**Exhibit 10.24**

 

 

**CONVERTIBLE SECURED NOTE PURCHASE AGREEMENT**

 

THIS AGREEMENT(this “Agreement”) is made as of October 4, 2002, by and among ALLIANCEPHARMACEUTICAL CORP., a New York corporation (the “Company”) and the Holderssignatory hereto (each a “Holder” and, collectively, the “Holders”).

 

WHEREAS, theCompany has agreed to sell to each Holder, and each Holder has agreed topurchase from the Company, upon the terms and conditions hereafter provided, aConvertible Secured Promissory Note in the form attached as Exhibit Ahereto (the “Note”) in the amount set forth each Holder’s name on the signaturepages hereto.

 

NOW THEREFORE,in consideration of the mutual covenants and conditions set forth herein, thesufficiency of which is hereby acknowledged, the parties hereby agree asfollows:

 

1.                                       **Purchase and Issuance of Notes.**  Subject to the terms and conditions setforth in this Agreement, the Company agrees to issue and sell to each Holdersignatory hereto the principal amount of Notes set opposite such Holder’s nameon the signature page hereto (the “Purchase Price”) and the Holder agrees topay the Purchase Price amount to the Company.

 

(a)                                  Closing.  The initial closing (the “Closing”) shalltake place at the offices of Stroock & Stroock & Lavan LLP at 10:00a.m., on October 4, 2002, or at such other time and place as the Company andthe Holder purchasing the Note agree upon. At the Closing, simultaneously with the execution of this Agreement, theCompany is issuing to the Holder a Note in the principal amount of suchHolder’s Purchase Price and the Holder is paying to the Company its respectivePurchase Price.

 

(b)                                 SubsequentClosing.  In subsequent closings(each, a “**Subsequent Closing**”),the Company may, without the consent of any of the Holders sell additionalNotes, subject to the terms of this Agreement; provided; however,that the aggregate principal amount of Notes to be issued by the Companypursuant to this Agreement shall not exceed $3,000,000.

 

2.                                       **Representations and Warranties of the Company.**  The Company hereby represents and warrantsto the Holders as of the date hereof, except as set forth in the schedulesdelivered herewith (collectively, the “Disclosure Schedules”), as follows:

 

(a)                                  ***Organization, Good Standing andQualification.***  Each ofthe Company and its Subsidiaries (as defined below) is a corporation dulyorganized, validly existing and in good standing under the laws of thejurisdiction of its incorporation and has all requisite corporate power andother authority to carry on its business as now conducted and to own itsproperties.  Each of the Company and itsSubsidiaries is duly qualified to do business as a foreign corporation and isin good standing in each jurisdiction in which the conduct of its business orits ownership or leasing of

 

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property makes suchqualification or leasing necessary unless the failure to so qualify has not andcould not reasonably be expected to have a Material Adverse Effect (as definedbelow).  The Company’s subsidiaries arereflected on Schedule 2(a) hereto (each a Subsidiary, and collectively the“Subsidiaries”).

 

(b)                                 ***Authorization.***  The Company has full power and authority andhas taken all requisite action on the part of the Company, its officers,directors and shareholders necessary for (i) the authorization, execution anddelivery of this Agreement, the Notes, the Warrants to purchase an aggregate of500,000 shares of Common Stock, at a price per share of Common Stock equal to$0.50 per share in accordance with the terms and conditions set forth in theDebenture Waiver and Consent (as defined below) (the “Warrants”), the ImagentSecurity Agreement made by the Company to the Collateral Agent (as definedbelow), for the benefit of the Holders, dated as of the date hereof (the“Security Agreement”), the General Collateral Security Agreement made by theCompany to the Collateral Agent for the benefit of the Holders, dated as of thedate hereof (the “General Collateral Security Agreement”), and the Imagent andOxygent Patent and Trademark Security Agreement made by the Company to theCollateral Agent for the benefit of the Holders, dated as of the date hereof(the “Patent and Trademark Security Agreement”), the Debenture Imagent SecurityAgreement made by the Company and the secured parties set forth therein, datedas of the date hereof (the “Debenture Security Agreement”),  the Debenture General Collateral SecurityAgreement made by the Company and the secured parties set forth therein, datedas of the date hereof (the “Debenture General Collateral Security Agreement”),and the Debenture Imagent and Oxygent Security Agreement made by the Companyand the secured parties set forth therein, dated as of the date hereof (theDebenture Patent and Trademark Security Agreement”), the IntercreditorAgreement between the Company, the collateral agents set forth therein, XmarkFund, L.P. and Xmark Fund, Ltd., dated as of the date hereof (the “XmarkIntercreditor Agreement”), the Intercreditor Agreement between the Company andthe secured parties set forth therein, dated as of the date hereof (the“Intercreditor Agreement”), and the Waiver and Consent, dated as of the datehereof, between the parties signatory thereto and in the form attached heretoas Exhibit F (the “Debenture Waiver and Consent,” and, collectively with thisAgreement, the Notes, the Warrants, the Security Agreement, the GeneralCollateral Security Agreement, the Patent and Trademark Security Agreement, theDebenture Security Agreement, the Debenture General Collateral SecurityAgreement, the Debenture Patent and Trademark Security Agreement, the XmarkIntercreditor Agreement and the Intercreditor Agreement, the “TransactionDocuments”), (ii) authorization of the performance of all obligations of theCompany under the Transaction Documents, and (iii) the authorization, issuanceand delivery of the Notes, the Warrants and the shares of common stock, parvalue $.01 per share (the “Common Stock”), of the Company (x) issuable uponconversion of the Notes (the “Conversion Shares”), (y) issuable in payment of intereston the Notes (the “Payment Shares”) and (z) issuable upon exercise of theWarrants.  The Transaction Documentsconstitute the legal, valid and binding obligations of the Company, enforceableagainst the Company in accordance with their terms, subject to bankruptcy,insolvency, fraudulent transfer, reorganization, moratorium and similar laws ofgeneral applicability, relating to or affecting creditors’ rights generally.

 

(c)                                  ***Capitalization.***  Schedule 2(c) sets forth (a) the authorizedcapital stock of the Company on the date hereof; (b) the number of shares ofcapital stock issued and outstanding on the

 

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date hereof; (c) the number ofshares of capital stock issuable pursuant to the Company’s stock plans; and (d)the number of shares of capital stock issuable and reserved for issuancepursuant to securities exercisable for, or convertible into or exchangeable forany shares of capital stock of the Company. All of the issued and outstanding shares of the Company’s capital stockhave been duly authorized and validly issued and are fully paid, nonassessableand free of pre-emptive rights and were issued in full compliance withapplicable law. All of the issued and outstanding shares of capital stock of eachSubsidiary have been duly authorized and validly issued and are fully paid,nonassessable and free of pre-emptive rights, were issued in full compliancewith applicable law and are owned by the Company, beneficially and of record,subject to no lien, encumbrance or other adverse claim.  No person is entitled to pre-emptive orsimilar statutory or contractual rights with respect to any securities of theCompany.  Except as described herein andon Schedule 2(c), (i) there are no outstanding warrants, options, convertiblesecurities or other rights, agreements or arrangements of any character underwhich the Company or any of its Subsidiaries is or may be obligated to issueany equity securities of any kind and except as contemplated by this Agreement,(ii) neither the Company nor any of its Subsidiaries is currently innegotiations for the issuance of any equity securities of any kind; and (iii)there are no agreements or arrangements under which the Company or a Subsidiaryis obligated to register the sale of any of its or their securities under theSecurities Act of 1933, as amended (the “Securities Act”) (except as set forthin the Notes). There are no voting agreements, buy sell agreements, or right offirst purchase agreements among the Company and any of the security holders ofthe Company.

 

Schedule 2(c)sets forth a true and complete table setting forth the pro forma capitalizationof the Company on a fully diluted basis giving effect to (i) the issuance ofthe Conversion Shares, (ii) any adjustments in other securities resulting fromsuch issuance, and (iii) the exercise or conversion of all outstandingsecurities.

 

The Companyhas furnished to the Holders true and correct copies of the Company’sCertificate of Incorporation as in effect on the date hereof (“Certificate ofIncorporation”), the Company’s By-laws as in effect on the date hereof (the“By-laws”), and all other instruments and agreements governing securitiesconvertible into or exercisable or exchangeable for capital stock of theCompany and each of its Subsidiaries.

 

(d)                                 ***Valid Issuance.***  The Company has duly authorized and reserveda sufficient number of shares of Common Stock, for issuance of the ConversionShares and the exercise of the Warrants (such shares of Common Stock issuableupon exercise of the Warrants being referred to as the “Warrant Shares”).  The Company has duly authorized and reserveda sufficient number of shares of Common Stock for issuance as payment ofinterest on the Notes.  The ConversionShares, the Payment Shares and the Warrant Shares, if issued pursuant to theNotes, will be validly issued, fully paid and non-assessable free and clear ofall taxes, liens, encumbrances and restrictions, except for restrictions ontransfer set forth in this Agreement or imposed by applicable securities lawsand will not be subject to preemptive rights or other similar rights and willnot impose personal liability upon the holder thereof.

 

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(e)                                  ***Consents.***  Except as set forth on Schedule 2(e), theexecution, delivery and performance by the Company of the TransactionDocuments, the offer issuance of the Notes, Warrants, Conversion Shares, thePayment Shares and the Warrant Shares, the granting of the security interestspursuant to the Security Agreement, the General Collateral Security Agreementand the Patent and Trademark Security Agreement and the exercise of the rightsgranted to the Holders therein require no consent of, action by or in respectof, or filing with, any person, governmental body, agency, or official otherthan (i) consents, actions or filings that have been made prior to the datehereof which are in full force and effect, (ii) consents set forth in items 7,8 and 9 on Schedule 2(e) to be obtained within five business days of the datehereof, and (iii) post-sale filings pursuant to applicable state and federalsecurities laws which the Company undertakes to file within the applicable timeperiods. The Company has taken all action necessary to exempt the transactionscontemplated by the Transaction Documents from the provisions ofSection 912 of the New York Business Corporation Law and any other stateanti-takeover or similar statute.  Thegranting of the (i) security interest in the Collateral (as defined in theSecurity Agreement, the General Collateral Security Agreement and the Patentand Trademark Security Agreement) pursuant to the Security Agreement, theGeneral Collateral Security Agreement, the Patent and Trademark SecurityAgreement and the exercise of the rights granted to the Holders therein(including, without limitation, the disposition of the Collateral), and (ii)security interest in the Collateral (as defined in the Debenture SecurityAgreement, the Debenture General Collateral Security Agreement and the DebenturePatent and Trademark Security Agreement) pursuant to the Debenture SecurityAgreement, the Debenture General Collateral Security Agreement, the DebenturePatent and Trademark Security Agreement and the exercise of the rights grantedto the secured parties (including, without limitation, the disposition of theCollateral), do not require the consent, authorization or approval of anygovernmental authority, including without limitation, the Food and DrugAdministration.

 

(f)                                    ***Delivery of SEC Filings; Business.***  The Company has provided the Holders withcopies of the Company’s most recent Annual Report on Form 10-K for the fiscalyear ended June 30, 2001 (the “2001 10-K”), and all other reports filed by theCompany pursuant to the Exchange Act of 1934, as amended (the “Exchange Act”)since the filing of the 2001 10-K and prior to the date hereof (all of theforegoing and all exhibits included therein and financial statements theretoand documents incorporated by reference therein collectively, being referred toherein as the “SEC Filings”).  The SECFilings are the only filings required of the Company pursuant to the ExchangeAct for such period.  The Company andits Subsidiaries are engaged only in the business described in the SEC Filingsand the SEC Filings contain a complete and accurate description in all materialrespects of the business of the Company and its Subsidiaries, taken as a whole.

 

(g)                                 ***Use of Proceeds.***  The proceeds from the sale of the Noteshereunder shall be used by the Company for working capital and generalcorporate purposes.

