EXECUTION COPY
 
SECURITIES PURCHASE AGREEMENT
 
SECURITIES PURCHASE AGREEMENT (the "Agreement"), dated as of January 5, 2006, by
and among Phantom Fiber Corporation, a Delaware corporation, with headquarters
located at 144 Front Street, Suite 580, Toronto, Ontario, Canada M5J 2L7
(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 convertible notes of the
Company, which Notes shall be convertible into the Company's common stock,
$0.001 par value per share (the "Common Stock"), in accordance with the terms of
the Notes.
 
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 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 (which aggregate amount for all Buyers shall be $3,500,000) (as
converted, collectively, the "Conversion Shares") and (ii) Series A Warrants and
Series B Warrants, in substantially the form attached hereto as Exhibit B
(collectively, the "Warrants"), to acquire that number of shares of Common Stock
(as exercised, collectively, the "Warrant Shares") set forth opposite such
Buyer's name in column (4) on the Schedule of Buyers.
 
D.  The Notes bear interest, which, subject to certain conditions, may be paid
in Common Stock ("Interest Shares").
 
E.  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, Interest Shares and
Warrant Shares under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
 
F.  The Notes, the Conversion Shares, the Interest Shares, the Warrants and the
Warrant Shares, are collectively are referred to herein as the "Securities".
 
NOW, THEREFORE, the Company and each Buyer hereby agree as follows:

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1.  PURCHASE AND SALE OF NOTES AND WARRANTS.
 
(a)  Amount. 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, agrees to purchase from the Company on
the Closing Date (as defined below), a principal amount of Notes, as is set
forth opposite such Buyer's name in column (3) on the Schedule of Buyers, along
with 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.
 
(b)  Closing. The closing (the "Closing") of the purchase of the Notes and the
Warrants by the Buyers shall occur at the offices of Schulte Roth & Zabel LLP,
919 Third Avenue, New York, New York 10022. The date and time of the Closing
(the "Closing Date") shall be 10:00 a.m., New York City Time, on the date
hereof, subject to notification of satisfaction (or waiver) of the conditions to
the Closing set forth in Sections 6 and 7 below (or such later date as is
mutually agreed to by the Company and each Buyer).
 
(c)  Purchase Price. The purchase price for each Buyer (the "Purchase Price") of
the Notes and related Warrants to be purchased by each Buyer at the Closing
shall be equal to $1.00 for each $1.00 of principal amount of Notes being
purchased by such Buyer at the Closing. The aggregate Purchase Price to be paid
by each Buyer at the Closing is as set forth opposite such Buyer's name in
column (3) on the Schedule of Buyers.
 
(d)  Form of Payment. On the Closing Date, (A) each Buyer shall pay its
aggregate 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
(B) the Company shall deliver to each Buyer the Notes (in such principal amount
as is set forth opposite such Buyer's name in column (3) on the Schedule of
Buyers), along with the Warrants (exercisable for the number of shares of Common
Stock as is set forth opposite such Buyer's name in column (4) on the Schedule
of Buyers), each duly executed on behalf of the Company and registered in the
name of such Buyer or its designee.
 
2.  BUYER'S REPRESENTATIONS AND WARRANTIES.
 
Each Buyer represents and warrants with respect to only itself that:
 
(a)  Organization; Authority. 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 power and authority to enter into and to
consummate the transactions contemplated by the Transaction Documents (as
defined below) to which it is a party and otherwise to carry out its obligations
hereunder and thereunder.
 
(b)  No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and
the Warrants, (ii) upon conversion of the Notes will acquire the Conversion
Shares, and (iii) upon exercise of the Warrants will acquire the Warrant Shares,
in each case, 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.
 
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(c)  Accredited Investor Status. Such Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D.
 
(d)  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.
 
(e)  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.
 
(f)  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.
 
(g)  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, by counsel reasonably acceptable to the Company and in form
and substance reasonably satisfactory 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 pursuant to an available
exemption from registration under the 1933 Act 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(g).
 
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(h)  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, the Warrant Shares and the Interest Shares, if any, have
been registered under the 1933 Act as contemplated by the Registration Rights
Agreement, the stock certificates representing the Conversion Shares, the
Warrant Shares and the Interest Shares, if any, 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, AND APPLICABLE
STATE SECURITIES LAWS, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE
FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE STATE
SECURITIES LAWS OR (II) UNLESS SOLD PURSUANT TO RULE 144(K) UNDER SAID
ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED PURSUANT TO
AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT 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, by counsel reasonably acceptable to the Company and in form
and substance reasonably satisfactory 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(k).
 
