Exhibit 10.24


 





 


CONVERTIBLE SECURED NOTE PURCHASE AGREEMENT


 


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


 


WHEREAS, the
Company has agreed to sell to each Holder, and each Holder has agreed to
purchase from the Company, upon the terms and conditions hereafter provided, a
Convertible Secured Promissory Note in the form attached as Exhibit A
hereto (the “Note”) in the amount set forth each Holder’s name on the signature
pages hereto.


 


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


 


1.                                       Purchase and Issuance of Notes.  Subject to the terms and conditions set
forth in this Agreement, the Company agrees to issue and sell to each Holder
signatory hereto the principal amount of Notes set opposite such Holder’s name
on the signature page hereto (the “Purchase Price”) and the Holder agrees to
pay the Purchase Price amount to the Company.


 


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


 


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


 


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


 


(a)                                  Organization, Good Standing and
Qualification.  Each of
the Company and its Subsidiaries (as defined below) is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
other authority to carry on its business as now conducted and to own its
properties.  Each of the Company and its
Subsidiaries is duly qualified to do business as a foreign corporation and is
in good standing in each jurisdiction in which the conduct of its business or
its ownership or leasing of


 

















 


property makes such
qualification or leasing necessary unless the failure to so qualify has not and
could not reasonably be expected to have a Material Adverse Effect (as defined
below).  The Company’s subsidiaries are
reflected on Schedule 2(a) hereto (each a Subsidiary, and collectively the
“Subsidiaries”).


 


(b)                                 Authorization.  The Company has full power and authority and
has taken all requisite action on the part of the Company, its officers,
directors and shareholders necessary for (i) the authorization, execution and
delivery of this Agreement, the Notes, the Warrants to purchase an aggregate of
500,000 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 the
Debenture Waiver and Consent (as defined below) (the “Warrants”), the Imagent
Security Agreement made by the Company to the Collateral Agent (as defined
below), for the benefit of the Holders, dated as of the date hereof (the
“Security Agreement”), the General Collateral Security Agreement made by the
Company to the Collateral Agent for the benefit of the Holders, dated as of the
date hereof (the “General Collateral Security Agreement”), and the Imagent and
Oxygent Patent and Trademark Security Agreement made by the Company to the
Collateral Agent for the benefit of the Holders, dated as of the date hereof
(the “Patent and Trademark Security Agreement”), the Debenture Imagent Security
Agreement made by the Company and the secured parties set forth therein, dated
as of the date hereof (the “Debenture Security Agreement”),  the Debenture General Collateral Security
Agreement made by the Company and the secured parties set forth therein, dated
as of the date hereof (the “Debenture General Collateral Security Agreement”),
and the Debenture Imagent and Oxygent Security Agreement made by the Company
and the secured parties set forth therein, dated as of the date hereof (the
Debenture Patent and Trademark Security Agreement”), the Intercreditor
Agreement between the Company, the collateral agents set forth therein, Xmark
Fund, L.P. and Xmark Fund, Ltd., dated as of the date hereof (the “Xmark
Intercreditor Agreement”), the Intercreditor Agreement between the Company and
the secured parties set forth therein, dated as of the date hereof (the
“Intercreditor Agreement”), and the Waiver and Consent, dated as of the date
hereof, between the parties signatory thereto and in the form attached hereto
as Exhibit F (the “Debenture Waiver and Consent,” and, collectively with this
Agreement, the Notes, the Warrants, the Security Agreement, the General
Collateral Security Agreement, the Patent and Trademark Security Agreement, the
Debenture Security Agreement, the Debenture General Collateral Security
Agreement, the Debenture Patent and Trademark Security Agreement, the Xmark
Intercreditor Agreement and the Intercreditor Agreement, the “Transaction
Documents”), (ii) authorization of the performance of all obligations of the
Company under the Transaction Documents, and (iii) the authorization, issuance
and delivery of the Notes, the Warrants and the shares of common stock, par
value $.01 per share (the “Common Stock”), of the Company (x) issuable upon
conversion of the Notes (the “Conversion Shares”), (y) issuable in payment of interest
on the Notes (the “Payment Shares”) and (z) issuable upon exercise of the
Warrants.  The Transaction Documents
constitute the legal, valid and binding obligations of the Company, enforceable
against the Company in accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar laws of
general applicability, relating to or affecting creditors’ rights generally.


 


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


 


2

















 


date hereof; (c) the number of
shares of capital stock issuable pursuant to the Company’s stock plans; and (d)
the number of shares of capital stock issuable and reserved for issuance
pursuant to securities exercisable for, or convertible into or exchangeable for
any shares of capital stock of the Company. 
All of the issued and outstanding shares of the Company’s capital stock
have been duly authorized and validly issued and are fully paid, nonassessable
and free of pre-emptive rights and were issued in full compliance with
applicable law. All of the issued and outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued and are fully paid,
nonassessable and free of pre-emptive rights, were issued in full compliance
with 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 or
similar statutory or contractual rights with respect to any securities of the
Company.  Except as described herein and
on Schedule 2(c), (i) there are no outstanding warrants, options, convertible
securities or other rights, agreements or arrangements of any character under
which the Company or any of its Subsidiaries is or may be obligated to issue
any equity securities of any kind and except as contemplated by this Agreement,
(ii) neither the Company nor any of its Subsidiaries is currently in
negotiations for the issuance of any equity securities of any kind; and (iii)
there are no agreements or arrangements under which the Company or a Subsidiary
is obligated to register the sale of any of its or their securities under the
Securities Act of 1933, as amended (the “Securities Act”) (except as set forth
in the Notes). There are no voting agreements, buy sell agreements, or right of
first purchase agreements among the Company and any of the security holders of
the Company.


 


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


 


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


 


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


 


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(e)                                  Consents.  Except as set forth on Schedule 2(e), the
execution, delivery and performance by the Company of the Transaction
Documents, the offer issuance of the Notes, Warrants, Conversion Shares, the
Payment Shares and the Warrant Shares, the granting of the security interests
pursuant to the Security Agreement, the General Collateral Security Agreement
and the Patent and Trademark Security Agreement and the exercise of the rights
granted to the Holders therein require no consent of, action by or in respect
of, or filing with, any person, governmental body, agency, or official other
than (i) consents, actions or filings that have been made prior to the date
hereof 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 date
hereof, and (iii) post-sale filings pursuant to applicable state and federal
securities laws which the Company undertakes to file within the applicable time
periods. The Company has taken all action necessary to exempt the transactions
contemplated by the Transaction Documents from the provisions of
Section 912 of the New York Business Corporation Law and any other state
anti-takeover or similar statute.  The
granting of the (i) security interest in the Collateral (as defined in the
Security Agreement, the General Collateral Security Agreement and the Patent
and Trademark Security Agreement) pursuant to the Security Agreement, the
General Collateral Security Agreement, the Patent and Trademark Security
Agreement 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 Security
Agreement, the Debenture General Collateral Security Agreement and the Debenture
Patent and Trademark Security Agreement) pursuant to the Debenture Security
Agreement, the Debenture General Collateral Security Agreement, the Debenture
Patent and Trademark Security Agreement and the exercise of the rights granted
to the secured parties (including, without limitation, the disposition of the
Collateral), do not require the consent, authorization or approval of any
governmental authority, including without limitation, the Food and Drug
Administration.