 

(h)                                 ***No Material Adverse Effect.***  Since June 30, 2001, except as set forth onSchedule 2(h) and as identified and described in the SEC Filings, there has notbeen:

 

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(1)                                  anychange in the consolidated assets, liabilities, financial condition oroperating results of the Company from that reflected in the financialstatements included in the 2001 10-K, except for (A) changes described onSchedule 2(h) and (B) changes in the ordinary course of business, in each casewhich have not and could not reasonably be expected to have a Material AdverseEffect (as defined herein), individually or in the aggregate;

 

(2)                                  anydeclaration or payment of any dividend, or any authorization or payment of anydistribution, on any of the capital stock of the Company, or any redemption orrepurchase of any securities of the Company;

 

(3)                                  anymaterial damage, destruction or loss, whether or not covered by insurance toany assets or properties of the Company or its Subsidiaries;

 

(4)                                  anywaiver, not in the ordinary course of business, by the Company or anySubsidiary of a material right or of a material debt owed to it;

 

(5)                                  anysatisfaction or discharge of any lien, claim or encumbrance or payment of anyobligation by the Company or a Subsidiary, except in the ordinary course ofbusiness and which is not material to the assets, properties, financialcondition, operating results or business of the Company and its Subsidiariestaken as a whole (as such business is presently conducted and as it is proposedto be conducted);

 

(6)                                  anychange or amendment to the Company’s Certificate of Incorporation or by-laws,or material change to any material contract or arrangement by which the Companyor any Subsidiary is bound or to which any of their respective assets orproperties is subject;

 

(7)                                  anymaterial labor difficulties or labor union organizing activities with respectto employees of the Company or any Subsidiary;

 

(8)                                  anytransaction entered into by the Company or a Subsidiary other than in theordinary course of business;

 

(9)                                  theloss of the services of any key employee, or material change in the compositionor duties of the senior management of the Company or any Subsidiary;

 

(10)                            theloss or threatened loss of any customer which has had or could reasonably beexpected to have a material adverse effect on (i) the assets, liabilities,results of operations, condition (financial or otherwise), business, orprospects of the Company and its subsidiaries taken as a whole or (ii) on theability of the Company to perform its obligations under the TransactionDocuments (collectively, a “Material Adverse Effect”); or

 

(11)                            anyother event or condition of any character that has had or could reasonably beexpected to have a Material Adverse Effect.

 

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(i)                                     ***SEC Filings.***

 

(1)               At the time offiling thereof, the SEC Filings complied as to form in all material respectswith the requirements of the Exchange Act and did not contain any untruestatement of a material fact or omit to state any material fact necessary inorder to make the statements made therein, in the light of the circumstancesunder which they were made, not misleading.

 

(2)               During thepreceding three years, each registration statement and any amendment theretofiled by the Company pursuant to the Securities Act and the rules andregulations thereunder, as of the date such statement or amendment becameeffective, complied as to form in all material respects with the Securities Actand did not contain any untrue statement of a material fact or omit to stateany material fact required to be stated therein or necessary in order to makethe statements made therein, in light of the circumstances under which theywere made, not misleading; and each prospectus filed pursuant toRule 424(b) under the Securities Act, as of its issue date and as of theclosing of any sale of securities pursuant thereto did not contain any untruestatement of a material fact or omit to state any material fact required to bestated therein or necessary in order to make the statements made therein, inthe light of the circumstances under which they were made, not misleading.

 

(j)                                     ***No Conflict, Breach, Violation orDefault****.*  The execution, delivery and performance ofthe Transaction Documents by the Company, the issuance and sale of the Notes,the Warrants, the Conversion Shares, the Payment Shares, the Warrant Shares,the granting of the security interests pursuant to the Security Agreement, theGeneral Collateral Security Agreement and the Patent and Trademark SecurityAgreement and the exercise of the rights granted to the Holders therein do notand will not conflict with or result in a breach or violation of any of theterms and provisions of, constitute a default (or an event that with notice orlapse of time or both would become a default) under, or give to others anyrights of termination, amendment, acceleration or cancellation under (i) theCertificate of Incorporation or the By-laws, both as in effect on the datehereof (copies of which have been provided to the Holders before the datehereof), or (ii) (a) any statute, rule, regulation or order of any governmentalagency or body (including without limitation, the Sarbanes-Oxley Act of 2002)or any court, domestic or foreign, having jurisdiction over the Company, anySubsidiary or any of their respective assets or properties, or (b) upon receiptof the consents set forth on Schedule 2(e), any agreement, indenture, orinstrument to which the Company or any Subsidiary is a party or by which theCompany or a Subsidiary is bound or to which any of their respective assets orproperties is subject.  Neither theCompany nor the Subsidiary is in violation of its Certificate of Incorporation,By-laws or other organizational documents and, except as provided in Schedule2(j), neither the Company nor any Subsidiary is in default (and no event hasoccurred which, with notice or lapse of time or both, would put the Company orany Subsidiary in default) under, nor has there occurred any event givingothers (with notice or lapse of time or both) any rights of termination,amendment, acceleration or cancellation of, any agreement, indenture orinstrument to which the Company or Subsidiary is a party, except for actual orpossible violations, defaults or rights that would not, individually or in theaggregate, have a Material Adverse Effect. The businesses of the Company and the Subsidiaries are not beingconducted, and shall not be

 

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conducted so long as theHolders own the Note or the Warrants are owned by the original holders, inviolation of any law, ordinance or regulation of any governmental entity,except for possible violations the sanctions for which either singly or in theaggregate would not have a Material Adverse Effect.  Except as specifically contemplated by this Agreement, theCompany is not required to obtain any consent, approval, authorization or orderof, or make any filing or registration with, any court or governmental agencyor any regulatory or self regulatory agency or other third party in order forit to execute, deliver or perform any of its obligations under the TransactionDocuments, in each case in accordance with the terms hereof or thereof.

 

(k)                                  ***Tax Matters.***  Except as provided in Schedule 2(k), theCompany and each Subsidiary has timely prepared and filed all tax returns,reports and declarations required to have been filed by the Company or suchSubsidiary with all appropriate governmental agencies and timely paid all taxesowed by it.  The charges, accruals andreserves on the books of the Company in respect of taxes for all fiscal periodsare adequate in all material respects, and there are no material unpaidassessments against the Company or any Subsidiary nor, to the Company’sknowledge (as defined herein), any basis for the assessment of any additionaltaxes, penalties or interest for any fiscal period or audits by any federal,state or local taxing authority except for any assessment which is not materialto the Company and its Subsidiaries, taken as a whole.  All taxes and other assessments and leviesthat the Company or any Subsidiary is required to withhold or to collect forpayment have been duly withheld and collected and paid to the propergovernmental entity or third party when due. There are no tax liens or claims pending or, to the Company’s knowledge,threatened against the Company or any Subsidiary or any of their respectiveassets or property.  There are no outstandingtax sharing agreements or other such arrangements between the Company and anySubsidiary or other corporation or entity. Neither the Company nor any of the Subsidiaries has executed a waiverwith respect to the statute of limitations relating to the assessment orcollection or any foreign, federal, state, provincial or local tax.  None of the Company’s tax returns ispresently being audited by any taxing authority.

 

(l)                                     ***Title to Properties.***  Except as disclosed in the SEC Filings andSchedule 2(1), the Company and each Subsidiary has good and marketable title infee simple to all real properties and good and merchantable title to all otherproperties and assets owned by it, in each case free from liens, encumbrancesand defects that would materially affect the value thereof or materiallyinterfere with the use made or currently planned to be made thereof by them;and except as disclosed in the SEC Filings and Schedule 2(1), the Company andeach Subsidiary holds any leased real or personal property under valid,subsisting and enforceable leases with no exceptions that would materiallyinterfere with the use made or currently planned to be made thereof by them.

 

(m)                               ***Certificates, Authorities andPermits.***  The Company andeach Subsidiary possess adequate certificates, authorities, licenses, approvalsor permits issued by appropriate governmental agencies or bodies necessary toconduct the business now operated by it, and neither the Company nor anySubsidiary has received any notice of proceedings relating to the revocation ormodification of any such certificate, authority or permit that, if determinedadversely to the Company or such Subsidiary, could reasonably be expected tohave a Material Adverse Effect, individually or in the aggregate.

 

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(n)                                 ***No Labor Disputes.***  No material labor dispute with the employeesof the Company or any Subsidiary exists or, to the Company’s knowledge, isimminent.

 

(o)                                 ***Intellectual Property.***

 

(1)               All IntellectualProperty of the Company and its Subsidiaries is currently in compliance withall legal requirements (including timely filings, proofs and payments of fees)and is valid and enforceable. “Intellectual Property” means all of the following: (i) patents, patentapplications, patent disclosures and inventions (whether or not patentable andwhether or not reduced to practice); (ii) trademarks, service marks, tradedress, trade names, corporate names, logos, slogans and Internet domain names,together with all goodwill associated with each of the foregoing; (iii)copyrights and copyrightable works; (iv) registrations, applications andrenewals for any of the foregoing; (v) trade secrets, confidential informationand know-how (including but not limited to ideas, formulae, compositions,manufacturing and production processes and techniques, research and developmentinformation, drawings, specifications, scientific, technical, and engineeringdata object and source codes, designs, business and marketing plans, andcustomer and supplier lists and related information); and (vi) proprietarycomputer software (including but not limited to data, data bases anddocumentation).  No IntellectualProperty of the Company or its Subsidiaries which is necessary for the conductof Company’s and each of its Subsidiaries’ respective businesses as currentlyconducted or as currently proposed to be conducted has been or is now involvedin any cancellation, dispute or litigation, and, to the Company’s knowledge, nosuch action is threatened.  “Company’sknowledge” means the actual knowledge of the officers of the Company holdingthe title of vice president and above, after due inquiry.  No patent of the Company or its Subsidiarieshas been or is now involved in any interference, reissue, re-examination oropposition proceeding.

 

(2)               All of the licensesand sublicenses and consent, royalty or other agreements concerningIntellectual Property which are necessary for the conduct of Company’s and eachof its Subsidiaries’ respective businesses as currently conducted or ascurrently proposed to be conducted to which the Company or any Subsidiary is aparty or by which any of their assets are bound (other than generallycommercially available, non-custom, off-the-shelf software application programshaving a retail acquisition price of less than $10,000 per license)(collectively, “License Agreements”) are valid and binding obligations of theCompany or its Subsidiaries that are parties thereto and, to the Company’sknowledge, the other parties thereto, enforceable in accordance with theirterms, except to the extent that enforcement thereof may be limited bybankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance orother similar laws affecting the enforcement of creditors’ rights generally,and neither the Company nor any of its Subsidiaries nor, to the Company’sknowledge, any other party thereto, is in material violation or breach of anysuch License Agreement, and no action or failure to act by the Company or anyof its Subsidiaries constitutes (with or without due notice or lapse of time orboth) a material default by the Company or any of its Subsidiaries thereunder.

 

(3)               The Company hasvalid title and right to use all of the Intellectual Property that constitutespart of the Collateral (as defined in the Security Agreement, the General

 

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Collateral Security Agreementand the Patent and Trademark Security Agreement).  The Subsidiaries do not have any right to or interest in theCollateral.

 

(4)               The Company and itsSubsidiaries own or have the valid right to use all of the IntellectualProperty necessary for the conduct of the Company’s and each of itsSubsidiaries’ businesses substantially as currently conducted or as currentlyproposed to be conducted and for the ownership, maintenance and operation ofthe Company’s and its Subsidiaries’ properties and assets.

 

(5)               Except as set forthon Schedule 2(o), the Intellectual Property reflected in the financialstatements included in the SEC Filings as owned by the Company and itsSubsidiaries that is necessary for the conduct of Company’s and each of itsSubsidiaries’ respective businesses as currently conducted or as currentlyproposed to be conducted is owned by them free and clear of all liens,encumbrances, adverse claims or obligations to license all such ownedIntellectual Property, other than licenses entered into in the ordinary courseof the Company’s and its Subsidiaries’ businesses.  The Company and its Subsidiaries have a valid and enforceableright to use all other Intellectual Property used or held for use in therespective businesses of the Company and its Subsidiaries.  The Company and its Subsidiaries have theright to use all of the owned and licensed Intellectual Property which isnecessary for the conduct of Company’s and each of its Subsidiaries’ respectivebusinesses as currently conducted or as currently proposed to be conducted inall jurisdictions in which they conduct their businesses.

 

(6)               The Company andeach of its Subsidiaries have taken reasonable steps to maintain, police andprotect the Intellectual Property which it owns and which is necessary for theconduct of Company’s and each of its Subsidiaries’ respective businesses ascurrently conducted or as currently proposed to be conducted, including theexecution of appropriate confidentiality agreements and intellectual propertyand work product assignments and releases. The conduct of the Company’s and itsSubsidiaries’ businesses as currently conducted does not infringe or otherwiseimpair or conflict with (collectively, “Infringe” or “Infringement”) anyIntellectual Property rights of any third party, and, to the Company’sknowledge, the Intellectual Property rights of the Company and its Subsidiarieswhich are necessary for the conduct of Company’s and each of its Subsidiaries’respective businesses as currently conducted or as currently proposed to beconducted are not being infringed by any third party, except to the extent suchInfringements do not have a Material Adverse Effect.  There is no litigation or order pending or outstanding or, to theCompany’s knowledge, threatened or imminent, that seeks to limit or challengeor that concerns the ownership, use, validity or enforceability of anyIntellectual Property of the Company and its Subsidiaries and the Company’s andits Subsidiaries’ use of any Intellectual Property owned by a third party.Neither the Company nor any of the Subsidiaries has entered into any consentagreement, indemnification agreement, forbearance to sue or settlementagreement with respect to the validity of the Company’s or its Subsidiaries’ownership or right to use its Intellectual Property and, to the best knowledgeof the Company, there is no reasonable basis for any such claim to be successful.