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(i)  Validity; Enforcement. This Agreement and the Registration Rights Agreement
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.
 
(j)  No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement and the Registration Rights Agreement 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 United States 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.
 
(k)  Residency. Such Buyer is a resident of that jurisdiction specified below
its address on the Schedule of Buyers.
 
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 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 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
by 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).
 
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(b)   Authorization; Enforcement; Validity. The Company has the requisite
corporate power and authority to enter into and perform its obligations under
this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the
Irrevocable Transfer Agent Instructions (as defined in Section 5(b)), 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, the
reservation for issuance and the issuance of the Conversion Shares issuable upon
conversion of the Notes, the issuance of the Warrants and the reservation for
issuance and issuance of the Warrant Shares issuable upon exercise of the
Warrants, have been duly authorized by the Company's Board of Directors and
(other than the filing with the SEC of one or more Registration Statements in
accordance with the requirements of the Registration Rights Agreement and any
other filings as may be required by any state securities agencies) 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.
 
(c)  Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and upon issuance in accordance with the terms of the Transaction
Documents shall be free from all taxes, liens and charges with respect to the
issue thereof. As of the Closing, the Company shall have reserved from its duly
authorized capital stock not less than the sum of (i) 125% of the maximum number
of shares of Common Stock issuable upon conversion of the Notes (assuming for
purposes hereof, that the Notes are convertible at the Conversion Price and
without taking into account any limitations on the conversion of the Notes set
forth in the Notes) and (ii) 125% of the maximum number of shares of Common
Stock issuable upon exercise of the Warrants (without taking into account any
limitations on the exercise of the Warrants set forth in the Warrants). Upon
issuance or conversion in accordance with the Notes or exercise in accordance
with the Warrants, as the case may be, the Interest Shares, 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 and
all Canadian securities laws are inapplicable to such offer and issuance.
 
(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, the Warrants, and reservation for issuance of the Conversion Shares
and the Warrant Shares and Interest Shares, if any) will not (i) result in a
violation of the Certificate 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, except to the extent such conflict, default or
termination right would not reasonably be expected to have a Material Adverse
Effect, or (iii) result in a violation of any law, rule, regulation, order,
judgment or decree (including United States federal and state securities laws or
Canadian securities laws and regulations and the rules and regulations of the
OTC Bulletin Board (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 to the extent such violation would not
reasonably be expected to have a Material Adverse Effect.
 
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(e)  Consents. 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) an "affiliate" of the Company (as defined in
Rule 144) or (iii) to the 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. The Company
further represents to each Buyer that the Company's decision to enter into the
Transaction Documents has been based solely on the independent evaluation by the
Company and its representatives.
 
(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 Oberon Securities as
placement agent (the "Agent") in connection with the sale of the Securities.
Other than the Agent, the Company has not engaged any placement agent or other
agent in connection with the sale of the Securities.
 
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(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 is, in each
case, 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 poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision 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. 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 and Canadian securities laws (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 each of the SEC Documents not available on the
EDGAR system that have been requested by each Buyer. As of their respective
dates, the SEC Documents complied in all material respects with the requirements
of the 1934 Act and Canadian securities laws 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 as in effect as of the time of filing. 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).
 
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(l)  Absence of Certain Changes. Except as disclosed in Section 3(l), since the
date of the Company's most recent audited financial statements contained in a
Form 10-KSB, there has been no material adverse change and no material adverse
development in the business, assets, properties, operations, condition
(financial or otherwise), results of operations or prospects of the Company.
Except as disclosed in Schedule 3(l), since the date of the Company's most
recent audited financials statements contained in a Form 10-KSB, the Company has
not (i) declared or paid any dividends, (ii) sold any assets, individually or in
the aggregate, in excess of $50,000 outside of the ordinary course of business
or (iii) had capital expenditures, individually or in the aggregate, in excess
of $50,000. 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.
 
