended December 31, 2007 compared to the three month period ended December 31, 2006

Sales, net. Sales, net, for the quarter ended December 31, 2007 and 2006 were $13.7 million and $20.8 million, respectively, a decrease of $7.1 million or 34.3%. The decrease is comprised of the following:
 

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For the three months ended December 31, 2007, approximately 76% of total net sales were derived from three customers as compared 81% of total net sales for the three months ended December 31, 2006. The loss of any of these customers would have an adverse affect on our operations. We continue to expand our customer base by expanding from selling our propriety branded Nutraceutical products primarily to “club” stores to the retail sales segment and expanding our sales in the international market.

Sales, net for the Nutraceutical segment for the three months ended December 31, 2007 and 2006 were $12.7 million and $19.1 million, respectively, a decrease of approximately $6.4 million or 33.6%. For the quarter ended December 31, 2007, our branded proprietary Nutraceutical product line decreased approximately $4.7 million primarily due to fewer promotional programs at our club stores as compared to the quarter ended December 31, 2006. In addition the Company’s contract manufacturing products sales decreased approximately $1.8 million, primarily due to lower reorders from a major international customer. The Syzmo™ product generated net sales of approximately $0.1 million, and the remaining Nutraceutical product lines were mainly flat, as compared to the prior period.

Pharmaceuticals sales for the three months ended December 31, 2007 were $0.7 million compared to $1.4 million, a decrease of $0.7 million or 49.4% from the comparable period. This decrease is primarily due to decreased sales in our Contract Research Organization (CRO) business in the quarter ended December 31, 2007 compared to the quarter ended December 31, 2006.

Our Biotechnologies Segment did not significantly contribute to our net sales and gross profits in the quarters ended December 31, 2007 and 2006.

41

Cost of sales. Cost of sales decreased to $11.6 million for the three months ended December 31, 2007 as compared to $14.1 million for the three months ended December 31, 2006. Cost of sales increased as a percentage of sales to 84.8% for the three months ended December 31, 2007 as compared to 67.7% for the three months ended December 31, 2006. This increase is primarily a result of approximately a $2.4 million of write-offs for certain inventory items. Of the write-off of $2.4 million, $1.6 million is related to changes in the Company’s packaging and design, discontinuation of certain product lines and valuation adjustments on certain new products in our Naturally branded product lines. The remaining $0.8 million write-off is a result of abandoning a focused marketing campaign to increase sales of our private labeled nutritional supplement products through e-commerce and mail publication, to expand business with new and existing customers by offering new products and formulas in our contract manufacturing product line of business.
 
The cost of sales for our Nutraceutical segment decreased $1.9 million from $12.7 million for the three months ended December 31, 2006 to $10.8 million for the three months ended December 31, 2007. As a percentage of net sales, the cost of sales increased 18.8%, from 66.5% for the three months ended December 31, 2006 to 85.3% for the three months ended December 31, 2007. This increase is primarily a result of approximately a $2.4 million of write-offs for certain inventory items. Of the write-off of $2.4 million, $1.6 million is related to changes in the Company’s packaging and design, discontinuation of certain product lines and valuation adjustments on certain new products in our Naturally branded product lines. The remaining $0.8 million write-off is a result of abandoning a focused marketing campaign to increase sales of our private labeled nutritional supplement products through e-commerce and mail publication, to expand business with new and existing customers by offering new products and formulas in our contract manufacturing product line of business. The remaining increase in our cost of sales as a percentage of net sales, is a result of the decline in net sales volumes for our branded Nutraceutical product line of approximately $4.7 million and a decline in net sales volumes in our contract manufacturing products of approximately $1.8 million. A majority of our manufacturing costs for our contract manufacturing business is fixed, which will increase the cost of sales as a percentage of sales as there are fewer sales to spread the fixed costs over.
 

42 The Pharmaceutical segments cost of sales was $0.7 million and $1.3 million for the three months ended December 31, 2007 and 2006, respectively. As a percentage of net sales, the cost of sales increased 2.7%, from 86.3% to 89.0% for the three months ended December 31, 2006 and 2007, respectively. This increase is due to lower sales in our CRO business, which resulted in an increased cost of sales as the majority of the costs are fixed and associated to salaries and employee benefits and excess manufacturing capacity in our API business. If our net sales continue to grow in our API business, we will be able to absorb more of our manufacturing costs, thereby decreasing our cost of goods sold on the future sales.

Selling and Administrative Expenses.Selling and administrative expenses were $5.8 million for the three months ended December 31, 2007, an increase of $1.1 million or 22.3% as compared with $4.7 million for the three months ended December 31, 2006. As a percentage of sales, net, selling and administrative expenses were 42.1% for the three months ended December 31, 2007 and 22.6% for the prior comparable period.
 

43

Selling and administrative expenses for our Nutraceuticals segment were $4.3 million for the three months ended December 31, 2007, an increase of $1.1 million or 33.3% as compared with $3.2 million for the three months ended December 31, 2006. As a percentage of the Nutraceutical segment’s sales, net, selling and administrative expenses were 33.5% for the three months ended December 31, 2007 and 16.7% for the prior comparable period.
 
During the three months ended December 31, 2007, our selling and administrative expenses in our Nutraceutical Segment related to business lines we acquired or divested during fiscal year 2007 added additional costs of approximately $0.9 million. The Organic Beverage Company (TOBC) increased the Nutraceuticals segment’s total selling and administrative expenses for the three months ended December 31, 2007 by $0.9 million, which was not included in the results for the three months ended December 31, 2006.
 
Excluding the selling and administrative expenses related to business lines acquired or divested during the fiscal year ended June 30, 2007, our selling and administrative expenses in our Nutraceuticals Segment increased $0.2 million from the prior comparable period. This increase is a result of approximately $0.7 million of increased stock compensation expense, off-set by $0.3 million reduction in advertising and marketing expenses, $0.1 million reduction in professional and legal fees and $0.1 million due to reduced insurance, tradeshows and travel related costs and other office related expenses.
 
The Pharmaceutical selling and administrative expenses remained flat at approximately $1.0 million for each of the three months ended December 31, 2007 as compared to the three months ended December 31, 2006.
 
The Biotechnologies selling and administrative expenses were flat at approximately $0.5 million for the three months ended December 31, 2007 and 2006, respectively.

Other expense, net. Other expense, net increased approximately $0.1 million for the three months ended December 31, 2007 primarily attributable to, an increase in interest expense due to the increased average total of outstanding obligations for the period ending December 31, 2007 as compared to December 31, 2006. In addition, interest income decreased for the quarter ended December 31, 2007 as compared to 2006 due to lower average cash and cash equivalents balance.

44

Federal and state income tax, net. Federal and state income tax expense decreased from $0.8 million for the three months ended December 31, 2006 to a Federal and state income tax benefit of $0.4 million for the three months ended December 31, 2007. Our effective tax rate decreased from 40.1% to (8.9)%. The dollar amount decrease and the decrease in our effective tax rates are primarily a result of our operating loss of $4.0 million for the quarter ended December 31, 2007 as compared to operating income of $1.9 million for the quarter ended December 31, 2006. Additionally, in the three months ended December 31, 2007, our net operating loss carry-forward increased $0.8 million, this was off-set by an increase in our valuation allowance of $1.1 million as a result of the impending spin-off of the Biotechnologies segment, for which the carry-forward losses will not be able to be utilized prior to the spin-off. The remaining net decrease of $0.1 million is a result of the changes in the other deferred asset components.

Net (loss) income. The Company’s net loss for the three months ended December 31, 2007 was $3.6 million as compared to net income of $1.1 million for the three months ended December 31, 2006. This decrease of approximately $4.7 million is primarily the result of a decrease in gross profit in our Nutraceuticals and Pharmaceutical segment of approximately $4.6 million and $0.1 million, respectively, an increase in selling and administrative expenses of $1.1 million primarily attributable to the Nutraceuticals segment, and an increase in other expense of approximately $0.1 million primarily attributable to increased interest expenses, off-set in part by a federal and state income tax benefit of approximately $0.4 million, mainly attributable to the increase in our deferred tax assets.

Seasonality. The Company’s results of operations in its Pharmaceuticals and Biotechnologies segments are not significantly affected by seasonal factors. The Nutraceutical business segment tends to be seasonal. The Company has found that in its first fiscal quarter ending in September, orders for its branded proprietary Nutraceutical products slow (absent the addition of new customers with a significant first time order), as buyers in their markets may have purchased sufficient inventory to carry them through the summer months. Conversely, in the Company’s second fiscal quarter, ending in December, orders for its products increase as the demand for the Company’s branded Nutraceutical products seems to increase in late December to early January as consumers become health conscious as they enter the new year.
 

45

The Company believes that there are other non-seasonal factors that also may also influence the variability of quarterly results including, but not limited to, general economic and industry conditions that affect consumer spending, changing consumer demands and current news on nutritional supplements. In addition, our recent growth has caused additional variability in our quarterly results. Accordingly, a comparison of the Company’s results of operations from consecutive periods is not necessarily meaningful, and the Company’s results of operations for any period are not necessarily indicative of future periods.

Liquidity and Capital Resources

The following table sets forth, for the periods indicated, the Company’s net cash flows used in operating, investing and financing activities, its period end cash and cash equivalents and other operating measures:

46

At December 31, 2007, the Company’s working capital was approximately $1.8 million, a decrease of $9.2 million over working capital at June 30, 2007 of $11.0 million. The decrease in our working capital was a result of the reclassifying of the Term Note from long-term to current liabilities, due to defaults in our covenants as of December 31, 2007. Cash and cash equivalents were $3.9 million at December 31, 2007, an increase of $1.7 million from June 30, 2007.
 

Net cash provided by operating activities of $1.6 million for the six months ended December 31, 2007 included net loss of $5.0 million. After excluding the effects of non-cash expenses, including deferred taxes, impairment charges, depreciation and amortization and compensation expense for employee stock options, the adjusted cash provided before the effect of the changes in working capital components was $3.8 million. Additional cash provided of approximately $2.8 million was the result of a decrease in accounts receivable of $0.7 million, inventory of $0.8 million, other current assets, security deposits and other assets of $0.3 million and a increase of accounts payable of $2.2 million, these increases to cash were partially offset by, an increase in accrued expenses and other current liabilities and income taxes payable of $1.4 million.

Net cash used in operating activities of $0.1 million for the six months ended December 31, 2006 resulted from net income of $1.3 million. After excluding the effects of non-cash expenses, including deferred taxes, impairment charges, depreciation and amortization and compensation expense for employee stock options, the adjusted cash provided before the effect of the changes in working capital components was $1.6 million. Cash used for working capital components of approximately $3.0 million was the result of an increase in inventory of $3.3 million, prepaid expenses and other current and non current assets of approximately $0.1 million and a decrease of accounts payable of approximately $0.2 million and a decrease of accrued expenses and other liabilities of $0.3 million, these reductions to cash were partially offset by, a decrease in accounts receivable of $0.6 million and an increase in income taxes payable of $0.3 million.