 

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(7)               The consummation ofthe transactions contemplated hereby will not result in the alteration, loss,impairment of or restriction on the Company’s or any of its Subsidiaries’ownership or right to use any of the Intellectual Property (including, withoutlimitation, property used pursuant to License Agreements) which is necessaryfor the conduct of Company’s and each of its Subsidiaries’ respectivebusinesses as currently conducted or as currently proposed to be conducted.

 

(8)               All software ownedby the Company or any of its Subsidiaries, and, to the Company’s knowledge, allsoftware licensed from third parties by the Company or any of its Subsidiaries,(i) is free from any material defect, bug, virus, or programming, design ordocumentation error; (ii) operates and runs in a reasonable and efficientbusiness manner; and (iii) conforms in all material respects to thespecifications and purposes thereof.

 

(9)               Except underconfidentiality obligations, there has been no material disclosure of any ofthe Company’s or its Subsidiaries’ confidential information or trade secrets toany third party.

 

(p)                                 ***Environmental Matters.***  Neither the Company nor any Subsidiary is inviolation of any statute, rule, regulation, decision or order of anygovernmental agency or body or any court, domestic or foreign, relating to theuse, disposal or release of hazardous or toxic substances or relating to theprotection or restoration of the environment or human exposure to hazardous ortoxic substances (collectively, “Environmental Laws”), owns or operates anyreal property contaminated with any substance that is subject to anyEnvironmental Laws, is liable for any off-site disposal or contaminationpursuant to any Environmental Laws, and is subject to any claim relating to anyEnvironmental Laws, which violation, contamination, liability or claim has hador could reasonably be expected to have a Material Adverse Effect, individuallyor in the aggregate; and there is no pending or, to the Company’s knowledge,threatened investigation that might lead to such a claim.

 

(q)                                 ***Litigation.***  Except as disclosed in the SEC Filings andthe Disclosure Schedules, including Schedule 2(q), there are no pendingactions, suits, proceedings, inquiries or investigations against or affectingthe Company, its Subsidiaries or any of its or their properties or theirrespective directors or officers in their capacities as such. To the bestknowledge of the Company, after reasonable investigation, there are no factswhich, if known by a potential claimant or governmental authority, could giverise to a claim or proceeding which, if asserted or conducted with resultsunfavorable to the Company or any of the Subsidiaries, could reasonably beexpected to have a Material Adverse Effect.

 

(r)                                    ***Financial Statements.***  The financial statements included in eachSEC Filing present fairly, in all material respects, the consolidated financialposition of the Company as of the dates shown and its consolidated results ofoperations and cash flows for the periods shown, and such financial statementshave been prepared in conformity with United States generally acceptedaccounting principles (“GAAP”) applied on a consistent basis (except as may bedisclosed therein or in the notes thereto, and, in the case of quarterlyfinancial statements, as permitted by Form 10-Q

 

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under the Exchange Act).  Except as set forth in the financialstatements of the Company included in the SEC Filings filed prior to the datehereof or as described on Schedule 2(r), neither the Company nor any of itsSubsidiaries has incurred any liabilities, contingent or otherwise, except (i)those incurred in the ordinary course of business, consistent (as to amount andnature) with past practices since the date of such financial statements, and(ii) obligations under contracts and commitments incurred in the ordinarycourse of business and not required under GAAP to be reflected in suchfinancial statements, none of which, individually or in the aggregate, have hador could reasonably be expected to have a Material Adverse Effect.

 

(s)                                  ***Insurance Coverage*.**  The Company and each Subsidiary maintain infull force and effect insurance coverage that is customary for comparablysituated companies for the business being conducted and properties owned orleased by the Company and each Subsidiary. No default or event has occurred that could give rise to a default underany such policy.

 

(t)                                    ***Brokers and Finders.***  No person will have, as a result of thetransactions contemplated by this Agreement, any valid right, interest or claimagainst or upon the Company, any Subsidiary or the Holders for any commission,fee or other compensation pursuant to any agreement, arrangement orunderstanding entered into by or on behalf of the Company.

 

(u)                                 ***No Directed Selling Efforts orGeneral Solicitation.*** Neither the Company nor any person acting on its behalf has conductedany general solicitation or general advertising (as those terms are used inRegulation D) in connection with the offer or sale of the Notes, the ConversionShares or Payment Shares.

 

(v)                                 ***No Integrated Offering.***  Neither the Company nor any of itsaffiliates, nor any person acting on its or their behalf has, directly orindirectly, made any offers or sales of any Company security or solicited anyoffers to buy any security, under circumstances that would adversely affectreliance by the Company on Section 4(2) for the exemption fromregistration for the transactions contemplated hereby or would requireregistration of the Notes, the Warrants, the Conversion Shares, the PaymentShares or the Warrant Shares under the Securities Act.

 

(w)                               ***Questionable Payments.***  Neither the Company nor any of itsSubsidiaries nor, to the Company’s knowledge, any of their respective currentor former shareholders, directors, officers, employees, agents or other personsacting on behalf of the Company or any Subsidiary, has on behalf of the Companyor any Subsidiary or in connection with their respective businesses: (a) usedany corporate funds for unlawful contributions, gifts, entertainment or otherunlawful expenses relating to political activity; (b) made any direct orindirect unlawful payments to any governmental officials or employees fromcorporate funds; (c) established or maintained any unlawful or unrecorded fundof corporate monies or other assets; (d) made any false or fictitious entrieson the books and records of the Company or any Subsidiary; or (e) made anyunlawful bribe, rebate, payoff, influence payment, kickback or other unlawfulpayment of any nature.

 

(x)                                   ***Disclosures.***  The information relating to or concerningthe Company, set forth in this Agreement or provided to the Holders inconnection with the transactions contemplated

 

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by the Transaction Documents donot contain any untrue statement of a material fact or omit to state a materialfact necessary in order to make the statements contained therein, in light ofthe circumstances under which they were made, not misleading.  None of the matters described on theDisclosure Schedules have had, or could reasonably be expected to have, aMaterial Adverse Effect, individually or in the aggregate, except as describedon the Disclosure Schedules.  No eventor circumstance has occurred or exists with respect to the Company or theSubsidiaries or their respective businesses, properties, prospects, operationsor financial conditions, which has not been publicly disclosed but, under applicablelaw, rule or regulation, would be required to be disclosed by the Company in aregistration statement filed on the date hereof by the Company under theSecurities Act with respect to a primary issuance of the Company’s securities.

 

(y)                                 ***Transactions with Affiliates.***  None of the officers or directors of theCompany and, to the Company’s knowledge, none of the employees of the Companyis presently a party to any transaction with the Company or a Subsidiary or toa presently contemplated transaction (other than for services as employees,officers and directors) that would be required to be disclosed pursuant to Item404 of Regulation S-K promulgated under the Securities Act, without regard tothe dollar thresholds contained in such Item.

 

(z)                                   ***Acknowledgment Regarding Holders’Purchase of the Securities.*** The Company acknowledges and agrees that no Holder is acting as afinancial advisor or fiduciary of the Company (or in any similar capacity) withrespect to this Agreement or the transactions contemplated hereby, therelationship between the Company and each Holder is “arms-length” and anystatement made by any Holder or any of its representatives or agents inconnection with this Agreement and the transactions contemplated hereby ismerely incidental to such Holder’s purchase of the Securities (as definedbelow) and has not been relied upon by the Company, its officers or directorsin any way.  The Company furtheracknowledges that the Company’s decision to enter into this Agreement has beenbased solely on an independent evaluation by the Company and itsrepresentatives.

 

3.                                       **Holders’ Representations.**  In connection with the Holders’ acquisitionof the Notes, the Holders represent to the Company the following:

 

(a)                                  ***Organization and Existence.***  The Holders are validly existingcorporations, limited partnerships or limited liability companies and have allrequisite corporate, partnership or limited liability company power andauthority to invest in the Notes, the Conversion Shares and the Payment Shares pursuantto this Agreement.

 

(b)                                 ***Authorization.***  The execution, delivery and performance bythe Holders of the Transaction Documents have been duly authorized and theTransaction Documents will each constitute the valid and legally bindingobligation of the Holders, enforceable against the Holders in accordance withtheir terms, subject to bankruptcy, insolvency, fraudulent transfer,reorganization, moratorium and similar laws of general applicability, relatingto or affecting creditors’ rights generally.

 

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(c)                                  ***Purchase Entirely for Own Account.***  The Notes, the Conversion Shares and thePayment Shares to be received by the Holders hereunder will be acquired for theHolders’ own account, not as nominee or agent, and not with a view to theresale or distribution of any part thereof in violation of the Securities Act,and the Holders has no present intention of selling, granting any participationin, or otherwise distributing the same in violation of the Securities Act.  The Holders are not registered brokerdealers or entities engaged in the business of being broker dealers.  Notwithstanding anything in thisSection 3(c) to the contrary, by making the representations herein, theHolders do not agree to hold the Securities for any minimum or other specificterm and reserve the right to dispose of the Securities at any time inaccordance with or pursuant to a registration statement or an exemption fromthe registration requirements under the Securities Act.

 

(d)                                 ***Investment Experience.***  The Holders acknowledge that they can bearthe economic risk and complete loss of their investment in the Notes, theConversion Shares and the Payment Shares and have such knowledge and experiencein financial or business matters that they are capable of evaluating the meritsand risks of the investment contemplated hereby.

 

(e)                                  ***Disclosure of Information.***  The Holders have had an opportunity toreceive all additional information related to the Company requested and to askquestions of and receive answers from the Company regarding the Company, itsbusiness and the terms and conditions of the sale of the Notes, the ConversionShares and the Payment Shares.  TheHolders acknowledge receipt of copies of the SEC Filings. Neither such inquiriesnor any other due diligence investigation conducted by the Holders shallmodify, amend or affect the Holders’ right to rely on the Company’srepresentations and warranties contained in this Agreement.

 

(f)                                    ***Restricted Securities.***  The Holders acknowledge and understand thatthe Notes constitute, and that the Conversion Shares, if issued, willconstitute “restricted securities” under the Securities Act and must be heldindefinitely unless they are subsequently registered under the Securities Actor an exemption from such registration is available.  The Holders further acknowledge and understand that the Companyis under no obligation to register the Notes or, except as otherwise set forthin this Agreement, the Conversion Shares and the Payment Shares.  The Holders understand that the instrumentevidencing the Notes shall be imprinted with a legend which prohibits thetransfer of the Notes unless (i) they are registered, (ii) such registration isnot required in the opinion of counsel satisfactory to the Company or (iii)they can be sold pursuant to Rule 144(k). 

 

(g)                                 ***Legends.***  It is understood that, if the Notes areconverted, until the earlier of (i) registration for resale pursuant hereto or(ii) the time when the Conversion Shares (as defined in the Notes) may be soldpursuant to Rule 144(k), certificates evidencing the Conversion Shares maybear the following or any similar legend:

 

“The securities represented hereby may not be transferred unless (i)such securities have been registered for sale pursuant to the Securities Act of1933, as amended, (ii) such securities may be sold pursuant toRule 144(k), or (iii) the Company has received an

 

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opinion ofcounsel satisfactory to it that such transfer may lawfully be made withoutregistration under the Securities Act of 1933 or qualification under applicablestate securities laws.”

 

The Companyagrees that it shall, immediately prior to a Registration Statement (as definedbelow) being declared effective, deliver to its transfer agent an opinionletter of counsel, opining that at any time a Registration Statement iseffective, the transfer agent shall issue, in connection with the issuance ofthe Conversion Shares or Payment Shares, as applicable, certificates representingany such Conversion Shares or Payment Shares without the restrictive legendabove, provided such Conversion Shares and Payment Shares are to be soldpursuant to the prospectus contained in the Registration Statement.  Upon receipt of such opinion, the Companyshall cause the transfer agent to confirm, for the benefit of the Holders, thatno further opinion of counsel is required at the time of transfer in order toissue such shares without such restrictive legend.