(m)  No Undisclosed Events, Liabilities, Developments or Circumstances. 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 Certificate
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 in all cases 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 that would reasonably
lead to delisting or suspension of the Common Stock by the Principal Market in
the foreseeable future. During the two (2) years prior to the date hereof, (i)
the Common Stock has been designated for quotation on the Principal Market, (ii)
trading in the Common Stock has not been suspended by the SEC or the Principal
Market and (iii) 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.
 
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(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 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 400,000,000 shares of Common Stock, of which as of
the date hereof, 14,147,421 are issued and outstanding, 2,000,000 shares are
reserved for issuance pursuant to the Company's stock option and purchase plans
and 1,481,538 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) 2,000 shares of preferred stock, par value
$100 per share, of which as of the date hereof, none are issued or 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 share capital 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
share capital 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 share capital 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
share capital 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 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
Certificate of Incorporation, as amended and as in effect on the date hereof
(the "Certificate 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.
 
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(s)  Indebtedness and Other Contracts. Neither the Company nor any of its
Subsidiaries (i) has any outstanding Indebtedness (as defined below), (ii) 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 (iii) 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 (including, without limitation, "capital leases" in
accordance with generally accepted accounting principals) (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, a
joint venture, a corporation, a trust, an unincorporated organization and a
government or any department or agency thereof.
 
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(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, that could, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.
 
(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 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
any such Subsidiary 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 or any such Subsidiary, 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 such Subsidiary to any liability with respect to any
of the foregoing matters.
 
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(ii)  The Company and its Subsidiaries are in compliance with all Canadian,
United States federal, state, provincial, 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 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 where
the failure to so own or possess would not reasonably be expected to result in a
Material Adverse Effect. 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 Canadian,
United States federal, state, provincial, 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.
 
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(z)  Subsidiary Rights. The Company or one of its Subsidiaries has the
unrestricted right to vote, and (subject to limitations imposed by applicable
law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.
 
(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, Canadian, United States federal, state and provincial 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 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 maintains 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 Company maintains disclosure
controls and procedures (as such term is defined in Rule 13a-14 under the 1934
Act) that are designed to ensure 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. During the twelve months prior to the date hereof neither the
Company nor any of its Subsidiaries have received any notice or correspondence
from any accountant relating to any potential material weakness in any part of
the system of internal accounting controls of the Company or any of its
Subsidiaries.
 
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(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. 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)  Registration Eligibility. The Company is eligible to register the
Conversion Shares, the Warrant Shares and the Interest Shares for resale by the
Buyers using Form SB-2 promulgated under the 1933 Act.
 
(gg)  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 Agent, sold, bid for, purchased, or paid any
compensation for soliciting purchases of, any of the Securities, or (iii) other
than the Agent, paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
 
(hh)  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 as set forth in the
following sentence. 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 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 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.
 
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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,
Warrant Shares and Interest Shares, if any, and none of the Notes or Warrants is
outstanding (the "Reporting Period"), the Company shall file all reports
required to be filed pursuant to Canadian securities laws and 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 working capital, and not for (A) repayment of any
outstanding Indebtedness of the Company or any of its Subsidiaries or (B)
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 (as defined in the Registration Rights Agreement) 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, 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.
 
(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).
 
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(g)  Fees. The Company shall reimburse Magnetar Capital Master Fund, Ltd. (a
Buyer) 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 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 limited to $35,000 and shall be withheld by such Buyer from its
Purchase Price at the Closing. The Company shall be responsible for the payment
of any placement agent's fees, financial advisory fees, or broker's commissions
(other than for Persons engaged by any Buyer) relating to or arising out of the
transactions contemplated hereby, including, without limitation, any fees
payable to the 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 relating to any such payment.
 
(h)  Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged pursuant to an available exemption from registration
under the 1933 Act 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(g) hereof; provided that an
Investor and its pledgee shall be required to comply with the provisions of
Section 2(g) 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 the material Transaction Documents
(including, without limitation, this Agreement (and all schedules to this
Agreement), the form of Notes, the form of Warrant and the Registration Rights
Agreement) (including all attachments, the "8-K Filing"). From and after the
filing of the 8-K Filing with the SEC, the Company shall have disclosed any
material nonpublic information delivered to the Buyers by the Company or any of
its Subsidiaries, or any of their respective officers, directors, employees or
agents. 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. In the event of a breach
of the foregoing covenant by the Company, or any of its Subsidiaries, or any of
its or their respective officers, directors, employees and agents, in addition
to any other remedy provided herein or in the Transaction Documents, a Buyer
shall have the right to make a public disclosure, in the form of a press
release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any
of its or their respective officers, directors, employees or agents. No 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 Filings and contemporaneously therewith
and (ii) as is required by applicable law and regulations (provided that in the
case of clause (i) each Buyer 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.
 
