SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of May 5, 2006, by and
among House of Taylor Jewelry, Inc., a Nevada corporation, with headquarters
located at 9200 Sunset Blvd., Suite 425, West Hollywood, California 90069
(the "Company"), and the investors listed on the Schedule of Buyers attached
hereto (individually, a "Buyer" and collectively, the "Buyers").

WHEREAS:

A.

The Company and each Buyer is executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by Section
4(2) of the Securities Act of 1933, as amended (the "1933 Act"), and Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the 1933 Act.

B.

The Company has authorized a new series of senior secured convertible notes of
the Company which notes shall be convertible into the Company's common stock,
par value $0.0001 per share (the "Common Stock"), in accordance with the terms
of the Notes (as defined below).

C.

Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) that aggregate principal amount of
the Notes, in substantially the form attached hereto as Exhibit A (the "Notes"),
set forth opposite such Buyer's name in column (3) on the Schedule of Buyers
attached hereto (which aggregate amount for all Buyers shall be $15,000,000) (as
converted, collectively, the "Conversion Shares"), (ii) warrants, in
substantially the form attached hereto as Exhibit B-1 (the "Series A Warrants"),
to acquire that number of shares of Common Stock set forth opposite such Buyer's
name in column (4) on the Schedule of Buyers, (iii) warrants in substantially
the form attached hereto as Exhibit B-2 (the "Series B Warrants") to acquire
that number of shares of Common Stock set forth opposite such Buyer's name in
column (5) on the Schedule of Buyers and (iv) warrants in substantially the form
attached hereto as Exhibit B-3 (the "Series C Warrants") to acquire that number
of shares of Common Stock set forth opposite such Buyer's name in column (6) on
the Schedule of Buyers (collectively with the Series A Warrants and the Series B
Warrants, the "Warrants") (as exercised, collectively, the "Warrant Shares").

D.

Contemporaneously with the execution and delivery of this Agreement, the parties
hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the "Registration Rights
Agreement"), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Conversion Shares and the Warrant Shares
under the 1933 Act and the rules and regulations promulgated thereunder, and
applicable state securities laws.

E.

The Notes, the Conversion Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the "Securities".

10098375.15

  

F.

The Notes will rank senior to all outstanding and future indebtedness of the
Company, subject to Permitted Senior Indebtedness (as defined in the Notes), and
will be secured by a first priority, perfected security interest in all of the
assets of the Company and the stock and assets of each of the Company's
subsidiaries, as evidenced by the pledge agreement attached hereto as Exhibit D
(the "Pledge Agreement") and the security agreement attached hereto as Exhibit E
(the "Security Agreement") and the guarantee attached hereto as Exhibit F (the
"Guarantee", and together with the Pledge Agreement, the Security Agreement and
any ancillary documents related thereto, collectively the "Security Documents").

NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

1.

PURCHASE AND SALE OF NOTES AND WARRANTS.

(a)

Purchase of Notes and Warrants.

(b)

Subject to the satisfaction (or waiver) of the conditions set forth in Sections
6 and 7 below, the Company shall issue and sell to each Buyer, and each Buyer
severally, but not jointly, will purchase from the Company on the Closing Date
(as defined below), (x) a principal amount of Notes as is set forth opposite
such Buyer's name in column (3) on the Schedule of Buyers and (y) Series A
Warrants to acquire that number of Warrant Shares as is set forth opposite such
Buyer's name in column (4) on the Schedule of Buyers, Series B Warrants to
acquire that number of Warrant Shares as is set forth opposite such Buyer's name
in column (5) on the Schedule of Buyers and Series C Warrants to acquire that
number of Warrant Shares as is set forth opposite such Buyer's name in column
(6) on the Schedule of Buyers (the "Closing").

(i)

Closing.  The date and time of the Closing (the "Closing Date") shall be 10:00
a.m., New York City Time, on May 12, 2006 (or such later date as is mutually
agreed to by the Company and the Required Holders (as defined in the Note))
after notification of satisfaction (or waiver) of the conditions to the Closing
set forth in Sections 6 and 7 below at the offices of Schulte Roth & Zabel LLP,
919 Third Avenue, New York, New York 10022.

(ii)

Purchase Price.  The aggregate purchase price for the Notes and the Warrants to
be purchased by each Buyer at the Closing (the "Purchase Price") shall be the
amount set forth opposite such Buyer's name in column (7) of the Schedule of
Buyers.  Each Buyer shall pay $1.00 for each $1.00 of principal amount of Notes
and related Warrants to be purchased by such Buyer at the Closing.

(c)

Form of Payment.  On the Closing Date, (i) each Buyer shall pay its Purchase
Price to the Company for the Notes and the Warrants to be issued and sold to
such Buyer at the Closing by wire transfer of immediately available funds in
accordance with the Company's written wire instructions and (ii) the Company
shall deliver to each Buyer (A) the Notes (in the principal amounts as such
Buyer shall request) which such Buyer is then purchasing and (B) the Warrants
(in the amounts as such Buyer shall request) which such Buyer is purchasing, in
each case duly executed on behalf of the Company and registered in the name of
such Buyer or its designee.

 

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2.

BUYER'S REPRESENTATIONS AND WARRANTIES.

Each Buyer represents and warrants to the Company with respect to only itself
that:

(a)

No Public Sale or Distribution.  Such Buyer is (i) acquiring the Notes and the
Warrants and (ii) upon conversion of the Notes and exercise of the Warrants
(other than pursuant to a Cashless Exercise (as defined in the Warrants)) will
acquire the Conversion Shares issuable upon conversion of the Notes and the
Warrant Shares issuable upon exercise of the Warrants, for its own account and
not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption under
the 1933 Act.  Such Buyer is acquiring the Securities hereunder in the ordinary
course of its business.  Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the
Securities.

(b)

Accredited Investor Status.  At the time such Buyer was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises
Notes or Warrants it will be, an "accredited investor" as defined in Rule 501(a)
under the 1933 Act.  Such Buyer is not a registered broker-dealer under Section
15 of the 1934 Act.

(c)

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

(d)

Information.  Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities which have been
requested by such Buyer.  Such Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company.  Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
herein.  Such Buyer understands that its investment in the Securities involves a
high degree of risk.  Such Buyer has sought such accounting, legal and tax
advice as it has considered necessary to make an informed investment decision
with respect to its acquisition of the Securities.

(e)

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

 

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(f)

Transfer or Resale.  Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration, or (C)
such Buyer provides the Company with reasonable assurance that such Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act, as amended, (or a successor rule thereto)
(collectively, "Rule 144"); (ii) any sale of the Securities made in reliance on
Rule 144 may be made only in accordance with the terms of Rule 144 and further,
if Rule 144 is not applicable, any resale of the Securities under circumstances
in which the seller (or the Person (as defined in Section 3(s)) through whom the
sale is made) may be deemed to be an underwriter (as that term is defined in the
1933 Act) may require compliance with some other exemption under the 1933 Act or
the rules and regulations of the SEC thereunder; and (iii) neither the Company
nor any other Person is under any obligation to register the Securities under
the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.  The Securities may be pledged in
connection with a bona fide margin account or other loan or financing
arrangement secured by the Securities and such pledge of Securities shall not be
deemed to be a transfer, sale or assignment of the Securities hereunder, and no
Buyer effecting a pledge of Securities shall be required to provide the Company
with any notice thereof or otherwise make any delivery to the Company pursuant
to this Agreement or any other Transaction Document (as defined in Section
3(b)), including, without limitation, this Section 2(f).

(g)

Legends.  Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of
the Conversion Shares and the Warrant Shares have been registered under the 1933
Act as contemplated by the Registration Rights Agreement, the stock certificates
representing the Conversion Shares and the Warrant Shares, except as set forth
below, shall bear any legend as required by the "blue sky" laws of any state and
a restrictive legend in substantially the following form (and a stop-transfer
order may be placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS
NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE
144A

 

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UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for resale under the 1933 Act, (ii) in connection with
a sale, assignment or other transfer, such holder provides the Company with an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such sale, assignment or transfer of the Securities may be made
without registration under the applicable requirements of the 1933 Act, or (iii)
such holder provides the Company with reasonable assurance that the Securities
can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.

(h)

Validity; Enforcement.  This Agreement, the Registration Rights Agreement and
the Security Documents to which such Buyer is a party have been duly and validly
authorized, executed and delivered on behalf of such Buyer and shall constitute
the legal, valid and binding obligations of such Buyer enforceable against such
Buyer in accordance with their respective terms, except as such enforceability
may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws
relating to, or affecting generally, the enforcement of applicable creditors'
rights and remedies.

(i)

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

(j)

Residency.  Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.

(k)

Independent Investment Decision.  Such Buyer has independently evaluated the
merits of its decision to purchase Securities pursuant to the Transaction
Documents, and such Buyer confirms that it has not relied on the advice of any
other Buyer's business and/or legal counsel in making such decision.  Such Buyer
has not relied on the business or legal advice of Roth Capital Partners, LLC or
any of its agents, counsel or Affiliates in making its investment decision
hereunder, and confirms that none of such Persons has made any representations
or warranties to such Buyer in connection with the transactions contemplated

 

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by the Transaction Documents.  For the purpose of this Agreement, "Affiliate"
means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144. With respect to
a Buyer, any investment fund or managed account that is managed on a
discretionary basis by the same investment manager as such Buyer will be deemed
to be an Affiliate of such Buyer.