 

The legend setforth above shall be removed and the Company shall issue a certificate withoutsuch legend to the holder of any Note, Conversion Share or Payment Share (eacha “Security” and collectively, the “Securities”) upon which it is stamped, if,unless otherwise required by state securities laws, (a) the sale of suchSecurity is registered under the Securities Act (including registrationpursuant to Rule 416 thereunder); (b) such holder provides the Companywith an opinion of counsel, in form, substance and scope customary for opinionsof counsel in comparable transactions, to the effect that a public sale ortransfer of such Security may be made without registration under the SecuritiesAct; or (c) such holder provides the Company with reasonable assurances thatsuch Security can be sold under Rule 144. In the event the above legend is removed from any Security andthereafter the effectiveness of a registration statement covering such Securityis suspended or the Company determines that a supplement or amendment theretois required by applicable securities laws, then upon reasonable advance writtennotice to the Holders the Company may require that the above legend be placedon any such Security that cannot then be sold pursuant to an effectiveregistration statement or under Rule 144 and the Holders shall cooperatein the replacement of such legend.  Suchlegend shall thereafter be removed when such Security may again be soldpursuant to an effective registration statement or under Rule 144.

 

(h)                                 ***Accredited Investor.***  The Holders are accredited investors asdefined in Rule 501(a) of Regulation D, as amended, under the SecuritiesAct.

 

(i)                                     ***No General Solicitation.***  The Holders did not learn of the investmentin the Notes or the Conversion Shares as a result of any public advertising orgeneral solicitation.

 

(j)                                     ***Brokers and Finders.***  No person will have, as a result of thetransactions contemplated by this Agreement, any valid right, interest or claimagainst or upon the Company, any Subsidiary or the Holders for any commission,fee or other compensation pursuant to any agreement, arrangement orunderstanding entered into by or on behalf of the Holders.

 

(k)                                  ***Taxes.***  The Holders understand that the Holders’investment in the Company may result in tax consequences.  The Holders shall rely solely on thedeterminations of their tax

 

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advisors or their owndeterminations, and not on any statements or representations by the Company orany of its agents, with regard to all such tax matters.

 

4.                                       **Covenants.**

 

(a)                                  ***Satisfaction of Conditions.***  The Company shall satisfy each of theconditions described in Section 7 of this Agreement.

 

(b)                                 ***Form D; Blue Sky Laws.***  The Company shall file with the Securitiesand Exchange Commission a Form D with respect to the Securities and Warrants asrequired under Regulation D and provide a copy thereof to the Holders promptlyafter such filing.  The Company shall,on or before the time of Closing and any Subsequent Closing, take such actionas the Company shall reasonably determine is necessary to qualify theSecurities for sale to the Holders pursuant to this Agreement under applicablesecurities or “blue sky” laws of the states of the United States or obtainexemption therefrom, and shall provide evidence of any such action so taken tothe Holders on or prior to the time of Closing and any Subsequent Closing.  Within two (2) business days after the timeof Closing, the Company shall file a Form 8-K concerning this Agreement and thetransactions contemplated hereby, which filing shall contain all materialinformation relating to the Company and the transactions entered into herewith.

 

(c)                                  ***Reporting Status.***  So long as any Holder beneficially owns anyof the Securities and Warrants, the Company shall timely file all reportsrequired to be filed with the SEC pursuant to the Exchange Act, and the Companyshall not terminate its status as an issuer required to file reports under theExchange Act even if the Exchange Act or the rules and regulations thereunderwould permit such termination.  Inaddition, the Company shall take all actions necessary to meet the “registranteligibility” requirements set forth in the general instructions to Form S-3 orany successor form thereto, to continue to be eligible to register the resaleof its Common Stock on a registration statement on Form S-3 under theSecurities Act.

 

(d)                                 ***Use of Proceeds.***  The Company shall have used the proceedsfrom the sale of the Notes as set forth in Schedule 4(d).

 

(e)                                  ***Expenses.***  The Company shall pay to the Holders at theClosing and any Subsequent Closing, reimbursement for all expenses reasonablyincurred by the Holders and their affiliates and advisors in connection withthe negotiation, preparation, execution and delivery of this Agreement and theother agreements to be executed in connection herewith, including, withoutlimitation, the Holders and their affiliates and advisors’ reasonable duediligence and attorneys’ fees and expenses (the “Expenses”); provided, however,that the Holders shall be permitted to deduct all Expenses from the PurchasePrice payable by the Holders hereunder. In addition, from time to timethereafter, upon the written request of a Holder, the Company shall pay to suchHolder such additional Expenses, if any, not covered by such payment, in eachcase to the extent reasonably incurred by the Holders or their affiliates oragents in connection with the negotiation, preparation, execution and deliveryof this Agreement and the other agreements executed in connection herewith.  Notwithstanding anything to the contrary inthis subsection (e), the Company shall not be required to

 

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pay any Expenses in excess of$90,625, excluding however, any Expenses incurred in connection with any SubsequentClosing.

 

(f)                                    ***Financial Information.***  The Company shall send (via electronictransmission or otherwise) the following reports to the Holders until theHolders transfer, assign or sell all of their Securities: (i) within ten (10)days after the filing with the SEC, a copy of its Annual Report on Form 10-K,its Quarterly Reports on Form 10-Q, its proxy statements and any CurrentReports on Form 8-K; and (ii) within one (1) day after release, copies of allpress releases issued by the Company or any of its subsidiaries.

 

(g)                                 ***Reservation of Shares.***  The Company currently has authorized andreserved for the purpose of issuance 17,142,857 shares of Common Stock toprovide for the full conversion of the Notes and issuance of the ConversionShares in connection therewith, such number of shares of Common Stock toprovide for the issuance of the payment of interest on the Notes and theissuance of Payment Shares in connection therewith, such number of shares ofCommon Stock to provide for the full exercise of the Warrants and issuance ofthe Warrant Shares in connection therewith and as otherwise required by theNotes and Warrants (collectively, the “Issuance Obligations”).  In the event such number of shares becomesinsufficient to satisfy the Issuance Obligations, the Company shall take allnecessary action to authorize and reserve such additional shares of CommonStock necessary to satisfy the Issuance Obligations.

 

(h)                                 ***Listing.***  The Company will use its best efforts tocontinue the listing and trading of its Common Stock on the OTC ElectronicBulletin Board (the “Bulletin Board”) or on the NASDAQ National Market (“NNM”),the Nasdaq Smallcap Market (the “Smallcap Market”) the New York Stock Exchange(“NYSE”) or the American Stock Exchange (“AMEX”) and will comply in allrespects with the reporting, filing and other obligations under the bylaws orrules of the National Association of Securities Dealers, Inc. (the “NASD”),such exchanges, or such electronic system, as applicable.  The Company shall promptly provide to theHolders copies of any notices it receives regarding the continued eligibilityof the Common Stock for trading in a market over the counter or, if applicable,any securities exchange or automated quotation system on which securities ofthe same class or series issued by the Company are then listed or quoted, ifany.

 

(i)                                     ***No Integrated Offerings.***  The Company shall not make any offers orsales of any security (other than the Securities and the Warrants) undercircumstances that would require registration of the Securities being offeredor sold hereunder under the Securities Act or cause this offering of theSecurities to be integrated with any other offering of securities by theCompany for purposes of any stockholder approval provision applicable to theCompany or its securities.

 

(j)                                     ***Legal Compliance.***  The Company shall conduct its business andthe business of the Subsidiaries in compliance with all laws, ordinances orregulations of governmental entities applicable to such businesses, exceptwhere the failure to do so would not have a Material Adverse Effect.

 

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(k)                                  ***Redemptions and Dividends.***  So long as any Holder beneficially owns anyNotes, the Company shall not, without first obtaining the written approval ofthe Holders, repurchase, redeem, or declare or pay any cash dividend ordistribution on, or otherwise prepay on account of, any shares of capital stockor other outstanding indebtedness of the Company, except for the prepaymentscontemplated in the Debenture Waiver and Consent, which prepayments areexpressly permitted herby and consented to by the Holders.

 

(l)                                     ***Stockholder Approval.***  If the Company is prohibited byRule 4350 of the NASD or any successor or similar rule, or the rules ofany other securities exchange or electronic trading system on which the CommonStock is then listed or traded from issuing all of the shares of Common Stockissuable upon complete conversion of the Notes (without giving effect to thelimitations on conversion and exercise contained in Section 3(h) andSection 4 of the Notes, the Company shall call a meeting of itsstockholders to be held as provided for in Section 4 of the Notes for thepurpose of voting upon and approving the issuance of the Notes, and the issuanceof the Conversion Shares and Payment Shares upon conversion of or otherwisepursuant to the Notes.  The Companyshall, through its Board of Directors, recommend to its stockholders approvalof such matters.  The Company shall useits best efforts to solicit from its stockholders proxies in favor of suchmatters sufficient to comply with all relevant legal requirements, including,without limitation Rule 4350 promulgated by the NASD, and shall vote suchproxies in favor of such matters.  Inthe event that the Company is required to obtain such approval and suchapproval is not obtained, the Company shall pay a cash payment to the Holdersin an amount equal to 120% of each Holder’s contribution to the Purchase Price.

 

(m)                               ***Sale or License of Imagent.***  The Company agrees to promptly commenceefforts to, and as soon as practicable but in no event later than December 31,2002, to sell or license the Imagent product and all derivations, improvementsthereon, products and processes for no less than six million dollars in netproceeds to the Company.

 

(n)                                 ***Operating Expenses.***  The Company agrees that following the timeof Closing, the Company will continue to reduce its Operating Expenses (asdefined below) to levels that SDS Merchant Fund, L.P., or any affiliate thereof,determines to be prudent taking into account the Company’s then revenues andprofitability or prospects for same and to the extent that the Company isrequired pursuant to this Section 4(n) to reduce Operating Expenses in anymaterial amount, it will immediately issue a press release and file with theSEC a Form 8-K disclosing such information.

 

“OperatingExpenses” shall include without limitation, expenses for compensation, employeebenefit plans, capital expenditures, lease expenditures, research anddevelopment costs, product development and marketing costs and commitments,interest expense, and other general administrative expenses.

 

(o)                                 ***Prior Registration Statements.***  The Company hereby represents and warrantsthat the following registration statements are effective under the SecuritiesAct: any registration statement issued in connection with that certainSecurities Purchase Agreement, dated as of August

 

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22, 2000 among the Company andthe signatories thereto, and any registration statement issued in connectionwith that certain Purchase Agreement, made as of the 30th day of October 2001by and among the Company and the signatories thereto (the “Prior RegistrationStatements”).  The Company shall takeall actions necessary to maintain the effectiveness of the Prior RegistrationStatements under the Securities Act.

 

(p)                                 ***Filing of Prospectus.***  Within four calendar days of the date ofClosing and any Subsequent Closing, if required by law in the reasonableopinion of counsel to any Holder, the Company shall file with the SEC aprospectus supplement pursuant to Rule 424(b) promulgated under theSecurities Act, to the extent necessary to reflect the transactionscontemplated by this Agreement.

 

(q)                                 ***Consents.***  The Company covenants and agrees with theHolders that it shall obtain the consents set forth in items 7, 8 and 9 onSchedule 2(e) within five business days as of the date hereof.

 

(r)                                    ***Waiver of Third Party RegistrationRights.***  The Companycovenants and agrees with the Holders that it will, within five (5) businessdays of the date of Closing, obtain from any and all third parties that havepiggyback registration rights with respect to the Company’s securities, waiversof such rights with respect to any registration statement filed as contemplatedby this Agreement and the Transaction Documents.

 

5.                                       **Transfer Agent Instructions.**

 

(a)                                  TheCompany shall instruct its transfer agent to issue certificates, registered inthe name of each Holder or its nominee, for the Conversion Shares and thePayment Shares in such amounts as specified from time to time by the Holders tothe Company upon conversion of the Notes or issuance of Payment Shares, asapplicable.

 

(b)                                 TheCompany warrants that no instruction other than such instructions referred toin this Section 5, and stop transfer instructions to give effect toSection 3(f) hereof in the case of the transfer of the Conversion Sharesor Payment Shares prior to registration of the Conversion Shares and Payment Sharesunder the Securities Act or without an exemption therefrom, will be given bythe Company to its transfer agent and that the Securities shall otherwise befreely transferable on the books and records of the Company as and to theextent provided in this Agreement.

 

(c)                                  Ifthe Holders provide the Company and the transfer agent with an opinion ofcounsel, which opinion of counsel shall be in form, substance and scopecustomary for opinions of counsel in comparable transactions, to the effectthat the Securities to be sold or transferred may be sold or transferredpursuant to an exemption from registration, or the Holders provide the Companywith reasonable assurances that such Securities may be sold underRule 144, the Company shall permit the transfer and, in the case of theConversion Shares and Payment Shares, promptly instruct

 

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its transfer agent to issue oneor more certificates in such name and in such denominations as specified by theHolders.

 

6.                                       **Conditions to the Company’s Obligation to Sell.**

 

(a)                                  Theobligation of the Company hereunder to issue and sell the Notes to the Holdersis subject to the satisfaction, at or before the Closing and any SubsequentClosing, of each of the following conditions thereto, provided that theseconditions are for the Company’s sole benefit and may be waived by the Companyat any time in its sole discretion:

 

(1)               The Holders shallhave delivered the Purchase Price in accordance with Section 1 above.