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(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 holders of Notes representing not less than a
majority of the aggregate principal amount of the then outstanding Notes.
 
(k)  Additional Notes; Variable Securities; Dilutive Issuances. So long as any
Buyer beneficially owns any Securities, the Company will not, without the prior
written consent of Buyers holding a majority of the principal amount of the
Notes, 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 so 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
conversion, exchange or exercise price which varies or may vary after issuance
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
purposes of clarification, this does not prohibit the issuance of securities
with customary "weighted average" or "full ratchet" anti-dilution adjustments
which adjust a fixed conversion or exercise price of securities sold by the
Company in the future. For so 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 Principal Market.
 
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(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)  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.
 
(n)  Additional Issuances of Securities.
 
(i)  For purposes of this Section 4(n), 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 two hundred seventy (270) days after the
Effective Date (as defined in the Registration Rights Agreement) the Company
will not, directly or indirectly, file any registration statement with the SEC
other than the Registration Statement (as defined in the Registration Rights
Agreement) or a registration statement on Form S-8 pursuant to the 1933 Act.
From the date hereof until the Effective 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 Closing Date until the date twelve months after the Effective
Date, the Company will not, directly or indirectly, effect any Subsequent
Placement unless the Company shall have first complied with this Section
4(n)(iii).
 
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(1)  The Company shall deliver to each Buyer 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, and (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 at least 80% 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 five (5) 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(n)(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 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(n)(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(n)(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(n)(iii)(1) above.
 
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(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(n)(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.
 
(6)  Any Offered Securities not acquired by the Buyers or other persons in
accordance with Section 4(n)(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(n) shall not apply in connection with the issuance of any Excluded Securities
(as defined in the Notes) or any security issued in a bona fide underwritten
public offering by the Company or any of its Subsidiaries.
 
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.
 
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(b)  Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit 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, the Interest Shares, if any,
and the Warrant Shares 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 D 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 with respect to the Securities, and that
the Securities shall otherwise be freely transferable on the books and records
of the Company, as applicable, 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(g), 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, Interest Shares, 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.
 
(a)  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 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 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.
 
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7.  CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
 
(a)  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 and (B) the Notes (in such principal amounts as is set
forth across from such Buyer's name in column (3) of the Schedule of Buyers and
the related Warrants (in such principal amounts as is set forth across from such
Buyer's name in column (4) of the Schedule of Buyers) being purchased by such
Buyer at the Closing pursuant to this Agreement.
 
(ii)  Such Buyer shall have received the opinion of [Sichenzia Ross Friedman
Ference LLP], the Company's outside counsel, dated as of the Closing Date, in
substantially the form of Exhibit E attached hereto.
 
(iii)  The Company shall have delivered to such Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit D 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 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 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 and is required to so qualify, 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
Certificate of Incorporation as certified by the Secretary of State of the State
of Delaware 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 Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit F.
 
(viii)  The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date) and the Company shall have performed, satisfied and complied in all
respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company
at or prior to the Closing Date. Such 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 G.
 
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(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)  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, if this Agreement is terminated pursuant to this Section 8,
the Company shall remain obligated to reimburse the non-breaching Buyers for the
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 United States
federal courts sitting in The City of New York, Borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY. 
 
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(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
holders of at least a majority of the aggregate number of Registrable Securities
issued and issuable hereunder, 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. Without limiting the foregoing, the Company confirms that, except as
set forth in this Agreement, no Buyer has made any commitment or promise or has
any other obligation to provide any financing to the Company or otherwise.
 
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(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:
 
Phantom Fiber Corporation
144 Front Street, Suite 580,
Toronto, Ontario, Canada M5J 2L7
Telephone:  (416) 703-4007
Facsimile:  (416) 703-0900
Attention:  Jeffrey Halloran
 
With a copy (for informational purposes only) to:
 
Sichenzia Ross Friedman Ference LLP
1065 Avenue of the Americas, 21st Floor
New York, New York 10018
Telephone: (212) 930-9700
Facsimile:  (212) 930-9725
Attention: Gregory Sichenzia, Esq.