47

The Company used $0.3 million and $0.7 million of cash in investing activities for the six months ended December 31, 2007 and 2006, respectively. The use of cash was to purchase property and equipment and intangible assets.
 
Cash provided by financing activities was $0.6 million and $0.7 million for the six months ended December 31, 2007 and 2006, respectively. Cash provided during the six months ended December 31, 2007 was the result of a net increase in borrowings under the revolving credit facility of approximately $0.5 million and proceeds from stock options exercises of approximately $0.1 million. The net cash provided by financing activities of $0.7 million was the result of borrowing $13.5 million under its revolving credit facility offset, in part by the paydown of notes payable ($4.7 million), early redemption of 650 shares of our Series B Preferred stock ($6.5 million) and a required deposit of $2.0 million, in an interest bearing certificate of deposit, with our lender in connection with our $15.0 million revolving credit facility.

On February 19, 2008, we entered into two Securities Purchase Agreements relating to a private placement of securities with two investors, one of whom is an affiliate of Carl DeSantis, a director of the Company, which when consummated will result in gross proceeds of $17.5 million to us. We expect to consummate the private placement in the near future following satisfaction of customary closing conditions. The private placement involves the sale of (i) 6,000 shares of newly designated Series C Convertible Preferred Stock (the “Series C Preferred”) with a stated value of $1,000 per share, (ii) $4.5 million in principal amount of 9.5% Convertible Promissory Notes (the “Convertible Notes”), and (iii) $7.0 million in principal amount of 8.0% Promissory Notes (the “Notes” and, together with the Series C Preferred and the Convertible Notes, the “Securities”). The Notes and the Convertible Notes will be secured by a pledge of substantially all of our assets. We expect to use approximately $16.4 million of the proceeds of the private placement to retire in full our credit facilities with Amalgamated Bank and expect to use the remaining balance of $1.1 million plus our release of the $2.0 million of Restricted Cash in the aggregate, of approximately $3.1 million for general working capital purposes.
 

48 The consummation of the above-described Securities private placement together with our expected consolidated net sales estimated to be between $25.0 million and $29.0 million, for the remaining six months of fiscal year 2008, current cash balances should provide a significant portion of our cash needs over the ensuing twelve-month period. Additionaly, we need to conclude our capital raise efforts for our Biotechnologies Segment and complete the pending spin-off of that business segment in order for us to meet our cash needs for all of our business segment’ operations and contractual commitments in fiscal 2008 and into fiscal 2009. Absent this additional sourcing, we may need to decrease our spending in our Business Segments that are net users of cash. We believe that we will be successful in obtaining these additional sources of financing; however there can be no assurances that we will.

Our total annual commitments at December 31, 2007 for long term non-cancelable leases of approximately $5.3 million consists of obligations under operating leases for facilities and lease agreements for the rental of warehouse equipment, office equipment and automobiles.

Capital Expenditures

The Company's capital expenditures for the three months ended December 31, 2007 and 2006 were $0.3 million and $0.4 million for each period, respectively. The Company has budgeted approximately $1.0 million for capital expenditures for fiscal 2008. The total amount is expected to be funded from cash provided from its operations.
 

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.
 

Recent Accounting Pronouncement

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109.” This interpretation was effective as of July 1, 2007. We adopted Interpretation No. 48 effective July 1, 2007, and the impact to our consolidated financial position, results of operations and cash flows was not material.

In September 2006, the FASB issue SFAS No. 157, “Fair Value Measurement” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 17, 2007 and interim periods within those fiscal years. We do not expect SFAS 157 to have a material impact on our consolidated financial position, results of operations and cash flows.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS No. 159 permits an entity to choose, at specified election dates, to measure eligible financial instruments and certain other items at fair value that are not currently required to be measured at fair value. An entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At the effective date, an entity may elect the fair value option for eligible items that exist at that date. The entity shall report the effect of the first remeasurement to fair value as a cumulative-effect adjustment to the opening balance of retained earnings. We do not expect SFAS No. 159 to have a material impact on our consolidated financial position, results of operations and cash flows.
 

49

In June 2007, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” that would require nonrefundable advance payments made by the Company for future R&D activities to be capitalized and recognized as an expense as the goods or services are received by the Company. EITF Issue No. 07-3 is effective for the Company with respect to new arrangements entered into beginning July 1, 2008. Currently we do not expect EITF Issue No. 07-3 to have a material impact on our consolidated financial position, results of operations and cash flows.

Impact of Inflation

The Company does not believe that inflation has significantly affected its results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the Company is party to financial instruments that are subject to market risks arising from changes in interest rates and foreign currency exchange rates, primarily with respect to the Canadian Dollar in its customer receivables. The Company’s use of derivative instruments is very limited and it does not enter into derivative instruments for trading purposes. We performed a sensitivity analysis to determine the impact of fluctuations on interest rates relating to our outstanding variable debt. If interest rates varied by plus or minus one percent our income would be higher or lower in the amount of $0.1 million per annum.
 

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Item 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company has not completed its Sarbanes Oxley section 404 process, or related assessment in the process of evaluation and testing and is not required to do so until our fiscal year ending June 30, 2008. The Company may identify deficiencies that may require remediation in the process of its evaluation and testing.

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PART II – OTHER INFORMATION
 

Item 1. LEGAL PROCEEDINGS

NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and Integrated BioPharma, Inc., pending in the Supreme Court for the State of New York, New York County. Plaintiffs NatEx Georgia LLC and Vasili Patarkalishvili commenced this action on July 19, 2004, alleging claims for breach of contact, fraud and breach of the implied duty of good faith and fair dealing arising out of an alleged failure by Paxis to provide information necessary for NatEx to perform under the parties' July 2003 agreements by which NatEx had agreed to supply Paclitaxel extract. The complaint sought damages of more than $5.0 million. By order dated January 6, 2006, the Court granted in part Defendants' motion to dismiss. The Court dismissed all of the claims against all defendants, except for the breach of contract claim against Paxis. Plaintiffs filed a notice of appeal of that decision. On April 17, 2007, the Supreme Court, Appellate Division, First Department dismissed Plaintiffs' appeal for failure to perfect. Certain of the Defendants, including the Company, filed counter-claims against Plaintiffs for breach of the July 2003 agreement with NatEx and to collect on a $1.3 million note. By order dated June 7, 2007, the Court granted summary judgment in favor Paxis on Plaintiffs' remaining claim, and granted summary judgment in favor of Defendants on their counterclaims against Plaintiffs. The Court subsequently entered judgment in favor of Paxis, dismissing Plaintiffs' complaint and in favor of the Company and against NatEx Georgia LLC in the amount of $1.3 million, plus interest, due on the Promissory Note. At a hearing on August 15, 2007, the Court granted Defendants' application to recover attorneys' fees from NatEx Georgia LLC and Vasili Patarkalishvili in the amount of $304,000. We believe, however, that NatEx Georgia LLC is insolvent, and further believe that we most likely will not be able to recover any of the judgment against Mr. Patarkalishvili.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2007. The risks described there could materially and adversely affect our business, financial condition and results of operations. The risk factors discussed in that Form 10-K do not identify all risks that we face because our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.

52

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 19, 2008, the Company entered into Securities Purchase Agreements relating to a private placement of securities to two investors, one of whom is an affiliate of Carl DeSantis, a director of the Company, which when consummated will result in gross proceeds of $17,500,000 to the Company.  The Company expects to consummate the private placement in the near future following satisfaction of customary closing conditions.  The private placement involves the sale of (i) 6,000 shares of newly designated Series C Convertible Preferred Stock (the “Series C Preferred”) with a stated value of $1,000 per share, (ii) $4,500,000 in principal amount of 9.5% Convertible Promissory Notes (the “Convertible Notes”), and (iii) $7,000,000 in principal amount of 8.0% Promissory Notes (the “Notes” and, together with the Series C Preferred and the Convertible Notes, the “Securities”). The Notes and the Convertible Notes will be secured by a pledge of substantially all of the Company's assets. The Company expects to use approximately $14,400,000 of the proceeds of the private placement to retire in full its credit facilities with Amalgamated Bank and expects to use the remaining balance of approximately $2,600,000 for general working capital purposes.

The Certificate of Designation of the Series C Preferred, to be filed promptly following consummation of the private placement, states, among other things, that the shares of the Preferred Stock are convertible any time at the option of the holder into shares of our common stock based on a conversion price set forth in the Certificate of Designation, subject to adjustment in the event of a stock dividend, stock split or combination, reclassification or similar event, and upon certain below-market issuances of our common stock.  The Series C Preferred may be redeemed under certain circumstances stated in the Certificate of Designations.

We have agreed, pursuant to the terms of Registration Rights Agreements with the investors, to (i) file a shelf registration statement, with respect to the resale of the shares of our common stock underlying the Securities, with the SEC within 30 days after the closing of the private placement; (ii) have the shelf registration statement declared effective by the SEC no later than 90 days after the closing date, and (iii) keep the shelf registration statement effective until all remittable securities may be sold under Rule 144(k) under the Securities Act of 1933. If we are unable to comply with any of the above covenants, we will be required to pay liquidated damages to the investor based on a formula set forth in the Registration Rights Agreement.
 

53

The Securities, and the shares of our common stock underlying the Securities, have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and was issued and sold in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated hereunder. These securities may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Securities Act.
 
The foregoing description of the Securities Purchase Agreements, the Registration Rights Agreements, the Certificate of Designation, the Notes and the Promissory Notes, is qualified in its entirety by reference to the full text of such instruments and agreements, a copy of each of which is attached hereto as exhibits, and each of which is incorporated herein in its entirety by reference.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.
 
 

54

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Two matters were submitted for a vote at the Company’s Annual Meeting of Stockholders held on November 30, 2007 by holders of record of the Company’s common stock, par value of $0.002 per share at the close of business on November 1, 2007 (the “Record Date”), which was determined to be 13,953,747 shares of common stock. The holders of 9,293,824 shares of common stock, a majority, were present in person or represented by proxy at the meeting. The two matters and the results of the voting at the Annual Meeting are as follows:
 

1.      To elect three Class I directors for a three year term to serve until 2010 Annual Meeting of Stockholders. The number of votes cast at the meeting for the election of the three (3) directors for a three year term to the 2010 Annual Meeting of Stockholders were as follows:

2.      To ratify the appointment of Amper Politziner & Mattia, P.C. as the Company’s independent auditors. The number of votes cast at the meeting for the proposal to ratify Amper Politziner & Mattia, P.C. as the Company’s independent auditors were as follows:

55

Item 5. OTHER INFORMATION     

See Item 4. above.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K
 
(a)     Exhibits
 
 
Exhibit

Number

10.1	Securities Purchase Agreement
10.2	Securities Purchase Agreement
31.1	Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2	Certification of pursuant to Section 302 of Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1	Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32.2	Certification of periodic financial report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

INTEGRATED BIOPHARMA, INC.