 

(2)               No statue, rule,regulation, executive order, decree, ruling or injunction shall have beenenacted, entered, promulgated or endorsed by any court or governmentalauthority of competent jurisdiction or any self-regulatory organization havingauthority over the matters contemplated hereby which prohibits the consummationof any of the transactions contemplated by this Agreement.

 

7.                                       **Conditions to the Holders Obligations to Purchase.**

 

(a)                                  Theobligation of the Holders hereunder to purchase the Notes from the Company issubject to the satisfaction, at or before the time of Closing and anySubsequent Closing, of each of the following conditions, provided that suchconditions are for each Holder’s sole benefit and may be waived by each Holderat any time in such Holder’s sole discretion:

 

(1)               The Company shallhave executed this Agreement, the other Transaction Documents and deliveredexecuted original copies of the same to each Holder.  All filings deemed reasonably necessary on the part of theHolders to properly perfect a first lien security interest in the Company’sassets, all as more particularly described in the Security Agreement, theGeneral Collateral Security Agreement and the Patent and Trademark SecurityAgreement, shall have been made and all fees payable, if any, in connectiontherewith shall have been paid by the Company.

 

(2)               The Company shallhave delivered to each Holder duly executed Notes (each in such denominationsas such Holder shall request) in accordance with Section 1 above.

 

(3)               The Common Stockshall continue to be traded on the NNM or Bulletin Board and trading in theCompany’s common stock (or on the NNM or Bulletin Board generally) shall nothave been suspended by the SEC or any other governing body of such NNM orBulletin Board market.

 

(4)               The representationsand warranties of the Company shall be true and correct as of the date whenmade and as of the time of Closing and any Subsequent Closing as though made atthat time (except for representations and warranties that speak as of aspecific date,

 

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which representations andwarranties shall be true and correct as of such date) and the Company shallhave performed, satisfied and complied in all material respects with thecovenants, agreements and conditions required by this Agreement to beperformed, satisfied or complied with by the Company at or prior to the time ofClosing and any Subsequent Closing.  TheHolders shall have received a certificate, executed by the Chief OperatingOfficer of the Company after reasonable investigation, dated as of the time ofClosing and any Subsequent Closing to the foregoing effect and as to such othermatters as may reasonably be requested by the Holders.

 

(5)               No statute, rule,regulation, executive order, decree, ruling, injunction, action or proceedingshall have been enacted, entered, promulgated or endorsed by any court orgovernmental authority of competent jurisdiction or any self-regulatoryorganization having authority over the matters contemplated hereby whichquestions the validity of, challenges or prohibits the consummation of, any ofthe transactions contemplated by this Agreement.

 

(6)               The Holders shallhave received an opinion of the Company’s counsel, dated as of the date ofClosing and any Subsequent Closing, in form, scope and substance reasonablysatisfactory to the Holders and in substantially the form of Exhibit Eattached hereto.

 

(7)               There shall havebeen no material adverse changes and no material adverse developments in thebusiness, properties, operations, prospects, financial condition or results ofoperations of the Company and the Subsidiaries, taken as a whole, since thedate hereof, and no information, of which the Holders are not currently aware,shall come to the attention of the Holders that is materially adverse to theCompany.

 

(8)               The Holders shallhave received a copy of resolutions, duly adopted by the Board of Directors ofthe Company, which shall be in full force and effect at the time of the Closingand any Subsequent Closing, authorizing the execution, delivery and performanceby the Company of this Agreement and the Transaction Documents, and theconsummation by the Company of the transactions contemplated hereby andthereby, certified as such by the Secretary or Assistant Secretary of theCompany, and such other documents they reasonably request in connection withthe Closing and any Subsequent Closing.

 

(9)               The Company shalldeliver the Warrants to the holders of the Company’s 5% Convertible Debenturesdue February 11, 2004 and the Company’s 5% Convertible Debentures dueAugust 22, 2004 (collectively, the “Existing Convertible Debt”).

 

(10)         The holders of at least75% of the principal amount outstanding under the Existing Convertible Debtshall execute an instrument, in form and substance satisfactory to the Holders,to the effect that, among other things, all holders of instruments evidencingthe Existing Convertible Debt to waive their right to a downward adjustment ofthe applicable conversion price for which the Existing Convertible Debt arepresently convertible into Common Stock as a result of the transactionscontemplated by this Agreement; provided however such waiver shall not apply toany Holder with respect to an amount outstanding under Existing ConvertibleDebt held by such Holder equal to the Purchase Price paid by such Holder.

 

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(11)         All outstanding warrantsissued on or after October 30, 2001 (but excluding the Warrants) to purchaseCommon Stock (the “Old Warrants”), shall be adjusted to provide for an exerciseprice equal to the Conversion Price and to provide that the Company mayrepurchase the Old Warrants at a price equal to 200% of the then applicableexercise price per Old Warrant.

 

(12)         The Company shall obtainan instrument in form and substance acceptable to the Holders, to the effectthat the holders of Existing Convertible Debt, shall waive any right toaccelerate the maturity of the Existing Convertible Debt on the account of adefault in payment or performance of the Existing Convertible Debt as of thedate of the Closing until January 31, 2003 and any future right to acceleratethe maturity of the Existing Convertible Debt on the account of the CommonStock no longer being eligible for trading on the NNM and such other terms andconditions as the Holders may request.

 

(13)         The Company shall obtainan instrument in form and substance acceptable to the Holders, to the effectthat the parties to that certain purchase agreement made as of the 30th day ofOctober, 2001 (the “Common Stock Purchase Agreement”), shall waive their rightsunder Section 7.10 (Purchase Price Adjustment) of the Common StockPurchase Agreement triggered as a result of the transactions contemplated bythis Agreement, including the issuance of the Notes and the Warrants.

 

(14)         The Company shall obtainan instrument in form and substance acceptable to the Holders, to the effectthat all holders of any instrument evidencing outstanding indebtedness of theCompany under any Bridge Note (as defined below) acknowledge and agree that theissuance of the Notes shall not be counted towards the $5,000,000 financingamount referred to in Section 1(b)(ii) of any Bridge Note, which providesthat the Company’s obligation to make payment matures on the date on which theCompany completes and receives the proceeds from a financing with aggregategross proceeds of at least $5,000,000. Bridge Note shall mean each of the Secured Promissory Note issued toXmark Fund, Ltd., dated July 23, 2002, the Secured Promissory Note issued toXmark Fund, L.P., dated July 23, 2002, the Secured Promissory Note issuedto Xmark Fund, L.P., dated August 7, 2002, and the Secured PromissoryNote, issued to Xmark Fund, Ltd., dated August 7, 2002.

 

(15)         The Company shall deliverevidence satisfactory to the Holders that the instruments evidencing theWarrants have been cancelled.

 

8.                                       **Registration of Conversion Shares.**

 

(a)                                  ***Demand Registration*. **At any time, Holders of the principalamount of the Notes then outstanding constituting at least twenty five percent(25%) of the Notes outstanding at such time may request registration (a “DemandRegistration”) under the Securities Act of all or part of their ConversionShares, Warrant Shares and such number of Payment Shares as the Holders shallrequest on a registration statement on Form S-3 (or, if Form S-3 is not thenavailable to the Company, on such form of registration statement as is thenavailable to effect a registration for

 

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resale of the Conversion Sharesof the Company under the Securities Act relating to the Conversion Shares) (a“Registration Statement”).  Each requestfor registration (a “Demand Notice”) shall specify the number of ConversionShares requested to be registered; provided, however, that such request shallbe for not less than such number of shares of Conversion Shares comprising atleast 20% of the then issued and outstanding Conversion Shares.  Within ten (10) days after receipt a DemandNotice, the Company will give written notice of such Demand Registration to allHolders and holders of the Warrants, subject to the terms of Section 4(d),will include in such registration all Conversion Shares and Warrant Shares withrespect to which the Company has received written requests from Holders orholders of the Warrants for inclusion therein within fifteen (15) business daysafter the receipt of the Company’s notice.

 

(b)                                 ***Piggyback Registration*.**  Whenever the Company proposes to registerany of its securities (a “Piggyback Registration”) under the Securities Act,the Company will give prompt written notice to the Holder, the holders of theOther Notes and the holders of the Warrants of its intention to effect such aregistration and, subject to the terms of Section 8(d) and (e) below, willinclude in such registration the Conversion Shares and the Warrant Shares;provided, however, that the Company has received a written request from theHolder for inclusion in such registration within fifteen (15) days after thereceipt of the Company’s notice.  If theCompany fails to receive a written request from the Holder within fifteen (15)days after the receipt of the Company’s notice, then the Company shall have noobligation to include the Conversion Shares in the offering.

 

(c)                                  ***Limitations on PiggybackRegistration*.** Section 8(b) hereof shall not apply to a registration effectedsolely to offer securities for sale pursuant to, or in connection with, (i) anemployee benefit plan or (ii) a transaction subject to Rule 145 under theSecurities Act or in an exchange offer registered on Form S-4 or any successorform to Form S-4, or to any registration on a form which does not permitinclusion of the Conversion Shares pursuant to the SEC’s rules or practice.

 

(d)                                 ***Restrictions on PiggybackRegistration.* **If: (A)the Holder requests registration of the Conversion Shares and the WarrantShares pursuant to Section 8(b) above; (B) the offering proposed to bemade is to be an underwritten public offering; and (C) the managingunderwriters of such public offering furnish a written opinion that the totalamount of securities to be included in such offering would exceed the maximumnumber of shares of Common Stock (as specified in such opinion) which can bemarketed at a price reasonably related to the current market value of suchCommon Stock and without otherwise materially and adversely affecting suchoffering (the “Underwriter Maximum”), then the rights of the Holder toparticipate in such offering shall be in the following order of priority: (X)first, the Company shall be entitled to participate; (Y) second, the number ofshares of securities requested to be included therein, up to the UnderwriterMaximum (after taking into account the number of shares to be sold pursuant toclause (X)) allocated pro rata among the Holder and the holders of the OtherNotes on the basis of the number of Conversion Shares owned by such Holders;and (Z) third, other securities requested to be included in such registrationup to the Underwriter Maximum (after taking into account the securities andConversion Shares to be sold pursuant to clauses (X) and (Y)).  The Company shall not be required to includeany of the securities of a Holder in such offering unless such Holder agrees tothe terms of the

 

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underwriting agreed to betweenthe Company and the underwriter or underwriters selected by the Company.

 

**(e)****                                  *Company Obligations.***  In connection with the registration of theConversion Shares and Payment Shares, the Company shall:

 

(i)                                     Useits best efforts to cause the Registration Statement to become effective aspromptly as possible after the date it is required to be filed with the SEC,and to remain continuously effective for a period that will terminate upon theearlier of (A) the date on which all Conversion Shares, Warrant Shares andPayment Shares, as applicable, covered by such Registration Statement asamended from time to time, have been sold by the Holders, and (B) the date onwhich all Conversion Shares, covered by such Registration Statement may be soldpursuant to Rule 144(k) of the Securities Act (the “RegistrationPeriod”).  The Company shall submit tothe SEC, within two (2) days after the Company learns that no review of theRegistration Statement will be made by the staff of the SEC or that the staffof the SEC has no further comments on such Registration Statement, as the casemay be, a request for acceleration of effectiveness of such RegistrationStatement to a time and date not later than 48 hours after the submission ofsuch request.  The Company shall notifythe Holder of the effectiveness of the Registration Statement on the date theRegistration Statement has been declared effective.

 

(ii)                                  Prepareand file with the SEC such amendments (including post-effective amendments) andsupplements to the Registration Statement and prospectus as may be necessary tokeep such Registration Statement effective, and such prospectus current, at alltimes during the Registration Period (other than during any Blackout Period (asdefined below) during which the provisions of Section 8(e)(vii)(A) beloware applicable), and, during the Registration Period, comply with theprovisions of the Securities Act applicable to the Company in order to permitthe disposition by the Holder of all of its Conversion Shares, Warrant Sharesand Payment Shares covered by such Registration Statement.

 

(iii)                               Providea copy to and permit the Holders and legal counsel designated by a majority ofthe Holders to review and have a reasonable opportunity to comment on theRegistration Statement, preliminary prospectus and prospectus and allamendments and supplements thereto no fewer than five (5) days prior to theirfiling with the SEC and not file any document to which such counsel reasonablyobjects.

 

(iv)                              Furnishto the Holders and their legal counsel promptly after the same is prepared andpublicly distributed, filed with the SEC, or received by the Company (but notlater than two (2) business days after the filing date, receipt date or sendingdate, as the case may be), one copy of each letter written by or on behalf ofthe Company to the SEC or the staff of the SEC, and each item of correspondencefrom the SEC or the staff of the SEC, in each case relating to the RegistrationStatement (other than any portion of any thereof which contains information forwhich the Company has sought confidential treatment).