(l)

Certain Trading Activities.  Such Buyer has not directly or indirectly, nor has
any Person acting on behalf of or pursuant to any understanding with such Buyer,
engaged in any transactions in the securities of the Company (including, without
limitations, any Short Sales involving the Company's securities) since the time
that such Buyer was first contacted by the Company or Roth Capital Partners, LLC
regarding the transactions contemplated hereby.  Such Buyer covenants that
neither it nor any Person acting on its behalf or pursuant to any understanding
with it will engage in any transactions in the securities of the Company
(including Short Sales) prior to the time that the transactions contemplated by
this Agreement are publicly disclosed.  For the purpose of this Agreement,
"Short Sales" include, without limitation, all "short sales" as defined in Rule
200 promulgated under Regulation SHO under the 1934 Act and all types of direct
and indirect stock pledges, forward sale contracts, options, puts, calls, swaps
and similar arrangements (including on a total return basis), and sales and
other transactions through non-US broker dealers or foreign regulated brokers.

(m)

Limited Ownership.  The purchase by such Buyer of the Securities issuable to it
at the Closing will not result in such Buyer or in the aggregate with other
Buyers (individually or together with other Persons with whom such Buyer has
identified, or will have identified, itself as part of a "group" in a public
filing made with the SEC involving the Company's securities) acquiring, or
obtaining the right to acquire, in excess of 19.999% of the outstanding shares
of Common Stock or the voting power of the Company on a post transaction basis
that assumes that the Closing shall have occurred. Such Buyer does not presently
intend to, alone or together with others, make a public filing with the SEC to
disclose that it has (or that it together with such other Persons have)
acquired, or obtained the right to acquire, as a result of the Closing (when
added to any other securities of the Company that it or they then own or have
the right to acquire), in excess of 19.999% of the outstanding shares of Common
Stock or the voting power of the Company on a post transaction basis that
assumes that the Closing shall have occurred.

(n)

General Solicitation.  Such Buyer is not purchasing the Securities as a result
of any advertisement, article, notice or other communication regarding the
Securities published in any newspaper, magazine or similar media or broadcast
over television or radio or presented at any seminar.

(o)

Organization.  Such Buyer is an entity duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization with the
requisite corporate or partnership power and authority to enter into and to
consummate the transactions contemplated by the applicable Transaction Documents
(as defined below) and otherwise to carry out its obligations thereunder.

 

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3.

REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to each of the Buyers that:

(a)

Organization and Qualification.  The Company and its "Subsidiaries" (which for
purposes of this Agreement means any joint venture or any entity in which the
Company, directly or indirectly, owns capital stock or holds an equity or
similar interest) are entities duly organized and validly existing in good
standing under the laws of the jurisdiction in which they are formed, and have
the requisite power and authorization to own their properties and to carry on
their business as now being conducted.  Each of the Company and its Subsidiaries
is duly qualified as a foreign entity to do business and is in good standing in
every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
reasonably be expected to have a Material Adverse Effect.  As used in this
Agreement, "Material Adverse Effect" means any material adverse effect on the
business, properties, assets, operations, results of operations, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries, taken
as a whole, or on the transactions contemplated hereby and the other Transaction
Documents or by the agreements and instruments to be entered into in connection
herewith or therewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined below).  The Company
has no Subsidiaries except as set forth on Schedule 3(a).

(b)

Authorization; Enforcement; Validity.  The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the
Notes, the Registration Rights Agreement, the Security Documents, the
Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), the
Warrants, and each of the other agreements entered into by the parties hereto in
connection with the transactions contemplated by this Agreement (collectively,
the "Transaction Documents") and to issue the Securities in accordance with the
terms hereof and thereof.  The execution and delivery of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Notes and the Warrants, the reservation for issuance and the issuance of the
Conversion Shares issuable upon conversion of the Notes, the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants,
and the granting of a security interest in the Collateral (as defined in the
Security Documents) have been duly authorized by the Company's Board of
Directors and (other than (i) the filing of appropriate UCC financing statements
with the appropriate states and other authorities pursuant to the Security
Agreement, (ii) the filing of a Form D under Regulation D of the 1933 Act and
(iii) the filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement) no
further filing, consent, or authorization is required by the Company, its Board
of Directors or its stockholders.  This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the
Company, and constitute the legal, valid and binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.

 

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(c)

Issuance of Securities.  The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the
issue thereof.  As of the Closing, a number of shares of Common Stock shall have
been duly authorized and reserved for issuance which equals 175% of the maximum
number of shares Common Stock issuable upon conversion of the Notes and upon
exercise of the Warrants.  Upon conversion in accordance with the Notes or
exercise in accordance with the Warrants, as the case may be, the Conversion
Shares and the Warrant Shares, respectively, will be validly issued, fully paid
and nonassessable and free from all preemptive or similar rights, taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock.  The offer and issuance by
the Company of the Securities is exempt from registration under the 1933 Act.

(d)

No Conflicts.  The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance of
the Notes and the Warrants, the granting of a security interest in the
Collateral and reservation for issuance and issuance of the Conversion Shares
and the Warrant Shares) will not (i) result in a violation of the Articles of
Incorporation (as defined in Section 3(r)) of the Company or any of its
Subsidiaries, any capital stock of the Company or Bylaws (as defined in Section
3(r)) of the Company or any of its Subsidiaries or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of The Nasdaq Capital Market (the "Principal Market")) applicable to
the Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected, except in the case of
(ii) and (iii) to the extent that such violation, conflict, default or right
would not have a Material Adverse Effect.

(e)

Consents.  Other than as set forth on Schedule 3(e), the Company is not required
to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency or any other Person in order for it to execute, deliver
or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof.  All
consents, authorizations, orders, filings and registrations which the Company is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the Closing Date, and the Company and its Subsidiaries
are unaware of any facts or circumstances which might prevent the Company from
obtaining or effecting any of the registration, application or filings pursuant
to the preceding sentence.  The Company is not in violation of the listing
requirements of the Principal Market and has no knowledge of any facts which
would reasonably lead to delisting or suspension of the Common Stock in the
foreseeable future.

(f)

Acknowledgment Regarding Buyer's Purchase of Securities.  The Company
acknowledges and agrees that each Buyer is acting solely in the capacity of
arm's length purchaser with respect to the Transaction Documents and the
transactions contemplated hereby and thereby and that no Buyer is (i) an officer
or director of the Company, (ii) to the knowledge of the Company, an "affiliate"
of the Company (as defined in Rule 144) or (iii) to the

 

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knowledge of the Company, a "beneficial owner" of more than 10% of the shares of
Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "1934 Act")).  The Company further acknowledges
that no Buyer is acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated hereby and thereby, and any advice given by a Buyer or
any of its representatives or agents in connection with the Transaction
Documents and the transactions contemplated hereby and thereby is merely
incidental to such Buyer's purchase of the Securities.

(g)

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

(h)

No Integrated Offering.  None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on their behalf has, directly or indirectly,
made any offers or sales of any security or solicited any offers to buy any
security, under circumstances that would require registration of any of the
Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated.  None of
the Company, its Subsidiaries, their affiliates and any Person acting on their
behalf will take any action or steps referred to in the preceding sentence that
would require registration of any of the Securities under the 1933 Act or cause
the offering of the Securities to be integrated with other offerings.

(i)

Dilutive Effect.  The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares
issuable upon exercise of the Warrants will increase in certain circumstances.
 The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Notes in accordance with this Agreement and the Notes and
its obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.

(j)

Application of Takeover Protections; Rights Agreement.  The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Articles of Incorporation or

 

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the laws of the jurisdiction of its formation which is or could become
applicable to any Buyer as a result of the transactions contemplated by this
Agreement, including, without limitation, the Company's issuance of the
Securities and any Buyer's ownership of the Securities.  The Company has not
adopted a stockholder rights plan or similar arrangement relating to
accumulations of beneficial ownership of Common Stock or a change in control of
the Company.

(k)

SEC Documents; Financial Statements.  Except as disclosed in Schedule 3(k),
during the two (2) years prior to the date hereof, the Company has filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the SEC pursuant to the reporting requirements of the 1934 Act (all
of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements, notes and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
Documents").  The Company has delivered to the Buyers or their respective
representatives true, correct and complete copies of the SEC Documents not
available on the EDGAR system.  As of their respective dates, the SEC Documents
complied in all material respects with the requirements of the 1934 Act and the
rules and regulations of the SEC promulgated thereunder applicable to the SEC
Documents, and none of the SEC Documents, at the time they were filed with the
SEC, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.  As of their respective dates, the financial statements of
the Company included in the SEC Documents complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto.  Such financial statements have
been prepared in accordance with generally accepted accounting principles,
consistently applied, during the periods involved (except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments).  

