EXHIBIT 10.1
PURCHASE AGREEMENT
 
THIS PURCHASE AGREEMENT (“Agreement”) is made as of the 25th day of June, 2008
by and among Precision Optics Corporation, Inc., a Massachusetts corporation
(the “Company”), and the Investors set forth on the signature pages affixed
hereto (each an “Investor” and collectively the “Investors”).

Recitals

A. The Company and the Investors are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (“Regulation D”), as promulgated by the U.S.
Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933,
as amended; and

B. The Investors wish to purchase from the Company, and the Company wishes to
sell and issue to the Investors, upon the terms and conditions stated in this
Agreement, (i) $600,000 in aggregate principal amount of the 10% Senior Secured
Convertible Notes in the form attached hereto as Exhibit A (the “Notes”), which
Notes are convertible into 12,000,000 shares of the Company’s Common Stock, par
value $0.01 per share (together with any securities into which such shares may
be reclassified the “Common Stock”), at a conversion price of $0.05 per share
(subject to adjustment as provided therein), and (ii) warrants to purchase an
aggregate of 7,920,000 shares of Common Stock (subject to adjustment as provided
therein) at an exercise price of $0.07 per share (subject to adjustment as
provided therein) in the form attached hereto as Exhibit B (the “Warrants”); and

C. Contemporaneous with the sale of the Notes and the Warrants, the parties
hereto will execute and deliver a Registration Rights Agreement, in the form
attached hereto as Exhibit C (the “Registration Rights Agreement”), pursuant to
which the Company will agree to provide certain registration rights under the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder, and applicable state securities laws.

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

1. Definitions. In addition to those terms defined above and elsewhere in this
Agreement, for the purposes of this Agreement, the following terms shall have
the meanings set forth below:

“Affiliate” means, with respect to any Person, any other Person which directly
or indirectly through one or more intermediaries Controls, is controlled by, or
is under common control with, such Person.
 

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“Amendment” means an amendment to the Company’s Articles of Organization
implementing a one-for-six reverse split of the Common Stock and maintaining the
number of authorized shares of Common Stock at 50,000,000.

“Amendment Effective Date” means the date on which the Amendment is effective.

“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business.

“Certificate of Amendment” means a Certificate of Amendment to the Company’s
Articles of Organization effecting the Amendment.

“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

“Company’s Knowledge” means the actual knowledge of the executive officers (as
defined in Rule 405 under the 1933 Act) of the Company, after due inquiry.

“Confidential Information” means trade secrets, confidential information and
know-how (including but not limited to ideas, formulae, compositions, processes,
procedures and techniques, research and development information, computer
program code, performance specifications, support documentation, drawings,
specifications, designs, business and marketing plans, and customer and supplier
lists and related information).

“Control” (including the terms “controlling”, “controlled by” or “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.

“Conversion Shares” means the shares of Common Stock issuable upon conversion of
the Notes.

“Effective Date” means the date on which the initial Registration Statement is
declared effective by the SEC.

“Effectiveness Deadline” means the date on which the initial Registration
Statement is required to be declared effective by the SEC under the terms of the
Registration Rights Agreement.

“Intellectual Property” means all of the following: (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice); (ii) trademarks, service marks, trade
dress, trade names, corporate names, logos, slogans and Internet domain names,
together with all goodwill associated with each of the foregoing; (iii)
copyrights and copyrightable works; (iv) registrations, applications and
renewals for any of the foregoing; and (v) proprietary computer software
(including but not limited to data, data bases and documentation).

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“Interest Shares” means shares of Common Stock issuable in lieu of cash interest
on the Notes.

“Material Adverse Effect” means a material adverse effect on (i) the assets,
liabilities, results of operations, condition (financial or otherwise),
business, or prospects of the Company and its Subsidiaries taken as a whole, or
(ii) the ability of the Company to perform its obligations under the Transaction
Documents.

“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.

“Proposal” has the meaning set forth in Section 7.10.

“Purchase Price” means Six Hundred Thousand Dollars ($600,000).

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

“SEC Filings” has the meaning set forth in Section 4.6.

“Securities” means the Notes, the Warrants, the Conversion Shares, the Interest
Shares and the Warrant Shares.

“Security Agreement” means the Pledge and Security Agreement in the form
attached hereto as Exhibit D.

“Subsidiary” of any Person means another Person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first Person.

“Transaction Documents” means this Agreement, the Notes, the Security Agreement,
the Warrants, the Registration Rights Agreement and the Voting Agreement.

“Voting Agreement” means the Voting Agreement in the form attached hereto as
Exhibit E.
 
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“Warrant Shares” means the shares of Common Stock issuable upon the exercise of
the Warrants.

“1933 Act” means the Securities Act of 1933, as amended, or any successor
statute, and the rules and regulations promulgated thereunder.

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

2. Purchase and Sale of the Notes and the Warrants. Subject to the terms and
conditions of this Agreement, on the Closing Date, each of the Investors shall
severally, and not jointly, purchase, and the Company shall sell and issue to
the Investors, the Notes and the Warrants in the respective amounts set forth
opposite the Investors’ names on the signature pages attached hereto in exchange
for the Purchase Price as specified in Section 3 below.

3. Closing. Upon confirmation that the other conditions to closing specified
herein have been satisfied or duly waived by the Investors, the Company shall
deliver to Lowenstein Sandler PC, in trust, the Notes and the Warrants,
registered in such name or names as the Investors may designate, with
instructions that such Notes and Warrants are to be held for release to the
Investors only upon payment in full of the Purchase Price to the Company by all
the Investors. Upon such receipt by Lowenstein Sandler PC of the Notes and the
Warrants, each Investor shall promptly, but no more than one Business Day
thereafter, cause a wire transfer in same day funds to be sent to the account of
the Company as instructed in writing by the Company, in an amount representing
such Investor’s pro rata portion of the Purchase Price as set forth on the
signature pages to this Agreement. On the date (the “Closing Date”) the Company
receives the Purchase Price, the Notes and the Warrants shall be released to the
Investors (the “Closing”). The Closing of the purchase and sale of the Notes and
the Warrants shall take place at the offices of Lowenstein Sandler PC, 1251
Avenue of the Americas, 18th Floor, New York, New York 10020, or at such other
location and on such other date as the Company and the Investors shall mutually
agree.

4. Representations and Warranties of the Company. The Company hereby represents
and warrants to the Investors that, except as set forth in the schedules
delivered herewith (collectively, the “Disclosure Schedules”):

4. 1 Organization, Good Standing and Qualification. Each of the Company and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to carry on its business as now
conducted and to own its properties. Each of the Company and its Subsidiaries is
duly qualified to do business as a foreign corporation and is in good standing
in each jurisdiction in which the conduct of its business or its ownership or
leasing of property makes such qualification or leasing necessary unless the
failure to so qualify has not had and could not reasonably be expected to have a
Material Adverse Effect. The Company’s Subsidiaries are listed on Schedule 4.1
hereto.
 
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4.2 Authorization. The Company has full power and authority and, except for the
approval of the Proposal by its stockholders and the filing of the Certificate
of Amendment as contemplated in Section 7.10, has taken all requisite action on
the part of the Company, its officers, directors and stockholders necessary for
(i) the authorization, execution and delivery of the Transaction Documents, (ii)
the authorization of the performance of all obligations of the Company hereunder
or thereunder, and (iii) the authorization, issuance (or reservation for
issuance) and delivery of the Securities. When delivered in accordance with the
terms hereof, the Transaction Documents will constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally.