 


(f)                                    Delivery of SEC Filings; Business.  The Company has provided the Holders with
copies of the Company’s most recent Annual Report on Form 10-K for the fiscal
year ended June 30, 2001 (the “2001 10-K”), and all other reports filed by the
Company 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 the
foregoing and all exhibits included therein and financial statements thereto
and documents incorporated by reference therein collectively, being referred to
herein as the “SEC Filings”).  The SEC
Filings are the only filings required of the Company pursuant to the Exchange
Act for such period.  The Company and
its Subsidiaries are engaged only in the business described in the SEC Filings
and the SEC Filings contain a complete and accurate description in all material
respects of the business of the Company and its Subsidiaries, taken as a whole.


 


(g)                                 Use of Proceeds.  The proceeds from the sale of the Notes
hereunder shall be used by the Company for working capital and general
corporate purposes.


 


(h)                                 No Material Adverse Effect.  Since June 30, 2001, except as set forth on
Schedule 2(h) and as identified and described in the SEC Filings, there has not
been:


 


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(1)                                  any
change in the consolidated assets, liabilities, financial condition or
operating results of the Company from that reflected in the financial
statements included in the 2001 10-K, except for (A) changes described on
Schedule 2(h) and (B) changes in the ordinary course of business, in each case
which have not and could not reasonably be expected to have a Material Adverse
Effect (as defined herein), individually or in the aggregate;


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


5

















 


(i)                                     SEC Filings.


 


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


 


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


 


(j)                                     No Conflict, Breach, Violation or
Default.  The execution, delivery and performance of
the 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, the
General Collateral Security Agreement and the Patent and Trademark Security
Agreement and the exercise of the rights granted to the Holders therein do not
and will not conflict with or result in a breach or violation of any of the
terms and provisions of, constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation under (i) the
Certificate of Incorporation or the By-laws, both as in effect on the date
hereof (copies of which have been provided to the Holders before the date
hereof), or (ii) (a) any statute, rule, regulation or order of any governmental
agency or body (including without limitation, the Sarbanes-Oxley Act of 2002)
or any court, domestic or foreign, having jurisdiction over the Company, any
Subsidiary or any of their respective assets or properties, or (b) upon receipt
of the consents set forth on Schedule 2(e), any agreement, indenture, or
instrument to which the Company or any Subsidiary is a party or by which the
Company or a Subsidiary is bound or to which any of their respective assets or
properties is subject.  Neither the
Company nor the Subsidiary is in violation of its Certificate of Incorporation,
By-laws or other organizational documents and, except as provided in Schedule
2(j), neither the Company nor any Subsidiary is in default (and no event has
occurred which, with notice or lapse of time or both, would put the Company or
any Subsidiary in default) under, nor has there occurred any event giving
others (with notice or lapse of time or both) any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Company or Subsidiary is a party, except for actual or
possible violations, defaults or rights that would not, individually or in the
aggregate, have a Material Adverse Effect. 
The businesses of the Company and the Subsidiaries are not being
conducted, and shall not be


 


6

















 


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


 


(k)                                  Tax Matters.  Except as provided in Schedule 2(k), the
Company and each Subsidiary has timely prepared and filed all tax returns,
reports and declarations required to have been filed by the Company or such
Subsidiary with all appropriate governmental agencies and timely paid all taxes
owed by it.  The charges, accruals and
reserves on the books of the Company in respect of taxes for all fiscal periods
are adequate in all material respects, and there are no material unpaid
assessments against the Company or any Subsidiary nor, to the Company’s
knowledge (as defined herein), any basis for the assessment of any additional
taxes, penalties or interest for any fiscal period or audits by any federal,
state or local taxing authority except for any assessment which is not material
to the Company and its Subsidiaries, taken as a whole.  All taxes and other assessments and levies
that the Company or any Subsidiary is required to withhold or to collect for
payment have been duly withheld and collected and paid to the proper
governmental entity or third party when due. 
There are no tax liens or claims pending or, to the Company’s knowledge,
threatened against the Company or any Subsidiary or any of their respective
assets or property.  There are no outstanding
tax sharing agreements or other such arrangements between the Company and any
Subsidiary or other corporation or entity. 
Neither the Company nor any of the Subsidiaries has executed a waiver
with respect to the statute of limitations relating to the assessment or
collection or any foreign, federal, state, provincial or local tax.  None of the Company’s tax returns is
presently being audited by any taxing authority.


 


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


 


(m)                               Certificates, Authorities and
Permits.  The Company and
each Subsidiary possess adequate certificates, authorities, licenses, approvals
or permits issued by appropriate governmental agencies or bodies necessary to
conduct the business now operated by it, and neither the Company nor any
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authority or permit that, if determined
adversely to the Company or such Subsidiary, could reasonably be expected to
have a Material Adverse Effect, individually or in the aggregate.


 


7

















 


(n)                                 No Labor Disputes.  No material labor dispute with the employees
of the Company or any Subsidiary exists or, to the Company’s knowledge, is
imminent.


 


(o)                                 Intellectual Property.


 


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


 


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


 


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


 


8

















 


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


 


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


 


(5)               Except as set forth
on Schedule 2(o), the Intellectual Property reflected in the financial
statements included in the SEC Filings as owned by the Company and its
Subsidiaries that is necessary for the conduct of Company’s and each of its
Subsidiaries’ respective businesses as currently conducted or as currently
proposed to be conducted is owned by them free and clear of all liens,
encumbrances, adverse claims or obligations to license all such owned
Intellectual Property, other than licenses entered into in the ordinary course
of the Company’s and its Subsidiaries’ businesses.  The Company and its Subsidiaries have a valid and enforceable
right to use all other Intellectual Property used or held for use in the
respective businesses of the Company and its Subsidiaries.  The Company and its Subsidiaries have the
right to use all of the owned and licensed Intellectual Property which is
necessary for the conduct of Company’s and each of its Subsidiaries’ respective
businesses as currently conducted or as currently proposed to be conducted in
all jurisdictions in which they conduct their businesses.


 


(6)               The Company and
each of its Subsidiaries have taken reasonable steps to maintain, police and
protect the Intellectual Property which it owns and which is necessary for the
conduct of Company’s and each of its Subsidiaries’ respective businesses as
currently conducted or as currently proposed to be conducted, including the
execution of appropriate confidentiality agreements and intellectual property
and work product assignments and releases. The conduct of the Company’s and its
Subsidiaries’ businesses as currently conducted does not infringe or otherwise
impair or conflict with (collectively, “Infringe” or “Infringement”) any
Intellectual Property rights of any third party, and, to the Company’s
knowledge, the Intellectual Property rights of the Company and its Subsidiaries
which are necessary for the conduct of Company’s and each of its Subsidiaries’
respective businesses as currently conducted or as currently proposed to be
conducted are not being infringed by any third party, except to the extent such
Infringements do not have a Material Adverse Effect.  There is no litigation or order pending or outstanding or, to the
Company’s knowledge, threatened or imminent, that seeks to limit or challenge
or that concerns the ownership, use, validity or enforceability of any
Intellectual Property of the Company and its Subsidiaries and the Company’s and
its Subsidiaries’ use of any Intellectual Property owned by a third party.
Neither the Company nor any of the Subsidiaries has entered into any consent
agreement, indemnification agreement, forbearance to sue or settlement
agreement with respect to the validity of the Company’s or its Subsidiaries’
ownership or right to use its Intellectual Property and, to the best knowledge
of the Company, there is no reasonable basis for any such claim to be successful.


 


9

















 


(7)               The consummation of
the 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, without
limitation, property used pursuant to License Agreements) which is necessary
for the conduct of Company’s and each of its Subsidiaries’ respective
businesses as currently conducted or as currently proposed to be conducted.


 


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


 


(9)               Except under
confidentiality obligations, there has been no material disclosure of any of
the Company’s or its Subsidiaries’ confidential information or trade secrets to
any third party.