Date: February 19, 2008	By:	/s/ E. Gerald Kay
		E. Gerald Kay,
		Chief Executive Officer
Date: February 19, 2008	By:	/s/ Dina L. Masi
		Dina L. Masi,
		Chief Financial Officer & Senior Vice President

57

EX-10

Exhibit 10.2

SECURITIES PURCHASE AGREEMENT

     THIS SECURITIES PURCHASE AGREEMENT, dated as of February 19, 2008 (this “Agreement”), is by and between INTEGRATED BIOPHARMA, INC., a Delaware corporation (the “Company”), and [CDS Entity] (“Investor”).
 

A.     The Company wishes to sell to Investor, and Investor wishes to purchase from the Company, upon the terms and subject to the conditions set forth in this Agreement, (i) an 9.5% Convertible Senior Secured Note having a principal amount of $4,500,000 in the form attached hereto as Exhibit A (the “Note”), and (ii) 3,000 shares of the Company’s Series C Convertible Preferred Stock, having a stated value of $1,000 per share (the “Series C Preferred Stock”), which series shall be designated pursuant to the Certificate of Designation in the form attached hereto as Exhibit B (the “Certificate of Designation”).

B.     The Series C Preferred Stock shall (i) be convertible into shares of Common Stock, (ii) accrue dividends at a rate of 10% per annum, payable in additional shares of Series C Preferred Stock, and (iii) mature on February 1, 2013 and be redeemed in shares of Common Stock. The Note, the shares of Common Stock and Series C Preferred Stock to be purchased by Investor hereunder, and the additional shares of Common Stock and Series C Preferred Stock issuable hereunder or under the Certificate of Designation, are collectively referred to herein as the “Securities”.

C.     The Company has agreed to effect the registration of the shares of Common Stock issuable upon the conversion or maturity date of the Series C Preferred Stock and the Note for resale by the holders thereof under the Securities Act of 1933 (as amended, and the rules and regulations promulgated thereunder, the “Securities Act”), pursuant to a Registration Rights Agreement in the form attached hereto as Exhibit C (the “Registration Rights Agreement”).

D.     The sale of the Securities by the Company to Investor, and any issuance of the additional Securities, will be effected in reliance upon the exemption from securities registration afforded by the provisions of Regulation D (“Regulation D”), as promulgated by the Securities and Exchange Commission (the “Commission”) under the Securities Act.

E.     The Company’s obligations hereunder and under the Note and the other transaction documents contemplated hereby will be guaranteed by each of the Company’s subsidiaries pursuant to a Guarantee in the form attached hereto as Exhibit D (the “Guarantee”) and secured by the assets of the Company and the Company’s subsidiaries pursuant to a Security Agreement in the form attached hereto as Exhibit E (the “Security Agreement”).

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

1.     TERMINOLOGY AND USAGE.
 

1.1 Definitions. When used herein, the terms below shall have the respective meanings indicated:
     

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

“ Allocation Amount” has the meaning specified in Section 5.5 of this Agreement.

“Biotech Spin-Off” has the meaning specified in Section 5.12 of this Agreement.

“Biotech Subsidiary” means InB:Biotechnologies, Inc., a New Jersey corporation.

“Board of Directors” means the Company’s board of directors.

“Business Day” means any day other than a Saturday, a Sunday or a day on which the Principal Market is closed or on which banks in the City of New York are required or authorized by law to be closed.

“Cap Amount” means 19.99% of the aggregate number of shares of Common Stock outstanding immediately prior to the Closing (subject to adjustment upon a stock split, stock dividend, recapitalization, reorganization, reclassification or other event that subdivides all of the outstanding shares of Common Stock).

“Certificate of Designation” has the meaning specified in the recitals of this Agreement.

“Closing” and “Closing Date” have the respective meanings specified in Section 2.1 of this Agreement.

“Commission” has the meaning specified in the recitals to this Agreement.

“Common Stock” has the meaning specified in the recitals to this Agreement.

“Company Subsidiary” means a Subsidiary of the Company.

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

“Disclosure Documents” means all SEC Documents filed with the Commission at least three (3) Business Days prior to the Execution Date and the unaudited Financial Statements (including the notes thereon) as of and for the period ending December 31, 2007 delivered to Imperium pursuant to this Agreement.

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

“Embargoed Person” has the meaning specified in Section 4.29 of this Agreement.
“Environmental Law” means any federal, state, provincial, local or foreign law, statute, code or ordinance, principle of common law, rule or regulation, as well as any permit, order, decree, judgment or injunction issued, promulgated, approved or entered thereunder, relating to pollution or the protection, cleanup or restoration of the environment or natural resources, or to the public health or safety, or otherwise governing the generation, use, handling, collection, treatment, storage, transportation, recovery, recycling, discharge or disposal of hazardous materials.

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

“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

“Execution Date” means the date of this Agreement.
“GAAP” means generally accepted accounting principles, applied on a consistent basis, as set forth in (i) opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants, (ii) statements of the Financial Accounting Standards Board and (iii) interpretations of the Commission and the staff of the Commission. Accounting principles are applied on a “consistent basis” when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period.

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

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

“Guarantee” has the meaning specified in the recitals of this Agreement.

“Holder” shall initially mean Imperium, provided that any Person that subsequently holds any Securities shall also be deemed a Holder.

“Holder Party” has the meaning specified in Section 5.10 of this Agreement.

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

“Issuance Event” has the meaning specified in Section 5.7 of this Agreement.

“Key Employee” has the meaning specified in Section 4.16 of this Agreement.

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

“Material Adverse Effect” means an effect that is material and adverse to (i) the consolidated business, properties, assets, operations, results of operations, financial condition, credit worthiness or prospects of the Company and the Company Subsidiaries taken as a whole, (ii) the ability of the Company or any material Company Subsidiary to perform its obligations under this Agreement or the other Transaction Documents or (iii) the rights and benefits to which a Holder is entitled under this Agreement, the Note, the Certificate of Designation and the other Transaction Documents.

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

“Note” has the meaning specified in the recitals of this Agreement.

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

“Permitted Debt” means the following: (a) Debt disclosed on Schedule 1.1(i) hereto; and (b) Debt consisting of capitalized lease obligations and purchase money indebtedness incurred in connection with acquisition of capital assets and obligations under sale-leaseback or similar arrangements provided in each case that such obligations are not secured by Liens on any assets of the Company or the Company Subsidiaries other than the assets so leased.

“Permitted Liens” means each of the following:

(a) Liens disclosed on Schedule 1.1(ii) hereto;

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

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

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

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

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

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

“Pro Rata Share” means, with respect to a Holder, the ratio determined by dividing (i) the principal amount of the Registrable Securities purchased hereunder by such Holder at the Closing by (ii) the aggregate principal amount of all Registrable Securities purchased hereunder by all of the Holders at the Closing.

“Purchase Price” has the meaning specified in Section 2.1.
“Registrable Securities” has the meaning specified in the Registration Rights Agreement.

“Registration Rights Agreement” has the meaning specified in the recitals to this Agreement.

“Registration Statement” has the meaning specified in the Registration Rights Agreement.

“Regulation D” has the meaning specified in the recitals to this Agreement.

“Restricted Payment” means (a) any dividend or other distribution (whether in cash, Property or obligations), direct or indirect, on account of (or the setting apart of money for a sinking or other analogous fund for the benefit of) any shares of any class of capital stock of the Company or the Company Subsidiaries now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to all of the holders of that class; (b) any redemption, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of the Company or any of its Affiliates now or hereafter outstanding, except the Securities; (c) any prepayment of principal of, premium, if any, or interest on, or any redemption, conversion, exchange, purchase, retirement, sinking fund or defeasance of, any Debt (whether upon acceleration of such Debt or otherwise); (d) any loan, advance or payment to any officer, director or stockholder of the Company or any of its Affiliates, exclusive of reasonable compensation and reimbursements paid to officers or directors in the ordinary course of business; and (e) any repayment of the CDS Debt prior to the Termination Date.

“Rule 144” means Rule 144 under the Securities Act or any successor provision.

“SEC Documents” means all reports, schedules, registration statements and definitive proxy statements filed by the Company with the Commission.

“Securities” has the meaning specified in the recitals of this Agreement.

“Securities Act” has the meaning specified in the recitals of this Agreement.

“Security Agreement” has the meaning specified in the recitals of this Agreement.

“Series C Preferred Stock” has the meaning specified in the recitals of this Agreement.

“Stockholder Cap Approval” means the affirmative vote by the holders of a majority of the votes cast (including a majority of the votes cast by each class entitled to vote as a separate class) at a meeting of the Company’s stockholders, or approval by written consent in accordance with applicable law, approving the issuance of Common Stock in excess of the Cap Amount.

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

“Termination Date” means the first date on which the Note has been repaid in full.

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

“Transaction Documents” means (i) this Agreement, (ii) the Securities, (iii) the Certificate of Designation, (iv) the Registration Rights Agreement, (v) the Guarantee, (vi) the Security Agreement, and (vii) all other agreements, documents and other instruments executed and delivered by or on behalf of the Company, any Company Subsidiary or any of their respective officers on or after the Closing in connection with this Agreement.

“Transfer Agent” has the meaning specified in Section 3.5 of this Agreement.

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

2.     PURCHASE AND SALE OF THE NOTE AND THE SHARES.

2.1     Purchase Price; Closing. Upon the terms and subject to the satisfaction or waiver of the conditions set forth in Sections 2.2 and 2.3, the Company agrees to sell and Investor agrees to purchase the Note and 3,000 shares of Series C Preferred Stock for an aggregate purchase price of $7,500,000 (the “Purchase Price”). The closing of such purchase and sale is hereinafter referred to as the “Closing”, and the date on which the Closing occurs is hereinafter referred to as the “Closing Date”. The Closing will be deemed to occur at the offices of Mazzeo Song & Bradham LLP, 708 Third Avenue, 19^th Floor, New York, New York 10017, when each of the conditions to the Closing described in Sections 2.2 and 2.3 has been satisfied or waived as specified therein.
 