4.3 Capitalization. The issued and outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and conform in all material respects to the
description thereof contained in the Company’s filings with the SEC. Except as
set forth in the Company’s SEC Filings and except for options and other awards
that may be granted under the Company’s Amended and Restated 1997 Incentive Plan
or the Company’s 2006 Equity Incentive Plan, the Company does not have
outstanding any options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. Except as
contemplated by this Agreement, neither the Company nor any of its Subsidiaries
is currently in negotiations for the issuance of any equity securities of any
kind. Except as described on Schedule 4.3 and except for the Registration Rights
Agreement and the Voting Agreements, there are no voting agreements, buy-sell
agreements, option or right of first purchase agreements or other agreements of
any kind among the Company and any of the securityholders of the Company
relating to the securities of the Company held by them. Except as described on
Schedule 4.3 and except as provided in the Registration Rights Agreement, no
Person has the right to require the Company to register any securities of the
Company under the 1933 Act, whether on a demand basis or in connection with the
registration of securities of the Company for its own account or for the account
of any other Person.

Except as described on Schedule 4.3, the issuance and sale of the Securities
hereunder will not obligate the Company to issue shares of Common Stock or other
securities to any other Person (other than the Investors) and will not result in
the adjustment of the exercise, conversion, exchange or reset price of any
outstanding security.

Except as described on Schedule 4.3, the Company does not have outstanding
stockholder purchase rights or “poison pill” or any similar arrangement in
effect giving any Person the right to purchase any equity interest in the
Company upon the occurrence of certain events.

4.4 Valid Issuance. From and after the Amendment Effective Date, (i) the
Conversion Shares will have been duly and validly authorized and, when issued
upon the due conversion of the Notes, will be validly issued, fully paid and
nonassessable, and shall be free and clear of all encumbrances and restrictions
(other than those created by the Investors), except for restrictions on transfer
set forth in the Transaction Documents or imposed by applicable securities laws,
and (ii) the Interest Shares will have been duly and validly authorized and,
when issued in accordance with the terms of the Notes, will be validly issued,
fully paid and nonassessable, and shall be free and clear of all encumbrances
and restrictions (other than those created by the Investors), except for
restrictions on transfer set forth in the Transaction Documents or imposed by
applicable securities laws. The Warrants have been duly and validly authorized.
From and after the Amendment Effective Date, the Warrant Shares will have been
duly and validly authorized and, when issued upon the due exercise of the
Warrants, will be validly issued, fully paid and non-assessable free and clear
of all encumbrances and restrictions, except for restrictions on transfer set
forth in the Transaction Documents or imposed by applicable securities laws and
except for those created by the Investors. From and after the Amendment
Effective Date, the Company will have reserved a sufficient number of shares of
Common Stock for issuance upon the conversion of the Notes, the payment of
interest on the Notes and upon exercise of the Warrants, free and clear of all
encumbrances and restrictions, except for restrictions on transfer set forth in
the Transaction Documents or imposed by applicable securities laws and except
for those created by the Investors.

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4.5 Consents. Except for the approval of the Proposal by its stockholders and
the filing of the Certificate of Amendment as contemplated in Section 7.10, the
execution, delivery and performance by the Company of the Transaction Documents
and the offer, issuance and sale of the Securities require no consent of, action
by or in respect of, or filing with, any Person, governmental body, agency, or
official other than filings that have been made pursuant to applicable state
securities laws and post-sale filings pursuant to applicable state and federal
securities laws which the Company undertakes to file within the applicable time
periods. Subject to the accuracy of the representations and warranties of each
Investor set forth in Section 5 hereof, the Company has taken all action
necessary to exempt (i) the issuance and sale of the Securities, (ii) the
issuance of the Conversion Shares upon the due conversion of the Notes, the
issuance of the Interest Shares as provided in the Notes and the issuance of the
Warrant Shares upon due exercise of the Warrants, and (iii) the other
transactions contemplated by the Transaction Documents from the provisions of
any stockholder rights plan or other “poison pill” arrangement, any
anti-takeover, business combination or control share law or statute binding on
the Company or to which the Company or any of its assets and properties may be
subject and any provision of the Company’s Articles of Organization or Bylaws
that is or could reasonably be expected to become applicable to the Investors as
a result of the transactions contemplated hereby, including without limitation,
the issuance of the Securities and the ownership, disposition or voting of the
Securities by the Investors or the exercise of any right granted to the
Investors pursuant to this Agreement or the other Transaction Documents.

4.6 Delivery of SEC Filings; Business. The Company has made available to the
Investors through the EDGAR system, true and complete copies of the Company’s
most recent Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007
(the “10-KSB”), and all other reports filed by the Company pursuant to the 1934
Act since the filing of the 10-KSB and prior to the date hereof (collectively,
the “SEC Filings”). The SEC Filings are the only filings required of the Company
pursuant to the 1934 Act for such period. The Company and its Subsidiaries are
engaged in all material respects only in the business described in the SEC
Filings and the SEC Filings contain a complete and accurate description in all
material respects of the business of the Company and its Subsidiaries, taken as
a whole.
 
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4.7 Use of Proceeds. The net proceeds of the sale of the Notes and the Warrants
hereunder shall be used by the Company for working capital and general corporate
purposes.

4.8 No Material Adverse Change. Since June 30, 2007, except for the Amendment
and except as identified and described in the SEC Filings or as described on
Schedule 4.8, there has not been:

(i) any change in the consolidated assets, liabilities, financial condition or
operating results of the Company from that reflected in the financial statements
included in the Company’s Quarterly Report on Form 10-QSB for the quarter ended
March 31, 2008, except for changes in the ordinary course of business which have
not had and could not reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate;

(ii) any declaration or payment of any dividend, or any authorization or payment
of any distribution, on any of the capital stock of the Company, or any
redemption or repurchase of any securities of the Company;

(iii) any material damage, destruction or loss, whether or not covered by
insurance to any assets or properties of the Company or its Subsidiaries;

(iv) any waiver, not in the ordinary course of business, by the Company or any
Subsidiary of a material right or of a material debt owed to it;

(v) any satisfaction or discharge of any lien, claim or encumbrance or payment
of any obligation by the Company or a Subsidiary, except in the ordinary course
of business and which is not material to the assets, properties, financial
condition, operating results or business of the Company and its Subsidiaries
taken as a whole (as such business is presently conducted and as it is proposed
to be conducted);

(vi) any change or amendment to the Company's Articles of Organization or
Bylaws, or material change to any material contract or arrangement by which the
Company or any Subsidiary is bound or to which any of their respective assets or
properties is subject;

(vii) any material labor difficulties or labor union organizing activities with
respect to employees of the Company or any Subsidiary;

(viii) any material transaction entered into by the Company or a Subsidiary
other than in the ordinary course of business;

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(ix) the loss of the services of any key employee, or material change in the
composition or duties of the senior management of the Company or any Subsidiary;

(x) the loss or threatened loss of any customer which has had or could
reasonably be expected to have a Material Adverse Effect; or

(xi) any other event or condition of any character that has had or could
reasonably be expected to have a Material Adverse Effect.

4.9 SEC Filings.

(a) At the time of filing thereof, the SEC Filings complied as to form in all
material respects with the requirements of the 1934 Act and did not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.

(b) Each registration statement and any amendment thereto filed by the Company
since January 1, 2005 pursuant to the 1933 Act and the rules and regulations
thereunder, as of the date such statement or amendment became effective,
complied as to form in all material respects with the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein not misleading; and each prospectus filed pursuant to Rule 424(b)
under the 1933 Act, as of its issue date and as of the closing of any sale of
securities pursuant thereto did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.

4.10 No Conflict, Breach, Violation or Default. Subject to the approval of the
Proposal by its stockholders and the filing of the Certificate of Amendment as
contemplated by Section 7.10, the execution, delivery and performance of the
Transaction Documents by the Company and the issuance and sale of the Securities
will not conflict with or result in a breach or violation of any of the terms
and provisions of, or constitute a default under (i) the Company’s Articles of
Organization or the Company’s Bylaws, both as in effect on the date hereof (true
and complete copies of which have been filed with the SEC), or (ii)(a) any
statute, rule, regulation or order of any governmental agency or body or any
court, domestic or foreign, having jurisdiction over the Company, any Subsidiary
or any of their respective assets or properties, or (b) any agreement or
instrument to which the Company or any Subsidiary is a party or by which the
Company or a Subsidiary is bound or to which any of their respective assets or
properties is subject, except, in the case of clause (ii) only, such breaches,
violations or defaults that individually or in the aggregate would not cause a
Material Adverse Effect.