(l)

Absence of Certain Changes.  Except as disclosed in Schedule 3(l), since March
31, 2005, there has been no material adverse change and no material adverse
development in the business, properties, operations, condition (financial or
otherwise), results of operations or prospects of the Company or its
Subsidiaries.  Except as disclosed in Schedule 3(l), since March 31, 2005, the
Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary
course of business or (iii) had capital expenditures, individually or in the
aggregate, in excess of $100,000.  The Company has not taken any steps to seek
protection pursuant to any bankruptcy law nor does the Company have any
knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would
reasonably lead a creditor to do so.  The Company is not as of the date hereof,
and after giving effect to the transactions contemplated hereby to occur at the
Closing, will not be Insolvent (as defined below).  For purposes of this Section
3(l), "Insolvent" means (i) the present fair saleable value of the Company's
assets is less than the amount required to pay the Company's total Indebtedness
(as defined in Section 3(s)), (ii) the Company is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured,

 

- 10 -

 

(iii) the Company intends to incur or believes that it will incur debts that
would be beyond its ability to pay as such debts mature or (iv) the Company has
unreasonably small capital with which to conduct the business in which it is
engaged as such business is now conducted and is proposed to be conducted.

(m)

No Undisclosed Events, Liabilities, Developments or Circumstances.  To the
Company's knowledge, no event, liability, development or circumstance has
occurred or exists, or is contemplated to occur with respect to the Company, its
Subsidiaries or their respective business, properties, prospects, operations or
financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with
the SEC relating to an issuance and sale by the Company of its Common Stock and
which has not been publicly announced.

(n)

Conduct of Business; Regulatory Permits.  Neither the Company nor its
Subsidiaries is in violation of any term of or in default under its Articles of
Incorporation or Bylaws or their organizational charter or certificate of
incorporation or bylaws, respectively.  Neither the Company nor any of its
Subsidiaries is in violation of any judgment, decree or order or any statute,
ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in
violation of any of the foregoing, except for possible violations which would
not, individually or in the aggregate, have a Material Adverse Effect.  Without
limiting the generality of the foregoing, the Company is not in violation of any
of the rules, regulations or requirements of the Principal Market and has no
knowledge of any facts or circumstances which would reasonably lead to delisting
or suspension of the Common Stock by the Principal Market in the foreseeable
future.  Since March 1, 2006, the Common Stock has been designated for quotation
on the Principal Market. During the two years prior to the date hereof, (i)
trading in the Common Stock has not been suspended by the SEC or the Principal
Market and (ii) the Company has received no communication, written or oral, from
the SEC or the Principal Market regarding the suspension or delisting of the
Common Stock from the Principal Market.  The Company and its Subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
regulatory authorities necessary to conduct their respective businesses, except
where the failure to possess such certificates, authorizations or permits would
not have, individually or in the aggregate, a Material Adverse Effect, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit.

(o)

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

(p)

Sarbanes-Oxley Act.  The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date

 

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hereof, and any and all applicable rules and regulations promulgated by the SEC
thereunder that are effective as of the date hereof, except where such
noncompliance would not have, individually or in the aggregate, a Material
Adverse Effect.

(q)

 Transactions With Affiliates.  Except as set forth in the SEC Documents filed
at least ten days prior to the date hereof and other than the grant of stock
options disclosed on Schedule 3(q), none of the officers, directors or employees
of the Company is presently a party to any transaction with the Company or any
of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
such officer, director or employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any such officer,
director, or employee has a substantial interest or is an officer, director,
trustee or partner.

(r)

Equity Capitalization.  As of the date hereof, the authorized capital stock of
the Company consists of (i) 2,000,000,000 shares of Common Stock, of which as of
the date hereof, 38,285,289 are issued and outstanding, up to 4,000,000 shares
will be reserved for issuance pursuant to the Company's stock option and
purchase plans and 4,141,378 shares are reserved for issuance pursuant to
securities (other than the Notes and the Warrants) exercisable or exchangeable
for, or convertible into, shares of Common Stock and (ii) 1,000,000 shares of
preferred stock, par value $0.0001 per share, of which as of the date hereof,
none are issued and outstanding.  All of such outstanding shares have been, or
upon issuance will be, validly issued and are fully paid and nonassessable.
 Except as disclosed in Schedule 3(r): (i) none of the Company's capital stock
is subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company; (ii) there are no outstanding
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may become bound to issue
additional capital stock of the Company or any of its Subsidiaries or options,
warrants, scrip, rights to subscribe to, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, or exercisable
or exchangeable for, any capital stock of the Company or any of its
Subsidiaries; (iii) there are no outstanding debt securities, notes, credit
agreements, credit facilities or other agreements, documents or instruments
evidencing Indebtedness of the Company or any of its Subsidiaries or by which
the Company or any of its Subsidiaries is or may become bound; (iv) there are no
financing statements securing obligations in any material amounts, either singly
or in the aggregate, filed in connection with the Company or any of its
Subsidiaries; (v) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement);
(vi) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries; (vii) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities; (viii) the Company does not have
any stock appreciation rights or "phantom stock" plans or agreements or any
similar plan or

 

- 12 -

 

agreement; and (ix) the Company and its Subsidiaries have no liabilities or
obligations required to be disclosed in the SEC Documents but not so disclosed
in the SEC Documents, other than those incurred in the ordinary course of the
Company's or its Subsidiaries' respective businesses and which, individually or
in the aggregate, do not or would not have a Material Adverse Effect.  The
Company has furnished to the Buyer true, correct and complete copies of the
Company's Articles of Incorporation, as amended and as in effect on the date
hereof (the "Articles of Incorporation"), and the Company's Bylaws, as amended
and as in effect on the date hereof (the "Bylaws"), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of
Common Stock and the material rights of the holders thereof in respect thereto.

(s)

Indebtedness and Other Contracts.  Except as disclosed in Schedule 3(s), neither
the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as
defined below), (ii) is a party to any contract, agreement or instrument, the
violation of which, or default under which, by the other party(ies) to such
contract, agreement or instrument would result in a Material Adverse Effect,
(iii) is in violation of any term of or in default under any contract, agreement
or instrument relating to any Indebtedness, except where such violations and
defaults would not result, individually or in the aggregate, in a Material
Adverse Effect, or (iv) is a party to any contract, agreement or instrument
relating to any Indebtedness, the performance of which, in the judgment of the
Company's officers, has or is expected to have a Material Adverse Effect.
 Schedule 3(s) provides a detailed description of the material terms of any such
outstanding Indebtedness.  For purposes of this Agreement:  (x) "Indebtedness"
of any Person means, without duplication (A) all indebtedness for borrowed
money, (B) all obligations issued, undertaken or assumed as the deferred
purchase price of property or services (other than trade payables entered into
in the ordinary course of business), (C) all reimbursement or payment
obligations with respect to letters of credit, surety bonds and other similar
instruments, (D) all obligations evidenced by notes, bonds, debentures or
similar instruments, including obligations so evidenced incurred in connection
with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention
agreement, or incurred as financing, in either case with respect to any property
or assets acquired with the proceeds of such indebtedness (even though the
rights and remedies of the seller or bank under such agreement in the event of
default are limited to repossession or sale of such property), (F) all monetary
obligations under any leasing or similar arrangement which, in connection with
generally accepted accounting principles, consistently applied for the periods
covered thereby, is classified as a capital lease, (G) all indebtedness referred
to in clauses (A) through (F) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any mortgage, lien, pledge, charge, security interest or other encumbrance upon
or in any property or assets (including accounts and contract rights) owned by
any Person, even though the Person which owns such assets or property has not
assumed or become liable for the payment of such indebtedness, and (H) all
Contingent Obligations in respect of indebtedness or obligations of others of
the kinds referred to in clauses (A) through (G) above; (y) "Contingent
Obligation" means, as to any Person, any direct or indirect liability,
contingent or otherwise, of that Person with respect to any indebtedness, lease,
dividend or other obligation of another Person if the primary purpose or intent
of the Person incurring such liability, or the primary effect thereof, is to
provide assurance to the obligee of such liability that such liability will be
paid or discharged, or that any agreements relating thereto will be complied
with, or that the holders of such liability will be protected (in whole or in
part) against loss with respect thereto; and (z) "Person" means an individual, a
limited liability company, a partnership,

 

- 13 -

 

a joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.

(t)

Absence of Litigation.  There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company, threatened against or affecting the Company, the
Common Stock or any of the Company's Subsidiaries or any of the Company's or its
Subsidiaries' officers or directors in their capacities as such, except as set
forth in Schedule 3(t).

(u)

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

(v)

Employee Relations.  i)  Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
 The Company and its Subsidiaries believe that their relations with their
employees are good.  No executive officer of the Company or any of its
Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or
otherwise terminate such officer's employment with the Company or any such
Subsidiary.  No executive officer of the Company or any of its Subsidiaries, to
the knowledge of the Company, is, or is now expected to be, in violation of any
material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each such executive officer does not subject the Company or any of its
Subsidiaries to any liability with respect to any of the foregoing matters.

(ii)

The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

(w)

Title.  The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries.   Any real property and facilities held
under lease by the Company and any of its Subsidiaries are held by them under
valid, subsisting and enforceable

 

- 14 -

 

leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its Subsidiaries.