2.2     Conditions to Investor’s Obligations at the Closing. Investor’s obligations to effect the Closing, including, without limitation, its obligation to purchase the Securities at the Closing, are conditioned upon the fulfillment (or waiver by Investor in its sole and absolute discretion) of each of the following events as of the Closing Date, and the Company shall use commercially reasonable efforts to cause each of such conditions to be satisfied:

2.2.1 the representations and warranties of the Company set forth in this Agreement and in the other Transaction Documents shall be true and correct in all material respects as of such date as if made on such date (except that to the extent that any such representation or warranty relates to a particular date, such representation or warranty shall be true and correct in all material respects as of that particular date);

2.2.2 the Company shall have complied with or performed in all material respects all of the agreements, obligations and conditions set forth in this Agreement and in the other Transaction Documents that are required to be complied with or performed by the Company on or before the Closing;

2.2.3 the Company shall have delivered to Investor a certificate, signed by the Secretary of the Company and each Company Subsidiary, certifying true, complete and accurate copies of (i) the constituent organizational documents of each such entity, each as amended through the Closing Date, and (ii) the resolutions passed by the board of directors or similar governing body of each such entity authorizing the execution, delivery and performance of the Transaction Documents to which such entity is a party;

2.2.4     [Intentionally Omitted]

2.2.5 the Company shall have delivered to Investor copies of (i) the executed Note, (ii) the executed stock certificates representing the purchased shares of Common Stock and Series C Preferred Stock, (iii) the executed signature pages of the Company and Company Subsidiaries to each of the other Transaction Documents to which they are a party, and (iv) the certificates representing all of the stock, notes and other securities required to be pledged by the Company and the Company Subsidiaries under the Security Agreement;

2.2.6 the Company’s counsel shall have confirmed that it has in its possession the originals of each of the documents specified in Section 2.2.5, and such counsel shall have confirmed that all such originals will be delivered to Investor or its counsel no later than the Business Day immediately following the Closing Date;

2.2.7 the Certificate of Designation shall have been accepted for filing by the Secretary of State of the State of Delaware and shall be in full force and effect;

2.2.8 the Company shall have delivered to Investor a legal opinion of its outside counsel covering the matters set forth on Exhibit F hereto and such opinion shall be in form and substance reasonably satisfactory to Investor;

2.2.9 the Company shall have delivered to Investor a payoff letter from Amalgamated Bank stating (i) the aggregate amount owed by the Company and the Company Subsidiaries to Amalgamated Bank as of the date of such letter, (ii) the per diem interest amount accruing on and after the date of such letter, (iii) the wiring instructions for payment, (iv) that all liens held by Amalgamated Bank on the assets of the Company and the Company Subsidiaries will terminate upon the payment of such payoff amount, and (v) upon the payment of such payoff amount, the Company and Investor shall be authorized to file UCC-3 terminations terminating the UCC financing statements filed by Amalgamated Bank against the Company and Company Subsidiaries;

2.2.10 the Company shall have contemporaneously with the Closing consummated its contemplated financing with Imperium Master Fund, Ltd. (“Imperium”) consisting of (i) $7,000,000 of debt, which will be senior to the Note, and (ii) 3,000 shares of Series C Preferred Stock, and Imperium and Investor shall have entered into an intercreditor and voting agreement pursuant to which Investor will have subordinated its liens on the assets of the Company and Company Subsidiaries to the liens held by Imperium and agreed to vote its shares of Series C Preferred Stock consistent with Imperium;

2.2.11 the Company shall have delivered to Investor the Company’s unaudited financial statements for the quarter ending December 31, 2007, and such financial statements shall not be, in Investor’s reasonable judgment, materially different from the projections for such quarter previously provided by the Company to Investor;

2.2.12 Investor shall have satisfactorily completed its due diligence of the Company;

2.2.13 there shall have occurred no material adverse change in the Company’s consolidated business or financial condition since the date of the Company’s most recent financial statements contained in the Disclosure Documents; and

2.2.14 there shall be no injunction, restraining order or decree of any nature of any court or Governmental Authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby and by the other Transaction Documents.

2.3     Conditions to Company’s Obligations at the Closing. The Company’s obligations to effect the Closing with Investor are conditioned upon the fulfillment (or waiver by the Company in its sole and absolute discretion) of each of the following events as of the Closing Date:
 

2.3.1 the representations and warranties of Investor set forth in this Agreement and in the other Transaction Documents to which it is a party shall be true and correct in all material respects as of such date as if made on such date (except that to the extent that any such representation or warranty relates to a particular date, such representation or warranty shall be true and correct in all material respects as of that date);

2.3.2 Investor shall have complied with or performed all of the agreements, obligations and conditions set forth in this Agreement that are required to be complied with or performed by Investor on or before the Closing;

2.3.3 there shall be no injunction, restraining order or decree of any nature of any court or Governmental Authority of competent jurisdiction that is in effect that restrains or prohibits the consummation of the transactions contemplated hereby and by the other Transaction Documents;

2.3.4 Investor shall have executed each Transaction Document to which it is a party and shall have delivered the same to the Company; and

2.3.5     Investor shall have wire transferred to the Company’s account, in immediately available funds, an amount equal to $7,500,000.

3.     REPRESENTATIONS AND WARRANTIES OF INVESTOR.
 

     Investor hereby represents and warrants to the Company and agrees with the Company that, as of the Execution Date:

3.1     Authorization; Enforceability. Investor is duly and validly organized, validly existing and in good standing under the laws of the Cayman Islands with the requisite corporate power and authority to purchase the Securities to be purchased by it hereunder and to execute and deliver this Agreement and the other Transaction Documents to which it is a party. This Agreement constitutes, and upon execution and delivery thereof, each other Transaction Document to which Investor is a party will constitute, Investor’s valid and legally binding obligation, enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.
 
3.2     Accredited Investor. Investor (i) is an “accredited investor” as that term is defined in Rule 501 of Regulation D, (ii) was not formed or organized for the specific purpose of making an investment in the Company, and (iii) is acquiring the Securities solely for its own account and not with a present view to the public resale or distribution of all or any part thereof, except pursuant to sales that are registered under, or exempt from the registration requirements of, the Securities Act and/or sales registered under the Securities Act; provided, however, that in making such representation, Investor does not agree to hold the Securities for any minimum or specific term and reserves the right to sell, transfer or otherwise dispose of the Securities at any time in accordance with the provisions of this Agreement and with federal and state securities laws applicable to such sale, transfer or disposition.Investor can bear the economic risk of a total loss of its investment in the Securities and has such knowledge and experience in business and financial matters so as to enable it to understand the risks of and form an investment decision with respect to its investment in the Securities.
 

3.3     Information. The Company has, prior to the Execution Date, provided Investor with information regarding the business, operations and financial condition of the Company and has, prior to the Execution Date, granted to Investor the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents concerning the Company in order for Investor to make an informed decision with respect to its investment in the Securities. Neither such information nor any other investigation conducted by Investor or any of its representatives shall modify, amend or otherwise affect Investor’s right to rely on the Company’s representations and warranties contained in this Agreement.

3.4     Limitations on Disposition. Investor acknowledges that, except as provided in the Registration Rights Agreement, the Securities have not been and are not being registered under the Securities Act and may not be transferred or resold without registration under the Securities Act or unless pursuant to an exemption therefrom.

3.5     Legend. Investor understands that the certificates representing the Common Stock and Series C Preferred Stock may bear at issuance a restrictive legend in substantially the following form:
 

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities laws, and may not be offered for sale or sold unless a registration statement under the Securities Act and applicable state securities laws shall have become effective with respect thereto, or an exemption from registration under the Securities Act and applicable state securities laws is available in connection with such offer or sale. These securities [and the securities issuable hereunder] (i) may be pledged or hypothecated in connection with a bona fide margin account or other financing secured by such securities or (ii) may be transferred or assigned to an affiliate of the holder hereof without the necessity of an opinion of counsel or the consent of the issuer hereof.”

Notwithstanding the foregoing, it is agreed that, as long as (A) the resale or transfer (including, without limitation, a pledge) of any of the Securities is registered pursuant to an effective registration statement, (B) such Securities have been sold pursuant to Rule 144, subject to receipt by the Company of customary documentation reasonably acceptable to the Company in connection therewith, or (C) such Securities are eligible for resale under Rule 144(k) or any successor provision, such Securities shall be issued without any legend or other restrictive language and, with respect to Securities upon which such legend is stamped, the Company shall issue new certificates without such legend to the holder upon request. The Company shall execute and deliver written instructions to the transfer agent for its Common Stock (the “Transfer Agent”) as may be necessary to satisfy any request by a Holder for removal of such legends no later than the close of business on the third (3^rd) Business Day following the receipt of the request from a Holder to the extent such legends may be removed in accordance with this Section 3.5.
 

3.6     Reliance on Exemptions. Investor understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of U.S. federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations and warranties of Investor set forth in this Section 3 in order to determine the availability of such exemptions and the eligibility of Investor to acquire the Securities.Investor acknowledges that it did not purchase the Securities based upon any advertisement in any publication of general circulation. Investor is relying on the representations, acknowledgements and agreements made by the Company in Section 4 and elsewhere in this Agreement in making investing, trading and/or other decisions concerning the Company’s securities.

3.7     Non-Affiliate Status; Common Stock Ownership. Investor is not an Affiliate of the Company and is not acting in association or concert with any other Person in regard to its purchase of the Securities or otherwise in respect of the Company. Investor’s investment in the Securities is not for the purpose of acquiring, directly or indirectly, control of, and it has no intent to acquire or exercise control of, the Company or to influence the decisions or policies of the Board of Directors.
 

3.8      Fees. Investor has not agreed to pay any compensation or other fee, cost or related expenditure to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby.

3.9No Conflicts. The execution and performance of this Agreement and the other Transaction Documents to which Investor is a party do not conflict in any material respect with any agreement to which Investor is a party or is bound, any court order or judgment applicable to Investor, or the constituent documents of Investor.

3.10     No Governmental Review. Investor understands that no U.S. federal or state agency or any other Governmental Authority has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of an investment in the Securities nor have such authorities passed upon the accuracy of any information provided to Investor or made any findings or determinations as to the merits of the offering of the Securities.

4.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Holder and agrees with such Holder that, as of the Execution Date:
 

4.1     Organization, Good Standing and Qualification. Each of the Company and Company Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization and has all requisite power and authority to carry on its business as now conducted. Each of the Company and Company Subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction in which it conducts business except where the failure so to qualify has not had or would not reasonably be expected to have a Material Adverse Effect.

