PATIENT
      SAFETY TECHNOLOGIES, INC.

     

    SECURED
      CONVERTIBLE NOTE AND WARRANT

    PURCHASE
      AGREEMENT

     

    This
      Secured Convertible Note and Warrant Purchase Agreement (this “Agreement”)
      is
      made as of the 8th
      day of
      September, 2006 by and between Patient Safety Technologies, Inc., a Delaware
      corporation (“PST”
or
      the
“Company”),
      and
      Steven J. Caspi, an individual (the “Purchaser”).

     

    RECITALS

     

    A. The
      Company desires to issue and sell, and the Purchaser desires to purchase from
      the Company (i) a secured convertible promissory note in the form attached
      to
      this Agreement as Exhibit
      A
      (the
“Note”),
      which
      Note shall be convertible on the terms stated therein into common stock of
      the
      Company, or into common stock of its subsidiary SurgiCount Medical, Inc.
      (“SurgiCount”), a California corporation, at such time as the Company elects to
      take a direct equity investment in SurgiCount, (ii) a warrant to purchase common
      stock of the Company in the form attached to this Agreement as Exhibit
      B
      (the
“PST
      Warrant”),
      and
      (iii) a warrant to purchase common stock of SurgiCount, at such time as the
      Company elects to take a direct equity investment in SurgiCount, in the form
      attached to this Agreement as Exhibit
      C
      (the
“SurgiCount
      Warrant”)
      (together, the PST Warrant and the SurgiCount Warrant are referred to herein
      as
“the
      Warrants”).
      The
      Note, Warrants and shares of common stock issuable upon conversion or exercise
      thereof are collectively referred to herein as the “Securities”.
      

     

    B. The
      Company desires to provide certain rights to register for resale the shares
      of
      common stock issuable to the Purchaser upon the conversion of the Note and/or
      exercise of the Warrants, in the form of “piggyback rights,” which are set forth
      in the Note. 

     

    AGREEMENT

     

    In
      consideration of the mutual promises contained herein and other good and
      valuable consideration, the receipt of which is hereby acknowledged, the parties
      to this Agreement agree as follows:

     

    1. Purchase
      and Sale of Note and Warrants.

     

    (a) Sale
      and Issuance of Note and Warrants.
      Subject
      to the terms and conditions of this Agreement, the Purchaser agrees to purchase
      and the Company agrees to sell and issue to the Purchaser the Note in the
      principal amount of $1,495,280.89, the PST Warrant for the purchase of
up
      to
      $312,500 in common stock of the Company, par value $0.33 per share (the
“Common
      Stock”),
      and
      the SurgiCount Warrant for the purchase of shares in SurgiCount at an exercise
      price to be determined at such time as the Company elects to take a direct
      equity investment in SurgiCount, such that the total number of shares multiplied
      by the exercise price does not exceed $312,500; or, a combination of PST and
      SurgiCount common stock purchased under the two Warrants such that in the
      aggregate, the total investment in common stock of the two companies does not
      exceed $312,500, as further described in the Warrants. The purchase price of
      the
      Note shall be equal to 100% of the principal amount of the Note, and the
      purchase price of the Warrants shall be $1.00 each. 

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    (b) Closing;
      Delivery.
      The
      purchase and sale of the Note and the Warrants shall take place at the offices
      of the Company on October ___, 2006,
      or
      at such other time and place as the Company and the Purchaser mutually agree,
      orally or in writing (which time and place are designated as the “Closing”).
      At
      the Closing, the Company shall deliver to the Purchaser the Note and the
      Warrants and other certain agreements against payment of the purchase price.
      

     

    2. Security
      Interest.
      The
      indebtedness represented by the Note (the “Obligations”)
      is to
      be secured by personal property owned by the Company consisting of a) equity
      securities identified in the pledge agreement between the Company and the
      Purchaser in the form attached to this Agreement as Exhibit
      D
      (the
“Pledge
      Agreement”),
      and
      b) the Note and Mortgage held by Ault Glazer Capital Partners, LLC (formerly
      Ault Glazer Bodnar Acquisition Fund, LLC) on each of the properties known as
      Trussville and Roebuck, owned by one of the Company’s subsidiaries and to be
      collaterally assigned to Purchaser. The securities pledged pursuant to the
      Pledge Agreement are maintained with Ault Glazer Bodnar Securities, LLC
      (“AGB
      Securities”).
      In
      addition, the Company has pledged (i) 8.5 acres of undeveloped land it owns
      in
      Heber Springs, Arkansas, to be encumbered by a mortgage (the “Arkansas
      Mortgage”),
      (ii)
      0.71 acres of undeveloped land it owns in Springfield, Tennessee, to be
      encumbered by a Deed of Trust (the “Tennessee
      Deed of Trust”),
      (iii)
      5 acres of undeveloped land owned through its subsidiary Automotive Services
      Group, Inc., as sole member of Automotive Services Group, LLC (“ASG”),
      the
      record owner of the property, located in Trussville, Alabama, to be encumbered
      by a mortgage (the “Alabama
      Mortgage”),
      (iv)
      Lot with carwash structure owned by ASG, located in Birmingham, Alabama, also
      to
      be encumbered by the Alabama Mortgage, and (iv) 1.10 acres of undeveloped land
      owned by ASG, located in Tuscaloosa, Alabama, also to be encumbered by the
      Alabama Mortgage. Purchaser holds an existing mortgage on the Tuscaloosa
      property (the “Tuscaloosa
      Mortgage”)
      and as
      an accommodation, the parties have further agreed to modify the existing
      Tuscaloosa Mortgage by adding as additional security the other two Alabama
      properties referenced above, located in Birmingham and Trussville, Alabama.
      In
      the alternative, since the existing loan on the Tuscaloosa property is in
      default, the parties may agree, if the default cannot be cured, to deed the
      Tuscaloosa property to the Purchaser via a deed in lieu of foreclosure, at
      which
      time the Purchaser’s existing loan on the Tuscaloosa property shall be deemed
      extinguished and the property shall be released as security under Alabama
      Mortgage. If the Purchaser then sells the Tuscaloosa property for less than
      the
      principal amount of the Purchaser’s loan on the property, the Company will
      makeup the shortfall either in cash or in Common Stock, and if via Common Stock,
      at the Value Weighted Average Price determined for the five (5) days immediately
      prior to the sale (subject to a $1.25/share floor). 

     

    3. Representations
      and Warranties of the Company.
      The
      Company hereby represents and warrants to the Purchaser that as of the date
      this
      Agreement is executed and delivered and as of the Closing, except as set forth
      on a Schedule of Exceptions attached hereto as Exhibit
      E,
      specifically identifying the relevant subsection hereof, which exceptions shall
      be deemed to be representations and warranties as if made
      hereunder:

     

    
      
         

      

      
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    3.1 Organization,
      Good Standing and Qualification.
      