If to the Transfer Agent:
 
PacWest Transfer, LLC
360 Main Street
P.O. Box 393
Washington, Virginia 22747
Telephone:  (540) 675-3129
Facsimile:  (540) 675-3281
Attention: Laurel Poffenroth
 
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.
 
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or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.
 
(g)  The Company hereby irrevocably appoints The Corporation Trust Company at
1209 Orange Street, Wilmington, Delaware 19801, Telephone: (302) 658-7581,
Facsimile: (302) 655-5049, as its agent for the receipt of service of process in
connection with any action pursuant to any Transaction Document in the United
States. The Company agrees that any document may be effectively served on it in
connection with any action, suit or proceeding in the United States by service
on its agents.
 
Any document shall be deemed to have been duly served if marked for the
attention of the agent at its address (as set out above) or such other address
in the United States as may be notified to the party wishing to serve the
document and delivered in accordance with the notice provisions set forth in
this Section 9(g).
 
If the Company's agent at any time ceases for any reason to act as such, the
Company shall appoint a replacement agent having an address for service in the
United States and shall notify each Buyer in writing of the name and address of
the replacement agent. Failing such appointment and notification, each Buyer
shall be entitled by notice to the Company to appoint a replacement agent to act
on the Company's behalf. The provisions of this Section 9(g) applying to service
on an agent apply equally to service on a replacement agent.
 
(h)  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 holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (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 in connection
with transfer of any of its Securities 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.
 
(i)  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.
 
(j)  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.
 
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(k)  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.
 
(l)  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 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(l) shall be the same
as those set forth in Section 6 of the Registration Rights Agreement.
 
(m)  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.
 
(n)  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.
 
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(o)  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, Canadian, foreign, provincial, state or United States 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.
 
(p)  Currency. Unless otherwise indicated, all dollar amounts referred to in
this Agreement are in United States Dollars ("US Dollars"). All amounts owing
under this Agreement or any Transaction Document shall be paid in US Dollars.
All amounts denominated in other currencies shall be converted in the US Dollar
equivalent amount in accordance with the Exchange Rate on the date of
calculation. "Exchange Rate" means, in relation to any amount of currency to be
converted into US Dollars pursuant to this Agreement, the US Dollar exchange
rate as published in the Wall Street Journal on the relevant date of
calculation.
 
(q)  Judgment Currency.
 
(i)  If for the purpose of obtaining or enforcing judgment against the Company
or any Subsidiary, in any court in any jurisdiction it becomes necessary to
convert into any other currency (such other currency being hereinafter in this
Section 9(q) referred to as the "Judgment Currency") an amount due in US Dollars
under this Agreement, the conversion shall be made at the Exchange Rate
prevailing on the Business Day immediately preceding:
 
(1)  the date of actual payment of the amount due, in the case of any proceeding
in the courts of New York or in the courts of any other jurisdiction that will
give effect to such conversion being made on such date: or
 
(2)  the date on which the foreign court determines, in the case of any
proceeding in the courts of any other jurisdiction (the date as of which such
conversion is made pursuant to this Section 9(q) being hereinafter referred to
as the "Judgment Conversion Date").
 
-29-

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(ii)  If in the case of any proceeding in the court of any jurisdiction referred
to in Section 9(q)(i)(2) above, there is a change in the Exchange Rate
prevailing between the Judgment Conversion Date and the date of actual payment
of the amount due, the applicable party shall pay such adjusted amount as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the Exchange Rate prevailing on the date of payment, will produce
the amount of US Dollars which could have been purchased with the amount of
Judgment Currency stipulated in the judgment or judicial order at the Exchange
Rate prevailing on the Judgment Conversion Date.
 
(iii)  Any amount due from the Company or any Subsidiary, under this provision
shall be due as a separate debt and shall not be affected by judgment being
obtained for any other amounts due under or in respect of this Agreement.
 
(r)  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 the Buyers are not acting in concert or as a group 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]
 
-30-

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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:
 
PHANTOM FIBER CORPORATION
 
   
   
    By:   /s/ Jeffrey Halloran   

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Name: Jeffrey Halloran
Title: Chief Executive Officer
   

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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:
 
MAGNETAR CAPITAL MASTER FUND, LTD.
 