4.2     Authorization; Consents. The Company has the requisite corporate power and authority to enter into and perform its obligations under the Transaction Documents, including, without limitation, the issuance and sale of the Securities to Investor in accordance with the terms hereof and thereof. All corporate action on the part of the Company necessary for the authorization, execution and delivery of, and the performance by the Company of its obligations under, the Transaction Documents to which the Company is a party has been taken, and no further consent or authorization of any Person (including, without limitation, any of the Company’s directors or shareholders or any Governmental Authority (other than such approval as may be required under the Securities Act and applicable state laws in respect of the Registration Rights Agreement) is required under any organizational document, Material Contract, Governmental Requirement or otherwise. The Board of Directors has determined that the sale and issuance of the Securities, and the consummation of the transactions contemplated hereby and by the other Transaction Documents, are in the best interests of the Company.
 
4.3 Enforcement. This Agreement has been and, at or prior to the Closing, each other Transaction Document required to be delivered by the Company at the Closing will be, duly executed and delivered by the Company. This Agreement constitutes and, upon the execution and delivery thereof by the Company, each other Transaction Documents will constitute, the valid and legally binding obligation of the Company, enforceable against the Company in accordance with their respective terms, subject to (i) applicable bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization or other similar laws of general application relating to or affecting the enforcement of creditors’ rights generally and (ii) general principles of equity.
 
4.4     Disclosure Documents; Agreements; Financial Statements; Other Information. The Company is subject to the reporting requirements of the Exchange Act and, except as described on Schedule 4.4, the Company has filed with the Commission all SEC Documents that the Company was required to file with the Commission on or after December 31, 2006. The Company is not aware of any event occurring or expected to occur on or prior to the Closing Date (other than the transactions effected hereby) that would require the filing of, or with respect to which the Company intends to file, a Form 8-K after the Closing. Each SEC Document filed on or after December 31, 2006, as of the date of the filing thereof with the Commission (or if amended or superseded by a filing prior to the Execution Date, then on the date of such amending or superseding filing), complied in all material respects with the requirements of the Securities Act or Exchange Act, as applicable, and, as of the date of such filing (or if amended or superseded by a filing prior to the Execution Date, then on the date of such filing), such SEC Document (including all exhibits and schedules thereto and documents incorporated by reference therein) did not contain an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All documents required to be filed as exhibits to the SEC Documents filed on or after December 31, 2006 have been filed as required. Except as set forth in the Disclosure Documents, the Company has no liabilities, contingent or otherwise, other than liabilities incurred in the ordinary course of business which, individually or in the aggregate, are not material to the consolidated business or financial condition of the Company and the Company Subsidiaries. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the Commission with respect thereto. Such financial statements have been prepared in accordance with GAAP consistently applied at the times and during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end adjustments). The Company will prepare the financial statements to be included in any reports, schedules, registration statements and definitive proxy statements that the Company is required to file or files with the Commission after the date hereof in accordance with GAAP (except in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements).
     
4.5     Capitalization; Subsidiaries; Outstanding Debt.
 

(a)     The capitalization of the Company, including its authorized capital stock, the number of shares issued and outstanding, the number of shares issuable and reserved for issuance pursuant to the Company’s stock option plans and agreements, the number of shares issuable and reserved for issuance pursuant to securities (other than the Securities) payable in, exercisable for, or convertible into or exchangeable for any shares of Common Stock is set forth on Schedule 4.5(a). All outstanding shares of capital stock of the Company have been, or upon issuance will be, validly issued, fully paid and non-assessable.

(b)     All of the Company Subsidiaries are disclosed on Schedule 4.5(b). Each of the Company Subsidiaries that is indicated as being “active” on Schedule 4.5(b) operates the business set forth opposite its name on Schedule 4.5(b). None of the Company Subsidiaries that is indicated as being “inactive” on Schedule 4.5(b) has any assets or operations of any kind. Except as disclosed on Schedule 4.5(b), the Company or a wholly-owned Company Subsidiary owns all of the capital stock of each Company Subsidiary, which capital stock is validly issued, fully paid and non-assessable, and no shares of the capital stock of the Company or any Company Subsidiary are subject to preemptive rights or any other similar rights of the shareholders of the Company or any such Company Subsidiary or any Liens created by or through the Company or any such Company Subsidiary.

(c)     Except as disclosed on Schedule 4.5(c) or as contemplated herein, there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into or exercisable or exchangeable for, any shares of capital stock of the Company or any Company Subsidiary, or arrangements by which the Company or any Company Subsidiary is or may become bound to issue additional shares of capital stock of the Company or any Company Subsidiary (whether pursuant to anti-dilution, “reset” or other similar provisions).

(d)     Schedule 4.5(d) identifies each individual item of Debt of the Company and/or any Company Subsidiary currently outstanding in excess of $25,000 as of the date hereof.

4.6     Due Authorization; Valid Issuance. The Securities are duly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be duly and validly issued, free and clear of any Liens imposed by or through the Company. Assuming the accuracy of Investor’s representations contained herein, the issuance and sale of the Securities under this Agreement will be effected in compliance with all applicable federal and state securities laws.
     
4.7     Form S-3. The Company is eligible to register the Registrable Securities for resale in a secondary offering by each Holder on a registration statement on Form S-3 under the Securities Act. To the Company’s knowledge, as of the date hereof and as of the Closing Date, there exist no facts or circumstances (including, without limitation, any required approvals or waivers of any circumstances that may delay or prevent the obtaining of accountant’s consents) that could reasonably be expected to prohibit or delay the preparation, filing or effectiveness of such registration statement on Form S-3.

4.8     No Conflict. Neither the Company nor any Company Subsidiary is in violation of any provisions of its certificate or articles of incorporation, bylaws or any other organizational document. Neither the Company nor any Company Subsidiary is in violation of or in default (and no event has occurred which, with notice or lapse of time or both, would constitute a default) under any provision of any instrument or contract to which it is a party or by which it or any of its Property is bound, or in violation of any provision of any Governmental Requirement applicable to the Company or any Company Subsidiary, except for any violation or default that has not had or would not reasonably be expected to have a Material Adverse Effect. The (i) execution, delivery and performance of this Agreement and the other Transaction Documents and (ii) consummation of the transactions contemplated hereby and thereby will not result in any violation of any provisions of the Company’s certificate of incorporation, bylaws or any other organizational document or in a default under any provision of any material instrument or contract to which the Company or any Company Subsidiary is a party or by which it or any of its Property is bound, or in violation of any provision of any Governmental Requirement applicable to the Company or be in conflict with or constitute, with or without the passage of time and giving of notice, a default under any such instrument or contract or the triggering of any preemptive or anti-dilution rights (including, without limitation, pursuant to any “reset” or similar provisions) or rights of first refusal or first offer, or any other rights that would allow or permit the holders of the Company’s securities or any other Person to purchase shares of Common Stock or other securities of the Company or any Company Subsidiary (whether pursuant to a shareholder rights plan provision or otherwise).
 
4.9     Financial Condition; Taxes; Litigation.
 

4.9.1     The financial condition of each of the Company and Company Subsidiaries is, in all material respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the consolidated business or financial condition of the Company and the Company Subsidiaries. There has been no (i) material adverse change to the business, operations, properties, financial condition, prospects or results of operations of the Company and any Company Subsidiary since the date of the Company’s most recent financial statements contained in the Disclosure Documents or (ii) change by the Company in its accounting principles, policies and methods except as required by changes in GAAP.

4.9.2     Each of the Company and Company Subsidiaries has prepared in good faith and duly and timely filed all tax returns required to be filed by it and such returns are complete and accurate in all material respects and each of the Company and Company Subsidiaries has paid all taxes required to have been paid by it, except for taxes which it reasonably disputes in good faith or the failure of which to pay has not had or would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Company Subsidiary has any liability with respect to taxes that accrued on or before the date of the most recent balance sheet of the Company included in the Disclosure Documents in excess of the amounts accrued with respect thereto that are reflected on such balance sheet.
 
4.9.3     Except for sales tax audits undertaken by state taxing authorities in the ordinary course of business, neither the Company nor any Company Subsidiary is the subject of any pending or, to the Company’s knowledge, threatened inquiry, investigation or administrative or legal proceeding by any Governmental Authority.
 
4.9.4 There is no material claim, litigation or administrative proceeding pending, or, to the Company’s knowledge, threatened or contemplated, against the Company or any Company Subsidiary, or against any officer, director or employee of the Company or any such Company Subsidiary in connection with such Person’s employment therewith. Neither the Company nor any Company Subsidiary is a party to or subject to the provisions of, any order, writ, injunction, judgment or decree of any court or Governmental Authority which has had or would reasonably be expected to have a Material Adverse Effect.
 
4.10      Manipulation of Price. The Company has not, and to its knowledge no one acting on its behalf has, taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities.

4.11     Intellectual Property.

(a)     Each of the Company and Company Subsidiaries owns, free and clear of claims or rights of any other Person, with full right to use, sell, license, sublicense, dispose of, and bring actions for infringement of, or, to the knowledge of the Company, has acquired licenses or other rights to use, all Intellectual Property necessary for the conduct of its business as presently conducted (other than with respect to software which is generally commercially available and not used or incorporated into the Company’s or such Company Subsidiary’s products and open source software which may be subject to one or more “general public” licenses). All works that are used or incorporated into the Company’s or any Company Subsidiary’s services, products or services or products actively under development and which is proprietary to the Company or such Company Subsidiary was developed by or for the Company or a Company Subsidiary by the current or former employees, consultants or independent contractors of the Company or a Company Subsidiary or purchased or licensed by the Company or a Company Subsidiary.

(b)     The business of each of the Company and Company Subsidiaries as presently conducted and the production, marketing, licensing, use and servicing of any products or services of each of the Company and Company Subsidiaries do not, to the knowledge of the Company, infringe or conflict with any patent, trademark, copyright, or trade secret rights of any third parties or any other Intellectual Property of any third parties in any material respect. Neither the Company nor any Company Subsidiary has received written notice from any third party asserting that any Intellectual Property owned or licensed by the Company or a Company Subsidiary, or which the Company or any Company Subsidiary otherwise has the right to use, is invalid or unenforceable by the Company or such Company Subsidiary and, to the Company’s knowledge, there is no valid basis for any such claim (whether or not pending or threatened).

(c)     No claim is pending or, to the Company’s knowledge, threatened against the Company or any Company Subsidiary nor has the Company or any Company Subsidiary received any written notice or other written claim from any Person asserting that the Company’s or any Company Subsidiary’s present or contemplated activities infringe or may infringe in any material respect any Intellectual Property of such Person, and the Company is not aware of any infringement by any other Person of any material rights of the Company or any Company under any Intellectual Property Rights.