     

    (a) The
      Company and each Subsidiary (defined below) is duly organized, validly existing
      and in good standing under the laws of their respective state of incorporation,
      and each of them has all requisite corporate power and authority to own their
      respective assets and properties and to carry on their respective businesses
      as
      now conducted and as proposed to be conducted. The Company does not own,
      directly or indirectly, any equity interest in any corporation, partnership,
      joint venture or other entity, except for (a) those entities identified as
      subsidiaries of the Company in Exhibit 21.1 to the Form 10-K (collectively,
      the
“Subsidiaries”)
      filed
      by the Company with the Securities and Exchange Commission (the “SEC”)
      for
      the year ended December 31, 2005 (the “Form
      10-K”),
      and
      (b) those interests in entities identified in Section 3.1 of the Schedule of
      Exceptions. The Company and each Subsidiary is duly qualified or licensed and
      in
      good standing to do business in each jurisdiction in which the property owned,
      leased, or operated by it or the nature of the business conducted by it makes
      such qualification or licensing necessary, except where the failure to be so
      duly qualified or licensed and in good standing is not reasonably expected
      to
      have, individually or in the aggregate, a Material Adverse Effect on the Company
      and the Subsidiaries taken as a whole.

     

    (b) For
      purposes of this Agreement, the term “Material
      Adverse Effect”
shall
      mean, with respect to any entity, any event, change or effect that, when taken
      individually or together with all other adverse events, changes and effects,
      is
      or is reasonably likely (a) to be materially adverse to the condition (financial
      or otherwise), properties, assets, liabilities, business, operations of that
      entity and its subsidiaries, taken as a whole, or (b) to prevent, have an
      adverse effect on or materially delay consummation of any of the transactions
      contemplated by any of the Transaction Documents or any entity’s performance of
      its obligations under any of the Transaction Documents.

     

    3.2 Authorization.
      

     

    (a) All
      corporate action necessary on the part of the Company for the authorization,
      execution and delivery of this Agreement, the Note, the Warrants, the Pledge
      Agreement, the Arkansas Mortgage, the Tennessee Deed of Trust, the Alabama
      Mortgage, the collateral assignments of the Trussville and Roebuck Mortgages,
      the modification of the Tuscaloosa Mortgage (if any), and any other documents
      or
      instruments required pursuant to any such agreement (collectively, the
“Transaction
      Documents”),
      the
      performance of all obligations of the Company hereunder and thereunder and
      the
      authorization, issuance and delivery of the Securities has been taken. Each
      of
      the Transaction Documents, when executed and delivered, shall constitute the
      valid and legally binding obligations of the Company, in each case enforceable
      against the Company in accordance with its respective terms, except (i) as
      limited by applicable bankruptcy, insolvency, reorganization, moratorium,
      fraudulent conveyance, and other laws of general application affecting
      enforcement of creditors’ rights generally and (ii) as limited by laws relating
      to the availability of specific performance, injunctive relief, or other
      equitable remedies.

     

    (b) Except
      for such filings, permits, consents and approvals which, if not obtained or
      made, are not reasonably expected to have a Material Adverse Effect on the
      Company and the Subsidiaries taken as a whole, no filing with or notice to,
      and
      no permit, authorization, consent or approval of, any governmental agency or
      authority is necessary for the execution and delivery by the Company of this
      Agreement or the consummation by the Company of the transactions contemplated
      hereby.

     

    
      
         

      

      
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    (c) The
      Board
      of Directors of the Company, by the requisite unanimous written consent or
      by
      vote of those present (who constituted a quorum of the directors then in
      office), with no dissenting votes, has duly and validly authorized the execution
      and delivery of the Transaction Documents and approved the consummation of
      the
      transactions contemplated hereby. 

     

    (d) The
      approval of any of the Transaction Documents and the transactions contemplated
      thereby is not required by any of the stockholders of the Company. 

     

    3.3 Capitalization;
      Valuation.
      

     

    (a) The
      authorized capital stock of the Company consists of:

     

    (i) 1,000,000
      shares of Convertible Preferred Stock, par value $1.00 per share, of which
      10,950 shares are issued and outstanding immediately prior to the Closing.
      All
      of the outstanding shares of Convertible Preferred Stock have been duly
      authorized, and are fully paid and nonassessable and issued in compliance with
      all applicable foreign, federal and state securities laws. The rights,
      privileges and preferences of the Convertible Preferred Stock are as stated
      in
      the Amended and Restated Certificate of Incorporation of the Company filed
      as an
      exhibit to the Form 10-K (the “Restated
      Certificate”).

     

    (ii) 25,000,000
      shares of Common Stock, of which approximately 6,260,048
      shares
      are issued and outstanding immediately prior to the Closing. All of the
      outstanding shares of Common Stock have been duly authorized, and are fully
      paid
      and nonassessable and issued in compliance with all applicable foreign, federal
      and state securities laws. The Company has reserved sufficient shares of Common
      Stock for issuance (x) upon exercise of the Warrants and (y) upon conversion
      of
      the Note.

     

    (iii) The
      Company has reserved 2,500,000
      shares
      of Common Stock for issuance to officers, directors, employees and consultants
      of the Company pursuant to the Company’s stock option plan (the “Stock
      Plan”).
      Of
      such reserved shares of Common Stock, 759,143
      shares
      have been issued pursuant to restricted stock purchase agreements and options
      to
      purchase 1,724,000
      shares
      have been granted.

     

    (iv) Except
      for (A) the Warrants, (B) the Note, (C) the conversion privileges of the
      Preferred Stock, (D) the stock reserved for issuance pursuant to the Stock
      Plan,
      and except as described on the Schedule of Exceptions, there are no outstanding
      options, warrants, rights (including conversion or preemptive rights or rights
      of first refusal or similar rights) or agreements, orally or in writing, related
      to the purchase or acquisition of any shares of Company’s capital stock except
      to Charles J. Kalina, who holds a $250,000 Promissory Note convertible into
      83,333.33 shares of common stock at a conversion price of $3.00 per share.
      In
      addition, the Company has received advances from Ault Glazer Capital Partners,
      LLC, pursuant to a Revolving Line of Credit Agreement, and as of September
      8,
      2006, the balance is $268,990, convertible at $3.10/share, or 86,771 shares.
      Also as of September 8, 2006, a total of 2,597,641 warrants, at exercise prices
      ranging from $1.25 to $6.05, remain outstanding. There are no rights of first
      refusal or similar rights, except those in favor of the Purchaser. 

     

    
      
         

      

      
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    3.4 Valid
      Issuance of Securities.
      The
      shares of Common Stock that are issuable upon conversion of the Note or exercise
      of the Warrants have been duly and validly reserved for issuance, and when
      issued, sold and delivered in accordance with the terms thereof for the
      consideration expressed therein, will be duly and validly issued, fully paid
      and
      nonassessable and free of restrictions on transfer, other than as set forth
      in
      applicable state and federal securities laws. Based in part upon the
      representations of the Purchaser in this Agreement, such shares of Common Stock
      will be issued in compliance with all applicable state and federal securities
      laws. 