4.11 Tax Matters. The Company and each Subsidiary has timely prepared and filed
all tax returns required to have been filed by the Company or such Subsidiary
with all appropriate governmental agencies and timely paid all taxes shown
thereon or otherwise owed by it (after giving effect to applicable extensions).
The charges, accruals and reserves on the books of the Company in respect of
taxes for all fiscal periods are adequate in all material respects, and there
are no material unpaid assessments against the Company or any Subsidiary nor, to
the Company’s Knowledge, any basis for the assessment of any additional taxes,
penalties or interest for any fiscal period or audits by any federal, state or
local taxing authority except for any assessment which is not material to the
Company and its Subsidiaries, taken as a whole. All taxes and other assessments
and levies that the Company or any Subsidiary is required to withhold or to
collect for payment have been duly withheld and collected and paid to the proper
governmental entity or third party when due. There are no tax liens or claims
pending or, to the Company’s Knowledge, threatened against the Company or any
Subsidiary or any of their respective assets or property. Except as described on
Schedule 4.11, there are no outstanding tax sharing agreements or other such
arrangements between the Company and any Subsidiary or other corporation or
entity.

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4.12 Title to Properties. Except as disclosed in the SEC Filings, the Company
and each Subsidiary has good and marketable title to all real properties and all
other properties and assets owned by it, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or currently planned to be made thereof
by them; and except as disclosed in the SEC Filings, the Company and each
Subsidiary holds any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere with the
use made or currently planned to be made thereof by them.

4.13 Certificates, Authorizations and Permits. The Company and each Subsidiary
possess adequate certificates, authorizations or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business now operated
by it, except where the failure to possess such certificates, authorizations or
permits has not had and could not reasonably be expected to have a Material
Adverse Effect, and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the Company or
such Subsidiary, could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate.

4.14 Labor Matters.
 
(a) Except as set forth on Schedule 4.14, the Company is not a party to or bound
by any collective bargaining agreements or other agreements with labor
organizations. Except as set forth on Schedule 4.14, the Company has not
violated in any material respect any laws, regulations, orders or contract
terms, affecting the collective bargaining rights of employees, labor
organizations or any laws, regulations or orders affecting employment
discrimination, equal opportunity employment, or employees’ health, safety,
welfare, wages and hours.
 
(b) (i) There are no labor disputes existing, or to the Company's Knowledge,
threatened, involving strikes, slow-downs, work stoppages, job actions,
disputes, lockouts or any other disruptions of or by the Company's employees,
(ii) there are no unfair labor practices or petitions for election pending or,
to the Company's Knowledge, threatened before the National Labor Relations Board
or any other federal, state or local labor commission relating to the Company's
employees, (iii) no demand for recognition or certification heretofore made by
any labor organization or group of employees is pending with respect to the
Company and (iv) to the Company's Knowledge, the Company enjoys good labor and
employee relations with its employees and labor organizations.

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(c) Except as disclosed in the SEC Filings or as described on Schedule 4.14, the
Company is, and at all times has been, in compliance in all material respects
with all applicable laws respecting employment (including laws relating to
classification of employees and independent contractors) and employment
practices, terms and conditions of employment, wages and hours, and immigration
and naturalization. There are no claims pending against the Company before the
Equal Employment Opportunity Commission or any other administrative body or in
any court asserting any violation of Title VII of the Civil Rights Act of 1964,
the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other
federal, state or local Law, statute or ordinance barring discrimination in
employment.
 
(d) Except as disclosed in the SEC Filings or as described on Schedule 4.14, the
Company is not a party to, or bound by, any employment or other contract or
agreement that contains any severance, termination pay or change of control
liability or obligation, including, without limitation, any “excess parachute
payment,” as defined in Section 280G(b) of the Internal Revenue Code.

(e) Except as specified in Schedule 4.14, each of the Company's employees is a
Person who is either a United States citizen or a permanent resident entitled to
work in the United States. To the Company's Knowledge, the Company has no
liability for the improper classification by the Company of such employees as
independent contractors or leased employees prior to the Closing.

4.15 Intellectual Property.

(a) All Intellectual Property of the Company and its Subsidiaries is currently
in compliance with all legal requirements (including timely filings, proofs and
payments of fees) and is valid and enforceable. No Intellectual Property of the
Company or its Subsidiaries which is necessary for the conduct of Company’s and
each of its Subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted has been or is now involved in any
cancellation, dispute or litigation, and, to the Company’s Knowledge, no such
action is threatened. No patent of the Company or its Subsidiaries has been or
is now involved in any interference, reissue, re-examination or opposition
proceeding.

(b) All of the licenses and sublicenses and consent, royalty or other agreements
concerning Intellectual Property which are necessary for the conduct of the
Company’s and each of its Subsidiaries’ respective businesses as currently
conducted or as currently proposed to be conducted to which the Company or any
Subsidiary is a party or by which any of their assets are bound (other than
 generally commercially available, non-custom, off-the-shelf software
application programs having a retail acquisition price of less than $10,000 per
license) (collectively, “License Agreements”) are valid and binding obligations
of the Company or its Subsidiaries that are parties thereto and, to the
Company’s Knowledge, the other parties thereto, enforceable in accordance with
their terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors’ rights generally, and
there exists no event or condition which will result in a material violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default by the Company or any of its Subsidiaries under any such License
Agreement.

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(c) The Company and its Subsidiaries own or have the valid right to use all of
the Intellectual Property that is necessary for the conduct of the Company’s and
each of its Subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted and for the ownership, maintenance and
operation of the Company’s and its Subsidiaries’ properties and assets, free and
clear of all liens, encumbrances, adverse claims or obligations to license all
such owned Intellectual Property and Confidential Information, other than
licenses entered into in the ordinary course of the Company’s and its
Subsidiaries’ businesses. The Company and its Subsidiaries have a valid and
enforceable right to use all third party Intellectual Property and Confidential
Information used or held for use in the respective businesses of the Company and
its Subsidiaries.

(d) To the Company’s Knowledge, the conduct of the Company’s and its
Subsidiaries’ businesses as currently conducted does not infringe or otherwise
impair or conflict with (collectively, “Infringe”) any Intellectual Property
rights of any third party or any confidentiality obligation owed to a third
party, and, to the Company’s Knowledge, the Intellectual Property and
Confidential Information of the Company and its Subsidiaries which are necessary
for the conduct of Company’s and each of its Subsidiaries’ respective businesses
as currently conducted or as currently proposed to be conducted are not being
Infringed by any third party. There is no litigation or order pending or
outstanding or, to the Company’s Knowledge, threatened or imminent, that seeks
to limit or challenge or that concerns the ownership, use, validity or
enforceability of any Intellectual Property or Confidential Information of the
Company and its Subsidiaries and the Company’s and its Subsidiaries’ use of any
Intellectual Property or Confidential Information owned by a third party, and,
to the Company’s Knowledge, there is no valid basis for the same.

(e) The consummation of the transactions contemplated hereby and by the other
Transaction Documents will not result in the alteration, loss, impairment of or
restriction on the Company’s or any of its Subsidiaries’ ownership or right to
use any of the Intellectual Property or Confidential Information which is
necessary for the conduct of Company’s and each of its Subsidiaries’ respective
businesses as currently conducted or as currently proposed to be conducted.

(f) The Company and its Subsidiaries have taken reasonable steps to protect the
Company’s and its Subsidiaries’ rights in their Intellectual Property and
Confidential Information. Except under confidentiality obligations, there has
been no material disclosure of any of the Company’s or its Subsidiaries’
Confidential Information to any third party.