(d)     All licenses or other agreements under which the Company or any Company Subsidiary is granted Intellectual Property (excluding licenses to use software utilized in the Company’s or such Company Subsidiary’s internal operations and which is generally commercially available) are in full force and effect and, to the Company’s knowledge, there is no material default by any party thereto. The Company has no reason to believe that the licensors under such licenses and other agreements do not have and did not have all requisite power and authority to grant the rights to the Intellectual Property purported to be granted thereby.

(e)     All licenses or other agreements under which the Company or any Company Subsidiary has granted rights to Intellectual Property to others (including all end-user agreements) are in full force and effect, there has been no material default by the Company or any Company Subsidiary thereunder and, to the Company’s knowledge, there is no material default of any provision thereof relating to Intellectual Property by any other party thereto.

(f)     Each of the Company and Company Subsidiaries has taken all steps required in accordance with commercially reasonable business practice to establish and preserve their ownership in their owned Intellectual Property and to keep confidential all material technical information developed by or belonging to the Company or such Company which has not been patented or copyrighted. To the Company’s knowledge, neither the Company nor any Company Subsidiary is making any unlawful use of any Intellectual Property of any other Person, including, without limitation, any former employer of any past or present employees of the Company or any Company Subsidiary. To the Company’s knowledge, neither the Company, any Company Subsidiary nor any of their respective employees has any agreements or arrangements with former employers of such employees relating to any Intellectual Property of such employers, which materially interfere or conflict with the performance of such employee’s duties for the Company or any Company Subsidiary or result in any former employers of such employees having any rights in, or claims on, the Company’s or any Company Subsidiary’s Intellectual Property. Each current employee of each of the Company and Company Subsidiaries who has access to material Intellectual Property has executed agreements regarding confidentiality, proprietary information and assignment of inventions and copyrights to the Company or such Company Subsidiary, as the case may be, each independent contractor or consultant of each of the Company and Company Subsidiaries has executed agreements regarding confidentiality and proprietary information, and neither the Company nor any Company Subsidiary has received written notice that any employee, consultant or independent contractor is in violation of any agreement or in breach of any agreement or arrangement with former or present employers relating to proprietary information or assignment of inventions. Without limiting the foregoing: (i) each of the Company and Company Subsidiaries has taken reasonable security measures to guard against unauthorized disclosure or use of any of its Intellectual Property that is confidential or proprietary; and (ii) except as to certain former employees of AgroLabs, Inc. against whom claims are being made, the Company has no reason to believe that any Person (including, without limitation, any former employee or consultant of the Company or any Company Subsidiary) has unauthorized possession of any of its Intellectual Property, or any part thereof, or that any Person has obtained unauthorized access to any of its Intellectual Property. Each of the Company and Company Subsidiaries has complied in all material respects with its respective obligations pursuant to all agreements relating to Intellectual Property rights that are the subject of licenses granted by third parties, except for any non-compliance that has not had or would not reasonably be expected to have a Material Adverse Effect.

4.12     Registration Rights; Rights of Participation. Except as set forth on Schedule 4.12, the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the Commission or any other Governmental Authority which has not been satisfied in full or waived on or prior to the date hereof and no Person, including, but not limited to, current or former shareholders of the Company, underwriters, brokers, agents or other third parties, has any right of first refusal, preemptive right, right of participation, anti-dilutive right or any similar right to participate in, or to receive securities or other assets of the Company solely as a result of the transactions contemplated by this Agreement or the other Transaction Documents.
 
4.13     Solicitation; Other Issuances of Securities. Neither the Company nor any of its Affiliates, nor any Person acting on its or their behalf, (i) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Securities, or (ii) has, directly or indirectly, made any offers or sales of any security or the right to purchase any security, or solicited any offers to buy any security or any such right, under circumstances that would require registration of the Securities under the Securities Act.
 
4.14     Fees. Except as set forth on Schedule 4.14, the Company is not obligated to pay any brokers, finders or financial advisory fees or commissions to any underwriter, broker, agent or other representative in connection with the transactions contemplated hereby. The Company will indemnify and hold harmless each Holder from and against any claim by any Person alleging that such Holder is obligated to pay any such compensation, fee, cost or related expenditure in connection with the transactions contemplated hereby.
 
4.15     Foreign Corrupt Practices. Neither the Company, any Company Subsidiary nor, to the knowledge of the Company, any director, officer, agent, employee or other Person acting on behalf of the Company or any Company Subsidiary, has (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity, (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee, or (iii) violated any provision of the Foreign Corrupt Practices Act of 1977, as amended, or made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.
 
4.16     Key Employees. The “executive officers” (as defined in Rule 501(f) of the Securities Act) of each of the Company and Company Subsidiaries (each, a “Key Employee”) is currently serving in the capacity described in the Disclosure Documents. The Company has no knowledge of any fact or circumstance (including, without limitation, (i) the terms of any agreement to which such person is a party or any litigation in which such person is or may become involved and (ii) any illness or medical condition that could reasonably be expected to result in the disability or incapacity of such person) that would limit or prevent any such person from serving in such capacity on a full-time basis in the reasonably foreseeable future, or of any intention on the part of any such person to limit or terminate his or her employment with the Company or any Company Subsidiary. No Key Employee has borrowed money pursuant to a currently outstanding loan that is secured by Common Stock or any right or option to receive Common Stock.
 
4.17     Labor Matters. There is no strike, labor dispute or union organization activities pending or, to the knowledge of the Company, threatened between the Company or any Company Subsidiary and their respective employees. No employees of the Company or any Company Subsidiary belong to any union or collective bargaining unit. Each of the Company and Company Subsidiaries has complied in all material respects with all applicable federal and state equal opportunity and other laws related to employment.

4.18     Environment. Neither the Company nor any Company Subsidiary has any liabilities under any Environmental Law, nor, to the Company's knowledge, do any factors exist that are reasonably likely to give rise to any such liability, affecting any of the properties owned or leased by the Company or any Company Subsidiary, in each case other than liabilities that have not had and would not reasonably be expected to have a Material Adverse Effect. Neither the Company nor any Company Subsidiary has violated any Environmental Law applicable to it now or previously in effect, other than any violation that has not had and would not reasonably be expected to have a Material Adverse Effect.

4.19     ERISA. Neither the Company nor any Company Subsidiary maintains or contributes to, or has any obligation under, any Pension Plan. Each of the Company and Company Subsidiaries is in compliance in all material respects with the presently applicable provisions of ERISA and the United States Internal Revenue Code of 1986, as amended, with respect to each Pension Plan except in any such case for any such matters that, individually or in the aggregate, have not had, and would not reasonably be expected to have, a Material Adverse Effect.

4.20     Insurance. The Company maintains insurance for itself and each Company Subsidiary in such amounts and covering such losses and risks as are reasonably sufficient and customary in the businesses in which the Company and each such Company Subsidiary are engaged. As of the date hereof and as of the Closing Date, no notice of cancellation has been received for any of such policies and the Company is in compliance in all material respects with all of the terms and conditions thereof. The Company has no 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 to conduct its business as currently conducted without a significant increase in cost. Without limiting the generality of the foregoing, the Company maintains Director’s and Officer’s insurance in an amount not less than $5 million for each covered occurrence.

4.21      Property. Each of the Company and Company Subsidiaries has good and marketable title to all real and personal Property owned by it, in each case free and clear of all Liens, other than the Permitted Liens. Any Property held under lease by the Company or a Company Subsidiary is held by it under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made or proposed to be made of such Property by the Company or such Company Subsidiary.

4.22      Regulatory Permits. Each of the Company and Company Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct its business, except where the failure to have any such certificate, authorization or permit would not have a Material Adverse Effect, and neither the Company nor any Company Subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit.
 

4.23     Investment Company. Neither the Company nor any Company Subsidiary is and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof, will become an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for an investment company, within the meaning of the Investment Company Act of 1940, as amended.

4.24     U.S. Real Property Holding Corporation. The Company is not, nor has ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended.

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

4.26     Money Laundering. The operations of the Company and the Company Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder, and no action, suit or proceeding by or before any Governmental Authority involving the Company or any of the Company Subsidiaries with respect to such Governmental Requirements is pending or, to the knowledge of the Company, threatened.

4.27     Transfer Taxes. No stock transfer or other taxes (other than income taxes) are required to be paid in connection with the issuance and sale of any of the Securities, other than such taxes for which the Company has established appropriate reserves and intends to pay in full on or before the Closing.

4.28     Sarbanes-Oxley Act; Internal Controls and Procedures. To the Company’s knowledge, the Company is in material compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002, as amended, and any and all applicable rules and regulations promulgated by the Commission thereunder that are effective as of the date hereof. The Company maintains internal accounting controls, policies and procedures, and such books and records as are reasonably designed to provide reasonable assurance that (i) all transactions to which the Company or any Company Subsidiary is a party or by which its properties are bound are effected by a duly authorized employee or agent of the Company, supervised by and acting within the scope of the authority granted by the Company’s senior management; (ii) the recorded accounting of the Company’s consolidated assets is compared with existing assets at regular intervals; and (iii) all transactions to which the Company or any Company Subsidiary is a party, or by which its properties are bound, are recorded (and such records maintained) in accordance with all Governmental Requirements and as may be necessary or appropriate to ensure that the financial statements of the Company are prepared in accordance with GAAP.

4.29     Embargoed Person. None of the funds or other assets of the Company or any Company Subsidiary shall constitute property of, or shall be beneficially owned, directly or indirectly, by any Person subject to trade restrictions under United States law, including, but not limited to, the International Emergency Economic Powers Act, 50 U.S.C. § 1701 et seq., the Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated under any such United States laws (each, an “Embargoed Person”), with the result that the investments evidenced by the Securities are or would be in violation of any Governmental Requirements. No Embargoed Person shall have any interest of any nature whatsoever in the Company or any Company Subsidiary with the result that the investments evidenced by the Securities are or would be in violation of any Governmental Requirements. None of the funds or other assets of the Company or any Company Subsidiary shall be derived from any unlawful activity with the result that the investments evidenced by the Securities are or would be in violation of any Governmental Requirements.

4.30     Transactions with Interested Persons. No officer, director or employee of the Company or any Company Subsidiary is or has made any arrangements with the Company or any Company Subsidiary to become a party to any transaction with the Company or any Company Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

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

4.32     Accountants. The Company’s accountants, who the Company expects will render their opinion with respect to the financial statements to be included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2008, are, to the Company’s knowledge, independent accountants as required by the Securities Act.

4.33     Solvency. (i) The fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing Debt; and (ii) the expected cash flows of the Company for future periods, together with the proceeds the Company would receive upon liquidation of its assets and the proceeds from expected debt or equity offerings, after taking into account all anticipated uses of such amounts, would be sufficient to pay all Debt when such Debt is required to be paid. The Company has no knowledge of any facts or circumstances which lead it to believe that it will be required to file for reorganization or liquidation under bankruptcy or reorganization laws of any jurisdiction, and has no present intention to so file.