     

    3.5 Consents
      and Defaults.
      

     

    (a) The
      execution, delivery and performance of each of the Transaction Documents and
      the
      consummation of the transactions contemplated by each of them will not result
      in
      any violation of or conflict with, constitute a default under (with or without
      due notice or lapse of time or both), require any consent, waiver or notice
      under any term, or result in the reduction or loss of any benefit or the
      creation or acceleration of any right or obligation (including any termination
      rights) under (i) the charter, certificate or articles of incorporation, bylaws
      or operating agreement (or other similar organizational or governing
      instruments) of the Company or any of the Subsidiaries, (ii) any agreement,
      note, bond, mortgage, indenture, contract, lease, permit or other obligation
      or
      right to which the Company or any of the Subsidiaries is a party or by which
      any
      of the assets or properties of the Company or any of the Subsidiaries is bound,
      other than the Promissory Note dated May 1, 2006 in favor of the Herbert Langsam
      Revocable Trust, which consent has been obtained, or
      (iii)
      any applicable domestic or foreign law or legal requirement, except
      in the
      case of clauses (ii) and (iii) where any of the foregoing is not reasonably
      expected to have, individually or in the aggregate, a Material Adverse Effect
      on
      the Company and the Subsidiaries taken as a whole. 

     

    (b) Neither
      the Company nor any of the Subsidiaries is in violation of any term of its
      charter, certificate or articles of incorporation, bylaws or operating agreement
      (or other similar organizational or governing instruments). 

     

    3.6 Litigation.
      There
      is no action, suit, proceeding or investigation pending or, to the Company’s
      knowledge, currently threatened against the Company or any of the Subsidiaries
      that questions the validity of any Transaction Document or the right of the
      Company to enter into any such agreement to which such person is a party, to
      consummate the transactions contemplated hereby or thereby, or that might
      result, either individually or in the aggregate, in a Material Adverse Effect
      on
      the Company and the Subsidiaries taken as a whole, or any change in the current
      equity ownership of any of them (except as contemplated herein), nor is the
      Company aware that there is any basis for the foregoing. The Company is not
      a
      party or subject to, and will not become a party or become subject to, the
      provisions of any order, writ, injunction, judgment or decree of any court
      or
      government agency or instrumentality that might result in a Material Adverse
      Effect on the Company (and the Subsidiaries taken as a whole) as long as the
      Company does not default on payments due under a Settlement Agreement in the
      lawsuit referenced in the Schedule of Exceptions hereto as Winstar
      v. PST
      in the
      aggregate of $750,000.00 ($150,000.00 of which has already been paid, the
      remainder due in a series of milestone payments by July 1, 2007). The Settlement
      Agreement is currently pending approval by a federal Bankruptcy Court in New
      York. Should PST default, the original obligation of $1,200,000.00 will become
      immediately due and payable. There is no action, suit, proceeding or
      investigation by the Company currently pending or which the Company intends
      to
      initiate. 

     

    
      
         

      

      
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    3.7 SEC
      Reports; Financial Statements.
      

     

    (a) Since
      January 1, 2003, the Company (including its predecessors, if applicable) has
      filed all forms, reports and documents with the SEC required to be filed by
      it
      under the Securities Act of 1933, as amended (“Securities
      Act”),
      and
      the Securities Exchange Act of 1934, as amended (“Exchange
      Act”)
      (collectively, the “Company
      SEC Reports”),
      each
      of which complied in all material respects with all applicable requirements
      of
      the Securities Act and the Exchange Act, each as in effect on the dates such
      Company SEC Reports were filed. 

    


    (b) None
      of
      the Company SEC Reports contained, when filed, any untrue statement of a
      material fact or omitted to state a material fact required to be stated or
      incorporated by reference therein or necessary in order to make the statements
      therein, in light of the circumstances under which they were made, not
      misleading, except to the extent amended prior to the date hereof by a
      subsequently filed Company SEC Report. The consolidated financial statements
      of
      the Company and any separate financial information relating to the Company
      included in the Company SEC Reports (the “Company
      Filed Financial Statements”)
      complied as to form in all material respects with applicable accounting
      requirements and the published rules and regulations of the SEC in respect
      thereof. 

    


    (c) The
      Company Filed Financial Statements contained in each of the Company SEC Reports
      (i) are true, accurate and complete in all respects; (ii) are consistent with
      the books and records of Company; (iii) present fairly and accurately the
      financial condition of the Company and the Subsidiaries, as appropriate, as
      of
      the respective dates thereof and the results of operations, changes in
      stockholder’s equity and cash flows of each of them for the periods covered
      thereby; and (iv) have been prepared in accordance with generally accepted
      accounting principles (“GAAP”),
      applied on a consistent basis throughout the periods covered,
      except
      as disclosed therein; provided,
      however,
      that the
      Company Balance Sheet may not contain all of the footnotes required by GAAP,
      and
      may be subject to normal adjustments consistent with past practice which are
      not
      material individually or in the aggregate. All reserves established by the
      Company and set forth in the Company Filed Financial Statements are adequate
      for
      the purposes for which they were established.

    


    (d) Since
      the
      date of the financial statements contained in the Company’s Form 10-Q filed with
      the SEC for the quarter ended June 30, 2006 (the “Form
      10-Q”)
      (such
      date, the “Company
      Balance Sheet Date”),
      there
      has not been any change, or any application or request for any change, by the
      Company or any of the Subsidiaries in accounting principles, methods or policies
      for financial accounting purposes, other than as a result of any changes under
      GAAP or other relevant accounting principles.

    


    (e)
       The
      Company is in compliance with the provisions of the Sarbanes-Oxley Act of 2002
      as applicable to it as of the date hereof.

     

    
      
         

      

      
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    3.8 Books
      and Records.
      

     

    (a) The
      books, records and accounts of the Company and its Subsidiaries, in all material
      respects, (i) have been maintained in accordance with good business practices
      on
      a basis consistent with prior years; (ii) are stated in reasonable detail and
      accurately and fairly reflect the transactions and dispositions of the assets
      of
      the Company and its Subsidiaries; and (iii) accurately and fairly reflect the
      basis for the financial statements pertaining to the Company and the
      Subsidiaries contained in the Company SEC Reports and the Company Filed
      Financial Statements. 

    


    (b) The
      Company has devised and maintains a system of internal accounting controls
      sufficient to provide reasonable assurances that (i) transactions are executed
      in accordance with management’s general or specific authorization; and (ii)
      transactions are recorded as necessary (A) to permit preparation of financial
      statements in conformity with GAAP; and (B) to maintain accountability for
      assets. 

    


    (c) The
      Company maintains a system of disclosure controls and procedures that comply
      with Rules 13a-14 and 13a-15 of the Exchange Act (as in effect on the date
      of
      this Agreement) and that are designed to ensure that information required to
      be
      disclosed by the Company in its reports or other documents filed with or
      furnished to the SEC is recorded, processed, summarized and reported within
      the
      time periods required by the SEC’s rules and forms, including, without
      limitation, controls and procedures designed to ensure that such information
      is
      accumulated and communicated to the Company’s senior management, including its
      principal executive and principal financial officers, or persons performing
      similar functions, as appropriate to allow timely decisions by Company regarding
      required disclosure. 