 

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(v)                                 Furnishto the Holder the Registration Statement and any amendment thereto, eachrelated prospectus and each amendment or supplement thereto and such number ofcopies of each prospectus and all amendments and supplements thereto and suchother documents, as the Holder may reasonably request in order to facilitatethe disposition of the Conversion Shares, Warrant Shares and Payment Sharesowned by the Holder.

 

(vi)                              Subjectto Section 8(e)(vii) below, use its best efforts (A) to register andqualify the Conversion Shares, Warrant Shares and Payment Shares covered by theRegistration Statement under the securities or blue sky laws of suchjurisdictions as the Holder reasonably requests, (B) to prepare and to file inthose jurisdictions such amendments (including post-effective amendments) andsupplements to such registrations and qualifications as may be necessary tomaintain the effectiveness thereof at all times during the Registration Periodand (C) to take all other actions reasonably necessary or advisable to qualifythe Conversion Shares, Warrant Shares and Payment Shares for sale by the Holderin such jurisdictions; provided, however, that the Company shall not berequired in connection therewith or as a condition thereto (X) to qualify to dobusiness in any jurisdiction where it would not otherwise be required toqualify but for this Section 8(e)(vi), (Y) to subject itself to generaltaxation in any such jurisdiction, or (Z) to file a general consent to serviceof process in any such jurisdiction.

 

(vii)                           (A) Aspromptly as practicable after becoming aware of any event or circumstance (1)as a result of which the prospectus relating to the Registration Statement, asthen in effect, includes an untrue statement of a material fact or omits tostate a material fact required to be stated therein or necessary to make thestatements therein, in light of the circumstances under which they were made,not misleading or (2) which requires the Company to amend or supplement theRegistration Statement due to the receipt from the Holders or any other sellingstockholder named in the related prospectus of new or additional informationabout the Holders or selling stockholder or its intended plan of distributionof its Conversion Shares or other securities covered by the RegistrationStatement, the Company shall notify the Holders and use its best effortspromptly to prepare a supplement or amendment to the Registration Statement andthe related prospectus to correct such untrue statement or omission or to addany new or additional information, and deliver a number of copies of suchsupplement or amendment to the Holders as it may reasonably request.  “Blackout Period” shall mean the twenty (20)day period commencing the day the Company notifies the Holders pursuant to thisSection 8(e)(vii)(A).

 

(B)Notwithstanding Section 8(e)(vii)(A) above, if at any time the Companynotifies the Holders as contemplated by Section 8(e)(vii)(A) the Companyalso notifies the Holders that the event giving rise to such notice relates toa development involving the Company which occurred subsequent to the later of(x) the SEC effective date for the Registration Statement and (y) the latestdate prior to such notice on which the Company has amended or supplemented theRegistration Statement, then the Company shall not be required to use bestefforts to make such amendment during a Blackout Period; and provided further,however, that no Blackout Period may commence sooner than sixty (60) days afterthe end of another Blackout Period and not more than one Blackout Period mayoccur during any one year period, provided that the Company shall use its

 

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best efforts to cause suchRegistration Statement to be amended and declared effective as soon as possiblefollowing expiration of the Blackout Period.

 

(viii)                        Use bestefforts to (i) prevent the issuance of any stop order or other suspension ofeffectiveness and, (ii) if such order is issued, obtain the withdrawal of anysuch order at the earliest possible moment.

 

(ix)                                Aspromptly as practicable after becoming aware of the issuance by the SEC of anystop order or other suspension of effectiveness of the Registration Statementnotify the Holder at the earliest possible time.

 

(x)                                   Makeavailable for inspection by the Holder and any advisor to or representative ofthe Holder, at the Holder’s sole expense, all records as shall be reasonablynecessary to enable the Holder to exercise its due diligence responsibility andcause the Company’s officers, directors and employees to supply all informationwhich the Holders or such advisor to or representative of the Holder mayreasonably request for purposes of such due diligence; provided, however, thatthe Holder shall hold in confidence and shall not make any disclosure of anyrecord or other information which the Company determines in good faith to beconfidential, and of which determination the Holder is so notified, unless (A)the disclosure of such record is necessary to avoid or correct a misstatementor omission in the Registration Statement and a reasonable time prior to suchdisclosure the Holder shall have informed the Company of the need to so correctsuch misstatement or omission and the Company shall have failed to correct suchmisstatement or omission, (B) the release of such record is ordered pursuant toa subpoena or other order from a court or government body of competentjurisdiction or (C) the information in such record has been made generallyavailable to the public other than by disclosure in violation of this or anyother agreement.  The Company shall notbe required to disclose any confidential information in such records to anyadvisor to or representative of the Holder until and unless such advisor orrepresentative shall have entered into a confidentiality agreement with theCompany with respect thereto, substantially in the form of thisSection 8(e)(x), which agreement shall permit such advisor orrepresentative to disclose records to the Holder who has retained such advisoror representative.  The Holder agreesthat it shall, upon learning that disclosure of such records is sought in or bya court or governmental body of competent jurisdiction or through other means,give prompt notice to the Company and allow the Company, at the Company’sexpense, to undertake appropriate action to prevent disclosure of, or to obtaina protective order for, the records deemed confidential.  The Company shall hold in confidence andshall not make any disclosure of information concerning the Holder provided tothe Company pursuant to this Section 8 unless (W) the disclosure of suchinformation is necessary to comply with federal or state securities laws, (X)the disclosure of such information is necessary to avoid or correct amisstatement or omission in the Registration Statement, (Y) the release of suchinformation is ordered pursuant to a subpoena or other order from a court orgovernmental body of competent jurisdiction, or (Z) such information has beenmade generally available to the public other than by disclosure in violation ofthis or any other agreement.  TheCompany agrees that it shall, upon learning that disclosure of such informationconcerning the Holders is sought in or by a court or governmental body ofcompetent jurisdiction or through other

 

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means, give prompt notice tothe Holders and allow it, at its own expense, to undertake appropriate actionto prevent disclosure of, or to obtain a protective order for, suchinformation.

 

(xi)                                Useits best efforts to cause the Conversion Shares, the Warrant Shares and thePayment Shares covered by the Registration Statement to be listed on suchsecurities exchange, interdealer quotation system or other market on whichsecurities of the same class or series issued by the Company are then listed ortraded no later than the SEC effective date.

 

(xii)                             Providea transfer agent and registrar, which may be a single entity, for theConversion Shares, the Warrant Shares and the Payment Shares at all times.

 

(xiii)                          Cooperatewith the Holder to facilitate the timely preparation and delivery of certificates(not bearing any restrictive legends) representing the Conversion Shares, theWarrant Shares and the Payment Shares to be offered pursuant to theRegistration Statement and enable such certificates to be in such denominationsor amounts as the Holder may reasonably request and registered in such names asthe Holder may request; and, not later than the applicable SEC effective date,the Company shall deliver to the transfer agent all documents needed to ensurethat the Holder may transfer its Conversion Shares, the Warrant Shares and thePayment Shares in accordance with the Registration Statement.

 

(xiv)                         Duringthe Registration Period, the Company shall not bid for or purchase any CommonStock or any right to purchase Common Stock or attempt to induce any person topurchase any such security or right if such bid, purchase or attempt would inany way limit the right of the holder to sell the Conversion Shares, theWarrant Shares and the Payment Shares by reason of the limitations set forth inRegulation M under the Exchange Act.

 

(xv)                            Takeall other reasonable actions necessary to expedite and facilitate dispositionby the holder of the Conversion Shares, the Warrant Shares and the PaymentShares pursuant to the Registration Statement relating thereto.

 

(xvi)                         TheCompany shall make generally available to its security holders as soon aspractical, but not later than ninety (90) days after the close of the periodcovered thereby, an earnings statement (in form complying with the provisionsof Rule 158 under the Securities Act) covering a twelve-month periodbeginning not later than the first day of the Company’s fiscal quarter nextfollowing the effective date of the Registration Statement.

 

(xvii)                      At therequest of any Holder, the Company shall prepare and file with the SEC suchamendments (including post-effective amendments) and supplements to aRegistration Statement and the prospectus used in connection with suchRegistration Statement as may be necessary in order to change the plan ofdistribution set forth in such Registration Statement.

 

(xviii)                   From and afterthe date of this Agreement, the Company shall not, and shall not agree to,allow the holders of any securities of the Company to include any of their

 

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securities which are notConversion Shares, Warrant Shares or Payment Shares in the RegistrationStatement under Section 8 hereof or any amendment or supplement theretowithout the consent of the Holders of a majority in interest of the ConversionShares.

 

(f)                                    ***Holder Obligations.***  In connection with the registration of theConversion Shares and the Payment Shares, the Holder shall have the followingobligations:

 

(i)                                     Itshall be a condition precedent to the obligations of the Company to completethe registration pursuant to this Section 8 with respect to the ConversionShares that the Holder shall furnish to the Company the information reasonablyand customarily requested by the Company necessary to complete the RegistrationStatement (the “Required Information”). At least ten (10) days prior to the anticipated filing date of theRegistration Statement, the Company shall notify the Holder of the RequiredInformation needed by the Company.  Ifat least four (4) days prior to the SEC filing date for the RegistrationStatement the Company has not received the Required Information from theHolder, the Company shall so notify the Holder at least three (3) days prior tothe SEC filing date for the Registration Statement and if at least two (2) daysprior to the SEC filing date for the Registration Statement the Company stillhas not received the Required Information from the Holder, then the Companyneed not file the Registration Statement; provided, however, that nothingherein shall constitute a waiver of the requirements of this Section 8.

 

(ii)                                  TheHolder agrees to cooperate with the Company as reasonably requested by theCompany in connection with the preparation and filing hereunder of theRegistration Statement, unless the Holder has notified the Company in writingof its election to exclude all of its Conversion Shares, Warrant Shares and thePayment Shares from registration.

 

(iii)                               Inconnection with any sale of the Conversion Shares or the Payment Shares whichis made by the Holder pursuant to the Registration Statement relating thereto(A) if such sale is made through the Holder’s broker, the Holder shall instructsuch broker to deliver the applicable prospectus to the purchaser (or thebroker therefor) in connection with such sale and shall supply copies of suchprospectus to such broker; (B) if such sale is made in a transaction directlywith a Holder and not through the facilities of any securities exchange ormarket, the Holder shall deliver, or cause to be delivered, the applicableprospectus to such purchaser; and (C) if such sale is made by any means otherthan those described in the immediately preceding clauses (A) and (B), theHolder shall otherwise use its reasonable best efforts to comply with theprospectus delivery requirements of the Securities Act applicable to such sale.

 

(g)                                 ***Rule 144.***  With a view to making available to theHolder the benefits of Rule 144 of the Securities Act, the Company agrees:

 

(i)                                     FurnishInformation.  So long as the Holderown Conversion Shares, Warrant Shares or the Payment Shares, promptly uponrequest, to furnish to the Holder such information as may be necessary andotherwise reasonably requested to cooperate with the Holder to permit it tosell the Conversion Shares, Warrant Shares and the Payment Shares pursuant toRule 144 without registration and to comply with all filing requirementspursuant to the Exchange Act.

 

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(ii)                                  FurnishInformation if Exchange Act Filings Not Required.  If at any time the Company is not required to file reports withthe SEC pursuant to Sections 13 or 15(d) of the Exchange Act, to use itsbest efforts to, upon the request of the Holder, to make publicly availableother information so long as is necessary to permit publication by brokers anddealers of quotations for the Common Stock and sales of the Conversion Shares,the Warrant Shares or the Payment Shares in accordance with Rule 15c2-11under the Exchange Act.

 

(h)                                 ***Indemnification.***

 

(i)                                     Indemnificationby the Company.  The Company willindemnify and hold harmless the Holder and its officers, directors, partners,members, employees and agents, successors and assigns, and each other person,if any, who controls the Holder within the meaning of the Securities Act,against any losses, claims, damages or liabilities, joint or several, to whichsuch seller, officer, director, partner, member, employee, agent, successorsand assigns or controlling person may become subject under the Securities Actor otherwise, insofar as such losses, claims, damages or liabilities (oractions in respect thereof) arise out of or are based upon: (A) any untruestatement or alleged untrue statement of any material fact contained in theRegistration Statement, any preliminary prospectus or final prospectuscontained therein, or any amendment or supplement thereof; (B) any blue skyapplication or other document executed by the Company specifically for thatpurpose or based upon written information furnished by the Company filed in anystate or other jurisdiction in order to qualify any or all of the ConversionShares, the Warrant Shares and the Payment Shares under the securities lawsthereof (any such application, document or information herein called a “BlueSky Application”); (C) the omission or alleged omission to state therein amaterial fact required to be stated therein or necessary to make the statementstherein not misleading; (D) any violation by the Company or its agents of anyrule or regulation promulgated under the Securities Act applicable to theCompany or its agents and relating to action or inaction required of theCompany in connection with such registration; or (E) any failure to register orqualify the Conversion Shares, the Warrant Shares or the Payment Sharesincluded in the Registration Statement in any state where the Company or itsagents has affirmatively undertaken or agreed in writing that the Company willundertake such registration or qualification on the Holder’s behalf (theundertaking of any underwriter chosen by the Company being attributed to theCompany) and will reimburse the Holder, and each such officer, director,partner, member, employee or agent and each such controlling person for anylegal or other expenses reasonably incurred by them in connection withinvestigating or defending any such loss, claim, damage, liability or action;provided, however, that the Company will not be liable in any such case if andto the extent that any such loss, claim, damage or liability arises out of oris based upon an untrue statement or alleged untrue statement or omission oralleged omission so made in conformity with information furnished by the Holderor any such controlling person in writing expressly for use in the RegistrationStatement or prospectus.