 


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


 


(q)                                 Litigation.  Except as disclosed in the SEC Filings and
the Disclosure Schedules, including Schedule 2(q), there are no pending
actions, suits, proceedings, inquiries or investigations against or affecting
the Company, its Subsidiaries or any of its or their properties or their
respective directors or officers in their capacities as such. To the best
knowledge of the Company, after reasonable investigation, there are no facts
which, if known by a potential claimant or governmental authority, could give
rise to a claim or proceeding which, if asserted or conducted with results
unfavorable to the Company or any of the Subsidiaries, could reasonably be
expected to have a Material Adverse Effect.


 


(r)                                    Financial Statements.  The financial statements included in each
SEC Filing present fairly, in all material respects, the consolidated financial
position of the Company as of the dates shown and its consolidated results of
operations and cash flows for the periods shown, and such financial statements
have been prepared in conformity with United States generally accepted
accounting principles (“GAAP”) applied on a consistent basis (except as may be
disclosed therein or in the notes thereto, and, in the case of quarterly
financial statements, as permitted by Form 10-Q


 


10

















 


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


 


(s)                                  Insurance Coverage.  The Company and each Subsidiary maintain in
full force and effect insurance coverage that is customary for comparably
situated companies for the business being conducted and properties owned or
leased by the Company and each Subsidiary. 
No default or event has occurred that could give rise to a default under
any such policy.


 


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


 


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


 


(v)                                 No Integrated Offering.  Neither the Company nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any Company security or solicited any
offers to buy any security, under circumstances that would adversely affect
reliance by the Company on Section 4(2) for the exemption from
registration for the transactions contemplated hereby or would require
registration of the Notes, the Warrants, the Conversion Shares, the Payment
Shares or the Warrant Shares under the Securities Act.


 


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


 


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


 


11

















 


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


 


(y)                                 Transactions with Affiliates.  None of the officers or directors of the
Company and, to the Company’s knowledge, none of the employees of the Company
is presently a party to any transaction with the Company or a Subsidiary or to
a presently contemplated transaction (other than for services as employees,
officers and directors) that would be required to be disclosed pursuant to Item
404 of Regulation S-K promulgated under the Securities Act, without regard to
the 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 a
financial advisor or fiduciary of the Company (or in any similar capacity) with
respect to this Agreement or the transactions contemplated hereby, the
relationship between the Company and each Holder is “arms-length” and any
statement made by any Holder or any of its representatives or agents in
connection with this Agreement and the transactions contemplated hereby is
merely incidental to such Holder’s purchase of the Securities (as defined
below) and has not been relied upon by the Company, its officers or directors
in any way.  The Company further
acknowledges that the Company’s decision to enter into this Agreement has been
based solely on an independent evaluation by the Company and its
representatives.


 


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


 


(a)                                  Organization and Existence.  The Holders are validly existing
corporations, limited partnerships or limited liability companies and have all
requisite corporate, partnership or limited liability company power and
authority to invest in the Notes, the Conversion Shares and the Payment Shares pursuant
to this Agreement.


 


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


 


12

















 


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


 


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


 


(e)                                  Disclosure of Information.  The Holders have had an opportunity to
receive all additional information related to the Company requested and to ask
questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the sale of the Notes, the Conversion
Shares and the Payment Shares.  The
Holders acknowledge receipt of copies of the SEC Filings. Neither such inquiries
nor any other due diligence investigation conducted by the Holders shall
modify, amend or affect the Holders’ right to rely on the Company’s
representations and warranties contained in this Agreement.


 


(f)                                    Restricted Securities.  The Holders acknowledge and understand that
the Notes constitute, and that the Conversion Shares, if issued, will
constitute “restricted securities” under the Securities Act and must be held
indefinitely unless they are subsequently registered under the Securities Act
or an exemption from such registration is available.  The Holders further acknowledge and understand that the Company
is under no obligation to register the Notes or, except as otherwise set forth
in this Agreement, the Conversion Shares and the Payment Shares.  The Holders understand that the instrument
evidencing the Notes shall be imprinted with a legend which prohibits the
transfer of the Notes unless (i) they are registered, (ii) such registration is
not 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 are
converted, 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 sold
pursuant to Rule 144(k), certificates evidencing the Conversion Shares may
bear 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 of
1933, as amended, (ii) such securities may be sold pursuant to
Rule 144(k), or (iii) the Company has received an


 


13

















 


opinion of
counsel satisfactory to it that such transfer may lawfully be made without
registration under the Securities Act of 1933 or qualification under applicable
state securities laws.”


 


The Company
agrees that it shall, immediately prior to a Registration Statement (as defined
below) being declared effective, deliver to its transfer agent an opinion
letter of counsel, opining that at any time a Registration Statement is
effective, the transfer agent shall issue, in connection with the issuance of
the Conversion Shares or Payment Shares, as applicable, certificates representing
any such Conversion Shares or Payment Shares without the restrictive legend
above, provided such Conversion Shares and Payment Shares are to be sold
pursuant to the prospectus contained in the Registration Statement.  Upon receipt of such opinion, the Company
shall cause the transfer agent to confirm, for the benefit of the Holders, that
no further opinion of counsel is required at the time of transfer in order to
issue such shares without such restrictive legend.


 


The legend set
forth above shall be removed and the Company shall issue a certificate without
such legend to the holder of any Note, Conversion Share or Payment Share (each
a “Security” and collectively, the “Securities”) upon which it is stamped, if,
unless otherwise required by state securities laws, (a) the sale of such
Security is registered under the Securities Act (including registration
pursuant to Rule 416 thereunder); (b) such holder provides the Company
with an opinion of counsel, in form, substance and scope customary for opinions
of counsel in comparable transactions, to the effect that a public sale or
transfer of such Security may be made without registration under the Securities
Act; or (c) such holder provides the Company with reasonable assurances that
such Security can be sold under Rule 144. 
In the event the above legend is removed from any Security and
thereafter the effectiveness of a registration statement covering such Security
is suspended or the Company determines that a supplement or amendment thereto
is required by applicable securities laws, then upon reasonable advance written
notice to the Holders the Company may require that the above legend be placed
on any such Security that cannot then be sold pursuant to an effective
registration statement or under Rule 144 and the Holders shall cooperate
in the replacement of such legend.  Such
legend shall thereafter be removed when such Security may again be sold
pursuant to an effective registration statement or under Rule 144.


 


(h)                                 Accredited Investor.  The Holders are accredited investors as
defined in Rule 501(a) of Regulation D, as amended, under the Securities
Act.


 


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


 


(j)                                     Brokers and Finders.  No person will have, as a result of the
transactions contemplated by this Agreement, any valid right, interest or claim
against or upon the Company, any Subsidiary or the Holders for any commission,
fee or other compensation pursuant to any agreement, arrangement or
understanding 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 the
determinations of their tax


 


14

















 


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


 


4.                                       Covenants.


 


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


 


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


 


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


 


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


 


(e)                                  Expenses.  The Company shall pay to the Holders at the
Closing and any Subsequent Closing, reimbursement for all expenses reasonably
incurred by the Holders and their affiliates and advisors in connection with
the negotiation, preparation, execution and delivery of this Agreement and the
other agreements to be executed in connection herewith, including, without
limitation, the Holders and their affiliates and advisors’ reasonable due
diligence and attorneys’ fees and expenses (the “Expenses”); provided, however,
that the Holders shall be permitted to deduct all Expenses from the Purchase
Price payable by the Holders hereunder. In addition, from time to time
thereafter, upon the written request of a Holder, the Company shall pay to such
Holder such additional Expenses, if any, not covered by such payment, in each
case to the extent reasonably incurred by the Holders or their affiliates or
agents in connection with the negotiation, preparation, execution and delivery
of this Agreement and the other agreements executed in connection herewith.  Notwithstanding anything to the contrary in
this subsection (e), the Company shall not be required to


 


15

















 


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


 


(f)                                    Financial Information.  The Company shall send (via electronic
transmission or otherwise) the following reports to the Holders until the
Holders 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 Current
Reports on Form 8-K; and (ii) within one (1) day after release, copies of all
press releases issued by the Company or any of its subsidiaries.