(x)

Intellectual Property Rights.  The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks,
service mark registrations, service names, patents, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
other intellectual property rights ("Intellectual Property Rights") necessary to
conduct their respective businesses as now conducted.  Except as set forth in
Schedule 3(x), none of the Company's Intellectual Property Rights have expired
or terminated, or are expected to expire or terminate, within three years from
the date of this Agreement.  The Company does not have any knowledge of any
infringement by the Company or its Subsidiaries of Intellectual Property Rights
of others.  There is no claim, action or proceeding being made or brought, or to
the knowledge of the Company, being threatened, against the Company or its
Subsidiaries regarding its Intellectual Property Rights.  The Company is unaware
of any facts or circumstances which might give rise to any of the foregoing
infringements or claims, actions or proceedings.  The Company and its
Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their intellectual properties.

(y)

Environmental Laws.  The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so
comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect.  The term "Environmental Laws" means all federal,
state, local or foreign laws relating to pollution or protection of human health
or the environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, "Hazardous Materials") into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

(z)

Subsidiary Rights.  Except as set forth in Schedule 3(z), the Company or one of
its Subsidiaries has the unrestricted right to vote, and (subject to limitations
imposed by applicable law) to receive dividends and distributions on, all
capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.

(aa)

Investment Company.  The Company is not, and is not an affiliate of, an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.

(bb)

Tax Status.  The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject, (ii) has paid
all taxes and other governmental

 

- 15 -

 

assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and (iii) has set aside on its books provision reasonably adequate
for the payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply.  There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.

(cc)

Internal Accounting and Disclosure Controls.  The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
and liability accountability, (iii) access to assets or incurrence of
liabilities is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets and
liabilities is compared with the existing assets and liabilities at reasonable
intervals and appropriate action is taken with respect to any difference (the
"Internal Accounting Controls").  The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is recorded,
processed, summarized and reported, within the time periods specified in the
rules and forms of the SEC, including, without limitation, controls and
procedures designed in to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the 1934 Act is
accumulated and communicated to the Company's management, including its
principal executive officer or officers and its principal financial officer or
officers, as appropriate, to allow timely decisions regarding required
disclosure.

(dd)

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

(ee)

Ranking of Notes.  Except as set forth on Schedule (ee), no Indebtedness of the
Company is senior to or ranks pari passu with the Notes in right of payment,
whether with respect of payment of redemptions, interest, damages or upon
liquidation or dissolution or otherwise.

(ff)

Form S-1 Eligibility.  The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under
the 1933 Act.

(gg)

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

 

- 16 -

 

(hh)

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

(ii)

Acknowledgement Regarding Buyers' Trading Activity.  It is understood and
acknowledged by the Company (i) that none of the Buyers have been asked to
agree, nor has any Buyer agreed, to desist from purchasing or selling, long
and/or short, securities of the Company, or "derivative" securities based on
securities issued by the Company or to hold the Securities for any specified
term; (ii) that any Buyer, and counter parties in "derivative" transactions to
which any such Buyer is a party, directly or indirectly, presently may have a
"short" position in the Common Stock, and (iii) that each Buyer shall not be
deemed to have any affiliation with or control over any arm's length
counter-party in any "derivative" transaction.  The Company further understands
and acknowledges that one or more Buyers may engage in hedging and/or trading
activities at various times during the period that the Securities are
outstanding, including, without limitation, during the periods that the value of
the Conversion Shares and the Warrant Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading activities,
if any, can reduce the value of the existing stockholders' equity interest in
the Company both at and after the time the hedging and/or trading activities are
being conducted.  The Company acknowledges that such aforementioned hedging
and/or trading activities do not constitute a breach of this Agreement, the
Notes, the Warrants or any of the documents executed in connection herewith.

(jj)

U.S. Real Property Holding Corporation.  The Company is not, nor has ever been,
a U.S. real property holding corporation within the meaning of Section 897 of
the Internal Revenue Code of 1986, as amended, and the Company shall so certify
upon Buyer's request.

(kk)

Disclosure.  The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any
information that constitutes or could reasonably be expected to constitute
material, nonpublic information other than the existence of the transactions
contemplated by this Agreement or the other Transaction Documents.  The Company
understands and confirms that each of the Buyers will rely on the foregoing
representations in effecting transactions in securities of the Company.  All
disclosure provided to the Buyers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this Agreement,
furnished by or on behalf of the Company is true and correct in all material
respects and does not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
 Each press release issued by the Company during the twelve (12) months
preceding the date of this Agreement did not at the time of release contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading.  No event
or circumstance has occurred or information exists with respect to the Company
or any of its

 

- 17 -

 

Subsidiaries or its or their business, properties, prospects, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed.  

4.

COVENANTS.

(a)

Best Efforts.  Each party shall use its best efforts timely to satisfy each of
the conditions to be satisfied by it as provided in Sections 6 and 7 of this
Agreement.

(b)

Form D and Blue Sky.  The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each
Buyer promptly after such filing.  The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States (or to obtain an exemption
from such qualification), and shall provide evidence of any such action so taken
to the Buyers on or prior to the Closing Date.  The Company shall make all
filings and reports relating to the offer and sale of the Securities required
under applicable securities or "Blue Sky" laws of the states of the United
States following the Closing Date.  

(c)

Reporting Status.  Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares and
Warrant Shares and none of the Notes or Warrants is outstanding (the "Reporting
Period"), the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would otherwise permit such termination.

(d)

Use of Proceeds.  The Company will use the proceeds from the sale of the
Securities for general corporate and for working capital purposes, provided
however, that not less than 50% of the Purchase Price, after giving effect to
costs of the placement, shall be allocated to purchase inventory; provided,
further, that the Company may not use the proceeds from the sale of the
Securities for (i) the repayment of any other outstanding Indebtedness of the
Company or any of its Subsidiaries, other than Indebtedness set forth on
Schedule 4(d) or (ii) the redemption or repurchase of any of its or its
Subsidiaries' equity securities.

(e)

Financial Information.  The Company agrees to send the following to each
Investor during the Reporting Period (i) unless the following are filed with the
SEC through EDGAR and are available to the public through the EDGAR system,
within one (1) Business Day after the filing thereof with the SEC, a copy of its
Annual Reports on Form 10-K or 10-KSB, any interim reports or any consolidated
balance sheets, income statements, stockholders' equity statements and/or cash
flow statements for any period other than annual, any Current Reports on Form
8-K and any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, if not
publicly filed, facsimile or e-mailed copies of all press releases issued by the
Company or any of its Subsidiaries, and (iii) copies of any notices and other
information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.

 

- 18 -

 

(f)

Listing.  The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents.  The Company shall
maintain the Common Stocks' authorization for quotation on the Principal Market.
 Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market.  The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(f).

(g)

Fees.  The Company shall reimburse Castlerigg Master Investments Ltd. (a Buyer)
("Castlerigg") or its designee(s) (in addition to any other expense amounts paid
to any Buyer prior to the date of this Agreement) for all reasonable
documentation costs and expenses incurred in connection with the transactions
contemplated by the Transaction Documents (including all reasonable legal fees
and disbursements in connection therewith, documentation and implementation of
the transactions contemplated by the Transaction Documents and due diligence in
connection therewith), which amount shall be withheld by such Buyer from its
Purchase Price at the Closing.  Castlerigg acknowledges receipt of $50,000
delivered prior to the date hereof as an advance against such costs, including
legal fees. The Company shall be responsible for the payment of any placement
agent's fees, financial advisory fees, or broker's commissions (other than for
Persons engaged by any Buyer) relating to or arising out of the transactions
contemplated hereby, including, without limitation, any fees or commissions
payable to the Placement Agent.  The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
reasonable attorney's fees and out-of-pocket expenses) arising in connection
with any claim against a Buyer relating to any such payment.  Except as
otherwise set forth in the Transaction Documents, each party to this Agreement
shall bear its own expenses in connection with the sale of the Securities to the
Buyers.

(h)

Pledge of Securities.  The Company acknowledges and agrees that the Securities
may be pledged by an Investor (as defined in the Registration Rights Agreement)
in connection with a bona fide margin agreement or other loan or financing
arrangement that is secured by the Securities.  The pledge of Securities shall
not be deemed to be a transfer, sale or assignment of the Securities hereunder,
and no Investor effecting a pledge of Securities shall be required to provide
the Company with any notice thereof or otherwise make any delivery to the
Company pursuant to this Agreement or any other Transaction Document, including,
without limitation, Section 2(f) hereof; provided that an Investor and its
pledgee shall be required to comply with the provisions of Section 2(f) hereof
in order to effect a sale, transfer or assignment of Securities to such pledgee.
 The Company hereby agrees to execute and deliver such documentation as a
pledgee of the Securities may reasonably request in connection with a pledge of
the Securities to such pledgee by an Investor.