   
   
    By:
Magnetar Financial LLC
  Its: Investment Manager         By:   /s/ Paul Smith   

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Name: Paul Smith
Title: General Counsel
   

 

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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:   /s/ Mark J. Nuovo   

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Name: Mark J. Nuovo
Title: Individual
   

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 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:   /s/ Konstantine (Gus) John Lucas   

--------------------------------------------------------------------------------

Name: Konstantine (Gus) John Lucas
Title: Investor
   

 

 

--------------------------------------------------------------------------------

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:   /s/ Pamela Ritchie   

--------------------------------------------------------------------------------

Name: Pamela Ritchie
Title: Investor
   

 

--------------------------------------------------------------------------------

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:
 
The Sunderland Family Trust
 
   
   
    By:   /s/  Ronald B. Sunderland   

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Name: Ronald B. Sunderland
Title: Trustee/Trustor
   

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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:   /s/  Linda A. Abrams   

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Name: Linda A. Abrams
Title: Investor
   

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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:   /s/ Michael Russo   

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Name: Michael Russo
Title: Trustee, Russo Living Trust 5/1/98
   

--------------------------------------------------------------------------------

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:   /s/ Mark P. DeVitre   

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Name: Mark P. DeVitre
Title: Investor
   

--------------------------------------------------------------------------------

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:   /s/ Howard Shapiro   

--------------------------------------------------------------------------------

Name:
Title:
   

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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:
 
Financial Trading Consultants
 
   
   
    By:   /s/ Howard Shapiro   

--------------------------------------------------------------------------------

Name:
Title: Trustee
   

--------------------------------------------------------------------------------

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:
 
Mequer Masters Int Pension Plan
 
   
   
    By:   /s/ Howard Shapiro   

--------------------------------------------------------------------------------

Name:
Title: Trustee
   

--------------------------------------------------------------------------------

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:   /s/ Timothy J. Livak   

--------------------------------------------------------------------------------

Name: Timothy J. Livak
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:   /s/  John Cramer   

--------------------------------------------------------------------------------

Name: John Cramer
Title:
 
 
/s/ Sharon R. Hawkins
Sharon R. Hawkins

--------------------------------------------------------------------------------

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:   /s/ Robert Kantor   

--------------------------------------------------------------------------------

Name: Robert Kantor
Title: Owner
   

--------------------------------------------------------------------------------

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:   /s/ Harry Forman   

--------------------------------------------------------------------------------

Name: Harry Forman
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:   /s/ Philip M. Barone   

--------------------------------------------------------------------------------

Name:
Title:
   

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SCHEDULE OF BUYERS

 
(1)
 
(2)
 
(3)
 
(4)
(5)
Buyer
Address and Facsimile Number
 
Aggregate Principal Amount of Notes
 
 
Aggregate Number of Warrants
Legal Representative's
Address and Facsimile Number
         
Magnetar Capital Master Fund, Ltd.
1603 Orrington Avenue
Evanston, IL 60201
Attn: Richard Levy and Matthew Ray
Facsimile: (847) 905-5603
Telephone: (847) 962-2308
$2,642,000
5,284,000
Schulte Roth & Zabel LLP
919 Third Avenue
New York, New York 10022
Attention: Eleazer Klein, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 756-2376
Mark J. Nuovo
2302 City Lights Dr.
Aliso Viejo, CA 92656
 
$100,000
200,000
 
Konstantine (Gus) John Lucas
17428 Oak Creek Court
Encino, CA 91316
Telephone: (818) 891-6465
 
$275,000
550,000
 
Pamela Ritchie
7514 Graystone Dr.
West Hills, CA 91304
(818) 716-6568
 
$16,500
33,000
 
The Sutherland Family Trust
3728 Regal Vista Drive
Sherman Oaks, CA 91403
Fax: (818) 906-0197
H: (818) 906-0197
O: (818) 977-4370
C: (310) 850-0571
 
$60,500
121,000
 
Linda Anne Abrams
7251 Sycamore Trail
Los Angeles, CA 90068
Home: (323) 876-5277
Cell: (818) 802-9995
Wk: (818) 977-4242
 
$50,000
100,000
 
Russo Living Trust 5/1/98
Michael Russo, Trustee
4610 Encino Ave.
Encino, CA 91316
Fax: (818) 789-0053
Phone: (818) 788-9335
 