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4.16 Environmental Matters. Neither the Company nor any Subsidiary is in
violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the
use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, “Environmental Laws”), owns or operates any real
property contaminated with any substance that is subject to any Environmental
Laws, is liable for any off-site disposal or contamination pursuant to any
Environmental Laws, or is subject to any claim relating to any Environmental
Laws, which violation, contamination, liability or claim has had or could
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate; and there is no pending or, to the Company’s Knowledge, threatened
investigation that might lead to such a claim.

4.17 Litigation. Except as described on Schedule 4.17, there are no pending
legal actions, suits or proceedings against or affecting the Company, its
Subsidiaries or any of its or their properties; and to the Company’s Knowledge,
no such actions, suits or proceedings are threatened or contemplated. Neither
the Company nor any Subsidiary, nor any director or officer thereof, is or since
January 1, 2003 has been the subject of any action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the Company’s Knowledge,
there is not pending or contemplated, any investigation by the SEC involving the
Company or any current or former director or officer of the Company. The SEC has
not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the 1933 Act
or the 1934 Act.

4.18 Financial Statements. The financial statements included in each SEC Filing
present fairly, in all material respects, the consolidated financial position of
the Company as of the dates shown and its consolidated results of operations and
cash flows for the periods shown, and such financial statements have been
prepared in conformity with United States generally accepted accounting
principles applied on a consistent basis (“GAAP”) (except as may be disclosed
therein or in the notes thereto, and, in the case of quarterly financial
statements, as permitted by Form 10QSB under the 1934 Act); provided, however,
that the unaudited financial statements are subject to normal year-end audit
adjustments (which are not expected to be material) and do not contain all
footnotes required under generally accepted accounting principles. As of their
respective dates, such financial statements complied as to form in all material
respects with the published rules and regulations of the Commission with respect
thereto. Except as set forth in the financial statements of the Company included
in the SEC Filings filed prior to the date hereof or as described on Schedule
4.18, neither the Company nor any of its Subsidiaries has incurred any
liabilities, contingent or otherwise, except those incurred in the ordinary
course of business, consistent (as to amount and nature) with past practices
since the date of such financial statements, none of which, individually or in
the aggregate, have had or could reasonably be expected to have a Material
Adverse Effect.

4.19 Insurance Coverage. The Company and each Subsidiary maintains in full force
and effect insurance coverage that is customary for comparably situated
companies for the business being conducted and properties owned or leased by the
Company and each Subsidiary, and the Company reasonably believes such insurance
coverage to be adequate against all liabilities, claims and risks against which
it is customary for comparably situated companies to insure.

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4.20 OTCBB Compliance. The Common Stock is registered pursuant to Section 12(g)
of the 1934 Act and is quoted on The Nasdaq Stock Market, Inc.’s OTC Bulletin
Board quotation service (the “OTCBB”), and the Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the 1934 Act or removal from quotation of the Common
Stock from the OTCBB, nor has the Company received any notification that the
SEC, the OTCBB or the Financial Industry Regulatory Authority, Inc. is
contemplating terminating such registration or quotation.

4.21 Brokers and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company, any Subsidiary or an Investor for any commission,
fee or other compensation pursuant to any agreement, arrangement or
understanding entered into by or on behalf of the Company, other than as
described in Schedule 4.21.

4.22 No Directed Selling Efforts or General Solicitation. Neither the Company
nor any Person acting on its behalf has conducted any general solicitation or
general advertising (as those terms are used in Regulation D) in connection with
the offer or sale of any of the Securities.

4.23 No Integrated Offering. Neither the Company nor any of its Affiliates, nor
any Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any Company security or solicited any offers to buy any
security, under circumstances that would adversely affect reliance by the
Company on Section 4(2) for the exemption from registration for the transactions
contemplated hereby or would require registration of the Securities under the
1933 Act.

4.24 Private Placement. The offer and sale of the Securities to the Investors as
contemplated hereby is exempt from the registration requirements of the 1933
Act.

4.25 Questionable Payments. Neither the Company nor any of its Subsidiaries nor,
to the Company’s Knowledge, any of their respective current or former directors,
officers, employees, agents or other Persons acting on behalf of the Company or
any Subsidiary, has on behalf of the Company or any Subsidiary or in connection
with their respective businesses: (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (b) made any direct or indirect unlawful payments to any
governmental officials or employees from corporate funds; (c) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets;
(d) made any false or fictitious entries on the books and records of the Company
or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment of any nature.

4.26 Transactions with Affiliates. Except as disclosed in the SEC Filings or as
disclosed on Schedule 4.26, none of the officers or directors of the Company
and, to the Company’s Knowledge, none of the employees of the Company is
presently a party to any transaction with the Company or any Subsidiary (other
than as holders of stock options and/or warrants, and 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 Company’s Knowledge, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner.

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4.27 Internal Controls. The Company is in material compliance with the
provisions of the Sarbanes-Oxley Act of 2002 currently applicable to the
Company. The Company and the Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
asset accountability, (iii) access to assets is permitted only in accordance
with management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in 1934
Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure
controls and procedures to ensure that material information relating to the
Company, including the Subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the 1934 Act, as the case
may be, is being prepared. The Company's certifying officers have evaluated the
effectiveness of the Company's controls and procedures as of the end of the
period covered by the most recently filed periodic report under the 1934 Act
(such date, the "Evaluation Date"). The Company presented in its most recently
filed periodic report under the 1934 Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company's internal controls (as such
term is defined in Item 308 of Regulation S-K) or, to the Company's Knowledge,
in other factors that could significantly affect the Company's internal
controls. The Company maintains and will continue to maintain a standard system
of accounting established and administered in accordance with GAAP and the
applicable requirements of the 1934 Act.

4.28 Disclosures. Neither the Company nor any Person acting on its behalf has
provided the Investors or their agents or counsel with any information that
constitutes, as of the Closing Date, material non-public information, other than
the terms of the transactions contemplated hereby. The written materials
delivered to the Investors in connection with the transactions contemplated by
the Transaction Documents do not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
contained therein, in light of the circumstances under which they were made, not
misleading.

5. Representations and Warranties of the Investors. Each of the Investors hereby
severally, and not jointly, represents and warrants to the Company that:

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5.1 Organization and Existence. If the Investor is not an individual, such
Investor is a validly existing corporation, limited partnership or limited
liability company and has all requisite corporate, partnership or limited
liability company power and authority to invest in the Securities pursuant to
this Agreement.

5.2 Authorization. The execution, delivery and performance by such Investor of
the Transaction Documents to which such Investor is a party have been duly
authorized and will each constitute the valid and legally binding obligation of
such Investor, enforceable against such Investor in accordance with their
respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally.

5.3 Purchase Entirely for Own Account. The Securities to be received by such
Investor hereunder will be acquired for such Investor’s own account, not as
nominee or agent, and not with a view to the resale or distribution of any part
thereof in violation of the 1933 Act, and such Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same in
violation of the 1933 Act without prejudice, however, to such Investor’s right
at all times to sell or otherwise dispose of all or any part of such Securities
in compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such Investor
to hold the Securities for any period of time. Such Investor is not a
broker-dealer registered with the SEC under the 1934 Act or an entity engaged in
a business that would require it to be so registered.

5.4 Investment Experience. Such Investor acknowledges that it can bear the
economic risk and complete loss of its investment in the Securities and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment contemplated hereby.

5.5 Disclosure of Information. Such Investor has had an opportunity to receive
all information related to the Company requested by it and to ask questions of
and receive answers from the Company regarding the Company, its business and the
terms and conditions of the offering of the Securities. Such Investor
acknowledges receipt of copies of the SEC Filings. Neither such inquiries nor
any other due diligence investigation conducted by such Investor shall modify,
limit or otherwise affect such Investor’s right to rely on the Company’s
representations and warranties contained in this Agreement.