 


(g)                                 Reservation of Shares.  The Company currently has authorized and
reserved for the purpose of issuance 17,142,857 shares of Common Stock to
provide for the full conversion of the Notes and issuance of the Conversion
Shares in connection therewith, such number of shares of Common Stock to
provide for the issuance of the payment of interest on the Notes and the
issuance of Payment Shares in connection therewith, such number of shares of
Common Stock to provide for the full exercise of the Warrants and issuance of
the Warrant Shares in connection therewith and as otherwise required by the
Notes and Warrants (collectively, the “Issuance Obligations”).  In the event such number of shares becomes
insufficient to satisfy the Issuance Obligations, the Company shall take all
necessary action to authorize and reserve such additional shares of Common
Stock necessary to satisfy the Issuance Obligations.


 


(h)                                 Listing.  The Company will use its best efforts to
continue the listing and trading of its Common Stock on the OTC Electronic
Bulletin 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 all
respects with the reporting, filing and other obligations under the bylaws or
rules of the National Association of Securities Dealers, Inc. (the “NASD”),
such exchanges, or such electronic system, as applicable.  The Company shall promptly provide to the
Holders copies of any notices it receives regarding the continued eligibility
of the Common Stock for trading in a market over the counter or, if applicable,
any securities exchange or automated quotation system on which securities of
the same class or series issued by the Company are then listed or quoted, if
any.


 


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


 


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


 


16

















 


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


 


(l)                                     Stockholder Approval.  If the Company is prohibited by
Rule 4350 of the NASD or any successor or similar rule, or the rules of
any other securities exchange or electronic trading system on which the Common
Stock is then listed or traded from issuing all of the shares of Common Stock
issuable upon complete conversion of the Notes (without giving effect to the
limitations on conversion and exercise contained in Section 3(h) and
Section 4 of the Notes, the Company shall call a meeting of its
stockholders to be held as provided for in Section 4 of the Notes for the
purpose of voting upon and approving the issuance of the Notes, and the issuance
of the Conversion Shares and Payment Shares upon conversion of or otherwise
pursuant to the Notes.  The Company
shall, through its Board of Directors, recommend to its stockholders approval
of such matters.  The Company shall use
its best efforts to solicit from its stockholders proxies in favor of such
matters sufficient to comply with all relevant legal requirements, including,
without limitation Rule 4350 promulgated by the NASD, and shall vote such
proxies in favor of such matters.  In
the event that the Company is required to obtain such approval and such
approval is not obtained, the Company shall pay a cash payment to the Holders
in 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 commence
efforts 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, improvements
thereon, products and processes for no less than six million dollars in net
proceeds to the Company.


 


(n)                                 Operating Expenses.  The Company agrees that following the time
of Closing, the Company will continue to reduce its Operating Expenses (as
defined 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 and
profitability or prospects for same and to the extent that the Company is
required pursuant to this Section 4(n) to reduce Operating Expenses in any
material amount, it will immediately issue a press release and file with the
SEC a Form 8-K disclosing such information.


 


“Operating
Expenses” shall include without limitation, expenses for compensation, employee
benefit plans, capital expenditures, lease expenditures, research and
development costs, product development and marketing costs and commitments,
interest expense, and other general administrative expenses.


 


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


 


17

















 


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


 


(p)                                 Filing of Prospectus.  Within four calendar days of the date of
Closing and any Subsequent Closing, if required by law in the reasonable
opinion of counsel to any Holder, the Company shall file with the SEC a
prospectus supplement pursuant to Rule 424(b) promulgated under the
Securities Act, to the extent necessary to reflect the transactions
contemplated by this Agreement.


 


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


 


(r)                                    Waiver of Third Party Registration
Rights.  The Company
covenants and agrees with the Holders that it will, within five (5) business
days of the date of Closing, obtain from any and all third parties that have
piggyback registration rights with respect to the Company’s securities, waivers
of such rights with respect to any registration statement filed as contemplated
by this Agreement and the Transaction Documents.


 


5.                                       Transfer Agent Instructions.


 


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


 


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


 


(c)                                  If
the Holders provide the Company and the transfer agent with an opinion of
counsel, which opinion of counsel shall be in form, substance and scope
customary for opinions of counsel in comparable transactions, to the effect
that the Securities to be sold or transferred may be sold or transferred
pursuant to an exemption from registration, or the Holders provide the Company
with reasonable assurances that such Securities may be sold under
Rule 144, the Company shall permit the transfer and, in the case of the
Conversion Shares and Payment Shares, promptly instruct


 


18

















 


its transfer agent to issue one
or more certificates in such name and in such denominations as specified by the
Holders.


 


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


 


(a)                                  The
obligation of the Company hereunder to issue and sell the Notes to the Holders
is subject to the satisfaction, at or before the Closing and any Subsequent
Closing, of each of the following conditions thereto, provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion:


 


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


 


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


 


7.                                       Conditions to the Holders Obligations to Purchase.


 


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


 


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


 


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


 


(3)               The Common Stock
shall continue to be traded on the NNM or Bulletin Board and trading in the
Company’s common stock (or on the NNM or Bulletin Board generally) shall not
have been suspended by the SEC or any other governing body of such NNM or
Bulletin Board market.


 


(4)               The representations
and warranties of the Company shall be true and correct as of the date when
made and as of the time of Closing and any Subsequent Closing as though made at
that time (except for representations and warranties that speak as of a
specific date,


 


19

















 


which representations and
warranties shall be true and correct as of such date) and the Company shall
have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the time of
Closing and any Subsequent Closing.  The
Holders shall have received a certificate, executed by the Chief Operating
Officer of the Company after reasonable investigation, dated as of the time of
Closing and any Subsequent Closing to the foregoing effect and as to such other
matters as may reasonably be requested by the Holders.


 


(5)               No statute, rule,
regulation, executive order, decree, ruling, injunction, action or proceeding
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction or any self-regulatory
organization having authority over the matters contemplated hereby which
questions the validity of, challenges or prohibits the consummation of, any of
the transactions contemplated by this Agreement.


 


(6)               The Holders shall
have received an opinion of the Company’s counsel, dated as of the date of
Closing and any Subsequent Closing, in form, scope and substance reasonably
satisfactory to the Holders and in substantially the form of Exhibit E
attached hereto.


 


(7)               There shall have
been no material adverse changes and no material adverse developments in the
business, properties, operations, prospects, financial condition or results of
operations of the Company and the Subsidiaries, taken as a whole, since the
date 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 the
Company.


 


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


 


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


 


(10)         The holders of at least
75% of the principal amount outstanding under the Existing Convertible Debt
shall execute an instrument, in form and substance satisfactory to the Holders,
to the effect that, among other things, all holders of instruments evidencing
the Existing Convertible Debt to waive their right to a downward adjustment of
the applicable conversion price for which the Existing Convertible Debt are
presently convertible into Common Stock as a result of the transactions
contemplated by this Agreement; provided however such waiver shall not apply to
any Holder with respect to an amount outstanding under Existing Convertible
Debt held by such Holder equal to the Purchase Price paid by such Holder.