 

(ii)                                  Indemnificationby the Holder.  In connection withany registration pursuant to the terms of this Section 8, the Holder willfurnish to the Company in writing such information as the Company reasonablyrequests concerning the Conversion Shares, the Warrant

 

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Shares and the Payment Sharesor the proposed manner of distribution for use in connection with theRegistration Statement or prospectus and agrees, severally, but not jointly toindemnify and hold harmless, to the fullest extent permitted by law, theCompany, its directors, officers, employees, stockholders and each person whocontrols the Company (within the meaning of the Securities Act) against anylosses, claims, damages, liabilities and expense (including reasonable attorneyfees) resulting from any untrue statement of a material fact or any omission ofa material fact required to be stated in the Registration Statement orprospectus or preliminary prospectus or amendment or supplement thereto ornecessary to make the statements therein not misleading, to the extent, butonly to the extent that such untrue statement or omission is contained in anyinformation furnished in writing by the Holder to the Company expressly forinclusion in the Registration Statement or prospectus or amendment orsupplement thereto.  In no event shallthe aggregate liabilities of the Holder pursuant to this Section 8(h)(ii)be greater in amount than the dollar amount of the proceeds (net of all expensepaid by the Holder and the amount of any damages such holder has otherwise beenrequired to pay by reason of such untrue statement or omission) received by theHolder upon the sale of the Conversion Shares included in the RegistrationStatement giving rise to such indemnification obligation.

 

(iii)                               Conductof Indemnification Proceedings.  Anyperson entitled to indemnification hereunder shall (A) give prompt notice tothe indemnifying party of any claim with respect to which it seeksindemnification and (B) permit such indemnifying party to assume the defense ofsuch claim with counsel reasonably satisfactory to the indemnified party;provided that any person entitled to indemnification hereunder shall have theright to employ separate counsel and to participate in the defense of suchclaim, but the fees and expenses of such counsel shall be at the expense ofsuch person unless (X) the indemnifying party has agreed to pay such fees orexpenses, or (Y) the indemnifying party shall have failed to assume the defenseof such claim and employ counsel reasonably satisfactory to such person or (Z)in the reasonable judgment of any such person, based upon written advice of itscounsel, a conflict of interest exists between such person and the indemnifyingparty with respect to such claims (in which case, if the person notifies theindemnifying party in writing that such person elects to employ separatecounsel at the expense of the indemnifying party, the indemnifying party shallnot have the right to assume the defense of such claim on behalf of such person);and provided, further, that the failure of any indemnified party to give noticeas provided herein shall not relieve the indemnifying party of its obligationshereunder, except to the extent that such failure to give notice shallmaterially adversely affect the indemnifying party in the defense of any suchclaim or litigation.  Except in the caseof Section 8(k)(ii) above, it is understood that theindemnifying party shall not, in connection with any proceeding in the samejurisdiction, be liable for fees or expenses of more than one separate firm ofattorneys at any time for all such indemnified parties. No indemnifying partywill, except with the consent of the indemnified party, consent to entry of anyjudgment or enter into any settlement that does not include as an unconditionalterm thereof the giving by the claimant or plaintiff to such indemnified partyof a release from all liability in respect of such claim or litigation. Noindemnified party shall consent to any settlement without the consent of theindemnifying party which shall not be unreasonably withheld or delayed.

 

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(iv)                              Contribution.  If for any reason the indemnificationprovided for in the preceding paragraphs (i) and (ii) is unavailable to anindemnified party or insufficient to hold it harmless, other than as expresslyspecified therein, then the indemnifying party shall contribute to the amountpaid or payable by the indemnified party as a result of such loss, claim,damage or liability in such proportion as is appropriate to reflect therelative fault of the indemnified party and the indemnifying party, as well asany other relevant equitable considerations. No person guilty of fraudulent misrepresentation within the meaning ofSection 11(f) of the Securities Act shall be entitled to contribution fromany person not guilty of such fraudulent misrepresentation.  In no event shall the aggregate contributionobligation of a holder of the Conversion Shares (together with any suchindemnification obligation of such Holder hereunder) be greater in amount thanthe dollar amount of the proceeds (net of all expenses paid by such holder andthe amount of any damages such holder has otherwise been required to pay byreason of such untrue or alleged untrue statement or omission or allegedomission) received by it upon the sale of the Conversion Shares or the PaymentShares giving rise to such contribution obligation.

 

(i)                                     ***Payment of Registration Expenses.***  The Company shall pay all fees and expenses incurredin connection with the filing of any and all Registration Statements with theSEC pursuant to this Section 8, provided, however, the Company shall notbe required to pay any expenses incurred by a Holder in connection with thereview by such Holder’s counsel of any Registration Statement.

 

9.                                       **Security Agreements. **As security for its performance of itsobligation under the Notes, the Company shall grant a priority securityinterest in certain assets of the Company, as set forth in the Security Agreementin the form attached as Exhibit B hereto, the General CollateralSecurity Agreement in the form attached as Exhibit C hereto and thePatent and Trademark Security Agreement in the form attached as Exhibit Dhereto.

 

10.                                 **Collateral Agency Provisions.**

 

(a)                                  ***Appointment of Collateral Agent.***  The Holders hereby appoint SDS MerchantFund, LP, to act as collateral agent (the “Collateral Agent”) and SDS MerchantFund, LP, agrees to act as Collateral Agent for the Holders, as contemplatedherein and in the Security Agreement, the General Collateral SecurityAgreement, the Patent and Trademark Security Agreement, Xmark IntercreditorAgreement, the Intercreditor Agreement and any other document securing theNotes (collectively, the “Collateral Documents”).

 

(b)                                 ***Collateral Agent Authorized to Enterinto Collateral Documents.*** Each of the Holders authorizes the Collateral Agent to enter into theCollateral Documents on its behalf.

 

(c)                                  ***Amendment to Collateral Documents.***  The Holders holding a majority of the totaloutstanding principal balance of the Notes (the “Required Holders”) shall havethe right to direct the Collateral Agent, from time to time, to consent to anyamendment, modification or supplement to or waiver of any provision of anyCollateral Document and to release any Collateral (as defined in the CollateralDocuments) from any lien or security interest held by the Collateral

 

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Agent; provided, however, that(i) no such direction shall require the Collateral Agent to consent to themodification of any provision or portion thereof which (in the sole judgment ofthe Collateral Agent) is intended to benefit the Collateral Agent, (ii) theCollateral Agent shall have the right to decline to follow any such directionif the Collateral Agent shall determine in good faith that the directed actionis not permitted by the terms of any Collateral Document or may not lawfully betaken and (iii) no such direction shall waive or  modify any provision of any Collateral Document the waiver ormodification of which requires the consent of all Holders unless all Holdersconsent thereto. The Collateral Agent may rely on any such direction given toit by the Required Holders and shall be fully protected in relying thereon, andshall under no circumstances be liable to any holder of the Notes or any otherperson or entity for taking or refraining from taking action in accordance withany direction or otherwise in accordance with any of the Collateral Documents.

 

(d)                                 ***Duties of Collateral Agent.***

 

(i)                                     Powers.  The Collateral Agent shall have and mayexercise such powers under the Collateral Documents as are specificallydelegated to the Collateral Agent by the terms hereof and thereof, togetherwith such powers as are reasonably incidental thereto. The Collateral Agentshall not have any implied duties or any obligations to take any action underthe Collateral Documents except any action specifically provided by theCollateral Documents to be taken by the Collateral Agent.

 

(ii)                                  Relianceon Instructions of Required Holders. The Collateral Agent shall be required to act or to refrain from acting(and shall be fully protected in so acting or refraining from acting) upon thewritten instructions of the Required Holders and such instructions shall bebinding upon all the Holders; provided that the Collateral Agent shall not berequired to take any action which the Collateral Agent in good faith believes(i) could reasonably be expected to expose it to personal liability or (ii) iscontrary to this Agreement, the Collateral Documents and applicable law.

 

(iii)                               ActionWithout Instructions After Event of Default.  Absent written instructions from the Required Holders at a timewhen an Event of Default shall have occurred and be continuing, the CollateralAgent may take, but shall have no obligation to take, any and all actions underthe Collateral Documents or any of them or otherwise as it shall deem to be inthe best interests of the Holders; provided, however, that in the absence ofwritten instructions from the Required Holders, the Collateral Agent shall notexercise remedies available to it under any Collateral Document with respect tothe Collateral or any part thereof (other than preserving, collecting andprotecting the Collateral and the proceeds thereof).

 

(iv)                              IndependentRight of Each Holder to Instruct Collateral Agent.  The right of each Holder to instruct theCollateral Agent is the separate and individual property of such Holder and maybe exercised as such Holder sees fit in its sole discretion and with noliability to any other such Holder for the exercise or non-exercisethereof.  Without limiting theforegoing, the Required Holders shall not be liable under any circumstances toany other Holder for any action

 

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taken or omitted to be takenhereunder by the Collateral Agent upon written instructions from the RequiredHolders.

 

(v)                                 RelationshipBetween Collateral Agent and Holders. The relationship between the Collateral Agent and the Holders is andshall be only to the extent explicitly provided for herein that of agent andprincipal and nothing herein contained shall be construed to constitute theCollateral Agent a trustee for any Holder or to impose on the Collateral Agent dutiesand obligations other than those expressly provided for herein.  Without limiting the generality of theforegoing, neither the Collateral Agent nor any of its directors, officers,employees, partners or agents shall:

 

(1)                                  beresponsible to the other Holders for any recitals, representations orwarranties contained in, or for the execution, validity, genuineness,perfection, effectiveness or enforceability of, the Collateral Documents (itbeing expressly understood that any determination of the foregoing is theresponsibility of each Holder),

 

(2)                                  beresponsible to the other Holders for the validity, genuineness, perfection,effectiveness, enforceability, existence, value or enforcement of any securityinterest in the Collateral (it being expressly understood that anydetermination of the foregoing is the responsibility of each Holder),

 

(3)                                  beunder any duty to inquire into or pass upon any of  the foregoing matters, orto make any inquiry concerning the performance by any person or entity of itsor their obligations under any Collateral Document (it being expresslyunderstood that any determination of the foregoing is the responsibility ofeach Holder),

 

(4)                                  bedeemed to have knowledge of the occurrence of an Event of Default, or anyevent, condition or circumstance the occurrence of which would, with the givingof notice or the passage of time or both, constitute an Event of Default,

 

(5)                                  beresponsible or liable for any shortage, discrepancy, damage, loss ordestruction of any part of the Collateral wherever the same may be locatedregardless of the cause thereof unless the same shall happen solely through thegross negligence or willful misconduct of the Collateral Agent as shall havebeen determined in a final nonappealable judgment of a court of competentjurisdiction,

 

(6)                                  haveany liability for any error or omission or action or failure to act of any kindmade in the settlement, collection or payment in connection with any of theCollateral Documents or any of the Collateral or any instrument received inpayment therefor or for any damage resulting therefrom other than as a soleresult of its own gross negligence or willful misconduct as shall have beendetermined in a final nonappealable judgment of a court of competentjurisdiction, or

 

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(7)                                  inany event, be liable as such for any action taken or omitted by it, absent, ineach case described in this subsection, its gross negligence or willfulmisconduct as shall have been determined in a final nonappealable judgment of acourt of competent jurisdiction.

 

(e)                                  ***Standard of Care.***  Each Holder agrees with all other Holdersand the Collateral Agent that nothing contained in this Agreement shall beconstrued to give rise to, nor shall such Holder have, any claims whatsoeveragainst the Collateral Agent on account of any act or omission to act inconnection with the exercise of any right or remedy of the Collateral Agentwith respect to the Collateral Documents or the Collateral in the absence ofgross negligence or willful misconduct of the Collateral Agent as shall havebeen determined in a final nonappealable judgment of a court of competentjurisdiction.