5.6 Restricted Securities. Such Investor understands that the Securities are
characterized as “restricted securities” under the U.S. federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act only in
certain limited circumstances.

5.7 Legends. It is understood that, except as provided below, certificates
evidencing the Securities may bear the following or any similar legend:

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(a) “The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the ‘Act’) and may not be transferred unless
(i) such securities have been registered for sale pursuant to the Act, (ii) such
securities may be sold without volume restriction pursuant to Rule 144, or (iii)
the Company has received an opinion of counsel reasonably satisfactory to it
that such transfer may lawfully be made without registration under the
Securities Act of 1933 or qualification under applicable state securities laws.”

(b) If required by the authorities of any state in connection with the issuance
of sale of the Securities, the legend required by such state authority.

5.8 Accredited Investor. Such Investor is an accredited investor as defined in
Rule 501(a) of Regulation D, as amended, under the 1933 Act.

5.9 No General Solicitation. Such Investor did not learn of the investment in
the Securities as a result of any general solicitation or general advertising.

5.10 Brokers and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company, any Subsidiary or an Investor for any commission,
fee or other compensation pursuant to any agreement, arrangement or
understanding entered into by or on behalf of such Investor.

5.11 Prohibited Transactions. Since the earlier of (a) such time as such
Investor was first contacted by the Company or any other Person acting on behalf
of the Company regarding the transactions contemplated hereby or (b) thirty (30)
days prior to the date hereof, neither such Investor nor any Affiliate of such
Investor which (x) had knowledge of the transactions contemplated hereby, (y)
has or shares discretion relating to such Investor’s investments or trading or
information concerning such Investor’s investments, including in respect of the
Securities, or (z) is subject to such Investor’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has,
directly or indirectly, effected or agreed to effect any short sale, whether or
not against the box, established any “put equivalent position” (as defined in
Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, granted any
other right (including, without limitation, any put or call option) with respect
to the Common Stock or with respect to any security that includes, relates to or
derived any significant part of its value from the Common Stock or otherwise
sought to hedge its position in the Securities (each, a “Prohibited
Transaction”). Prior to the earliest to occur of (i) the termination of this
Agreement, (ii) the Effective Date or (iii) the Effectiveness Deadline, such
Investor shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in a Prohibited Transaction. Such Investor acknowledges
that the representations, warranties and covenants contained in this Section
5.11 are being made for the benefit of the Investors as well as the Company and
that each of the other Investors shall have an independent right to assert any
claims against such Investor arising out of any breach or violation of the
provisions of this Section 5.11.

5.12 Reliance on Exemptions. Such Investor understands that the Securities are
being offered and sold to it in reliance upon specific exemptions from the
registration requirements of the 1933 Act, the rules and regulations promulgated
thereunder and state securities laws and that the Company is relying upon the
truth and accuracy of, and the Investor’s compliance with, the representations,
warranties, agreements, acknowledgments and understandings of the Investor set
forth herein in order to determine the availability of such exemptions and the
eligibility of the Investor to acquire the Securities.

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5.13 Investment Decision. Such Investor understands that nothing in the
Agreement or any other materials presented to such Investor in connection with
the purchase and sale of the Securities constitutes legal, tax or investment
advice. Such Investor has consulted such legal, tax and investment advisors as
it, in its sole discretion, has deemed necessary or appropriate in connection
with its purchase of the Securities.

5.14 Risk of Loss. Such Investor understands that its investment in the
Securities involves a significant degree of risk, including a risk of total loss
of such Investor’s investment, and such Investor has full cognizance of and
understands all of the risk factors related to such Investor’s purchase of the
Securities, including, but not limited to, those set forth under or incorporated
by reference under the caption “Factors That May Affect Future Results and
Market Price of Stock” in the SEC Filings. Such Investor understands that the
market price of the Common Stock has been volatile and that no representation is
being made as to the future value of the Common Stock.

5.15 No Government Review. Such Investor understands that no United States
federal or state agency or any other government or governmental agency has
passed upon or made any recommendation or endorsement of the Securities.

5.16 Residency. Such Investor's principal executive office, if an entity, or
residence, if an individual, is in the jurisdiction set forth immediately below
such Investor’s name on the signature pages hereto.

6. Conditions to Closing.

6.1 Conditions to the Investors’ Obligations. The obligation of each Investor to
purchase the Notes and the Warrants at the Closing is subject to the fulfillment
to such Investor’s satisfaction, on or prior to the Closing Date, of the
following conditions, any of which may be waived by such Investor (as to itself
only):

(a) The representations and warranties made by the Company in Section 4 hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 4 hereof not
qualified as to materiality shall be true and correct in all material respects
at all times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct in all material
respects as of such earlier date. The Company shall have performed in all
material respects all obligations and covenants herein required to be performed
by it on or prior to the Closing Date.

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(b) The Company shall have obtained any and all consents, permits, approvals,
registrations and waivers necessary or appropriate for consummation of the
purchase and sale of the Securities and the consummation of the other
transactions contemplated by the Transaction Documents, all of which shall be in
full force and effect.

(c) The Company shall have executed and delivered the Registration Rights
Agreement, the Voting Agreements, the Security Agreement and the other Security
Documents.

(d) No judgment, writ, order, injunction, award or decree of or by any court, or
judge, justice or magistrate, including any bankruptcy court or judge, or any
order of or by any governmental authority, shall have been issued, and no action
or proceeding shall have been instituted by any governmental authority,
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.

(e) The Company shall have delivered to the Investors a Certificate, executed on
behalf of the Company by its Chief Executive Officer or its Chief Financial
Officer, dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in subsections (a), (b), (d) and (h) of this Section 6.1.

(f) The Company shall have delivered to the Investors a Certificate, executed on
behalf of the Company by its Clerk, dated as of the Closing Date, certifying the
resolutions adopted by the Board of Directors of the Company approving (i) the
transactions contemplated by this Agreement and the other Transaction Documents,
(ii) the issuance of the Securities and (iii) the Amendment, certifying the
current versions of the Articles of Organization and Bylaws of the Company and
certifying as to the signatures and authority of persons signing the Transaction
Documents and related documents on behalf of the Company.

(g) The Investors shall have received an opinion from Ropes & Gray LLP, the
Company's counsel, dated as of the Closing Date, in form and substance
reasonably acceptable to the Investors and addressing such legal matters as the
Investors may reasonably request.

(h) No stop order or suspension of trading shall have been imposed by the SEC or
any other governmental or regulatory body with respect to public trading in the
Common Stock.

(i) The Persons set forth in Schedule 6.1 shall have executed and delivered
Voting Agreements.

6.2 Conditions to Obligations of the Company. The Company's obligation to sell
and issue the Notes and the Warrants at the Closing is subject to the
fulfillment to the satisfaction of the Company on or prior to the Closing Date
of the following conditions, any of which may be waived by the Company:

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(a) The representations and warranties made by the Investors in Section 5
hereof, other than the representations and warranties contained in Sections 5.3,
5.4, 5.5, 5.6, 5.7, 5.8 and 5.9 (the “Investment Representations”), shall be
true and correct in all material respects when made, and shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investment
Representations shall be true and correct in all respects when made, and shall
be true and correct in all respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investors shall have
performed in all material respects all obligations and covenants herein required
to be performed by them on or prior to the Closing Date.

(b) The Investors shall have executed and delivered the Registration Rights
Agreement, the Security Agreement and the other Security Documents to which they
are a party.

(c) The Investors shall have delivered the Purchase Price to the Company.

6.3 Termination of Obligations to Effect Closing; Effects.

(a) The obligations of the Company, on the one hand, and the Investors, on the
other hand, to effect the Closing shall terminate as follows:

(i) Upon the mutual written consent of the Company and the Investors;

(ii) By the Company if any of the conditions set forth in Section 6.2 shall have
become incapable of fulfillment, and shall not have been waived by the Company;

(iii) By an Investor (with respect to itself only) if any of the conditions set
forth in Section 6.1 shall have become incapable of fulfillment, and shall not
have been waived by the Investor; or

(iv) By either the Company or any Investor (with respect to itself only) if the
Closing has not occurred on or prior to June 30, 2008;

provided, however, that, except in the case of clause (i) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.