(i)

Disclosure of Transactions and Other Material Information.  On or before 8:30
a.m., New York Time, on the first Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching

 

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the material Transaction Documents (including, without limitation, this
Agreement (and all schedules to this Agreement), the form of each of the Notes,
the form of Warrant, the Registration Rights Agreement and the Security
Documents) as exhibits to such filing (including all attachments, the "8-K
Filing").  From and after the filing of the 8-K Filing with the SEC, no Buyer
shall be in possession of any material, nonpublic information received from the
Company, any of its Subsidiaries or any of their respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing.  The Company shall
not, and shall cause each of its Subsidiaries and its and each of their
respective officers, directors, employees and agents, not to, provide any Buyer
with any material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer.  No Buyer shall have any liability to
the Company, its Subsidiaries, or any of its or their respective officers,
directors, employees, stockholders or agents for any such disclosure.  Subject
to the foregoing, neither the Company, its Subsidiaries nor any Buyer shall
issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or
other public disclosure with respect to such transactions (i) in substantial
conformity with the 8-K Filing and contemporaneously therewith and (ii) as is
required by applicable law and regulations (provided that in the case of clause
(i) the Required Holders shall be consulted by the Company in connection with
any such press release or other public disclosure prior to its release).
 Without the prior written consent of any applicable Buyer, the Company shall
not disclose the name of any Buyer in any filing, announcement, release or
otherwise.  

(j)

Restriction on Redemption and Cash Dividends.  So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare
or pay any cash dividend or distribution on, the Common Stock without the prior
express written consent of the Required Holders (as defined in the Notes).

(k)

Additional Notes; Variable Securities; Dilutive Issuances.  So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes other
than to the Buyers as contemplated hereby and the Company shall not issue any
other securities that would cause a breach or default under the Notes.  For long
as any Notes or Warrants remain outstanding, the Company shall not, in any
manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable
or exercisable for Common Stock at a price which varies or may vary with the
market price of the Common Stock, including by way of one or more reset(s) to
any fixed price unless the conversion, exchange or exercise price of any such
security cannot be less than the then applicable Conversion Price (as defined in
the Notes) with respect to the Common Stock into which any Note is convertible
or the then applicable Exercise Price (as defined in the Warrants) with respect
to the Common Stock into which any Warrant is exercisable.  For long as any
Notes or Warrants remain outstanding, the Company shall not, in any manner,
enter into or affect any Dilutive Issuance (as defined in the Notes) if the
effect of such Dilutive Issuance is to cause the Company to be required to issue
upon conversion of any Note or exercise of any Warrant any shares of Common
Stock in excess of that number of shares of Common Stock which the Company may
issue upon conversion of the Notes and exercise of the Warrants without
breaching the Company's obligations under the rules or regulations of the
Eligible Market (as defined in the Registration Rights Agreement).

 

- 20 -

 

(l)

Corporate Existence.  So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the
Notes) unless the Company is in compliance with the applicable provisions
governing Fundamental Transactions set forth in the Notes and the Warrants.

(m)

Reservation of Shares.  So long as any Buyer owns any Securities, the Company
shall take all action necessary to at all times have authorized, and reserved
for the purpose of issuance, no less than 175% of the number of shares of Common
Stock issuable upon conversion of all of the Notes and issuable upon exercise of
the Warrants then outstanding (without taking into account any limitations on
the conversion of the Notes or exercise of the Warrants set forth in the Notes
and Warrants, respectively).

(n)

Conduct of Business.  The business of the Company and its Subsidiaries shall not
be conducted in violation of any law, ordinance or regulation of any
governmental entity, except where such violations would not result, either
individually or in the aggregate, in a Material Adverse Effect.

(o)

Additional Issuances of Securities.

(i)

For purposes of this Section 4(o), the following definitions shall apply.

(1)

"Convertible Securities" means any stock or securities (other than Options)
convertible into or exercisable or exchangeable for shares of Common Stock.

(2)

"Options" means any rights, warrants or options to subscribe for or purchase
shares of Common Stock or Convertible Securities.

(3)

"Common Stock Equivalents" means, collectively, Options and Convertible
Securities.

(ii)

From the date hereof until the date that is 30 Trading Days (as defined in the
Notes) following the Effective Date (as defined in the Registration Rights
Agreement) (the "Trigger Date"), the Company will not, directly or indirectly,
offer, sell, grant any option to purchase, or otherwise dispose of (or announce
any offer, sale, grant or any option to purchase or other disposition of) any of
its or its Subsidiaries' equity or equity equivalent securities, including
without limitation any debt, preferred stock or other instrument or security
that is, at any time during its life and under any circumstances, convertible
into or exchangeable or exercisable for shares of Common Stock or Common Stock
Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a "Subsequent Placement").

(iii)

From the Trigger Date until the date on which none of the Notes is outstanding,
the Company will not, directly or indirectly, effect any Subsequent Placement
unless the Company shall have first complied with this Section 4(o)(iii).

 

- 21 -

 

(1)

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

(2)

To accept an Offer, in whole or in part, such Buyer must deliver a written
notice to the Company prior to the end of the tenth (10th) Business Day after
such Buyer's receipt of the Offer Notice (the "Offer Period"), setting forth the
portion of such Buyer's Basic Amount that such Buyer elects to purchase and, if
such Buyer shall elect to purchase all of its Basic Amount, the
Undersubscription Amount, if any, that such Buyer elects to purchase (in either
case, the "Notice of Acceptance").  If the Basic Amounts subscribed for by all
Buyers are less than the total of all of the Basic Amounts, then each Buyer who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all the Basic Amounts and the Basic Amounts subscribed for (the "Available
Undersubscription Amount"), each Buyer who has subscribed for any
Undersubscription Amount shall be entitled to purchase only that portion of the
Available Undersubscription Amount as the Basic Amount of such Buyer bears to
the total Basic Amounts of all Buyers that have subscribed for Undersubscription
Amounts, subject to rounding by the Company to the extent its deems reasonably
necessary.

(3)

The Company shall have ten (10) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered
Securities as to which a Notice of Acceptance has not been given by the Buyers
(the "Refused Securities"), but only to the offerees described in the Offer
Notice (if so described therein) and only upon terms and conditions (including,
without limitation, unit prices and interest rates) that are not more favorable
to the acquiring person or persons or less favorable to the Company than those
set forth in the Offer Notice.

(4)

In the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in
Section 4(o)(iii)(3) above), then each Buyer may, at its sole option and in its
sole discretion, reduce the number or amount of the Offered Securities specified
in its Notice

 

- 22 -

 

of Acceptance to an amount that shall be not less than the number or amount of
the Offered Securities that such Buyer elected to purchase pursuant to Section
4(o)(iii)(2) above multiplied by a fraction, (i) the numerator of which shall be
the number or amount of Offered Securities the Company actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
Buyers pursuant to Section 4(o)(iii)(3) above prior to such reduction) and (ii)
the denominator of which shall be the original amount of the Offered Securities.
 In the event that any Buyer so elects to reduce the number or amount of Offered
Securities specified in its Notice of Acceptance, the Company may not issue,
sell or exchange more than the reduced number or amount of the Offered
Securities unless and until such securities have again been offered to the
Buyers in accordance with Section 4(o)(iii)(1) above.

(5)

Upon the closing of the issuance, sale or exchange of all or less than all of
the Refused Securities, the Buyers shall acquire from the Company, and the
Company shall issue to the Buyers, the number or amount of Offered Securities
specified in the Notices of Acceptance, as reduced pursuant to Section
4(o)(iii)(3) above if the Buyers have so elected, upon the terms and conditions
specified in the Offer.  The purchase by the Buyers of any Offered Securities is
subject in all cases to the preparation, execution and delivery by the Company
and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective
counsel and to the Company and its counsel.

(6)

Any Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(o)(iii)(3) above may not be issued, sold or exchanged until they
are again offered to the Buyers under the procedures specified in this
Agreement.

(iv)

The restrictions contained in subsections (ii) and (iii) of this Section 4(o)
shall not apply in connection with the issuance of any Excluded Securities (as
defined in the Notes).

(p)

Additional Registration Statements.  Until the Effective Date (as defined in the
Registration Rights Agreement), the Company will not file a registration
statement under the 1933 Act relating to securities that are not the Securities.
 

(q)

Stockholder Approval.  The Company shall provide each stockholder entitled to
vote at a special or annual meeting of stockholders of the Company (the
"Stockholder Meeting"), which shall be promptly called and held not later than
July 30, 2006 (the "Stockholder Meeting Deadline"), a proxy statement,
substantially in the form which has been previously reviewed by the Buyers and
Schulte Roth & Zabel LLP, soliciting each such stockholder's affirmative vote at
the Stockholder Meeting for approval of resolutions providing for the Company's
issuance of all of the Securities as described in the Transaction Documents in
accordance with applicable law and the rules and regulations of the Principal
Market and such affirmative approval being referred to herein as the
"Stockholder Approval"), and the Company shall use its reasonable best efforts
to solicit its stockholders' approval of such resolutions  and to cause the
Board of Directors of the Company to recommend to the stockholders that they
approve such resolutions.  The Company shall be obligated to use its reasonable
best efforts to

 

- 23 -

 

obtain the Stockholder Approval by the Stockholder Meeting Deadline.  If,
despite the Company's reasonable best efforts the Stockholder Approval is not
obtained on or prior to the Stockholder Meeting Deadline, the Company shall
cause an additional Stockholder Meeting to be held every six (6) months
thereafter until such Stockholder Approval is obtained or the Notes are no
longer outstanding.