$11,000
22,000
 
Mark P. DeVitre
530 S. Bentley Ave.
Los Angeles, CA 90049
Hm: (310) 476-4633
Work: (818) 977-1056
 
$5,500
11,000
 
Howard Shapiro
199 Logtown Road
Port Jeruis, NY 12771
(845) 856-0451
 
$55,000
110,000
 
Financial Trading Consultants Pension Plan
199 Logtown Road
Port Jeruis, NY 12771
(845) 856-0451
 
$55,000
110,000
 
Meuqer Masters International Pension Plan
199 Logtown Road
Port Jeruis, NY 12771
(845) 856-0451
 
$55,000
110,000
 
Timothy J. Livak
24945 Grissom Circle
Laguna Hills, CA 92653
(714) 878-6766
Fax: (949) 305-6073
 
$70,000
140,000
 
John Cramer and
Sharon Hawkins
33167 Wakeen Circle
Temecola, CA 92592
Fax: (818) 549-1409
Tel: (310) 764-3439
 
$5,500
11,000
 
Robert Kantor
31 Garfield Avenue
Clifton, NJ 07012
Fax: (212) 206-6028
Phone: (212) 206-6179
 
$77,000
154,000
 
Harry Forman
5401 Bevis Ave.
Sherman Oaks, CA 91411
(818) 787-4900
 
$11,000
22,000
 
Philip M. Barone
3103 Executive Parkway, Suite 100
Toledo, OH 43606
(419) 551-4300
cell: (419) 392-2812
$11,000
22,000
 
TOTAL:
 
$3,500,000.00
7,000,000
 

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Disclosure Schedules
to
Securities Purchase Agreement
(Prepared in connection with Notes and Warrants sold by the Company to the
Buyers pursuant to the Securities Purchase Agreement dated as of January 5, 2006
(the “January 2006 Purchase Agreement”). Capitalized terms not defined herein
shall have the meaning given to such terms in the January 2006 Purchase
Agreement.)

 

 
January 5, 2005

--------------------------------------------------------------------------------

Schedule 3(a)
Subsidiaries

Phantom Fiber Corp., a 100% owned subsidiary of the Company incorporated in
Ontario, Canada

Phantom Fiber, Inc., a 100% owned subsidiary of Phantom Fiber Corp.,
incorporated in Ontario, Canada

--------------------------------------------------------------------------------

Schedule 3(l)
Absence of Certain Changes

None.
 

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Schedule 3(q)
Transactions With Affiliates

[q3.jpg]
 

 

 

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Schedule 3(q)
Transactions With Affiliates (continued)

 

[q3-2.jpg]
 

 

--------------------------------------------------------------------------------

 
Schedule 3(q)
Transactions With Affiliates (continued)

The Company is contingently liable for the following:

a)  
Issuance of 500,000 restricted common shares (after adjustment for a 1 for 20
stock consolidation) to Jeff Halloran in satisfaction of certain “earn-in’
criteria specified in an employment agreement dated February 4, 2004 with
Pivotal Self-Service Technologies Inc.

b)  
Issuance of 250,000 share purchase warrants (after adjustment for a 1 for 20
stock consolidation) to Jeff Halloran with a term of five years in satisfaction
of certain “earn-in’ criteria specified in an employment agreement dated
February 4, 2004 with Pivotal Self-Service Technologies Inc., with each warrant
entitling the holder to purchase one share of common stock at $4.00 per share.

c)  
Issuance of compensatory restricted common shares to the pre-merger shareholders
of Phantom Fiber Corporation in connection with Reverse Acquisition Transaction
with Pivotal Self-Service Technologies Inc. An initial provision of 500,000
common shares (after adjustment for a 1 for 20 stock consolidation) has been
established to date in this regard.

d)  
Grant of 37,500 stock options(after adjustment for a 1 for 20 stock
consolidation) to Gordon Fowler for services rendered as an Executive Director
for the period November 1, 2004 to January 31, 2005, such options granted at a
volume weighted average exercise price for the period of $1.29.

e)  
Grant of 37,500 stock options(after adjustment for a 1 for 20 stock
consolidation) to Gordon Fowler for services rendered as an Executive Director
for the period February 1, 2005 to April 30, 2005, such options granted at a
volume weighted average exercise price for the period of $1.06.

f)  
Issuance of 16,949 restricted common shares (after adjustment for a 1 for 20
stock consolidation) to Gordon Fowler in consideration for services rendered as
an Executive Director for the period November 1, 2004 to December 31, 2004, such
shares computed on the basis of $10,000 per month multiplied by two months and
divided by the volume weighted average share price for the period of $1.18.