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(b) In the event of termination by the Company or any Investor of its
obligations to effect the Closing pursuant to this Section 6.3, written notice
thereof shall forthwith be given to the other Investors by the Company and the
other Investors shall have the right to terminate their obligations to effect
the Closing upon written notice to the Company and the other Investors. Nothing
in this Section 6.3 shall be deemed to release any party from any liability for
any breach by such party of the terms and provisions of this Agreement or the
other Transaction Documents or to impair the right of any party to compel
specific performance by any other party of its obligations under this Agreement
or the other Transaction Documents.

7. Covenants and Agreements of the Company.

7.1 Reservation of Common Stock. From and after the Amendment Effective Date,
the Company shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of providing for the
conversion of the Notes, the issuance of the Interest Shares and the exercise of
the Warrants, such number of shares of Common Stock as shall from time to time
equal the Conversion Shares, the Interest Shares (assuming all interest on the
Notes is paid in Interest Shares) and the Warrant Shares.

7.2 Reports. The Company will furnish to the Investors such information relating
to the Company and its Subsidiaries as from time to time may reasonably be
requested by the Investors; provided, however, that the Company shall not
disclose material nonpublic information to the Investors, or to advisors to or
representatives of the Investors, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides the Investors, such advisors and representatives with the
opportunity to accept or refuse to accept such material nonpublic information
for review and any Investor wishing to obtain such information enters into an
appropriate confidentiality agreement with the Company with respect thereto.

7.3 No Conflicting Agreements. The Company will not take any action, enter into
any agreement or make any commitment that would conflict or interfere in any
material respect with the Company’s obligations to the Investors under the
Transaction Documents.

7.4 Insurance. The Company shall not materially reduce the insurance coverages
described in Section 4.19.

7.5 Compliance with Laws. The Company will comply in all material respects with
all applicable laws, rules, regulations, orders and decrees of all governmental
authorities.

7.6 Listing of Underlying Shares and Related Matters. If the Company applies to
have its Common Stock or other securities traded on any stock exchange or
market, it shall include in such application the Conversion Shares, the Interest
Shares and the Warrant Shares and will take such other action as is necessary to
cause such Common Stock to be so listed. Following any such listing, the Company
will use commercially reasonable efforts to continue the listing and trading of
its Common Stock on such stock exchange or market and, in accordance, therewith,
will use commercially reasonable efforts to comply in all respects with the
Company’s reporting, filing and other obligations under the bylaws or rules of
such stock exchange or market, as applicable.

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7.7 Termination of Covenants. The provisions of Sections 7.2 through 7.5 shall
terminate and be of no further force and effect on the date on which the
Company’s obligations under the Registration Rights Agreement to register or
maintain the effectiveness of any registration covering the Registrable
Securities (as such term is defined in the Registration Rights Agreement) shall
terminate.

7.8 Removal of Legends. In connection with any sale or disposition of the
Securities by an Investor pursuant to Rule 144 or pursuant to any other
exemption under the 1933 Act such that the purchaser acquires freely tradable
shares and upon compliance by the Investor with the requirements of this
Agreement, the Company shall or, in the case of Common Stock, shall cause the
transfer agent for the Common Stock (the “Transfer Agent”) to issue replacement
certificates representing the Securities sold or disposed of without restrictive
legends. Upon the earlier of (i) registration for resale pursuant to the
Registration Rights Agreement or (ii) the Conversion Shares, the Interest Shares
or the Warrant Shares, as applicable, becoming freely tradable by a
non-affiliate pursuant to Rule 144 the Company shall (A) deliver to the Transfer
Agent irrevocable instructions that the Transfer Agent shall issue a certificate
representing shares of Common Stock without legends upon receipt by such
Transfer Agent of (X) either (1) a customary representation by the Investor that
Rule 144 applies to the shares of Common Stock represented thereby or (2) a
statement by the Investor that such Investor has sold the shares of Common Stock
represented thereby in accordance with the Plan of Distribution contained in the
Registration Statement, and (Y) if applicable, the legended certificates for
such shares, and (B) cause its counsel to deliver to the Transfer Agent one or
more blanket opinions to the effect that the removal of such legends in such
circumstances may be effected under the 1933 Act. At any time when one or more
of the Securities may be freely sold or is covered by an effective Registration
Statement, the Company shall, or shall cause the Transfer Agent to, promptly
cause the Investor’s Securities to be replaced with Securities which do not bear
restrictive legends, and Conversion Shares subsequently issued upon the due
conversion of the Notes, Interest Shares issued pursuant to the Notes and
Warrant Shares subsequently issued upon due exercise of the Warrants shall not
bear such restrictive legends provided such Securities may be freely sold or are
covered by an effective Registration Statement. When the Company is required to
cause an unlegended Security to be issued as provided herein, if: (1) the
unlegended Security is not delivered to an Investor within three (3) Business
Days of submission by that Investor of a request for unlegended Securities and,
if applicable, the documentation specified above to the Transfer Agent or the
Company, as applicable, and (2) prior to the time such unlegended Security is
received by the Investor, the Investor, or any third party on behalf of such
Investor or for the Investor’s account, purchases (in an open market transaction
or otherwise) another Security to deliver in satisfaction of a sale by the
Investor of such Security (a “Buy-In”), then the Company shall pay in cash to
the Investor (for costs incurred either directly by such Purchaser or on behalf
of a third party) the amount by which the total purchase price paid for the
replacement Security as a result of the Buy-In (including brokerage commissions,
if any) exceeds the proceeds received by such Investor as a result of the sale
to which such Buy-In relates. The Investor shall provide the Company written
notice indicating the amounts payable to the Investor in respect of the Buy-In.

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7.9 Subsequent Equity Sales. From the date hereof until such time as no Investor
holds any of the Securities, the Company shall be prohibited from effecting or
entering into an agreement to effect any Subsequent Financing involving a
“Variable Rate Transaction”. The term “Variable Rate Transaction” shall mean a
transaction in which the Company issues or sells (i) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or (B)
with a conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock or
(ii) enters into any agreement, including, but not limited to, an equity line of
credit, whereby the Company may sell securities at a future determined price.

7.10 Proxy Statement; Stockholders Meeting; Filing of Amendment. (a) Promptly
following the execution and delivery of this Agreement the Company shall take
all action necessary to call a meeting of its stockholders (the “Stockholders
Meeting”), which shall occur not later than December 2, 2008 (the “Stockholders
Meeting Deadline”), for the purpose of seeking approval of the Company’s
stockholders for the Amendment (the “Proposal”). In connection therewith, the
Company will promptly prepare and file with the SEC proxy materials (including a
proxy statement and form of proxy) for use at the Stockholders Meeting and,
after receiving and promptly responding to any comments of the SEC thereon,
shall promptly mail such proxy materials to the stockholders of the Company.
Each Investor shall promptly furnish in writing to the Company such information
relating to such Investor and its investment in the Company as the Company may
reasonably request for inclusion in the Proxy Statement. The Company will comply
with Section 14(a) of the 1934 Act and the rules promulgated thereunder in
relation to any proxy statement (as amended or supplemented, the “Proxy
Statement”) and any form of proxy to be sent to the stockholders of the Company
in connection with the Stockholders Meeting, and the Proxy Statement shall not,
on the date that the Proxy Statement (or any amendment thereof or supplement
thereto) is first mailed to stockholders or at the time of the Stockholders
Meeting, contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein not false
or misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies or the Stockholders Meeting which has become false or misleading. If the
Company should discover at any time prior to the Stockholders Meeting, any event
relating to the Company or any of its Subsidiaries or any of their respective
affiliates, officers or directors that is required to be set forth in a
supplement or amendment to the Proxy Statement, in addition to the Company's
obligations under the 1934 Act, the Company will promptly inform the Investors
thereof.