    


    3.9 No
      Undisclosed Liabilities.
      There
      are
      no material liabilities of the Company or any of the Subsidiaries of any kind
      whatsoever, whether accrued, contingent, absolute, determined, determinable
      or
      otherwise, which are required to be reflected in its financial statements (or
      in
      the notes thereto) in accordance with GAAP, other than (a) liabilities
      disclosed, provided for or reserved against in the financial statements
      contained in the Form 10-Q or in the notes thereto; (b) liabilities arising
      in
      the ordinary course of business after the Company Balance Sheet Date or which
      arose in the ordinary course of business prior to the Company Balance Sheet
      Date
      but were not required to be disclosed, provided for or reserved against in
      the
      financial statements contained in the Form 10-Q; and (c) liabilities arising
      under this Agreement.

     

    3.10 Absence
      of Changes.
      Except
      as
      contemplated by this Agreement or as disclosed in the Company SEC Reports filed
      prior to the date hereof, since the Company Balance Sheet Date, the Company
      and
      the Subsidiaries have conducted their business in the ordinary and usual course
      consistent with past practice and there has not been: 

     

    (a)
      any
      event, occurrence or development which had or is reasonably expected to have,
      individually or in the aggregate, a Material Adverse Effect on the Company
      and
      the Subsidiaries taken as a whole;

     

    
      
         

      

      
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    (b)
      any
      declaration, setting aside or payment of any dividend or other distribution
      in
      respect of any shares of capital stock of the Company or (except to the Company
      or other Subsidiaries) any Subsidiary, any split, combination or
      reclassification of any shares of capital stock of the Company or any
      Subsidiary, or any repurchase, redemption or other acquisition by the Company
      or
      any of the Subsidiaries of any securities of the Company or any of the
      Subsidiaries; 

     

    (c)
      any
      amendment or change to the charter, certificate or articles of incorporation,
      operating agreement or bylaws (or other similar organizational or governing
      instrument) of the Company or any of the Subsidiaries, or any amendment of
      any
      term of any outstanding security of the Company or any of the Subsidiaries
      that
      would materially increase the obligations of the Company or any such subsidiary
      under such security;

     

    (d)
      (i)
      any
      incurrence or assumption by the Company or any of the Subsidiaries of any
      indebtedness for borrowed money other than under existing credit facilities
      (or
      any renewals, replacements or extensions that do not increase the aggregate
      commitments thereunder) except in the ordinary and usual course of business
      consistent with past practice, or (ii) any guarantee, endorsement, or other
      incurrence or assumption of liability (whether directly, contingently or
      otherwise) by the Company or any of the Subsidiaries for the obligations of
      any
      other person (other than any wholly owned subsidiary of the Company), other
      than
      in the ordinary and usual course of business consistent with past
      practice;

     

    (e)
      any
      creation or assumption by the Company or any of the Subsidiaries of any lien
      or
      encumbrance on any material asset of the Company or any of the Subsidiaries
      other than in the ordinary and usual course of business consistent with past
      practice;

     

    (f)
      any
      making of any loan, advance or capital contribution to or investment in any
      person by the Company or any of the Subsidiaries other than (i) loans, advances
      or capital contributions to or investments in wholly owned subsidiaries of
      the
      Company; (ii) loans or advances to employees of the Company or any of the
      Subsidiaries in the ordinary and usual course of business consistent with past
      practice; or (iii) extensions of credit to customers in the ordinary and usual
      course of business consistent with past practice;

     

    (g)
      any
      contract or agreement entered into by the Company or any of the Subsidiaries
      on
      or prior to the date hereof relating to any material acquisition or disposition
      of any assets or business, other than contracts or agreements in the ordinary
      and usual course of business consistent with past practice and those
      contemplated by this Agreement;

     

    (h)
      any
      modification, amendment, assignment, termination or relinquishment by the
      Company or any of the Subsidiaries of any contract, license or other right
      (including any insurance policy naming it as a beneficiary or a loss payable
      payee) that is reasonably expected to have a Material Adverse Effect, after
      taking into account the benefit of the consideration, if any, received in
      exchange for agreeing to such modification, amendment, assignment, termination
      or relinquishment, on the Company and the Subsidiaries taken as a
      whole;

     

    
      
         

      

      
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    (i)
      any
      material change in any method of accounting or accounting principles or practice
      by the Company or any of the Subsidiaries, except for any such change required
      by reason of a change in GAAP, which change has been consistently
      applied;

     

    (j)
      any
      (i)
      grant of any severance or termination pay to any director, officer or employee
      of the Company or any of the Subsidiaries; (ii) entering into of any employment,
      deferred compensation, severance, consulting, termination or other similar
      agreement (or any change or amendment to any such existing agreement) with
      any
      director, officer, employee, agent or other similar representative of the
      Company or any of the Subsidiaries (collectively, “Company
      Employment Agreements”)
      whose
      annual cash compensation exceeds $100,000, other than changes or amendments
      that
      (A) do not and will not result in increases, in the aggregate, of more than
      five
      percent in the salary, wages or other compensation of any such person and (B)
      are otherwise consistent with clause (iv) below; (iii) increase in benefits
      payable under any existing severance or termination pay policies or Company
      Employment Agreements; or (iv) increase in compensation, bonus or other benefits
      payable to directors, officers or employees of the Company or any of the
      Subsidiaries other than, in the case of clauses (ii) and (iv) only, increases
      prior to the date hereof in compensation, bonus or other benefits payable to
      directors, officers or employees of the Company or any of the Subsidiaries
      in
      the ordinary and usual course of business consistent with past practice or
      merit
      increases in salaries of employees at regularly scheduled times in customary
      amounts consistent with past practices; or 

     

    (k)
      any
      (i)
      making or revoking of any material election relating to taxes; (ii) settlement
      or compromise of any material claim, action, suit, litigation, proceeding,
      arbitration, investigation, audit or controversy relating to taxes; or (iii)
      change to any material methods of reporting income or deductions for federal
      income tax purposes.

     

    3.11 Compliance
      with Applicable Law; Permits.
      The
      Company and each of the Subsidiaries hold all permits, licenses, variances,
      exemptions, orders, and approvals of all governmental entities necessary for
      the
      lawful conduct of their respective businesses (“Company
      Permits”),
      except for failures to hold such permits, licenses, variances, exemptions,
      orders and approvals which are not reasonably expected to have, individually
      or
      in the aggregate, a Material Adverse Effect on the Company and the Subsidiaries
      taken as a whole. The Company and each of the Subsidiaries are in compliance
      with the terms of the Company Permits, except where the failure to comply is
      not
      reasonably expected to have, individually or in the aggregate, a Material
      Adverse Effect on the Company and the Subsidiaries taken as a whole. The
      businesses and operations of the Company and the Subsidiaries comply in all
      respects with the requirements of all laws, rules and regulations applicable
      to
      the Company or the Subsidiaries, except where the failure to so comply is not
      reasonably expected to have, individually or in the aggregate, a Material
      Adverse Effect on the Company and the Subsidiaries taken as a
      whole.