4.34     Disclosure. The representations, warranties and written statements contained in this Agreement and the other Transaction Documents and in the certificates, exhibits and schedules delivered by the Company to Investor pursuant to this Agreement and the other Transaction Documents and in connection with Investor’s due diligence investigation of the Company, do not contain any untrue statement of a material fact, and do not omit to state a material fact required to be stated therein or necessary in order to make such representations, warranties or statements not misleading in light of the circumstances under which they were made. Neither the Company nor any Person acting on its behalf or at its direction has provided Investor with material non-public information other than the terms of the transactions contemplated hereby. Following the issuance of a press release in accordance with Section 5.1(c), to the Company’s knowledge, Investor will not possess any material non-public information concerning the Company that was provided to Investor by the Company or its agents or representatives. The Company acknowledges that Investor is relying on the representations, acknowledgments and agreements made by the Company in this Section 4.34 and elsewhere in this Agreement in making trading and other decisions concerning the Company’s securities.

5.     COVENANTS AND AGREEMENTS.
 

5.1     Filings and Public Disclosure by the Company. The Company shall:

(a)     file a Form D with respect to the Securities issued at the Closing as and when required under Regulation D and provide a copy thereof to Investor promptly after such filing;

(b)     at or prior to the Closing, take such action as the Company reasonably determines upon the advice of counsel is necessary to qualify the Securities for sale under applicable state or “blue-sky” laws or obtain an exemption therefrom, and shall promptly provide evidence of any such action to Investor at Investor’s request; and

(c)     (i) on or prior to 8:30 a.m. (eastern time) on the Business Day following the Execution Date, issue a press release disclosing the material terms of this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby, and (ii) on or prior to 5:00 p.m. (eastern time) on the Business Day following the Execution Date, file with the Commission a Current Report on Form 8-K disclosing the material terms of and including as exhibits this Agreement and the other Transaction Documents and the transactions contemplated hereby and thereby; provided, however, that Investor shall have a reasonable opportunity to review and comment on any such press release or Form 8-K prior to the issuance or filing thereof; and provided, further, that if the Company fails to issue a press release disclosing the material terms of this Agreement and the other Transaction Documents within the time frames described herein, any Holder may issue a press release disclosing such information without any notice to or consent by the Company. Thereafter, the Company shall timely file any filings and notices required by the Commission or applicable law with respect to the transactions contemplated hereby.

5.2     Use of Proceeds. The Company shall use the proceeds from the sale of the Securities (i) first to repay all amounts outstanding under the Amalgamated Bank credit facilities, and (ii) second for working capital and general corporate purposes.
5.3     Certain Affirmative Covenants of the Company. The Company agrees that, during the period beginning on the Execution Date and ending on the Termination Date, the Company shall, and shall cause each Company Subsidiary to:

(a)     maintain its corporate existence in good standing;

(b)     comply with all Governmental Requirements applicable to the operation of its business, except for instances of noncompliance that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(c)     comply with all agreements, documents and instruments binding on it or affecting its Properties or business, including, without limitation, all Material Contracts, except for instances of noncompliance that would not reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect;

(d)     provide each Holder with copies of all materials sent to its shareholders at the same time as such materials are delivered to such shareholders;

(e)     timely file with the Commission all reports required to be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer required by the Exchange Act to file reports thereunder even if the Exchange Act or the rules or regulations thereunder would permit such termination (and otherwise make and keep public information available, as those terms are understood and defined in Rule 144);

(f)     [Intentionally Omitted];

(g)     ensure that the Common Stock is at all times listed or quoted on the Nasdaq Global Market, the New York Stock Exchange, the American Stock Exchange, or such other exchange or quotation service reasonably satisfactory to the Holder (or if there is more than one Holder, the Holders holding a majority of the Series C Preferred Stock held by all Holders); and

(h)     maintain commercially reasonable insurance coverage (including D&O insurance) for each of the Company and Company Subsidiaries.

5.4     Certain Negative Covenants of the Company. The Company agrees that, during the period beginning on the Execution Date and ending on the Termination Date, the Company shall not, and shall cause each Company Subsidiary not to:

(a)     enter into any transaction or arrangement with any Affiliate, employee, officer, director or shareholder of the Company or Company Subsidiary, unless such transaction is effectuated on an arms’ length basis and approved by the independent directors of the Company or such Company Subsidiary, as the case may be;
 

(b)     incur (or permit to exist) any Debt (other than Permitted Debt);

(c)     grant, establish or maintain any Lien on any of its Property other than Permitted Liens;

(d)     make any Restricted Payments other than Restricted Payments made by a Company Subsidiary to the Company;

(e)     make any offers or sales of any security or solicit any offers to buy any security, which will be integrated with the sale of the Securities in a manner which would require the registration of any of the Securities under the Securities Act or require stockholder approval under the rules and regulations of the Principal Market;

(f)     dispose of all or any part of its Property unless (i) such disposition is in the ordinary course of business and for fair market value, and (ii) such Property is not material to the Company’s or any Company Subsidiary’s business, operations or financial condition or performance; or

(g)     consent to or implement any termination, amendment, modification, supplement or waiver of the certificate or articles of incorporation, articles of organization, bylaws, regulations or other constituent documents of the Company or any Company Subsidiary which would reasonably be expected to adversely affect the rights of any Holder under the Transaction Documents.

5.5     Limitation on Issuance of Common Stock. Each Holder acknowledges and agrees that the aggregate number of shares of Common Stock that may be issued by the Company pursuant to this Agreement and the Securities may not at any time exceed the Cap Amount without the Stockholder Cap Approval and that the Company shall have no obligation to issue shares of Common Stock pursuant to this Agreement or the Securities in excess of the Cap Amount unless either (x) the Stockholder Cap Approval has been obtained or (y) the Company has obtained a written opinion from outside counsel that such approval is not required, which opinion shall be reasonably satisfactory to the Holders holding a majority of the shares of Series C Preferred Stock held by all Holders. In furtherance of the limitation set forth in the immediately preceding sentence, at any time following the Closing Date, the aggregate number of shares of Common Stock that such Holder may receive upon the conversion of such Holder’s shares of Series C Preferred Stock may not exceed the product of (A) the Cap Amount and (B) such Holder’s Pro Rata Share (the “Allocation Amount”). In the event that a Holder shall sell or otherwise transfer any of such Holder’s shares of Series C Preferred Stock, each transferee shall be allocated a pro rata portion of such transferor’s Allocation Amount. Any portion of the Allocation Amount allocated to any Holder or other Person which no longer holds any shares of Series C Preferred Stock shall be reallocated to the remaining Holders pro rata based on the number of the Registrable Securities held by such Holders at such time. In the event that, as a result of this Section 5.5, the Company is prohibited from issuing any shares of Common Stock to a Holder electing to convert its shares of Series C Preferred Stock, the Company shall, upon such Holder’s request, pay such Holder not later than two Business Days after such request an amount of cash equal to the product of (1) the number of shares of Common Stock that the Company is prohibited from issuing multiplied by (2) the VWAP (as defined in the Certificate of Designation) as of the Trading Day immediately preceding the date on which such Holder delivered the applicable conversion notice, and upon timely payment of the foregoing amount, the Company shall be deemed relieved of its obligation under the Certificate of Designation to deliver such shares of Common Stock.

5.6     Stockholder Cap Approval. The Company shall obtain the Stockholder Cap Approval as promptly as practicable after the date hereof but in no event later than 60 days after the Closing Date.

5.7     Issuance of Additional Shares of Common Stock. The Company shall issue and deliver to the Holder, for no additional consideration, 50,000 shares of Common Stock (such number of shares to be proportionately adjusted for stock splits, reverse stock splits, stock dividends and similar events occurring after the date hereof) on a quarterly basis in arrears commencing with the three-month anniversary of the Closing Date, until the Note has been repaid in full, after which the Company’s obligations to so issue shares of Common Stock shall no longer be applicable. For the avoidance of doubt, the Holder shall not be entitled to pro rata distributions of shares of Common Stock on account of the period between the beginning of a three-month period and the repayment of the Note in full.
     
5.8     Use of Holder’s Name. Except as may be required by applicable law and/or this Agreement, the Company shall not use, directly or indirectly, any Holder’s name or the name of any of its Affiliates in any advertisement, announcement, press release or other similar communication unless it has received the prior written consent of such Holder for the specific use contemplated or as otherwise required by applicable law or regulation.
 
5.9     Disclosure of Non-Public Information. The Company agrees that it will not at any time following the Execution Date disclose material non-public information to any Holder without first obtaining such Holder’s prior written consent confirming that such Holder is willing to receive material non-public information at such time.
 
5.10     Indemnification of Holders. The Company will indemnify and hold each Holder and its directors, managers, officers, shareholders, members, partners, employees and agents (each, a “Holder Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Holder Party may suffer or incur as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or by the Company or any Company Subsidiary in the other Transaction Documents or (b) any action instituted against a Holder, or any of its Affiliates, by any shareholder of the Company who is not an Affiliate of such Holder, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Holder’s representation, warranties or covenants under the Transaction Documents or any agreements or understandings such Holder may have with any such shareholder or any violations by such Holder or any such Affiliate of state or federal securities laws or any conduct by such Holder or any such Affiliate which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Holder Party in respect of which indemnity may be sought pursuant to this Agreement, such Holder Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing. Any Holder Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Holder Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time following such Holder Party’s written request that it do so, to assume such defense and to employ counsel or (iii) in such action there is, in the reasonable opinion of such separate counsel, a material conflict on any material issue between the position of the Company and the position of such Holder Party. The Company will not be liable to any Holder Party under this Agreement (i) for any settlement by a Holder Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (ii) to the extent, but only to the extent, that a loss, claim, damage or liability is attributable to such Holder Party’s wrongful actions or omissions, or gross negligence or to such Holder Party’s breach of any of the representations, warranties, covenants or agreements made by such Holder Party in this Agreement or in the other Transaction Documents.

5.11     Limitations on Disposition by Holder. No Holder shall sell, transfer, assign or dispose of any Securities, unless:

(a)     there is then in effect an effective registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

(b)     such Holder has notified the Company in writing of any such disposition, and furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such Securities under the Securities Act; provided, however, that no such opinion of counsel will be required (A) if the sale, transfer, assignment or disposition is made to an Affiliate of such Holder, (B) if the sale, transfer, assignment or disposition is made pursuant to Rule 144 and such Holder provides the Company with evidence reasonably satisfactory to the Company that the proposed transaction satisfies the requirements of Rule 144, (C) if such Securities are eligible for resale under Rule 144(k) or any successor provision or (D) if in connection with a bona fide pledge or hypothecation of any Securities under a margin arrangement with a broker-dealer or other financial institution or the sale of any such Securities by such broker-dealer or other financial institution following such Holder’s default under such margin arrangement.