 

(f)                                    ***Collateral In Possession ofCollateral Agent.***  TheCollateral Agent shall be at liberty to place any of the Collateral, thisAgreement, the Collateral Documents and any other instruments, documents ordeeds delivered to it pursuant to or in connection with any of such documentsin any safe deposit box, safe or receptacle selected by it or with any bank,any company whose business includes undertaking the safe custody of documentsor any firm of lawyers of good repute and the Collateral Agent shall not beresponsible for any loss thereby incurred unless such loss is solely the resultof the Collateral Agent’s gross negligence or willful misconduct as shall havebeen determined in a final nonappealable judgment of a court of competentjurisdiction.  The Agent’s books andrecords shall at all times show that the Collateral is held by the Agentsubject to the pledge and lien of the Collateral Documents.

 

(g)                                 ***Agents, Officers and Employees ofCollateral Agent.***  TheCollateral Agent may execute any of its duties under the Collateral Documentsby or through its agents, officers or employees. Neither the Collateral Agentnor any of its agents, officers or employees shall be liable for any actiontaken or omitted to be taken by it or them in good faith, be responsible forthe consequence of any oversight or error of judgment or answerable for anyloss unless any of the foregoing shall happen through its or their grossnegligence or willful misconduct as shall have been determined in a finalnonappealable judgment of a court of competent jurisdiction.

 

(h)                                 ***Appointment of Co-Agent.***  Whenever the Collateral Agent shall deem itnecessary or prudent in order either to conform to any law of any jurisdictionin which all or any part of the Collateral shall be situated or to make anyclaim or bring any suit with respect to the Collateral or the CollateralDocuments, or in the event that the Collateral Agent shall have been requestedto do so by or on behalf of the Required Holders, the Collateral Agent shallexecute and deliver a supplemental agreement and all other instruments andagreements necessary or proper to constitute a bank or trust company , or oneor more other persons or entities approved by the Collateral Agent, either toact as co-agent or co-agents with respect to all or any part of the Collateralor  with respect to the CollateralDocuments, jointly with the Collateral Agent or any successor or successors, orto act as separate agent  or agents ofany such property, in any such case with such powers as may be provided in suchsupplemental agreement, and to vest in such bank, trust company or otherpersons or entities as such co-agent or separate agent, as the case may be, any

 

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property, title, right or powerof the Collateral Agent deemed necessary or advisable by the Required Holdersor the Collateral Agent.

 

(i)                                     ***Reliance on Certain Documents.***  The Collateral Agent shall be entitled torely on any communication, instrument or document believed by it to be genuineand correct and to have been signed or sent by the proper person or entity, andwith respect to all legal matters shall be entitled to rely on the advice oflegal advisors selected by it concerning all matters relating to the CollateralDocuments and its duties hereunder and thereunder and otherwise shall rely onsuch experts as it deems necessary or desirable, and shall not be liable to anyHolder or any other person or entity for the consequences of such reliance.

 

(j)                                     ***Collateral Agent May Have SeparateRelationship with Parties.*** The Collateral Agent (or any affiliate of the Collateral Agent) may,notwithstanding the fact that it is the Collateral Agent, act as a lender tothe Company and lend money to, and generally engage in any kind of businesswith such party in the same manner and to the same effect as though it were notthe Collateral Agent; and such business shall not constitute a breach of anyobligation of the Collateral Agent to the other Holders.

 

(k)                                  ***Indemnification of Collateral Agent.***  The Company (and, to the extent that theCompany fails to do so, each of the Holders, ratably on the basis of therespective principal amounts of the Notes outstanding at the time of theoccurrence giving rise to the below liabilities, losses, etc.), agrees toindemnify the Collateral Agent for any and all liabilities, losses, damages,penalties, actions, judgments, suits, costs, expenses or disbursements of anykind and nature whatsoever that may be imposed on, incurred by or assertedagainst the Collateral Agent in its capacity as the Collateral Agent, in anyway relating to or arising out of the Collateral Documents or the transactionscontemplated hereby or thereby or the enforcement of any of the terms hereof orthereof, provided that neither the Company nor any Holder shall be liable forany of the foregoing to the extent they arise from gross negligence or willfulmisconduct on the part of the Collateral Agent as shall have been determined ina final nonappealable  judgment of acourt of competent jurisdiction. This Section 10(k) shall survive thetermination of this Agreement. Prior to taking any action hereunder asCollateral Agent, the Collateral Agent may require each Holder to deposit withit sufficient sums as it determines in good faith is necessary to protect theCollateral Agent for costs and expenses associated with taking such action, andthe Collateral Agent shall have no liability hereunder for failure to take suchaction unless the Holders promptly deposit such sums.

 

(l)                                     ***Resignation.***  The Collateral Agent at any time may resign,upon 30 days’ prior written notice, by an instrument addressed and delivered tothe Holders and may be removed at any time with or without cause upon 30 days’prior written notice, by an instrument in writing duly executed by dulyauthorized signatories of the Required Holders.  The Required Holders shall also have the right to appoint asuccessor to the Collateral Agent upon any such resignation or removal, byinstrument of substitution complying with the requirements of applicable law,or, in the absence of any such requirement, without other formality than appointmentand designation in writing, a copy of which instrument or writing shall be sentto each Holder. Upon the making of such appointment and delivery to suchsuccessor Collateral Agent of the Collateral then held by the

 

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retiring Collateral Agent, suchsuccessor Collateral Agent shall thereupon succeed to and become vested withall the rights, powers, privileges and duties conferred hereby and by theCollateral Documents upon the Collateral Agent named herein, and one or moresuch appointments and designations shall not exhaust the right to appoint anddesignate further successor Collateral Agents hereunder. The retiringCollateral Agent shall not be discharged from its duties and obligationshereunder until, and the retiring Collateral Agent shall be so discharged when,all the Collateral held by the retiring Collateral Agent has been delivered tothe successor Collateral Agent and such successor Collateral Agent shallexecute, acknowledge and deliver to each holder of the Notes and to the Companyan instrument accepting such appointment. If no successor shall be appointed and approved on or prior to the dateof any such resignation, the resigning Collateral Agent may apply to any courtof competent jurisdiction to appoint a successor to act until a successor shallhave been appointed by the Required Holders as above provided.

 

(m)                               ***Rights with Respect to Collateral.***

 

(1)               Each Holder agreeswith all other Holders (i) that it shall not, and shall not attempt to,exercise any rights with respect to its security interest in the Collateral,whether pursuant to any other agreement or otherwise (other than pursuant tothis Agreement), or take or institute any action against the Collateral Agentor any of the other Holders in respect of the Collateral or its rightshereunder (other than any such action arising from the breach of thisAgreement) and (ii) that such Holder has no other rights with respect to theCollateral other than as set forth in this Agreement and the CollateralDocuments.

 

(2)               Each Holder agreeswith all other Holders and the Collateral Agent that nothing contained in thisSection 10 shall be construed to give rise to, nor shall such Holder have,any claims whatsoever against any other Holder or the Collateral Agent onaccount of any act or omission to act in connection with the exercise of anyright or remedy of the Collateral Agent or any other Holder with respect to theCollateral in the absence of gross negligence or willful misconduct of such otherHolder or Collateral Agent, as applicable, as shall have been determined in afinal nonappealable judgment of a court of competent jurisdiction.

 

11.                                 **General Provisions.**

 

(a)                                  **Governing Law; Jurisdiction.**  This Agreement shall be governed by andconstrued in accordance with the domestic substantive laws of the State of NewYork, without giving effect to any choice or conflict of law provision or rulethat would cause the application of the laws of any other jurisdiction. TheCompany irrevocably consents to the jurisdiction of the United States federalcourts and the state courts located in the County of New York, State of NewYork in any suit or proceeding based on or arising under this Note andirrevocably agrees that all claims in respect of such suit or proceeding may bedetermined in such courts.  The Companyirrevocably waives the defense of an inconvenient forum to the maintenance ofsuch suit or proceeding.  The Companyfurther agrees that service of process upon the Company mailed by first class mailshall be deemed in every respect effective service of process upon the Companyin any such suit or proceeding. The Company agrees that a final non-appealablejudgment in any such suit or

 

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proceeding shall be conclusiveand may be enforced in other jurisdictions by suit on such judgment or in anyother lawful manner.  Nothing hereinshall affect the right of the Holder to institute suit and conduct an action inany other appropriate manner, jurisdiction or court or to serve process in anyother manner permitted by law.

 

(b)**                                 *Entire Agreement.***  This Agreement, including Exhibits and theDisclosure Schedules, and the other Transaction Documents, as well as the otherdocuments contemplated thereby constitute the entire agreement between theparties with respect to the subject matter hereof. This Agreement may only bemodified or amended in writing signed by the Company and the holders of amajority of the then outstanding aggregate principal amount of the Notes.

 

(c)                                  ***Severability.***  In case any provision of the Agreement isdeclared invalid, illegal or unenforceable, the validity, legality andenforceability of the remaining provisions shall not in any way be affected orimpaired thereby.

 

(d)                                 ***Notices.***  All notices, demands or other communicationsgiven hereunder shall be effected in the manner provided for in Section 11of the Notes.

 

(e)                                  ***Counterparts.***  This Agreement may be executed in any numberof counterparts, each of which shall be an original, but all of which togethershall constitute one instrument. A telephone line facsimile transmission ofthis Agreement bearing a signature on behalf of a party hereto shall be legaland binding on such party.

 

(f)                                    ***Further Assurances.***  Each party shall do and perform, or cause tobe done and performed, all such further acts and things, and shall execute anddeliver all such other agreements, certificates, instruments and documents, asthe other party may reasonably request in order to carry out the intent andaccomplish the purposes of this Agreement and the consummation of thetransactions contemplated hereby.

 

(g)                                 ***Successors and Assigns.***  This Agreement shall be binding upon andinure to the benefit of the parties and their successors and assigns. TheCompany shall not assign this Agreement or any rights or obligationshereunder.  Notwithstanding theforegoing, each Holder may assign its rights hereunder to any of its“affiliates,” as that term is defined under the Exchange Act, without theconsent of the Company or to any other person or entity with the consent of theCompany, which consent shall not be unreasonably withheld.  This provision shall not limit any Holder’sright to transfer the Securities pursuant to the terms of the Note and thisAgreement or to assign the Holder’s rights under the Transaction Documents toany such transferee. In addition, and notwithstanding anything to the contrarycontained in the Transaction Documents, the Securities may be pledged and allrights of the Holders under this Agreement or any other agreement or documentrelated to the transactions contemplated hereby may be assigned, withoutfurther consent of the Company, to a bona fide pledgee in connection with theHolders’ margin or brokerage account.

 

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(h)                                 ***Survival.***  The representations and warranties of theCompany and the agreements and covenants set forth in Sections 2 and 7hereof shall survive for two years following the Closing, notwithstanding anydue diligence investigation conducted by or on behalf of the Holders.  Moreover, none of the representations andwarranties made by the Company herein shall act as a waiver of any rights orremedies the Holders may have under applicable U.S. federal or state securitieslaws.  The Company shall indemnify andhold harmless the Holders and each Holder’s officers, directors, employees,partners, members, agents and affiliates for all losses or damages arising as aresult of or related to any breach or alleged breach by the Company of any of itsrepresentations or covenants set forth herein, including advancement ofexpenses as they are incurred.

 

(i)                                     ***Consent Rights.***  The Company shall not (i) declare or pay anydividends (whether in cash or stock) or otherwise make any distributions withrespect to Common Stock or (ii) create or sell any securities that rank seniorto or paripassu with the Notes without the written consent ofthe Holders of a majority of the principal amount and interest of the Note andthe Other Notes outstanding.

 

 

*[Remainder of Page Intentionally Left Blank]*

 

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IN WITNESS WHEREOF, the parties have dulyexecuted this Agreement as of the day and year first set forth above.

 

 
| **COMPANY:** |                                          |
|--------------|-----------------------------------------------|
|         | **ALLIANCE  PHARMACEUTICAL CORP.**            |
|         |                                          |
|         | By:                                           | /s/ Theodore D. Roth |   |
|         | Name: Theodore D. Roth                        |
|         | Title: President and Chief Operating  Officer |

 

 

[SignaturePage to Convertible Secured Note Purchase Agreement]

 

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| **HOLDER:** |                             |
|-------------|----------------------------------|
|        | **Photogen  Technologies, Inc.** |
|        |                             |
|        | By:                              | /s/ Brooks Boveroux |   |
|        | Name:                            | Brooks Boveroux |   |
|        | Title:                           | Chief Financial Officer |   |
|        | Purchase Price:  $250,000   |   |
|             |                                  |  |  |  |  |  |  |

 

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