     

    3.12 Proprietary
      Assets.
      

     

    (a) The
      Company and each Subsidiary has full title and ownership of, or has a license
      to, or can obtain upon reasonable terms and conditions sufficient rights to,
      all
      patents, patent applications, trademarks, service marks, trade names,
      copyrights, moral rights, maskworks, trade secrets, confidential and proprietary
      information, compositions of matter, formulas, designs, proprietary rights
      and
      know-how and processes (collectively, the “Proprietary
      Assets”)
      necessary to enable each of them to carry on their businesses as now conducted
      and as presently proposed to be conducted without any conflict with, or
      infringement of, the rights of others. 

     

    
      
         

      

      
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    (b) Neither
      the Company nor any Subsidiary has violated or infringed and is not currently
      violating or infringing, and neither the Company nor any Subsidiary has received
      any communications alleging that either of them (or any of their employees
      or
      consultants) has violated or infringed, or, by conducting its business as
      proposed would violate or infringe, any Proprietary Assets of any other person
      or entity. No third party has any ownership right, title, interest, claim in
      or
      lien on any of the Proprietary Assets of the Company or any Subsidiary, and
      the
      Company and each Subsidiary has taken, and in the future will use best efforts
      to take, all steps reasonably necessary to preserve their legal rights in,
      and
      the secrecy of, all of their Proprietary Assets, except those for which
      disclosure is required for legitimate business or legal reasons.

     

    (c) Neither
      the Company nor any Subsidiary has received any communications alleging that
      it
      or any of its employees or consultants has violated or, by conducting its
      business as proposed, would violate any Proprietary Assets of any other person
      or entity. Neither the Company nor any Subsidiary is aware that any of its
      employees is obligated under any contract (including licenses, covenants or
      commitments of any nature) or other agreement, or subject to any judgment,
      decree or order of any court or administrative agency, that would interfere
      with
      the use of such employee’s best efforts to promote the interest of the Company
      or the Subsidiary or that would conflict with the business of the Company or
      Subsidiary as proposed to be conducted. 

     

    3.13 Tax
      Matters.
      

     

    (a) As
      of
      September 8, 2006, the Company has timely filed (or has had timely filed) all
      Tax Returns required to be filed by it (or on its behalf). All such Tax Returns
      are true, complete and correct in all respects. The Company has paid all Taxes
      due for the periods covered by such Tax Returns (whether or not shown on or
      reportable on such Tax Returns) or with respect to any period prior to the
      date
      of this Agreement. There are no liens on any of the assets of the Company with
      respect to Taxes, other than liens for Taxes not yet due and payable or for
      Taxes that the Company is contesting in good faith through appropriate
      proceedings and for which appropriate reserves have been
      established.

     

    (b) The
      Company Financial Statements contained in the Form 10-K and Form 10-Q reflect
      adequate reserves for all Taxes payable by the Company for all Taxable periods
      and portions thereof through the dates thereof.

     

    (c) No
      deficiencies for any Taxes have been proposed, asserted, or assessed (either
      in
      writing or verbally, formally or informally) or are expected to be proposed,
      asserted, or assessed against the Company that have not been fully paid or
      adequately provided for in the appropriate financial statements of the Company,
      no requests for waivers of the time to assess any Taxes are pending, and no
      power of attorney still in effect in respect of any Taxes has been executed
      or
      filed with any taxing authority. The Company has not received notice (either
      in
      writing or verbally, formally or informally) or expects to receive notice that
      it has not filed a Tax Return or paid Taxes required to be filed or paid by
      it.
      The Tax Returns of the Company have never been audited by a government or taxing
      authority, nor is any such audit in process, pending or threatened (either
      in
      writing or verbally, formally or informally). No waiver or extension of any
      statute of limitations is in effect with respect to Taxes or Tax Returns of
      the
      Company. The Company has disclosed on its federal income tax returns all
      positions taken therein that could give rise to a substantial understatement
      penalty within the meaning of Section 6662 of the Internal Revenue Code of
      1986,
      as amended. 

     

    
      
         

      

      
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    (d) The
      Company has complied in all respects with all requirements applicable to the
      payment and withholding of Taxes and has duly and timely withheld from employee
      salaries, wages and other compensation and has paid over to the appropriate
      taxing authority all material amounts required to be so withheld and paid over
      for all periods under all applicable Legal Requirements.

    


    (e) No
      federal, state, local, or foreign audits or other administrative proceedings
      or
      court proceedings are presently pending in respect of any Taxes or Tax Returns
      of the Company and the Company has not received notice (either in writing or
      verbally, formally or informally) of any pending audit or proceeding in respect
      of any Taxes or Tax Returns.

    


    (f) For
      purposes of this Section 3.13, (i) the term “Tax”
or
      “Taxes”
means
      all taxes, however denominated, including any interest, penalties or other
      additions to tax that may become payable in respect thereof, imposed by any
      federal, territorial, state, local or foreign government or any agency or
      political subdivision of any such government, which taxes shall include, without
      limiting the generality of the foregoing, all income or profits taxes
      (including, but not limited to, federal income taxes and state income taxes),
      payroll and employee withholding taxes, unemployment insurance, social security
      taxes, sales and use taxes, ad valorem taxes, excise taxes, franchise taxes,
      gross receipts taxes, business license taxes, occupation taxes, real and
      personal property taxes, stamp taxes, environmental taxes, transfer taxes,
      workers’ compensation, Pension Benefit Guaranty Corporation premiums and other
      governmental charges, and other obligations of the same or of a similar nature
      to any of the foregoing, which the Company is required to pay, withhold or
      collect; and (ii) the term “Tax
      Return”
means
      any report, return, document, declaration, or any other information or filing
      required to be supplied to any taxing authority or jurisdiction (domestic or
      foreign) in respect of Taxes, including, information returns, any document
      in
      respect of or accompanying payments or estimated Taxes, or in respect of or
      accompanying requests for the extension of time in which to file any such
      report, return document, declaration, or other information, including amendments
      thereof and attachments thereto.

    


    3.14 Listing
      and Maintenance Requirements.
      The
      Common Stock is registered pursuant to Section 12(b)
      of the
      Exchange Act, and the Company has taken no action designed to, or which is
      likely to have the effect of, terminating the registration of the Common Stock
      under the Exchange Act nor has the Company received any notification that the
      SEC is contemplating terminating such registration. Except
      as
      set forth in Section 3.14 of the Schedule of Exceptions,
      the
      Company has not, in the 12 months preceding the date hereof, received notice
      from the Over the Counter Bulletin Board, Nasdaq or any trading market on which
      the Common Stock is or has been listed or quoted to the effect that the Company
      is not in compliance with the listing or maintenance requirements of such
      trading market. The Company is in compliance with all such listing and
      maintenance requirements at this time.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

     

    3.15 Registration
      Rights and Voting Rights.
      Except
      as set forth in Section 3.15 of the Schedule of Exceptions, the Company has
      not
      granted or agreed to grant any registration rights, including piggyback rights,
      to any other person or entity. No
      stockholders of the Company or of the Subsidiary have entered into any
      agreements with respect to the voting of shares of capital stock of the Company
      or of the Subsidiary.