(r)

Letter of Credit.  On any Disclosure Date (as defined in the Notes), the Company
shall obtain an irrevocable letter of credit (the "Letter of Credit"), in the
amount of $5,000,000 issued in favor of Castlerigg (the "LC Agent") by a bank
acceptable to such LC Agent (the "Letter of Credit Bank") and in form and
substance acceptable to such LC Agent.  Subject to the last three sentences of
this Section 4(r), the Letter of Credit shall expire not earlier than 91 days
after the Maturity Date of the Notes (the "LC Expiration Date").  Upon the
occurrence and during the continuance of an Event of Default under (and as
defined in) the Notes, the LC Agent shall be entitled to draw under the Letter
of Credit for the full Letter of Credit Amount (as defined in the Notes) then
available thereunder, it being understood that the LC Agent shall act for the
benefit of the Buyers on a pro rata basis based on the principal amount of the
Notes held by each of the Buyers and hold such amount as collateral security for
the obligations under the Notes for the benefit of the Buyers.  The Company
shall obtain such renewals, extensions or replacements of the Letter of Credit
as necessary to ensure that the Letter of Credit shall not expire prior to the
LC Expiration Date (unless the Letter of Credit shall have been reduced to zero
in accordance with the terms contained in this Section 4(r) prior to such date).
 If, at any time, the Company cannot obtain a renewal, extension or replacement
of the Letter of Credit such that the Letter of Credit will expire prior to the
LC Expiration Date (a "Withdrawal Event"), the Company and the Letter of Credit
Bank shall each give the LC Agent written notice of the occurrence of a
Withdrawal Event at least forty-five (45) days prior to the then current
expiration date of the Letter of Credit.  Following a Withdrawal Event, the LC
Agent shall be entitled to draw down the Letter of Credit Amount in its entirety
(whether or not an Event of Default shall have occurred or be continuing under
any of the Notes) and hold such amount as collateral security for the
obligations under the Notes for the benefit of the Buyers.

(s)

LC Agent.  Castlerigg is hereby appointed as the LC Agent for the Buyers
hereunder, and each Buyer hereby authorizes the LC Agent (and its officers,
directors, employees and agents) to take any and all such actions on behalf of
such Buyer with respect to the Letter of Credit in accordance with the terms of
this Agreement.  The LC Agent shall not have, by reason hereof or any of the
other Transaction Documents, a fiduciary relationship in respect of the Buyers.
 Neither the LC Agent nor any of its officers, directors, employees and agents
shall have any liability to the Buyers for any action taken or omitted to be
taken in connection hereof except to the extent caused by its own gross
negligence or willful misconduct, and the Buyers agrees to defend, protect,
indemnify and hold harmless the LC Agent and all of its officers, directors,
employees and agents (collectively, the "Indemnitees") from and against any
losses, damages, liabilities, obligations, penalties, actions, judgments, suits,
fees, costs and expenses (including, without limitation, reasonable attorneys'
fees, costs and expenses) incurred by such Indemnitee, as incurred, whether
direct, indirect or consequential, arising from or in connection with the
performance by such Indemnitee of the duties and obligations of the LC Agent
pursuant hereto.

 

- 24 -

 

(t)

Collateral Agent.  Each Buyer hereby (a) appoints Castlerigg, as the collateral
agent hereunder and under the other Security Documents (in such capacity, the
"Collateral Agent"), and (b) authorizes the Collateral Agent (and its officers,
directors, employees and agents) to take such action on such Buyer's behalf in
accordance with the terms hereof and thereof.  The Collateral Agent shall not
have, by reason hereof or any of the other Security Documents, a fiduciary
relationship in respect of any Buyer.  Neither the Collateral Agent nor any of
its officers, directors, employees and agents shall have any liability to any
Buyer for any action taken or omitted to be taken in connection hereof or any
other Security Document except to the extent caused by its own gross negligence
or willful misconduct, and each Buyer agrees to defend, protect, indemnify and
hold harmless the Collateral Agent and all of its officers, directors, employees
and agents (collectively, the "Indemnitees") from and against any losses,
damages, liabilities, obligations, penalties, actions, judgments, suits, fees,
costs and expenses (including, without limitation, reasonable attorneys' fees,
costs and expenses) incurred by such Indemnitee, whether direct, indirect or
consequential, arising from or in connection with the performance by such
Indemnitee of the duties and obligations of Collateral Agent pursuant hereto or
any of the Security Documents.

(u)

Account Control Agreements.  

(i)

The Company shall deliver to the Collateral Agent within ten (10) Business Days
following the Closing Date, a deposit account control agreement, in form and
substance satisfactory to the Collateral Agent, duly executed by the Company,
the Collateral Agent and Israel Discount Bank (the "Depository Bank") with
respect to the accounts of the Company and, if applicable, the accounts of its
Subsidiaries maintained at the Depository Bank.

(ii)

The Company shall deliver to Collateral Agent by July 31, 2006 either (x)
evidence that all accounts maintained by the Company and its Subsidiaries at
Bank Leumi have been closed, or (y) a deposit account control agreement, in form
and substance satisfactory to the Collateral Agent, duly executed by the
Company, the Collateral Agent and Bank Leumi with respect to the accounts of the
Borrower and, if applicable, the accounts of its Subsidiaries maintained at Bank
Leumi.

5.

REGISTER; TRANSFER AGENT INSTRUCTIONS.

(a)

Register.  The Company shall maintain at its principal executive offices (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Notes and the Warrants in which the
Company shall record the name and address of the Person in whose name the Notes
and the Warrants have been issued (including the name and address of each
transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and Warrant Shares
issuable upon exercise of the Warrants held by such Person.  The Company shall
keep the register open and available at all times during business hours for
inspection of any Buyer or its legal representatives following reasonable
written notice of not less than two Business Days.

(b)

Transfer Agent Instructions.  The Company shall issue irrevocable instructions
to its transfer agent, and any subsequent transfer agent, to issue certificates
or credit

 

- 25 -

 

shares to the applicable balance accounts at The Depository Trust Company
("DTC"), registered in the name of each Buyer or its respective nominee(s), for
the Conversion Shares and the Warrant Shares issued at the Closing or upon
conversion of the Notes or exercise of the Warrants in such amounts as specified
from time to time by each Buyer to the Company upon conversion of the Notes or
exercise of the Warrants in the form of Exhibit G attached hereto (the
"Irrevocable Transfer Agent Instructions").  The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5(b), and stop transfer instructions to give effect to Section
2(g) hereof, will be given by the Company to its transfer agent, and that the
Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the other
Transaction Documents.  If a Buyer effects a sale, assignment or transfer of the
Securities in accordance with Section 2(f), the Company shall permit the
transfer and shall promptly instruct its transfer agent to issue one or more
certificates or credit shares to the applicable balance accounts at DTC in such
name and in such denominations as specified by such Buyer to effect such sale,
transfer or assignment.  In the event that such sale, assignment or transfer
involves Conversion Shares or Warrant Shares sold, assigned or transferred
pursuant to an effective registration statement or pursuant to Rule 144, the
transfer agent shall issue such Securities to the Buyer, assignee or transferee,
as the case may be, without any restrictive legend.  The Company acknowledges
that a breach by it of its obligations hereunder will cause irreparable harm to
a Buyer.  Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5(b) will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 5(b), that a Buyer shall be entitled, in addition to all other
available remedies, to an order and/or injunction restraining any breach and
requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.

6.

CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

Closing Date.  The obligation of the Company hereunder to issue and sell the
Notes and the related Warrants to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
each Buyer with prior written notice thereof:

(i)

Such Buyer shall have executed each of the Transaction Documents to which it is
a party and delivered the same to the Company.

(ii)

Such Buyer and each other Buyer shall have delivered to the Company the Purchase
Price (less, in the case of Castlerigg, the amounts withheld pursuant to Section
4(g)) for the Notes and the related Warrants being purchased by such Buyer at
the Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.

(iii)

The representations and warranties of such Buyer shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and such Buyer shall have performed, satisfied and
complied in all material respects

 

- 26 -

 

with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by such Buyer at or prior to the Closing
Date.

7.

CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

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

(i)

The Company shall have executed and delivered to such Buyer (A) each of the
Transaction Documents, (B) the Notes (in such principal amounts as such Buyer
shall request) being purchased by such Buyer at the Closing pursuant to this
Agreement, and (C) the Warrants (in such amounts as such Buyer shall request)
being purchased by such Buyer at the Closing pursuant to this Agreement.

(ii)

Such Buyer shall have received the opinion of Resch Polster Alpert & Berger
LLP , the Company's outside counsel, dated as of the Closing Date, in
substantially the form of Exhibit H attached hereto.

(iii)

The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit G attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company's transfer agent.

(iv)

The Company shall have delivered to such Buyer a true copy of certificate
evidencing the formation and good standing of the Company and each of its
Subsidiaries in such entity's jurisdiction of formation issued by the Secretary
of State (or comparable office) of such jurisdiction, as of a date within 10
days of the Closing Date.

(v)

The Company shall have delivered to such Buyer a true copy of certificate
evidencing the Company's qualification as a foreign corporation and good
standing issued by the Secretary of State (or comparable office) of each
jurisdiction in which the Company conducts business, as of a date within 10 days
of the Closing Date.

(vi)

The Company shall have delivered to such Buyer a certified copy of the Articles
of Incorporation as certified by the Secretary of State of the State of Nevada
within ten (10) days of the Closing Date.