 


20

















 


(11)         All outstanding warrants
issued on or after October 30, 2001 (but excluding the Warrants) to purchase
Common Stock (the “Old Warrants”), shall be adjusted to provide for an exercise
price equal to the Conversion Price and to provide that the Company may
repurchase the Old Warrants at a price equal to 200% of the then applicable
exercise price per Old Warrant.


 


(12)         The Company shall obtain
an instrument in form and substance acceptable to the Holders, to the effect
that the holders of Existing Convertible Debt, shall waive any right to
accelerate the maturity of the Existing Convertible Debt on the account of a
default in payment or performance of the Existing Convertible Debt as of the
date of the Closing until January 31, 2003 and any future right to accelerate
the maturity of the Existing Convertible Debt on the account of the Common
Stock no longer being eligible for trading on the NNM and such other terms and
conditions as the Holders may request.


 


(13)         The Company shall obtain
an instrument in form and substance acceptable to the Holders, to the effect
that the parties to that certain purchase agreement made as of the 30th day of
October, 2001 (the “Common Stock Purchase Agreement”), shall waive their rights
under Section 7.10 (Purchase Price Adjustment) of the Common Stock
Purchase Agreement triggered as a result of the transactions contemplated by
this Agreement, including the issuance of the Notes and the Warrants.


 


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


 


(15)         The Company shall deliver
evidence satisfactory to the Holders that the instruments evidencing the
Warrants have been cancelled.


 


8.                                       Registration of Conversion Shares.


 


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


 


21

















 


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


 


(b)                                 Piggyback Registration.  Whenever the Company proposes to register
any of its securities (a “Piggyback Registration”) under the Securities Act,
the Company will give prompt written notice to the Holder, the holders of the
Other Notes and the holders of the Warrants of its intention to effect such a
registration and, subject to the terms of Section 8(d) and (e) below, will
include in such registration the Conversion Shares and the Warrant Shares;
provided, however, that the Company has received a written request from the
Holder for inclusion in such registration within fifteen (15) days after the
receipt of the Company’s notice.  If the
Company 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 no
obligation to include the Conversion Shares in the offering.


 


(c)                                  Limitations on Piggyback
Registration. 
Section 8(b) hereof shall not apply to a registration effected
solely to offer securities for sale pursuant to, or in connection with, (i) an
employee benefit plan or (ii) a transaction subject to Rule 145 under the
Securities Act or in an exchange offer registered on Form S-4 or any successor
form to Form S-4, or to any registration on a form which does not permit
inclusion of the Conversion Shares pursuant to the SEC’s rules or practice.


 


(d)                                 Restrictions on Piggyback
Registration.  If: (A)
the Holder requests registration of the Conversion Shares and the Warrant
Shares pursuant to Section 8(b) above; (B) the offering proposed to be
made is to be an underwritten public offering; and (C) the managing
underwriters of such public offering furnish a written opinion that the total
amount of securities to be included in such offering would exceed the maximum
number of shares of Common Stock (as specified in such opinion) which can be
marketed at a price reasonably related to the current market value of such
Common Stock and without otherwise materially and adversely affecting such
offering (the “Underwriter Maximum”), then the rights of the Holder to
participate in such offering shall be in the following order of priority: (X)
first, the Company shall be entitled to participate; (Y) second, the number of
shares of securities requested to be included therein, up to the Underwriter
Maximum (after taking into account the number of shares to be sold pursuant to
clause (X)) allocated pro rata among the Holder and the holders of the Other
Notes on the basis of the number of Conversion Shares owned by such Holders;
and (Z) third, other securities requested to be included in such registration
up to the Underwriter Maximum (after taking into account the securities and
Conversion Shares to be sold pursuant to clauses (X) and (Y)).  The Company shall not be required to include
any of the securities of a Holder in such offering unless such Holder agrees to
the terms of the


 


22

















 


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


 


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


 


(i)                                     Use
its best efforts to cause the Registration Statement to become effective as
promptly 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 the
earlier of (A) the date on which all Conversion Shares, Warrant Shares and
Payment Shares, as applicable, covered by such Registration Statement as
amended from time to time, have been sold by the Holders, and (B) the date on
which all Conversion Shares, covered by such Registration Statement may be sold
pursuant to Rule 144(k) of the Securities Act (the “Registration
Period”).  The Company shall submit to
the SEC, within two (2) days after the Company learns that no review of the
Registration Statement will be made by the staff of the SEC or that the staff
of the SEC has no further comments on such Registration Statement, as the case
may be, a request for acceleration of effectiveness of such Registration
Statement to a time and date not later than 48 hours after the submission of
such request.  The Company shall notify
the Holder of the effectiveness of the Registration Statement on the date the
Registration Statement has been declared effective.


 


(ii)                                  Prepare
and file with the SEC such amendments (including post-effective amendments) and
supplements to the Registration Statement and prospectus as may be necessary to
keep such Registration Statement effective, and such prospectus current, at all
times during the Registration Period (other than during any Blackout Period (as
defined below) during which the provisions of Section 8(e)(vii)(A) below
are applicable), and, during the Registration Period, comply with the
provisions of the Securities Act applicable to the Company in order to permit
the disposition by the Holder of all of its Conversion Shares, Warrant Shares
and Payment Shares covered by such Registration Statement.


 


(iii)                               Provide
a copy to and permit the Holders and legal counsel designated by a majority of
the Holders to review and have a reasonable opportunity to comment on the
Registration Statement, preliminary prospectus and prospectus and all
amendments and supplements thereto no fewer than five (5) days prior to their
filing with the SEC and not file any document to which such counsel reasonably
objects.


 


(iv)                              Furnish
to the Holders and their legal counsel promptly after the same is prepared and
publicly distributed, filed with the SEC, or received by the Company (but not
later than two (2) business days after the filing date, receipt date or sending
date, as the case may be), one copy of each letter written by or on behalf of
the Company to the SEC or the staff of the SEC, and each item of correspondence
from the SEC or the staff of the SEC, in each case relating to the Registration
Statement (other than any portion of any thereof which contains information for
which the Company has sought confidential treatment).


 


23

















 


(v)                                 Furnish
to the Holder the Registration Statement and any amendment thereto, each
related prospectus and each amendment or supplement thereto and such number of
copies of each prospectus and all amendments and supplements thereto and such
other documents, as the Holder may reasonably request in order to facilitate
the disposition of the Conversion Shares, Warrant Shares and Payment Shares
owned by the Holder.


 


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


 


(vii)                           (A) As
promptly as practicable after becoming aware of any event or circumstance (1)
as a result of which the prospectus relating to the Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading or (2) which requires the Company to amend or supplement the
Registration Statement due to the receipt from the Holders or any other selling
stockholder named in the related prospectus of new or additional information
about the Holders or selling stockholder or its intended plan of distribution
of its Conversion Shares or other securities covered by the Registration
Statement, the Company shall notify the Holders and use its best efforts
promptly to prepare a supplement or amendment to the Registration Statement and
the related prospectus to correct such untrue statement or omission or to add
any new or additional information, and deliver a number of copies of such
supplement 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 this
Section 8(e)(vii)(A).


 


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


 


24

















 


best efforts to cause such
Registration Statement to be amended and declared effective as soon as possible
following expiration of the Blackout Period.


 


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


 


(ix)                                As
promptly as practicable after becoming aware of the issuance by the SEC of any
stop order or other suspension of effectiveness of the Registration Statement
notify the Holder at the earliest possible time.