     

    3.16 Private
      Placement.
      Subject
      in part to the truth and accuracy of the Purchaser’s representations set forth
      in this Agreement, the offer, sale and issuance of the Securities as
      contemplated by this Agreement, and the issuance of shares of Common Stock
      upon
      conversion of the Note
      and
      exercise of the Warrants,
      is or
      will be exempt from the registration requirements of the Securities Act, and
      neither the Company nor any authorized agent acting on its behalf will take
      any
      action hereafter that would cause the loss of such exemption.

     

    3.17 Full
      Disclosure.
      

     

    (a) The
      Company has provided Purchaser with all the information available to it that
      (i)
      Purchaser has requested of the Company for deciding whether to enter into this
      Agreement and effect the transactions contemplated hereby and (ii) which the
      Company believes is reasonably necessary to enable the Purchaser to decide
      whether to acquire the Securities. None of the Company’s representations or
      warranties in any of the Transaction Documents or any other agreements, nor
      any
      written information or statements or certificates made or delivered by the
      Company in connection herewith, when taken as a whole, contains any untrue
      statement of a material fact or omits to state a material fact necessary to
      make
      the statements herein or therein not misleading in light of the circumstances
      under which they were made.

    


    (b) There
      is
      no fact or series of related facts known to the Company that has specific
      application to the Company and that could reasonably be expected to,
      individually or in the aggregate, have a Material Adverse Effect on the Company
      and the Subsidiaries, taken as a whole, or (as far as the Company can reasonably
      foresee) that could materially adversely affect the assets, liabilities,
      business, prospects, financial condition, operations, or results of operations
      of the Company, that has not been set forth in this Agreement.

     

    3.18 Brokers.
      Except
      for AGB
      Securities,
      no
      broker, finder, investment banker or other person is entitled to receive from
      the Company or any Subsidiary any brokerage, finder’s or other fee or commission
      or expense reimbursement in connection with any of the Transaction Documents
      or
      any of the transactions contemplated thereby. 

     

    4.
      Representations
      and Warranties of the Purchaser. The
      Purchaser hereby represents and warrants to the Company and the Subsidiary
      that:

     

    (a) Accredited
      Investor.
      The
      Purchaser is an accredited investor, as defined in Rule 501(a) of Regulation
      D
      promulgated under the Securities Act.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

     

    (b) Authorization.
      The
      Transaction Documents, when executed and delivered by the Purchaser, will
      constitute valid and legally binding obligations of the Purchaser, enforceable
      in accordance with their terms, except as limited by applicable bankruptcy,
      insolvency, reorganization, moratorium, fraudulent conveyance, and any other
      laws of general application affecting enforcement of creditors’ rights
      generally, and as limited by laws relating to the availability of a specific
      performance, injunctive relief, or other equitable remedies.

     

    (c) Purchase
      Entirely for Own Account.
      This
      Agreement is made with the Purchaser in reliance upon the Purchaser’s
      representation to the Company, which by the Purchaser’s execution of this
      Agreement, the Purchaser hereby confirms, that the Securities to be acquired
      by
      the Purchaser will be acquired for investment for the Purchaser’s own account,
      not as a nominee or agent, and not with a view to the resale or distribution
      of
      any part thereof, and that the Purchaser has no present intention of selling,
      granting any participation in, or otherwise distributing the same. By executing
      this Agreement, the Purchaser further represents that the Purchaser does not
      presently have any contract, undertaking, agreement or arrangement with any
      person to sell, transfer or grant participation to such person or to any third
      person, with respect to any of the Securities. The Purchaser represents that
      it
      has full power and authority to enter into this Agreement. The Purchaser has
      not
      been formed for the specific purpose of acquiring the Securities.

     

    (d) Restricted
      Securities.
      The
      Purchaser understands that the Securities have not been, and will not be,
      registered under the Securities Act, by reason of a specific exemption from
      the
      registration provisions of the Securities Act which depends upon, among other
      things, the bona fide nature of the investment intent and the accuracy of the
      Purchaser’s representations as expressed herein. The Purchaser understands that
      the Securities are “restricted securities” under applicable U.S. federal and
      state securities laws and that, pursuant to these laws, the Purchaser must
      hold
      the Securities indefinitely unless they are registered with the SEC and
      qualified by state authorities, or an exemption from such registration and
      qualification requirements is available. The Purchaser acknowledges that the
      Company has no obligation to register or qualify the Securities for resale
      except as set forth in the Registration Rights Agreement. The Purchaser has
      such
      knowledge and experience in financial and business matters that it is capable
      of
      evaluating the merits and risks of the proposed investment and therefore has
      the
      capacity to protect its own interests in connection with the purchase of the
      Securities.

     

    (e) Restrictions
      and Legends.
      None of
      the shares of the Securities shall be sold, transferred, assigned, pledged,
      hypothecated or otherwise disposed of unless one of the following events shall
      have occurred: (i) such securities are disposed of pursuant to and in conformity
      with an effective registration statement filed with the SEC pursuant to the
      Securities Act or pursuant to Rule 144 of the SEC thereunder; or (ii) the seller
      shall have delivered to the Company a written opinion by counsel which is
      reasonably acceptable to the Company to the effect that the proposed transfer
      is
      exempt from the registration and prospectus delivery requirements of the
      Securities Act. The Purchaser understands that the Securities, and any
      securities issued in respect thereof or exchange therefor, may bear the
      following legend:

     

    “THE
      SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND
      NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF.
      NO
      SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION
      STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM SATISFACTORY TO
      THE
      COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF
      1933,
      AS AMENDED, EXCEPT AS SET FORTH HEREIN.”

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

     

    5. Conditions
      of the Purchaser’s Obligations at Closing.
      The
      obligations of the Purchaser to the Company under this Agreement are subject
      to
      the fulfillment, on or before the Closing, of each of the following conditions,
      unless otherwise waived:

     

    (a) Representations
      and Warranties. The
      representations and warranties of the Company contained in Section 3 shall
      be
      true on and as of the Closing with the same effect as though such
      representations and warranties had been made on and as of the date of the
      Closing.

     

    (b) Performance.
      The
      Company shall have performed and complied with all covenants, agreements,
      obligations and conditions contained in this Agreement and in the other
      Transaction Documents that are required to be performed or complied with by
      such
      entity on or before the Closing.

     

    (c) Qualifications.
      All
      authorizations, approvals or permits, if any, of any governmental authority
      or
      regulatory body of the United States or of any state that are required in
      connection with and prior to the lawful issuance and sale of the Securities
      pursuant to this Agreement shall be obtained and effective as of the
      Closing.