(vii)

The Company shall have delivered to such Buyer a certificate, executed by the
Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company's Board of
Directors in a form reasonably acceptable to such Buyer, (ii) the Articles of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit I.

(viii)

The representations and warranties of the Company shall be true and correct in
all material respects (other than representations and warranties that are

 

- 27 -

 

already qualified by materiality or Material Adverse Effect which shall be true
and correct in all respects) as of the date when made and as of the Closing Date
as though made at that time (except for representations and warranties that
speak as of a specific date) and the Company shall have performed, satisfied and
complied in all respects with the covenants, agreements and conditions required
by the Transaction Documents to be performed, satisfied or complied with by the
Company at or prior to the Closing Date.  Such Buyer shall have received a
certificate, executed by the Chief Executive Officer of the Company, dated as of
the Closing Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Buyer in the form attached hereto as Exhibit J.

(ix)

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

(x)

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

(xi)

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

(xii)

In accordance with the terms of the Security Documents, the Company shall have
delivered to the Collateral Agent certificates representing the Subsidiaries'
shares of capital stock, along with duly executed blank stock powers.

(xiii)

Within six (6) Business Days prior to the Closing, the Company shall have
delivered or caused to be delivered to each Buyer (A) true copies of UCC search
results, listing all effective financing statements which name as debtor the
Company or any of its Subsidiaries filed in the prior five years to perfect an
interest in any assets thereof, together with copies of such financing
statements, none of which, except as otherwise agreed in writing by the Buyers,
shall cover any of the Collateral (as defined in the Security Documents) and the
results of searches for any tax lien and judgment lien filed against such Person
or its property, which results, except as otherwise agreed to in writing by the
Buyers shall not show any such Liens (as defined in the Security Documents); and
(B) a perfection certificate, duly completed and executed by the Company and
each of its Subsidiaries, in form and substance satisfactory to the Buyers.

(xiv)

The Company shall have received written consents from each of the licensors with
respect to the Interplanet License (as defined in the Notes) and the Sandbox
License (as defined in the Notes) in a manner satisfactory to the Buyer and to
allow the Notes to be secured by a first priority security interest in all of
Company’s and its Subsidiaries’ assets, and capital stock in a manner
satisfactory to such Buyer.

 

- 28 -

 

(xv)

The Company shall have filed with the United States Patent and Trademark Office
(the "PTO") documents sufficient to overcome any PTO refusal to register the
HOUSE OF TAYLOR and HOUSE OF TAYLOR JEWELRY trademarks.

(xvi)

The Company shall have entered into the Voting Agreement, substantially in the
form attached hereto as Exhibit K, executed by the Company and Interplanet
Productions, Ltd., Sandbox Jewelry LLC, Jack Abramov, Monty Abramov and the
Abramov Trust (the "Voting Agreement").

(xvii)

The Company shall deliver to such Buyer evidence of the termination of the line
of credit with Bank Leumi and all security interests related thereto together
with authorization from Bank Leumi to file and terminate all existing liens
filed in connection therewith.

(xviii)

The Company shall deliver to such Buyer evidence of the termination of the line
of credit with the Depository Bank and all security interests related thereto
together with authorization from the Depository Bank to file and terminate all
existing liens filed in connection therewith.

(xix)

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

8.

TERMINATION.  In the event that the Closing shall not have occurred with respect
to a Buyer on or before five (5) Business Days from the date hereof due to the
Company's or such Buyer's failure to satisfy the conditions set forth in
Sections 6 and 7 above (and the nonbreaching party's failure to waive such
unsatisfied condition(s)), the nonbreaching party shall have the option to
terminate this Agreement with respect to such breaching party at the close of
business on such date without liability of any party to any other party;
provided, however, this if this Agreement is terminated pursuant to this Section
8, the Company shall remain obligated to reimburse the non-breaching Buyers for
their expenses described in Section 4(g) above.

9.

MISCELLANEOUS.

(a)

Governing Law; Jurisdiction; Jury Trial.  All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York.  Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper.  Each party hereby
irrevocably waives personal service of process and

 

- 29 -

 

consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
 EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREBY.

(b)

Counterparts.  This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.

(c)

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

(d)

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

(e)

Entire Agreement; Amendments.  This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyers, the Company, their affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor any Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters.  No provision of this Agreement may
be amended other than by an instrument in writing signed by the Company and the
Required Holders, and any amendment to this Agreement made in conformity with
the provisions of this Section 9(e) shall be binding on all Buyers and holders
of Securities, as applicable.  No provision hereof may be waived other than by
an instrument in writing signed by the party against whom enforcement is sought.
 No such amendment shall be effective to the extent that it applies to less than
all of the holders of the applicable Securities then outstanding.  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 also is offered to all of the parties to the
Transaction Documents, holders of Notes or holders of the Warrants, as the case
may be.  The Company has not, directly or indirectly, made any agreements with
any Buyers relating to the terms or conditions of the transactions contemplated
by the Transaction Documents except as set forth in the Transaction Documents.

 

- 30 -

 

(f)

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

If to the Company:

House of Taylor Jewelry, Inc.
9200 Sunset Boulevard, Suite 425
West Hollywood, CA 90069
Telephone:

(310) 860-2660
Facsimile:

(310) 860-2661
Attention:

Pauline Schneider

Copy to (for informational purposes only):

Resch Polster Alpert & Berger LLP 
10390 Santa Monica Boulevard, Fourth Floor
Los Angeles, CA 90025-5058
Telephone:

(310) 277-8300 
Facsimile:

(310) 552-3209 
Attention:

Aaron A. Grunfeld, Esq.

If to the Transfer Agent:

US Stock Transfer Corporation
1745 Gardena Avenue

Glendale, CA  91204
Facsimile:  

(818) 502-1404
Attention:  

Christine Moore

If to a Buyer, to its address and facsimile number set forth on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers,

with a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York  10022
Telephone:

(212) 756-2000
Facsimile:

(212) 593-5955
Attention:

Eleazer N. Klein, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to

 

- 31 -

 

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

(g)

Successors and Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including
any purchasers of the Notes or the Warrants.  The Company shall not assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the Required Holders (unless the Company is in compliance with the
applicable provisions governing Fundamental Transactions set forth in the Notes
and the Warrants).  A Buyer may assign some or all of its rights hereunder
without the consent of the Company, in which event such assignee shall be deemed
to be a Buyer hereunder with respect to such assigned rights; provided that such
assignee agrees in writing with the Company (i) to be bound by all of the
provisions contained herein and (ii) that the representations and warranties of
such assignee set forth in Section 2 hereof are true and correct as if made by
such assignee on the date of such assignment.

(h)

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

(i)

Survival.  Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in
Sections 2 and 3 and the agreements and covenants set forth in Sections 4, 5 and
9 shall survive the Closing.  Each Buyer shall be responsible only for its own
representations, warranties, agreements and covenants hereunder.

(j)

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

(k)

Indemnification.  In consideration of each Buyer's execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to
all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless each Buyer and each
other holder of the Securities and all of their stockholders, partners, members,
officers, directors, employees and direct or indirect investors and any of the
foregoing Persons' agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the "Indemnitees") from and against any and all
actions, causes of action, suits, claims, losses, costs, penalties, fees,
liabilities and damages, and expenses in connection therewith (irrespective of
whether any such Indemnitee is a party to the action for which indemnification
hereunder is sought), and including reasonable attorneys' fees and disbursements
(the "Indemnified Liabilities"), incurred by any Indemnitee as a result of, or
arising out of, or

 

- 32 -

 

relating to (a) any misrepresentation or breach of any representation or
warranty made by the Company in the Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby or (c) any cause of action, suit or claim brought
or made against such Indemnitee by a third party (including for these purposes a
derivative action brought on behalf of the Company) and arising out of or
resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any transaction financed or to be financed
in whole or in part, directly or indirectly, with the proceeds of the issuance
of the Securities, (iii) any disclosure made by such Buyer pursuant to Section
4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the
Transaction Documents.  To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities which is permissible under applicable law.  Except as otherwise set
forth herein, the mechanics and procedures with respect to the rights and
obligations under this Section 9(k) shall be the same as those set forth in
Section 6 of the Registration Rights Agreement.

(l)

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

(m)

Remedies.  Each Buyer and each holder of the Securities shall have all rights
and remedies set forth in the Transaction Documents and all rights and remedies
which such holders have been granted at any time under any other agreement or
contract and all of the rights which such holders have under any law.  Any
Person having any rights under any provision of this Agreement shall be entitled
to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement
and to exercise all other rights granted by law.  Furthermore, the Company
recognizes that in the event that it fails to perform, observe, or discharge any
or all of its obligations under the Transaction Documents, any remedy at law may
prove to be inadequate relief to the Buyers.  The Company therefore agrees that
the Buyers shall be entitled to seek temporary and permanent injunctive relief
in any such case without the necessity of proving actual damages and without
posting a bond or other security.

(n)

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

 

- 33 -

 

(o)

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

[Signature Page Follows]

 

- 34 -

 

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

COMPANY:

HOUSE OF TAYLOR JEWELRY, INC.