 

--------------------------------------------------------------------------------

Schedule 3(r)
Equity Capitalization

Obligations of the Company and its Subsidiaries to issue Equity Securities

See Schedule 3(q).

In addition to the securities described in Schedule 3(q), on December 8, 2005,
the Company completed a private placement of 1,560,000 shares of common stock
and warrants to purchase 1,560,000 shares of common stock to 14 accredited
investors resulting in aggregate gross proceeds of $858,000. The common stock
and warrants were sold as Units, with each Unit consisting of one share of
common stock and a warrant to purchase one share of common stock, for a per Unit
purchase price of $0.55. Each warrant entitles the holder to purchase one share
of the Company’s common stock at $1.10 per share, exercisable for a period of
three years. Each of the investors in this private placement has the right to
exchange their Units for other equity securities of the Company which may be
sold by the Company during the period ending 45 days after closing if the
Company completes an equity financing within such period. The Company also
agreed to file a registration statement with the SEC on Form SB-2 no later than
90 days following closing covering the resale of common stock and common stock
issuable upon exercise of warrants sold to such investors.

Outstanding Debt Securities and Other Documents Evidencing Indebtedness

In 2001, the Company restructured a $416,821 payable with a creditor, whereby
$76,821 was forgiven, $180,000 was satisfied through the issuance of 1.8 million
shares of the Company’s common stock and a note payable of $160,000 was issued
and has since been paid down to $57,500. This amount is due on demand and has
therefore not been discounted.

Financing Statements

There are no financing statements filed in connection with the Company or any
Subsidiaries. However, there are existing security interests with respect to the
Company’s capital lease obligations for equipment.

Registration Obligations

On December 8, 2005, the Company completed a private placement of 1,560,000
shares of common stock and warrants to purchase 1,560,000 shares of common stock
to 14 accredited investors resulting in aggregate gross proceeds of $858,000.
The common stock and warrants were sold as Units, with each Unit consisting of
one share of common stock and a warrant to purchase one share of common stock,
for a per Unit purchase price of $0.55. Each warrant entitles the holder to
purchase one share of the Company’s common stock at $1.10 per share, exercisable
for a period of three years.

--------------------------------------------------------------------------------

Schedule 3(r)
Equity Capitalization (continued)

Each of the investors in the above private placement has the right to exchange
their Units for other equity securities of the Company which may be sold by the
Company during the period ending 45 days after closing if the Company completes
an equity financing within such period. The Company also agreed to file a
registration statement with the SEC on Form SB-2 no later than 90 days following
closing covering the resale of common stock and common stock issuable upon
exercise of warrants sold to such investors.

--------------------------------------------------------------------------------

Schedule 3(s)
Indebtedness and Other Contracts

As of the date of the Agreement and excluding contingent debt and liabilities
disclosed elsewhere, the Company has total debt on a consolidated and unaudited
basis of approximately $1,000,000, which includes approximately $885,000 of
accounts payable and other accrued liabilities.

As of the date of the Agreement the Company has approximately$24,500 of
outstanding short term borrowings, which represents an unsecured loan from a
shareholder of the Company repayable on demand and bearing no interest. As of
the date of the Agreement the Company has approximately $57,500 of notes
payable, resulting from a restructuring of a $416,821 payable in 2001, whereby
$76,821 was forgiven, $180,000 was satisfied through the issuance of 1.8 million
shares of the Company’s common stock and a note payable of $160,000 was issued
and has since been paid down to $57,500. This amount is due on demand.

As of the date of the Agreement the Company has approximately $33,000 of
outstanding capital lease obligations relating to computers and office
equipment.

 

--------------------------------------------------------------------------------

EXHIBITS
 
 

Exhibit
A Form of Notes

Exhibit
B Form of Warrants

Exhibit
C Registration Rights Agreement

Exhibit
D Irrevocable Transfer Agent Instructions

Exhibit
E Form of Outside Company Counsel Opinion

Exhibit
F Form of Secretary's Certificate

Exhibit
G Form of Officer's Certificate

 

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