     

    (d) Transaction
      Documents.
      The
      Company shall have executed and delivered to the Purchaser the Transaction
      Documents.

     

    (e) Title
      Insurance.
      The
      Company shall have made arrangements acceptable to the Purchaser for lender’s
      title insurance on the Arkansas Mortgage, the Tennessee Deed of Trust and the
      Alabama Mortgage, and, if applicable, for an Endorsement to the Purchaser’s
      existing loan policy on the Tuscaloosa property.

     

    (f) Proceedings
      and Documents.
      All
      corporate and other proceedings in connection with the transactions hereunder
      shall have been taken, and all documents and instruments incident to such
      transactions shall be satisfactory in substance and form to the Purchaser,
      and
      the Purchaser shall have received all such counterpart originals or certified
      or
      other copies of such documents as it may reasonably request.

     

    6. Conditions
      of the Company’s Obligations at Closing.
      The
      obligations of the Company to the Purchaser under this Agreement are subject
      to
      the fulfillment of each of the following conditions, unless otherwise
      waived:

     

    (a) Representations
      and Warranties. The
      representations and warranties of the Purchaser contained in Section 4 shall
      be
      true on and as of the Closing with the same effect as though such
      representations and warranties had been made on and as of the
      Closing.

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

     

    (b) Performance. All
      covenants, agreements and conditions contained in this Agreement to be performed
      by the Purchaser shall have been performed or complied with in all material
      respects.

     

    (c) Qualifications.
      All
      authorizations, approvals or permits, if any, of any governmental authority
      or
      regulatory body of the United States or of any state that are required in
      connection with the lawful issuance and sale of the Securities pursuant to
      this
      Agreement shall be obtained and effective as of the Closing.

     

    (d) Transaction
      Documents.
      The
      Purchaser shall have executed and delivered to the Transactions Documents to
      which it is a party.

     

    7. Indemnification.
      The
      Company hereby agrees to indemnify and hold harmless the Purchaser from and
      against any costs, damages, fees or expenses incurred by Purchaser as a result
      of any breach of any representation, warranty or covenant by either the Company
      contained in the Transaction Documents.

     

    8. Right
      of First Offer.
      Subject
      to the terms and conditions specified in this Section 8, until the twelve-month
      anniversary of the Closing, the
      Company hereby grants to Purchaser a right of first offer with respect to future
      sales by the Company of its Shares (as hereinafter defined). For purposes of
      this Section 8, the term “Purchaser” includes any entity wholly-owned by
      Purchaser, and Purchaser shall be entitled to transfer all or a portion of
      the
      right of first offer hereby granted to such entity, so long as such transfer
      does not cause the loss of the exemption under Section 4(2) of the Act or any
      similar exemption under applicable state securities laws in connection with
      such
      sale of Shares by the Company. 

    


    Each
      time
      the Company proposes to offer any shares of, or securities convertible into
      or
      exchangeable or exercisable for any shares of, any class of its capital stock
      (the “Shares”),
      the
      Company shall first make an offering of such Shares to the Purchaser in
      accordance with the following provisions:

     

    (a)
      The
      Company shall deliver a notice in accordance with Section 9.8 (the “Notice”)
      to the
      Purchaser stating (i) its bona fide intention to offer such Shares, (ii) the
      number of such Shares to be offered, and (iii) the price and terms upon which
      it
      proposes to offer such Shares.

     

    (b)
      By
      written notification received by the Company, within ten (10) business days
      after receipt of the Notice, (i) the Purchaser may elect to purchase or obtain,
      at the price and on the terms specified in the Notice, up to that portion of
      such Shares that equals the proportion that the number of shares of Common
      Stock
      issued and held, or issuable upon conversion or exercise of the Note and
      Warrant(s) then held, by the Purchaser bears to the total number of shares
      of
      Common Stock of the Company then outstanding (assuming full conversion and
      exercise of all outstanding convertible and exercisable securities), and (ii)
      the Purchaser may elect to pay all or a portion of the purchase price for such
      Shares by cancellation of all or a portion of the principal or accrued interest
      due to Purchaser under the Note. 

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

     

    (c)
      If
      all
      Shares that Purchaser is entitled to obtain pursuant to Section 8(b) are not
      elected to be obtained as provided in Section 8(b) hereof, the Company may,
      during the 30-day period following the expiration of the period provided in
      Section 8(b) hereof, offer the remaining unsubscribed portion of such Shares
      to
      any person or persons at a price not less than, and upon terms no more favorable
      to the offeree than those specified in the Notice. If the Company does not
      enter
      into an agreement for the sale of the Shares within such period, or if such
      agreement is not consummated within sixty (60) days of the execution thereof,
      the right provided hereunder shall be deemed to be revived and such Shares
      shall
      not be offered unless first reoffered to the Purchaser in accordance herewith.
      

     

    (d)
      The
      right
      of first offer in this Section 8 shall not be applicable to:

     

    (i)
      the
      issuance of shares of securities pursuant to a split or subdivision of the
      outstanding shares of Common Stock or the determination of holders of Common
      Stock entitled to receive a dividend or other distribution payable in additional
      shares of Common Stock or other securities or rights convertible into, or
      entitling the holder thereof to receive directly or indirectly, additional
      shares of Common Stock (hereinafter referred to as “Common
      Stock Equivalents”)
      without payment of any consideration by such holder for the additional shares
      of
      Common Stock or the Common Stock Equivalents (including the additional shares
      of
      Common Stock issuable upon conversion or exercise thereof);

     

    (ii)
      the
      issuance of shares of Common Stock or options therefor to employees,
      consultants, officers or directors (if in transactions with primarily
      non-financing purposes) of the Company pursuant to a stock option plan or
      restricted stock purchase plan approved by the stockholders of the Company
      and
      Board of Directors of the Company;

     

    (iii)
      the
      issuance of shares of Common Stock (A) in a bona fide, firmly underwritten
      public offering under the Act, or (B) upon exercise of warrants or rights
      granted to underwriters in connection with such a public offering;

     

    (iv)
      the
      issuance of shares of Common Stock pursuant to the conversion or exercise of
      convertible or exercisable securities outstanding as of the date hereof or
      subsequently issued pursuant to this Section 8;

     

    (v)
      the
      issuance of shares of Common Stock in connection with a bona fide business
      acquisition of or by the Company, whether by merger, consolidation, sale of
      assets, sale or exchange of stock or otherwise, each as approved by the Board
      of
      Directors of the Company and, if required, the stockholders of the Company;
      

     

    9. Miscellaneous.
      

     

    9.1 Survival
      of Warranties.
      Unless
      otherwise set forth in this Agreement, the warranties, representations and
      covenants of the Company and the Purchaser contained in or made pursuant to
      this
      Agreement shall survive the execution and delivery of this agreement and the
      Closing.