 


(x)                                   Make
available for inspection by the Holder and any advisor to or representative of
the Holder, at the Holder’s sole expense, all records as shall be reasonably
necessary to enable the Holder to exercise its due diligence responsibility and
cause the Company’s officers, directors and employees to supply all information
which the Holders or such advisor to or representative of the Holder may
reasonably request for purposes of such due diligence; provided, however, that
the Holder shall hold in confidence and shall not make any disclosure of any
record or other information which the Company determines in good faith to be
confidential, and of which determination the Holder is so notified, unless (A)
the disclosure of such record is necessary to avoid or correct a misstatement
or omission in the Registration Statement and a reasonable time prior to such
disclosure the Holder shall have informed the Company of the need to so correct
such misstatement or omission and the Company shall have failed to correct such
misstatement or omission, (B) the release of such record is ordered pursuant to
a subpoena or other order from a court or government body of competent
jurisdiction or (C) the information in such record has been made generally
available to the public other than by disclosure in violation of this or any
other agreement.  The Company shall not
be required to disclose any confidential information in such records to any
advisor to or representative of the Holder until and unless such advisor or
representative shall have entered into a confidentiality agreement with the
Company with respect thereto, substantially in the form of this
Section 8(e)(x), which agreement shall permit such advisor or
representative to disclose records to the Holder who has retained such advisor
or representative.  The Holder agrees
that it shall, upon learning that disclosure of such records is sought in or by
a court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the Company, at the Company’s
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, the records deemed confidential.  The Company shall hold in confidence and
shall not make any disclosure of information concerning the Holder provided to
the Company pursuant to this Section 8 unless (W) the disclosure of such
information is necessary to comply with federal or state securities laws, (X)
the disclosure of such information is necessary to avoid or correct a
misstatement or omission in the Registration Statement, (Y) the release of such
information is ordered pursuant to a subpoena or other order from a court or
governmental body of competent jurisdiction, or (Z) such information has been
made generally available to the public other than by disclosure in violation of
this or any other agreement.  The
Company agrees that it shall, upon learning that disclosure of such information
concerning the Holders is sought in or by a court or governmental body of
competent jurisdiction or through other


 


25

















 


means, give prompt notice to
the Holders and allow it, at its own expense, to undertake appropriate action
to prevent disclosure of, or to obtain a protective order for, such
information.


 


(xi)                                Use
its best efforts to cause the Conversion Shares, the Warrant Shares and the
Payment Shares covered by the Registration Statement to be listed on such
securities exchange, interdealer quotation system or other market on which
securities of the same class or series issued by the Company are then listed or
traded no later than the SEC effective date.


 


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


 


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


 


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


 


(xv)                            Take
all other reasonable actions necessary to expedite and facilitate disposition
by the holder of the Conversion Shares, the Warrant Shares and the Payment
Shares pursuant to the Registration Statement relating thereto.


 


(xvi)                         The
Company shall make generally available to its security holders as soon as
practical, but not later than ninety (90) days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions
of Rule 158 under the Securities Act) covering a twelve-month period
beginning not later than the first day of the Company’s fiscal quarter next
following the effective date of the Registration Statement.


 


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


 


(xviii)                   From and after
the 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


 


26

















 


securities which are not
Conversion Shares, Warrant Shares or Payment Shares in the Registration
Statement under Section 8 hereof or any amendment or supplement thereto
without the consent of the Holders of a majority in interest of the Conversion
Shares.


 


(f)                                    Holder Obligations.  In connection with the registration of the
Conversion Shares and the Payment Shares, the Holder shall have the following
obligations:


 


(i)                                     It
shall be a condition precedent to the obligations of the Company to complete
the registration pursuant to this Section 8 with respect to the Conversion
Shares that the Holder shall furnish to the Company the information reasonably
and customarily requested by the Company necessary to complete the Registration
Statement (the “Required Information”). 
At least ten (10) days prior to the anticipated filing date of the
Registration Statement, the Company shall notify the Holder of the Required
Information needed by the Company.  If
at least four (4) days prior to the SEC filing date for the Registration
Statement the Company has not received the Required Information from the
Holder, the Company shall so notify the Holder at least three (3) days prior to
the SEC filing date for the Registration Statement and if at least two (2) days
prior to the SEC filing date for the Registration Statement the Company still
has not received the Required Information from the Holder, then the Company
need not file the Registration Statement; provided, however, that nothing
herein shall constitute a waiver of the requirements of this Section 8.


 


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


 


(iii)                               In
connection with any sale of the Conversion Shares or the Payment Shares which
is 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 instruct
such broker to deliver the applicable prospectus to the purchaser (or the
broker therefor) in connection with such sale and shall supply copies of such
prospectus to such broker; (B) if such sale is made in a transaction directly
with a Holder and not through the facilities of any securities exchange or
market, the Holder shall deliver, or cause to be delivered, the applicable
prospectus to such purchaser; and (C) if such sale is made by any means other
than those described in the immediately preceding clauses (A) and (B), the
Holder shall otherwise use its reasonable best efforts to comply with the
prospectus delivery requirements of the Securities Act applicable to such sale.


 


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


 


(i)                                     Furnish
Information.  So long as the Holder
own Conversion Shares, Warrant Shares or the Payment Shares, promptly upon
request, to furnish to the Holder such information as may be necessary and
otherwise reasonably requested to cooperate with the Holder to permit it to
sell the Conversion Shares, Warrant Shares and the Payment Shares pursuant to
Rule 144 without registration and to comply with all filing requirements
pursuant to the Exchange Act.


 


27

















 


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


 


(h)                                 Indemnification.


 


(i)                                     Indemnification
by the Company.  The Company will
indemnify 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 which
such seller, officer, director, partner, member, employee, agent, successors
and assigns or controlling person may become subject under the Securities Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon: (A) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof; (B) any blue sky
application or other document executed by the Company specifically for that
purpose or based upon written information furnished by the Company filed in any
state or other jurisdiction in order to qualify any or all of the Conversion
Shares, the Warrant Shares and the Payment Shares under the securities laws
thereof (any such application, document or information herein called a “Blue
Sky Application”); (C) the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; (D) any violation by the Company or its agents of any
rule or regulation promulgated under the Securities Act applicable to the
Company or its agents and relating to action or inaction required of the
Company in connection with such registration; or (E) any failure to register or
qualify the Conversion Shares, the Warrant Shares or the Payment Shares
included in the Registration Statement in any state where the Company or its
agents has affirmatively undertaken or agreed in writing that the Company will
undertake such registration or qualification on the Holder’s behalf (the
undertaking of any underwriter chosen by the Company being attributed to the
Company) and will reimburse the Holder, and each such officer, director,
partner, member, employee or agent and each such controlling person for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the Company will not be liable in any such case if and
to the extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by the Holder
or any such controlling person in writing expressly for use in the Registration
Statement or prospectus.


 


(ii)                                  Indemnification
by the Holder.  In connection with
any registration pursuant to the terms of this Section 8, the Holder will
furnish to the Company in writing such information as the Company reasonably
requests concerning the Conversion Shares, the Warrant


 


28

















 


Shares and the Payment Shares
or the proposed manner of distribution for use in connection with the
Registration Statement or prospectus and agrees, severally, but not jointly to
indemnify and hold harmless, to the fullest extent permitted by law, the
Company, its directors, officers, employees, stockholders and each person who
controls the Company (within the meaning of the Securities Act) against any
losses, claims, damages, liabilities and expense (including reasonable attorney
fees) resulting from any untrue statement of a material fact or any omission of
a material fact required to be stated in the Registration Statement or
prospectus or preliminary prospectus or amendment or supplement thereto or
necessary to make the statements therein not misleading, to the extent, but
only to the extent that such untrue statement or omission is contained in any
information furnished in writing by the Holder to the Company expressly for
inclusion in the Registration Statement or prospectus or amendment or
supplement thereto.  In no event shall
the 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 expense
paid by the Holder and the amount of any damages such holder has otherwise been
required to pay by reason of such untrue statement or omission) received by the
Holder upon the sale of the Conversion Shares included in the Registration
Statement giving rise to such indemnification obligation.