By:

Name:

Title:  

 

   

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

BUYERS:

CASTLERIGG MASTER INVESTMENTS LTD.

By:

Name:

Title:   

 

   

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

OTHER BUYERS:

By:

Name:

Title:

 

   

SCHEDULE OF BUYERS

(1)

(2)

(3)

(4)

(5)

(6)

(7)

(6)

Buyer

Address and
Facsimile Number

Aggregate
Principal
Amount of
Notes

Number of
Series A
Warrant Shares

Number of
Series B
Warrant Shares

Number of
Series C
Warrant Shares

Purchase Price

Legal Representative's Address and Facsimile Number

        

Castlerigg Master Investments Ltd.

c/o Sandell Asset Management

40 West 57th St

26th Floor

New York, NY 10019

Attention: Cem Hacioglu/
Matthew Pliskin

Fax:  212-603-5710

Telephone: 212-603-5700

Residence: British Virgin Islands

$5,000,000

937,500

406,250

812,500

$5,000,000

Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York  10022
Attention:  Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone:  (212) 756-2376

DKR SoundShore Oasis Holding Fund LTD.

c/o DKR Capital Partners L.P.

1281 E. Main Street, 3rd Floor

Stamford, CT 06902

Attn:  Rajni Narasi

Tel:   203-324-8378

Fax:  203-674-4737

$1,000,000

187,500

81,250

162,500

$1,000,000

 

Telluride Capital Master Fund Ltd

c/o Telluride Capital Master Fund Ltd.

1000 Parkers Lake Road

Wayzata, MN 55391

Attn:  Mark Kuper

Tel:   952-653-6446

Fax:  952-476-2568

$1,000,000

187,500

81,250

162,500

$1,000,000

 

Rockmore Investment Master Fund Ltd.

c/o.Rockmore Capital

650 Fifth Avenue, 24th Floor

New York, NY 10019

Attn: Bruce Bernstein

Tel:   212-258-2301

Fax:   212-258-2315

$500,000

93,750

40,625

81,250

$500,000

 

Smithfield Fiduciary LLC

c/o Highbridge Capital Management, LLC

9 West 57th St, 27th Floor

New York, NY 10019

Attn: Ari J. Storch / Adam J. Chill

Tel: 212-287-4720

Fax: 212-751-0755

$500,000

93,750

40,625

81,250

$500,000

 

Northwood Capital Partners, LP

c/o Northwood Capital Partners

1150 First Avenue, Suite 600

King of Prussia, PA 19406

Attn:  Robert A. Berlacher

Tel:   610-783-4777

Fax:  610-783-4788

$200,000

37,500

16,250

32,500

$200,000

 

Insignia Partners, LP

c/o Northwood Capital Partners

1150 First Avenue, Suite 600

King of Prussia, PA 19406

Attn:  Robert A. Berlacher

Tel:   610-783-4777

Fax:  610-783-4788

$100,000

18,750

8,125

16,250

$100,000

 

Cabernet Partners, LP

c/o Northwood Capital Partners

1150 First Avenue, Suite 600

King of Prussia, PA 19406

Attn:  Robert A. Berlacher

Tel:   610-783-4777

Fax:  610-783-4788

$50,000

9,375

4,063

8,125

$50,000

 

Chardonnay Partners, LP

c/o Northwood Capital Partners

1150 First Avenue, Suite 600

King of Prussia, PA 19406

Attn:  Robert A. Berlacher

Tel:   610-783-4777

Fax:  610-783-4788

$50,000

9,375

4,063

8,125

$50,000

 

BTG Investments, LLC

c/o BTG Investments, LLC

24 Corporate Plaza

Newport Beach, CA 92660

Attn: Gordon Roth

Tel:   949-720-5774

Fax:  949-720-7241

$310,000

58,125

25,188

50,375

$310,000

 

Whalehaven Capital Fund Limited

c/o Whalehaven

PO Box HM 1027

3rd Floor, 14 Par La Ville Road

Hamilton, Bermuda HMDX

Attn: Evan Schemenauer

Tel:  441-295-5224

Fax:  441-295-5262

$300,000

56,250

24,375

48,750

$300,000

 

AJW Partners, LLC

c/o.The N.I.R. Group

1044 Northern Blvd., Suite 302

Roslyn, NY 11576

Attn: Corey S. Ribotsky

Tel:   516-739-7115

Fax:  516-739-7110

$27,750

5,203

2,255

4,509

$27,750

 

AJW Offshore Ltd.

c/o.The N.I.R. Group

1044 Northern Blvd., Suite 302

Roslyn, NY 11576

Attn: Corey S. Ribotsky

Tel:   516-739-7115

Fax:  516-739-7110

$147,625

27,680

11,995

23,989

$147,625

 

New Millennium Capital Partners II, LLC

c/o.The N.I.R. Group

1044 Northern Blvd., Suite 302

Roslyn, NY 11576

Attn: Corey S. Ribotsky

Tel:   516-739-7115

Fax:  516-739-7110

$3,375

633

274

548

$3,375

 

AJW Qualified Partners, LLC

c/o.The N.I.R. Group

1044 Northern Blvd., Suite 302

Roslyn, NY 11576

Attn: Corey S. Ribotsky

Tel:   516-739-7115

Fax:  516-739-7110

$71,250

13,359

5,789

11,578

$71,250

 

SDS Capital Group SPC, LTD.

c/o SDS Management, LLC

53 Forest Avenue, Suite 201

Old Greenwich, CT 06870

Attn:  General Counsel

Tel:   (203) 967-5850

Fax:  (203) 967-5851

$200,000

37,500

16,250

32,500

$200,000

 

Iroquois Master Fund Ltd.

c/o Iroquois Capital

641 Lexington Avenue, 26th Floor

New York, NY 10022

Attn: Joshua Silverman

Tel:   212-974-3070

Fax:  212-207-3452

$200,000

37,500

16,250

32,500

$200,000

 

Sandbox Jewelry, LLC

c/o Sandbox Jewelry, LLC

10900 Wilshire Boulevard, 15th Floor

Los Angeles, CA 90024

Attn: Steve Roseblum

Tel:   310-557-2700

Fax:  310-481-2234

$125,000

23,438

10,156

20,313

$125,000

 

Interplanet Productions Ltd.

c/o Reback Lee & Co., Inc.

1990 S. Bundy Dr, #700

Los Angeles, CA 90025

Attn: Derrick Lee

$125,000

23,438

10,156

20,313

$125,000

 

Rachel Abramov

c/o Rachel Abramov

9200 Sunset Blvd., Ste 425

West Hollywood, CA 90069

Attn: Rachel Abramov

Tel:   310-860-2660

Fax:  310-860-2661

$45,000

8,437

3,655

7,313

$45,000

 

Jack Abramov

c/o Rachel Abramov

9200 Sunset Blvd., Ste 425

West Hollywood, CA 90069

Attn: Rachel Abramov

Tel:   310-860-2660

Fax:  310-860-2661

$40,000

7,500

3,250

6,500

$40,000

 

Monty Abramov

c/o Rachel Abramov

9200 Sunset Blvd., Ste 425

West Hollywood, CA 90069

Attn: Rachel Abramov

Tel:   310-860-2660

Fax:  310-860-2661

$40,000

7,500

3,250

6,500

$40,000

 

MAC385 LLC

c/o MAC385 LLC

914 Westwood Blvd., #809

Los Angeles, CA 90024

Attn: Sim Farar

Tel:   310-413-1104

Fax:  310-385-9632

$50,000

9,375

4,063

8,125

$50,000

 

Lomond International, Inc.  

c/o Lomond International, Inc.

11125 Colonial Country Lane

Charlotte, NC 28277

Attn: Martin Sumichrast

Tel:   704-847-4920

Fax:  704-847-4917

$50,000

9,375

4,063

8,125

$50,000

 

Aaron A. Grunfeld

c/o Aaron A. Grunfeld

10390 Santa Monica Blvd, 4th Floor

Los Angeles, CA 90025

Attn: Rachel Abramov

Tel:   310-788-7577

Fax:  310-552-3209

$25,000

4,687

2,031

4,063

$25,000

 

   

EXHIBITS

Exhibit A

Form of Notes

Exhibit B-1

Form of Series A Warrant

Exhibit B-2

Form of Series B Warrant

Exhibit B-3

Form of Series C Warrant

Exhibit C

Registration Rights Agreement

Exhibit D

Form of Pledge Agreement

Exhibit E

Form of Security Agreement

Exhibit F

Form of Guarantee

Exhibit G

Irrevocable Transfer Agent Instructions

Exhibit H

Form of Outside Company Counsel Opinion

Exhibit I

Form of Secretary's Certificate

Exhibit J

Form of Officer's Certificate

Exhibit K

Voting Agreement

SCHEDULES

Schedule 3(a)

Subsidiaries

Schedule 3(k)

SEC Documents; Financial Statements

Schedule 3(l)

Absence of Certain Changes

Schedule 3(q)

Transactions with Affiliates

Schedule 3(r)

Capitalization

Schedule 3(s)

Indebtedness and Other Contracts

Schedule 3(t)

Litigation

Schedule 3(x)

Intellectual Property

Schedule 3(z)

Subsidiary Rights

Schedule 3(ee)

Ranking of Notes