(b) Subject to their fiduciary obligations under applicable law (as determined
in good faith by the Company’s Board of Directors after consultation with the
Company’s outside counsel), the Company's Board of Directors shall recommend to
the Company's stockholders that the stockholders vote in favor of the Proposal
(the “Company Board Recommendation”) and shall take all commercially reasonable
action (including, without limitation, the hiring of a proxy solicitation firm
of nationally recognized standing) to solicit the approval of the stockholders
for the Proposal unless the Board of Directors shall have modified, amended or
withdrawn the Company Board Recommendation pursuant to the provisions of the
immediately succeeding sentence. The Company covenants that the Board of
Directors of the Company shall not modify, amend or withdraw the Company Board
Recommendation unless the Board of Directors (after consultation with the
Company’s outside counsel) shall determine in the good faith exercise of its
business judgment that maintaining the Company Board Recommendation would
violate its fiduciary duty to the Company’s stockholders. Whether or not the
Company's Board of Directors modifies, amends or withdraws the Company Board
Recommendation pursuant to the immediately preceding sentence, the Company shall
in accordance with applicable law and the provisions of its Articles of
Organization and Bylaws, (i) take all action necessary to convene the
Stockholders Meeting as promptly as practicable, but no later than the
Stockholders Meeting Deadline, to consider and vote upon the approval of the
Proposal and (ii) submit the Proposal at the Stockholders Meeting to the
stockholders of the Company for their approval.

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(c) Not later than two (2) Business Days after obtaining approval of the
Proposal at the Stockholders Meeting, the Company shall file the Certificate of
Amendment with the Secretary of the Commonwealth of Massachusetts which shall be
as promptly as practicable after the filing thereof as permitted by applicable
law. The Company shall notify the Investors in writing of the filing of the
Certificate of Amendment as provided in the immediately preceding sentence not
later than one (1) Business Day after such filing.

7.11 Right to Participate in Future Financings. From the date hereof until 90
days after the Effective Date, upon any financing by the Company of its Common
Stock or Common Stock Equivalents (a “Subsequent Financing”), each Investor
shall have the right to participate in such Subsequent Financing as provided
herein. At least seven (7) Business Days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Investor a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice
shall ask such Investor if it wants to review the details of such financing
(such additional notice, a “Subsequent Financing Notice”). Upon the request of
an Investor, and only upon a request by such Investor, for a Subsequent
Financing Notice, the Company shall promptly, but no later than one Business Day
after such request, deliver a Subsequent Financing Notice to such Investor. The
Subsequent Financing Notice shall describe in reasonable detail the proposed
terms of such Subsequent Financing, the amount of proceeds intended to be raised
thereunder, the Person with whom such Subsequent Financing is proposed to be
effected, and attached to which shall be a term sheet or similar document
relating thereto. Each Investor shall notify the Company by 5:00 p.m. (New York
City time) on the fifth (5th) Business Day after their receipt of the Subsequent
Financing Notice of its willingness to participate in the Subsequent Financing
on the terms described in the Subsequent Financing Notice, subject to completion
of mutually acceptable documentation. The Investors agreeing to participate in
the Subsequent Financing shall have the right to purchase their Pro Rata Portion
(as defined below) of the Common Stock or Common Stock Equivalents to be issued
in such Subsequent Financing. “Pro Rata Portion” is the ratio of (x) the number
of shares of Common Stock beneficially owned amount by such Investor (determined
in accordance with Rule 13d-3 under the 1934 Act and (y) number of shares of
Common Stock then outstanding (calculated on a fully diluted basis).
Notwithstanding the foregoing, this Section 7.11 shall not apply in respect of
the issuance of (a) shares of Common Stock or options to employees, consultants,
officers or directors of the Company pursuant to any stock or option plan duly
adopted by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose, shares of Common Stock issuable in
respect of the Notes and the Warrants, and (c) securities upon the exercise of
or conversion of any convertible securities, options or warrants issued and
outstanding on the date of this Agreement, provided that the terms of such
securities have not been amended since the date of this Agreement to increase
the number of shares of Common Stock issuable thereunder or to lower the
exercise or conversion price thereof.

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7.12 Equal Treatment of Investors. No consideration shall be offered or paid to
any Person to amend or consent to a waiver or modification of any provision of
any of the Transaction Documents unless the same consideration is also offered
to all of the parties to the Transaction Documents. For clarification purposes,
this provision constitutes a separate right granted to each Investor by the
Company and negotiated separately by each Investor, and is intended for the
Company to treat the Investors as a class and shall not in any way be construed
as the Investors acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

7.13 Restructuring. The Company shall use commercially reasonable efforts
(including a significant salary reduction for certain employees) to effect a
cost restructuring that will reduce the net cash burn of the Company and its
Subsidiaries to $500,000 or less for the fiscal year ending June 30, 2009. As
part of that restructuring, the Company intends to amend its existing equity
incentive plan (the “2006 Plan”) to increase the number of shares available to
grant to key employees of, and consultants to, the Company and its Subsidiaries.
Over the next 24 months the grants under the 2006 Plan and any other equity
incentive plan adopted by the Company from time to time shall not cumulatively
exceed 20% of the shares of Common Stock outstanding on the date hereof
(calculated on a fully diluted basis).

7.14 Use of Proceeds. The Company shall use the net proceeds of the sale of the
Notes and the Warrants as provided in Section 4.7.

8. Survival and Indemnification.

8.1 Survival. The representations, warranties, covenants and agreements
contained in this Agreement shall survive the Closing of the transactions
contemplated by this Agreement.

8.2 Indemnification. The Company agrees to indemnify and hold harmless each
Investor and its Affiliates and their respective directors, officers, employees
and agents from and against any and all losses, claims, damages, liabilities and
expenses (including without limitation reasonable attorney fees and
disbursements and other expenses incurred in connection with investigating,
preparing or defending any action, claim or proceeding, pending or threatened
and the costs of enforcement thereof) (collectively, “Losses”) to which such
Person may become subject as a result of any breach of representation, warranty,
covenant or agreement made by or to be performed on the part of the Company
under the Transaction Documents, and will reimburse any such Person for all such
amounts as they are incurred by such Person.

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8.3 Conduct of Indemnification Proceedings. Promptly after receipt by any Person
(the “Indemnified Person”) of notice of any demand, claim or circumstances which
would or might give rise to a claim or the commencement of any action,
proceeding or investigation in respect of which indemnity may be sought pursuant
to Section 8.2, such Indemnified Person shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person, and
shall assume the payment of all reasonable fees and expenses; provided,
however, that the failure of any Indemnified Person so to notify the Company
shall not relieve the Company of its obligations hereunder except to the extent
that the Company is materially prejudiced by such failure to notify. In any such
proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless: (i) the Company and the Indemnified Person shall
have mutually agreed to the retention of such counsel; or (ii) in the reasonable
judgment of counsel to such Indemnified Person representation of both parties by
the same counsel would be inappropriate due to actual or potential differing
interests between them. The Company shall not be liable for any settlement of
any proceeding effected without its written consent, which consent shall not be
unreasonably withheld, but if settled with such consent, or if there be a final
judgment for the plaintiff, the Company shall indemnify and hold harmless such
Indemnified Person from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment. Without the prior written
consent of the Indemnified Person, which consent shall not be unreasonably
withheld, the Company shall not effect any settlement of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party and indemnity could have been sought hereunder by such
Indemnified Party, unless such settlement includes an unconditional release of
such Indemnified Person from all liability arising out of such proceeding.