 


(iii)                               Conduct
of Indemnification Proceedings.  Any
person entitled to indemnification hereunder shall (A) give prompt notice to
the indemnifying party of any claim with respect to which it seeks
indemnification and (B) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party;
provided that any person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in the defense of such
claim, but the fees and expenses of such counsel shall be at the expense of
such person unless (X) the indemnifying party has agreed to pay such fees or
expenses, or (Y) the indemnifying party shall have failed to assume the defense
of 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 its
counsel, a conflict of interest exists between such person and the indemnifying
party with respect to such claims (in which case, if the person notifies the
indemnifying party in writing that such person elects to employ separate
counsel at the expense of the indemnifying party, the indemnifying party shall
not 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 notice
as provided herein shall not relieve the indemnifying party of its obligations
hereunder, except to the extent that such failure to give notice shall
materially adversely affect the indemnifying party in the defense of any such
claim or litigation.  Except in the case
of Section 8(k)(ii) above, it is understood that the
indemnifying party shall not, in connection with any proceeding in the same
jurisdiction, be liable for fees or expenses of more than one separate firm of
attorneys at any time for all such indemnified parties. No indemnifying party
will, except with the consent of the indemnified party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or litigation. No
indemnified party shall consent to any settlement without the consent of the
indemnifying party which shall not be unreasonably withheld or delayed.


 


29

















 


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


 


(i)                                     Payment of Registration Expenses.  The Company shall pay all fees and expenses incurred
in connection with the filing of any and all Registration Statements with the
SEC pursuant to this Section 8, provided, however, the Company shall not
be required to pay any expenses incurred by a Holder in connection with the
review by such Holder’s counsel of any Registration Statement.


 


9.                                       Security Agreements.  As security for its performance of its
obligation under the Notes, the Company shall grant a priority security
interest in certain assets of the Company, as set forth in the Security Agreement
in the form attached as Exhibit B hereto, the General Collateral
Security Agreement in the form attached as Exhibit C hereto and the
Patent and Trademark Security Agreement in the form attached as Exhibit D
hereto.


 


10.                                 Collateral Agency Provisions.


 


(a)                                  Appointment of Collateral Agent.  The Holders hereby appoint SDS Merchant
Fund, LP, to act as collateral agent (the “Collateral Agent”) and SDS Merchant
Fund, LP, agrees to act as Collateral Agent for the Holders, as contemplated
herein and in the Security Agreement, the General Collateral Security
Agreement, the Patent and Trademark Security Agreement, Xmark Intercreditor
Agreement, the Intercreditor Agreement and any other document securing the
Notes (collectively, the “Collateral Documents”).


 


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


 


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


 


30

















 


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


 


(d)                                 Duties of Collateral Agent.


 


(i)                                     Powers.  The Collateral Agent shall have and may
exercise such powers under the Collateral Documents as are specifically
delegated to the Collateral Agent by the terms hereof and thereof, together
with such powers as are reasonably incidental thereto. The Collateral Agent
shall not have any implied duties or any obligations to take any action under
the Collateral Documents except any action specifically provided by the
Collateral Documents to be taken by the Collateral Agent.


 


(ii)                                  Reliance
on 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 the
written instructions of the Required Holders and such instructions shall be
binding upon all the Holders; provided that the Collateral Agent shall not be
required 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) is
contrary to this Agreement, the Collateral Documents and applicable law.


 


(iii)                               Action
Without Instructions After Event of Default.  Absent written instructions from the Required Holders at a time
when an Event of Default shall have occurred and be continuing, the Collateral
Agent may take, but shall have no obligation to take, any and all actions under
the Collateral Documents or any of them or otherwise as it shall deem to be in
the best interests of the Holders; provided, however, that in the absence of
written instructions from the Required Holders, the Collateral Agent shall not
exercise remedies available to it under any Collateral Document with respect to
the Collateral or any part thereof (other than preserving, collecting and
protecting the Collateral and the proceeds thereof).


 


(iv)                              Independent
Right of Each Holder to Instruct Collateral Agent.  The right of each Holder to instruct the
Collateral Agent is the separate and individual property of such Holder and may
be exercised as such Holder sees fit in its sole discretion and with no
liability to any other such Holder for the exercise or non-exercise
thereof.  Without limiting the
foregoing, the Required Holders shall not be liable under any circumstances to
any other Holder for any action


 


31

















 


taken or omitted to be taken
hereunder by the Collateral Agent upon written instructions from the Required
Holders.


 


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


 


(1)                                  be
responsible to the other Holders for any recitals, representations or
warranties contained in, or for the execution, validity, genuineness,
perfection, effectiveness or enforceability of, the Collateral Documents (it
being expressly understood that any determination of the foregoing is the
responsibility of each Holder),


 


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


 


(3)                                  be
under any duty to inquire into or pass upon 
any of  the foregoing matters, or
to make any inquiry concerning the performance by any person or entity of its
or their obligations under any Collateral Document (it being expressly
understood that any determination of the foregoing is the responsibility of
each Holder),


 


(4)                                  be
deemed to have knowledge of the occurrence of an Event of Default, or any
event, condition or circumstance the occurrence of which would, with the giving
of notice or the passage of time or both, constitute an Event of Default,


 


(5)                                  be
responsible or liable for any shortage, discrepancy, damage, loss or
destruction of any part of the Collateral wherever the same may be located
regardless of the cause thereof unless the same shall happen solely through the
gross negligence or willful misconduct of the Collateral Agent as shall have
been determined in a final nonappealable judgment of a court of competent
jurisdiction,


 


(6)                                  have
any liability for any error or omission or action or failure to act of any kind
made in the settlement, collection or payment in connection with any of the
Collateral Documents or any of the Collateral or any instrument received in
payment therefor or for any damage resulting therefrom other than as a sole
result of its own gross negligence or willful misconduct as shall have been
determined in a final nonappealable judgment of a court of competent
jurisdiction, or


 


32

















 


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


 


(e)                                  Standard of Care.  Each Holder agrees with all other Holders
and the Collateral Agent that nothing contained in this Agreement shall be
construed to give rise to, nor shall such Holder have, any claims whatsoever
against the Collateral Agent on account of any act or omission to act in
connection with the exercise of any right or remedy of the Collateral Agent
with respect to the Collateral Documents or the Collateral in the absence of
gross negligence or willful misconduct of the Collateral Agent as shall have
been determined in a final nonappealable judgment of a court of competent
jurisdiction.


 


(f)                                    Collateral In Possession of
Collateral Agent.  The
Collateral Agent shall be at liberty to place any of the Collateral, this
Agreement, the Collateral Documents and any other instruments, documents or
deeds delivered to it pursuant to or in connection with any of such documents
in any safe deposit box, safe or receptacle selected by it or with any bank,
any company whose business includes undertaking the safe custody of documents
or any firm of lawyers of good repute and the Collateral Agent shall not be
responsible for any loss thereby incurred unless such loss is solely the result
of the Collateral Agent’s gross negligence or willful misconduct as shall have
been determined in a final nonappealable judgment of a court of competent
jurisdiction.  The Agent’s books and
records shall at all times show that the Collateral is held by the Agent
subject to the pledge and lien of the Collateral Documents.


 


(g)                                 Agents, Officers and Employees of
Collateral Agent.  The
Collateral Agent may execute any of its duties under the Collateral Documents
by or through its agents, officers or employees. Neither the Collateral Agent
nor any of its agents, officers or employees shall be liable for any action
taken or omitted to be taken by it or them in good faith, be responsible for
the consequence of any oversight or error of judgment or answerable for any
loss unless any of the foregoing shall happen through its or their gross
negligence or willful misconduct as shall have been determined in a final
nonappealable judgment of a court of competent jurisdiction.