5.12     Biotech Spin-Off. Notwithstanding any provision in this Agreement or the other Transaction Documents to the contrary, the Company shall be permitted to effectuate the Biotech Spin-Off. As used herein, “Biotech Spin-Off” means the pro rata distribution by the Company to its shareholders of a dividend consisting of more than ninety (90%) of the outstanding common stock of the Biotech Subsidiary. If the Biotech Spin-Off is not consummated on or prior to the ninetieth (90^th) day following the Closing, then the Company shall cause the Biotech Subsidiary to execute and deliver assumptions to the Security Agreement and Guarantee; provided, however, that if the Biotech Spin-Off occurs thereafter, the Holder shall release, or shall cause to be released, all of its Liens on the assets of the Biotech Subsidiary in connection with the Biotech Spin-Off.

6.     MISCELLANEOUS.

6.1     Survival; Severability. The representations, warranties, covenants and indemnities made by the parties herein and in the other Transaction Documents shall survive the Closing notwithstanding any due diligence investigation made by or on behalf of the party seeking to rely thereon. In the event that any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision; provided that in such case the parties shall negotiate in good faith to replace such provision with a new provision which is not illegal, unenforceable or void, as long as such new provision does not materially change the economic benefits of this Agreement to the parties.

6.2     Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and permitted assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. A Holder may assign its rights and obligations hereunder in connection with any private sale or transfer of the Securities that is permitted hereunder, as long as, as a condition precedent to such transfer, the transferee executes an acknowledgment agreeing to be bound by the applicable provisions of this Agreement, in which case the term “Holder” shall be deemed to refer to such transferee as though such transferee were an original signatory hereto, and such assignment complies with applicable Governmental Requirements. The Company may not assign its rights or obligations under this Agreement.
 
6.3     No Reliance. Each party acknowledges that (i) it has such knowledge in business and financial matters as to be fully capable of evaluating this Agreement, the other Transaction Documents and the transactions contemplated hereby and thereby, (ii) it is not relying on any advice or representation of any other party in connection with entering into this Agreement, the other Transaction Documents or such transactions (other than the representations made in this Agreement or the other Transaction Documents), (iii) it has not received from any other party any assurance or guarantee as to the merits (whether legal, regulatory, tax, financial or otherwise) of entering into this Agreement or the other Transaction Documents or the performance of its obligations hereunder and thereunder, and (iv) it has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisors to the extent that it has deemed necessary, and has entered into this Agreement and the other Transaction Documents based on its own independent judgment and, if applicable, on the advice of such advisors, and not on any view (whether written or oral) expressed by any other party.
 
6.4      Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of the other Holders hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. The Company acknowledges and agrees that nothing contained herein or in any other Transaction Document, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or a “group” as described in Section 13(d) of the Exchange Act, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder has been represented by its own separate counsel in connection with the transactions contemplated hereby, shall be entitled to protect and enforce its rights, including, without limitation, rights arising out of this Agreement or the other Transaction Documents, individually, and shall not be required to join any other Holder as an additional party in any proceeding for such purpose.
 
6.5     Injunctive Relief. The Company acknowledges and agrees that a breach by it of its obligations hereunder will cause irreparable harm to each Holder and that the remedy or remedies at law for any such breach will be inadequate and agrees, in the event of any such breach, in addition to all other available remedies, such Holder shall be entitled to an injunction restraining any breach and requiring immediate and specific performance of such obligations without the necessity of showing economic loss or the posting of any bond.
 
6.6     Governing Law; Jurisdiction; Waiver of Jury Trial.
 
(a)     This Agreement shall be governed by and construed under the laws of the State of New York applicable to contracts made and to be performed entirely within the State of New York. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City and County of New York for the adjudication of any dispute hereunder or any other Transaction Document or in connection herewith or therewith or with any transaction contemplated hereby or thereby, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.
 

(b)     EACH PARTY TO THIS AGREEMENT ACKNOWLEDGES AND AGREES THAT ANY DISPUTE OR CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES AND, THEREFORE, EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE BREACH, TERMINATION OR VALIDITY OF THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. EACH PARTY TO THIS AGREEMENT CERTIFIES AND ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.6(b).

6.7     Counterparts; Facsimile. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Any executed signature page delivered by facsimile or e-mail transmission shall be binding to the same extent as an original executed signature page, with regard to any agreement subject to the terms hereof or any amendment thereto.
 
6.8     Headings. The headings used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
 
6.9     Notices. Any notice, demand or request required or permitted to be given by the Company or the Holder pursuant to the terms of this Agreement shall be in writing and shall be deemed delivered (i) when delivered personally or by verifiable facsimile transmission, unless such delivery is made on a day that is not a Business Day, in which case such delivery will be deemed to be made on the next succeeding Business Day, (ii) on the next Business Day after timely delivery to an overnight courier and (iii) on the Business Day actually received if deposited in the U.S. mail (certified or registered mail, return receipt requested, postage prepaid), addressed as follows:
 

If to the Company:
 

Integrated BioPharma, Inc.
225 Long Avenue
Hillside, New Jersey 07205
Attn: Chief Executive Officer
Tel: (973) 926-0816
Fax: (973) 926-1735
 

          With a copy (which shall not constitute notice) to:

Greenberg Traurig, LLP
200 Park Avenue
New York, New York 10166
Attn: Andrew H. Abramowitz
Tel: (212) 801-9200
Fax: (212) 801-6400

and if to any Holder, to such address for such Holder as shall appear on such Holder’s signature page hereto, or as shall be designated by such Holder in writing to the Company in accordance with this Section 6.9.

6.10     Expenses. The Company and Investor shall pay all costs and expenses that it incurs in connection with the negotiation, execution, delivery and performance of this Agreement or the other Transaction Documents.
 
6.11     Entire Agreement; Amendments. This Agreement and the other Transaction Documents constitute the entire agreement between the parties with regard to the subject matter hereof and thereof, superseding all prior agreements or understandings, whether written or oral, between or among the parties. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended except pursuant to a written instrument executed by the Company and (i) while the Note is outstanding, by the Holders holding a majority of the outstanding principal of the Note, and (ii) if the Note is no longer outstanding, by the Holders holding a majority of the shares of Series C Preferred Stock held by all Holders. Any waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
 

     [Signature Pages to Follow]

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

INTEGRATED BIOPHARMA, INC.

By:	/s/ E. Gerald Kay
	Name: E. Gerald Kay
	Title: Chief Executive Officer

[CDS ENTITY]
 
 
By:     _______________________________
     Name:
     Title:
     
 
ADDRESS:
 

EX-31

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, E. Gerald Kay certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 

Date: February 19, 2008	By: /s/ E. Gerald Kay
	Name: E. Gerald Kay
	Title: Chief Executive Officer

EX-31

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Dina L. Masi certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integrated BioPharma, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 

Date: February 19, 2008	By: /s/ Dina L. Masi
	Name: Dina L. Masi
	Title: Chief Financial Officer and Senior Vice President

EX-32

Exhibit 32.1

CERTIFICATION OF PERIODIC REPORT

As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q for the first quarter ended December 31, 2007 of Integrated BioPharma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), E. Gerald Kay, the Chief Executive Officer of Integrated BioPharma, Inc. certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to his knowledge:
 

(1)      the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)      the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: February 19, 2008	By: /s/ E. Gerald Kay
	Name: E. Gerald Kay
	Title: Chief Executive Officer

EX-32

Exhibit 32.2

CERTIFICATION OF PERIODIC REPORT

As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q for the first quarter ended December 31, 2007 of Integrated BioPharma, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Dina L. Masi, the Senior Vice President and Chief Financial Officer of Integrated BioPharma, Inc. certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that to his knowledge:
 

(1)      the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2)      the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This certification accompanies the Report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
 
A signed original of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: February 19, 2008	By: /s/ Dina L. Masi
	Name: Dina L. Masi
	Title: Chief Financial Officer and Senior Vice President

EX-10

Exhibit 10.1
Execution Copy

SECURITIES PURCHASE AGREEMENT

     THIS SECURITIES PURCHASE AGREEMENT, dated as of February 19, 2008 (this “Agreement”), is by and between INTEGRATED BIOPHARMA, INC., a Delaware corporation (the “Company”), and IMPERIUM MASTER FUND, LTD., a Cayman Islands company (“Imperium”).
 

A.     The Company wishes to sell to Imperium, and Imperium wishes to purchase from the Company, upon the terms and subject to the conditions set forth in this Agreement, (i) an 8% Senior Secured Note having a principal amount of $7,000,000 in the form attached hereto as Exhibit A (the “Note”), (ii) 200,000 shares of the Company’s common stock, par value $0.002 per share (the “Common Stock”), and (iii) 3,000 shares of the Company’s Series C Convertible Preferred Stock, having a stated value of $1,000 per share (the “Series C Preferred Stock”), which series shall be designated pursuant to the Certificate of Designation in the form attached hereto as Exhibit B (the “Certificate of Designation”).

B.     The Series C Preferred Stock shall (i) be convertible into shares of Common Stock, (ii) accrue dividends at a rate of 10% per annum, payable in additional shares of Series C Preferred Stock, and (iii) mature on February 1, 2013 and be redeemed in shares of Common Stock. The Note, the shares of Common Stock and Series C Preferred Stock to be purchased by Imperium hereunder, and the additional shares of Common Stock and Series C Preferred Stock issuable hereunder or under the Certificate of Designation, are collectively referred to herein as the “Securities”.

C.     The Company has agreed to effect the registration of the shares of Common Stock issuable upon the conversion or maturity date of the Series C Preferred Stock for resale by the holders thereof under the Securities Act of 1933 (as amended, and the rules and regulations promulgated thereunder, the “Securities Act”), pursuant to a Registration Rights Agreement in the form attached hereto as Exhibit C (the “Registration Rights Agreement”).

D.     The sale of the Securities by the Company to Imperium, and any issuance of the additional Securities, will be effected in reliance upon the exemption from securities registration afforded by the provisions of Regulation D (“Regulation D”), as promulgated by the Securities and Exchange Commission (the “Commission”) under the Securities Act.

E.     The Company’s obligations hereunder and under the Note and the other transaction documents contemplated hereby will be guaranteed by each of the Company’s subsidiaries pursuant to a Guarantee in the form attached hereto as Exhibit D (the “Guarantee”) and secured by the assets of the Company and the Company’s subsidiaries pursuant to a Security Agreement in the form attached hereto as Exhibit E (the “Security Agreement”).