9. Miscellaneous.

9.1 Successors and Assigns. This Agreement may not be assigned by a party hereto
without the prior written consent of the Company or the Investors, as
applicable, provided, however, that an Investor may assign its rights and
delegate its duties hereunder in whole or in part to an Affiliate or to a third
party acquiring some or all of its Securities in a transaction complying with
applicable securities laws without the prior written consent of the Company or
the other Investors. The provisions of this Agreement shall inure to the benefit
of and be binding upon the respective permitted successors and 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
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement, except as expressly provided in this Agreement.

9.2 Counterparts; Faxes. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may also
be executed and transmitted via facsimile, or by portable document format via
electronic mail, each of which shall be deemed an original.

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9.3 Titles and Subtitles. The titles and subtitles used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.

9.4 Notices. Unless otherwise provided, any notice required or permitted under
this Agreement shall be given in writing and shall be deemed effectively given
as hereinafter described (i) if given by personal delivery, then such notice
shall be deemed given upon such delivery, (ii) if given by telex or telecopier,
then such notice shall be deemed given upon receipt of confirmation of complete
transmittal, (iii) if given by mail, then such notice shall be deemed given upon
the earlier of (A) receipt of such notice by the recipient or (B) three days
after such notice is deposited in first class mail, postage prepaid, and (iv) if
given by an internationally recognized overnight air courier, then such notice
shall be deemed given one Business Day after delivery to such carrier. All
notices shall be addressed to the party to be notified at the address as
follows, or at such other address as such party may designate by ten days’
advance written notice to the other party:

If to the Company:

Precision Optics Corporation, Inc.
22 East Broadway
Gardner, Massachusetts 01440-3338
Attention: Richard E. Forkey,
President, Chief Executive Officer and Treasurer
Fax: (978) 630-1487

With a copy to:

Ropes & Gray LLP
One International Place
Boston, MA 02110
Attention: Patrick O’Brien
Fax: (617) 951-7050

If to the Investors:

to the addresses set forth on the signature pages hereto.

9.5 Expenses. The parties hereto shall pay their own costs and expenses in
connection herewith, except that the Company shall pay the reasonable fees and
expenses of Lowenstein Sandler PC not to exceed $35,000, regardless of whether
the transactions contemplated hereby are consummated; it being understood that
Lowenstein Sandler PC has only rendered legal advice to the Special Situations
Funds participating in this transaction and not to the Company or any other
Investor in connection with the transactions contemplated hereby, and that each
of the Company and each Investor has relied for such matters on the advice of
its own respective counsel. Such expenses shall be paid upon demand. The Company
shall reimburse the Investors upon demand for all reasonable out-of-pocket
expenses incurred by the Investors, including without limitation reimbursement
of attorneys’ fees and disbursements, in connection with any amendment,
modification or waiver of this Agreement or the other Transaction Documents. In
the event that legal proceedings are commenced by any party to this Agreement
against another party to this Agreement in connection with this Agreement or the
other Transaction Documents, the party or parties which do not prevail in such
proceedings shall severally, but not jointly, pay their pro rata share of the
reasonable attorneys’ fees and other reasonable out-of-pocket costs and expenses
incurred by the prevailing party in such proceedings.

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9.6 Amendments and Waivers. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Investors. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any Securities purchased under this Agreement at the time outstanding, each
future holder of all such Securities, and the Company.

9.7 Publicity. Except as set forth below, no public release or announcement
concerning the transactions contemplated hereby shall be issued by the Company
or the Investors without the prior consent of the Company (in the case of a
release or announcement by the Investors) or the Investors (in the case of a
release or announcement by the Company) (which consents shall not be
unreasonably withheld), except as such release or announcement may be required
by law or the applicable rules or regulations of any securities exchange or
securities market, in which case the Company or the Investors, as the case may
be, shall allow the Investors or the Company, as applicable, to the extent
reasonably practicable in the circumstances, reasonable time to comment on such
release or announcement in advance of such issuance. No later than one Business
Day following the Closing Date, the Company will publicly disclose the
transactions contemplated hereby and, in connection therewith, will, no later
than two Business Days following the Closing Date, file with the SEC either a
Current Report on Form 8-K or a Quarterly Report on Form 10-QSB, to the extent
permissible, which shall attach as exhibits copies of the Transaction Documents.

9.8 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof but shall be interpreted as if it were written so as
to be enforceable to the maximum extent permitted by applicable law, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any respect.

9.9 Entire Agreement. This Agreement, including the Exhibits and the Disclosure
Schedules, and the other Transaction Documents constitute the entire agreement
among the parties hereof with respect to the subject matter hereof and thereof
and supersede all prior agreements and understandings, both oral and written,
between the parties with respect to the subject matter hereof and thereof.

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9.10 Further Assurances. The parties shall execute and deliver all such further
instruments and documents and take all such other actions as may reasonably be
required to carry out the transactions contemplated hereby and to evidence the
fulfillment of the agreements herein contained.

9.11 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of New York without regard to the choice of law principles
thereof (other than Section 5-1401 of the New York General Obligation Law). Each
of the parties hereto irrevocably submits to the exclusive jurisdiction of the
courts of the State of New York located in New York County and the United States
District Court for the Southern District of New York for the purpose of any
suit, action, proceeding or judgment relating to or arising out of this
Agreement and the transactions contemplated hereby. Service of process in
connection with any such suit, action or proceeding may be served on each party
hereto anywhere in the world by the same methods as are specified for the giving
of notices under this Agreement. Each of the parties hereto irrevocably consents
to the jurisdiction of any such court in any such suit, action or proceeding and
to the laying of venue in such court. Each party hereto irrevocably waives any
objection to the laying of venue of any such suit, action or proceeding brought
in such courts and irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY
LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN
CONSULTED SPECIFICALLY AS TO THIS WAIVER.

9.12 Independent Nature of Investors' Obligations and Rights. The obligations of
each Investor under any Transaction Document are several and not joint with the
obligations of any other Investor, and no Investor shall be responsible in any
way for the performance of the obligations of any other Investor under any
Transaction Document. The decision of each Investor to purchase Securities
pursuant to the Transaction Documents has been made by such Investor
independently of any other Investor. Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no Investor
will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including, without limitation, the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Transaction Documents for the purpose of closing
a transaction with multiple Investors and not because it was required or
requested to do so by any Investor.
 
[signature page follows]

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IN WITNESS WHEREOF, the parties have executed this Agreement or caused their
duly authorized officers to execute this Agreement as of the date first above
written.

The Company:
PRECISION OPTICS CORPORATION
     
By:
/s/ Richard E. Forkey  
Name: Richard E. Forkey
 
Title: President, Chief Executive Officer and Treasurer

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The Investors:
SPECIAL SITUATIONS FUND III QP, L.P.
     
By:
/s/ Austin W. Marxe  
Name: Austin W. Marxe
 
Title: General Partner

Aggregate Purchase Price: $275,000
Principal Amount of Notes: $275,000
Number of Warrants: 3,630,000

Address for Notice:
   
527 Madison Avenue
 
Suite 2600
 
New York, NY 10022
     
with a copy to:
     
Lowenstein Sandler PC
 
65 Livingston Avenue
 
Roseland, NJ 07068
 
Attn: John D. Hogoboom, Esq.
 
Telephone:   973.597.2500
 
Facsimile:      973.597.2400

SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P.
 
By:
/s/ Austin W. Marxe
Name: Austin W. Marxe
Title: General Partner

Aggregate Purchase Price: $275,000
Principal Amount of Notes: $275,000
Number of Warrants: 3,630,000

527 Madison Avenue
Suite 2600
New York, NY 10022
 
with a copy to:
 
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attn: John D. Hogoboom, Esq.
Telephone: 973.597.2500
Facsimile: 973.597.2400

 
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/s/ Arnold Schumsky
Arnold Schumsky

Aggregate Purchase Price: $50,000
Principal Amount of Notes: $50,000
Number of Warrants: 660,000

Address for Notice:

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