 


(h)                                 Appointment of Co-Agent.  Whenever the Collateral Agent shall deem it
necessary or prudent in order either to conform to any law of any jurisdiction
in which all or any part of the Collateral shall be situated or to make any
claim or bring any suit with respect to the Collateral or the Collateral
Documents, or in the event that the Collateral Agent shall have been requested
to do so by or on behalf of the Required Holders, the Collateral Agent shall
execute and deliver a supplemental agreement and all other instruments and
agreements necessary or proper to constitute a bank or trust company , or one
or more other persons or entities approved by the Collateral Agent, either to
act as co-agent or co-agents with respect to all or any part of the Collateral
or  with respect to the Collateral
Documents, jointly with the Collateral Agent or any successor or successors, or
to act as separate agent  or agents of
any such property, in any such case with such powers as may be provided in such
supplemental agreement, and to vest in such bank, trust company or other
persons or entities as such co-agent or separate agent, as the case may be, any


 


33

















 


property, title, right or power
of the Collateral Agent deemed necessary or advisable by the Required Holders
or the Collateral Agent.


 


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


 


(j)                                     Collateral Agent May Have Separate
Relationship 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 to
the Company and lend money to, and generally engage in any kind of business
with such party in the same manner and to the same effect as though it were not
the Collateral Agent; and such business shall not constitute a breach of any
obligation of the Collateral Agent to the other Holders.


 


(k)                                  Indemnification of Collateral Agent.  The Company (and, to the extent that the
Company fails to do so, each of the Holders, ratably on the basis of the
respective principal amounts of the Notes outstanding at the time of the
occurrence giving rise to the below liabilities, losses, etc.), agrees to
indemnify the Collateral Agent for any and all liabilities, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of any
kind and nature whatsoever that may be imposed on, incurred by or asserted
against the Collateral Agent in its capacity as the Collateral Agent, in any
way relating to or arising out of the Collateral Documents or the transactions
contemplated hereby or thereby or the enforcement of any of the terms hereof or
thereof, provided that neither the Company nor any Holder shall be liable for
any of the foregoing to the extent they arise from gross negligence or willful
misconduct on the part of the Collateral Agent as shall have been determined in
a final nonappealable  judgment of a
court of competent jurisdiction. This Section 10(k) shall survive the
termination of this Agreement. Prior to taking any action hereunder as
Collateral Agent, the Collateral Agent may require each Holder to deposit with
it sufficient sums as it determines in good faith is necessary to protect the
Collateral Agent for costs and expenses associated with taking such action, and
the Collateral Agent shall have no liability hereunder for failure to take such
action 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 to
the 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 duly
authorized signatories of the Required Holders.  The Required Holders shall also have the right to appoint a
successor to the Collateral Agent upon any such resignation or removal, by
instrument of substitution complying with the requirements of applicable law,
or, in the absence of any such requirement, without other formality than appointment
and designation in writing, a copy of which instrument or writing shall be sent
to each Holder. Upon the making of such appointment and delivery to such
successor Collateral Agent of the Collateral then held by the


 


34

















 


retiring Collateral Agent, such
successor Collateral Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties conferred hereby and by the
Collateral Documents upon the Collateral Agent named herein, and one or more
such appointments and designations shall not exhaust the right to appoint and
designate further successor Collateral Agents hereunder. The retiring
Collateral Agent shall not be discharged from its duties and obligations
hereunder until, and the retiring Collateral Agent shall be so discharged when,
all the Collateral held by the retiring Collateral Agent has been delivered to
the successor Collateral Agent and such successor Collateral Agent shall
execute, acknowledge and deliver to each holder of the Notes and to the Company
an instrument accepting such appointment. 
If no successor shall be appointed and approved on or prior to the date
of any such resignation, the resigning Collateral Agent may apply to any court
of competent jurisdiction to appoint a successor to act until a successor shall
have been appointed by the Required Holders as above provided.


 


(m)                               Rights with Respect to Collateral.


 


(1)               Each Holder agrees
with 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 to
this Agreement), or take or institute any action against the Collateral Agent
or any of the other Holders in respect of the Collateral or its rights
hereunder (other than any such action arising from the breach of this
Agreement) and (ii) that such Holder has no other rights with respect to the
Collateral other than as set forth in this Agreement and the Collateral
Documents.


 


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


 


11.                                 General Provisions.


 


(a)                                  Governing Law; Jurisdiction.  This Agreement shall be governed by and
construed in accordance with the domestic substantive laws of the State of New
York, without giving effect to any choice or conflict of law provision or rule
that would cause the application of the laws of any other jurisdiction. The
Company irrevocably consents to the jurisdiction of the United States federal
courts and the state courts located in the County of New York, State of New
York in any suit or proceeding based on or arising under this Note and
irrevocably agrees that all claims in respect of such suit or proceeding may be
determined in such courts.  The Company
irrevocably waives the defense of an inconvenient forum to the maintenance of
such suit or proceeding.  The Company
further agrees that service of process upon the Company mailed by first class mail
shall be deemed in every respect effective service of process upon the Company
in any such suit or proceeding. The Company agrees that a final non-appealable
judgment in any such suit or


 


35

















 


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


 


(b)                                 Entire Agreement.  This Agreement, including Exhibits and the
Disclosure Schedules, and the other Transaction Documents, as well as the other
documents contemplated thereby constitute the entire agreement between the
parties with respect to the subject matter hereof. This Agreement may only be
modified or amended in writing signed by the Company and the holders of a
majority of the then outstanding aggregate principal amount of the Notes.


 


(c)                                  Severability.  In case any provision of the Agreement is
declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.


 


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


 


(e)                                  Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. A telephone line facsimile transmission of
this Agreement bearing a signature on behalf of a party hereto shall be legal
and binding on such party.


 


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


 


(g)                                 Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns. The
Company shall not assign this Agreement or any rights or obligations
hereunder.  Notwithstanding the
foregoing, each Holder may assign its rights hereunder to any of its
“affiliates,” as that term is defined under the Exchange Act, without the
consent of the Company or to any other person or entity with the consent of the
Company, which consent shall not be unreasonably withheld.  This provision shall not limit any Holder’s
right to transfer the Securities pursuant to the terms of the Note and this
Agreement or to assign the Holder’s rights under the Transaction Documents to
any such transferee. In addition, and notwithstanding anything to the contrary
contained in the Transaction Documents, the Securities may be pledged and all
rights of the Holders under this Agreement or any other agreement or document
related to the transactions contemplated hereby may be assigned, without
further consent of the Company, to a bona fide pledgee in connection with the
Holders’ margin or brokerage account.


 


36

















 


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


 


(i)                                     Consent Rights.  The Company shall not (i) declare or pay any
dividends (whether in cash or stock) or otherwise make any distributions with
respect to Common Stock or (ii) create or sell any securities that rank senior
to or pari  passu with the Notes without the written consent of
the Holders of a majority of the principal amount and interest of the Note and
the Other Notes outstanding.


 


 


[Remainder of Page Intentionally Left Blank]


 


37

















 


IN WITNESS WHEREOF, the parties have duly
executed 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

  



 


 


[Signature
Page to Convertible Secured Note Purchase Agreement]


 

















 


	
  HOLDER:

  	
   

  
	
   

  	
  Photogen
  Technologies, Inc.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Brooks Boveroux

  	
   

  
	
   

  	
  Name:

  	
  Brooks Boveroux

  	
   

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  	
   

  
	
   

  	
  Purchase Price:  $250,000