     

    9.2 Successors
      and Assigns.
      The
      terms and conditions of this Agreement shall inure to the benefit of and be
      binding upon the respective successors and assigns of the parties. Nothing
      in
      this Agreement, express or implied, is intended to confer upon any party other
      than the parties hereto or their respective successors and assigns any rights,
      remedies, obligations, or liabilities under or by reason of this Agreement,
      except as expressly provided in this Agreement. The Purchaser may assign this
      Agreement to, without limitation, any entity that it controls (“control” meaning
      ownership of more than a fifty percent (50%) interest in voting rights.)


     

    
      
         

      

      
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    9.3 Governing
      Law; Jurisdiction.
      This
      Agreement and all acts and transactions pursuant hereto and the rights,
      remedies, powers and duties of the parties hereto shall be governed, construed
      and interpreted in accordance with the laws of the State of California,
      without
      regard to principles of conflicts of laws. Each party consents to the
      non-exclusive jurisdiction of the courts of the State of California. Each party
      further consents to service of process in any litigation relating to any
      Transaction Document by written notice given in accordance with Section 9.8.
      For
      purposes of any dispute or controversy arising under this Agreement or the
      transactions contemplated herein, the parties also mutually consent to the
      jurisdiction of the courts of the State of California, and the federal district
      court, Central District of California, and agree that any and all process
      directed to any of them in any such litigation may be served outside the State
      of California with the same force and effect as if service had been made within
      the State of California. 

     

    9.4 Waiver
      of Jury Trial.
      EACH OF
      THE COMPANY AND THE PURCHASER HEREBY WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE
      IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE
      ARISING OUT OF, CONNECTED WITH, RELATED TO OR INCIDENTAL TO THIS AGREEMENT
      OR
      ANY OTHER TRANSACTION DOCUMENT. INSTEAD, ANY DISPUTES RESOLVED IN COURT WILL
      BE
      RESOLVED IN A BENCH TRIAL WITHOUT A JURY.

     

    9.5
       Reference
      Provision.

     

    (a) In
      the
      event that the waiver of jury trial set forth in Section 9.4 above is not
      enforceable, the Company and the Purchaser elect to proceed under the provisions
      of this Section 9.5 (the “Reference
      Provision”).

     

    (b) With
      the
      exception of the matters specified in clause (c) below, any controversy, dispute
      or claim (each, a “Claim”)
      between the parties arising out of or relating to this Agreement will be
      resolved by a reference proceeding in California in accordance with the
      provisions of Section 638
      et
      seq.
      of the
      California Code of Civil Procedure (“CCP”),
      or
      their successor sections, which shall constitute the exclusive remedy for the
      resolution of any Claim, including whether the Claim is subject to the reference
      proceeding. Except as otherwise provided in this Agreement, venue for the
      reference proceeding will be in the state or federal court in the county or
      district where venue is otherwise appropriate under applicable law (the
“Court”).

     

    (c) The
      matters that shall not be subject to a reference are the following:


     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

     

    (i) non-judicial
      foreclosure of any security interests in real or personal property;


     

    (ii)
       exercise
      of self-help remedies (including, without limitation, set-off); 

     

    (iii) appointment
      of a receiver; and 

     

    (iv) temporary,
      provisional or ancillary remedies (including, without limitation, writs of
      attachment, writs of possession, temporary restraining orders or preliminary
      injunctions). 

     

    This
      Section 9.5 does not limit the right of any party to exercise or oppose any
      of
      the rights and remedies described in clauses (i) and (ii) or to seek or oppose
      from a court of competent jurisdiction any of the matters described in clauses
      (iii) and (iv). The exercise of, or opposition to, any of those matters does
      not
      waive the right of any party to a reference pursuant to this Section
      9.5.

     

    (d) The
      referee shall be a retired judge or justice selected by mutual written agreement
      of the parties. If the parties do not agree within ten (10) days of a written
      request to do so by any party, then, upon request of any party, the referee
      shall be selected by the Presiding Judge of the Court (or his or her
      representative). A request for appointment of a referee may be heard on an
      ex
      parte or expedited basis, and the parties agree that irreparable harm would
      result if ex parte relief is not granted. Pursuant to CCP Sec. 170.6, each
      party
      shall have one peremptory challenge to the referee selected by the Presiding
      Judge of the Court (or his or her representative).

     

    (e) The
      parties agree that time is of the essence in conducting the reference
      proceedings. Accordingly, the referee shall be requested, subject to change
      in
      the time periods specified herein for good cause shown, to: 

     

    (i) set
      the
      matter for a status and trial-setting conference within fifteen (15) days after
      the date of selection of the referee; 

     

    (ii) if
      practicable, try all issues of law or fact within one hundred twenty (120)
      days
      after the date of the conference; and 

     

    (iii) report
      a
      statement of decision within twenty (20) days after the matter has been
      submitted for decision.

     

    (f) The
      referee will have power to expand or limit the amount and duration of discovery.
      The referee may set or extend discovery deadlines or cutoffs for good cause,
      including a party’s failure to provide requested discovery for any reason
      whatsoever. Unless otherwise ordered, no party shall be entitled to “priority”
in conducting discovery, depositions may be taken by either party upon seven
      (7)
      days written notice, and all other discovery shall be responded to within
      fifteen (15) days after service. All disputes relating to discovery which cannot
      be resolved by the parties shall be submitted to the referee whose decision
      shall be final and binding.

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

     

    (g) Except
      as
      expressly set forth in this Section 9.5, the referee shall determine the manner
      in which the reference proceeding is conducted including the time and place
      of
      hearings, the order of presentation of evidence, and all other questions that
      arise with respect to the course of the reference proceeding. All proceedings
      and hearings conducted before the referee, except for trial, shall be conducted
      without a court reporter, except that when any party so requests, a court
      reporter will be used at any hearing conducted before the referee, and the
      referee will be provided a courtesy copy of the transcript. The party making
      such a request shall have the obligation to arrange for and pay the court
      reporter. Subject to the referee’s power to award costs to the prevailing party,
      the parties will equally share the cost of the referee and the court reporter
      at
      trial.

     

    (h) The
      referee shall be required to determine all issues in accordance with existing
      case law and the statutory laws of the State of California. The rules of
      evidence applicable to proceedings at law in the State of California will be
      applicable to the reference proceeding. The referee shall be empowered to enter
      equitable as well as legal relief, enter equitable orders that will be binding
      on the parties and rule on any motion that would be authorized in a trial,
      including without limitation motions for summary judgment or summary
      adjudication. The referee shall issue a decision at the close of the reference
      proceeding which disposes of all Claims of the parties that are the subject
      of
      the reference. Pursuant to CCP Sec. 644, such decision shall be entered by
      the
      Court as a judgment or an order in the same manner as if the action had been
      tried by the Court and any such decision will be final, binding and conclusive.
      The parties reserve the right to appeal from the final judgment or order or
      from
      any appealable decision or order entered by the referee. The parties reserve
      the
      right to findings of fact, conclusions of law, a written statement of decision,
      and the right to move for a new trial or a different judgment, which new trial,
      if granted, is also to be a reference proceeding under this
      provision.

     

    (i) If
      the
      enabling legislation which provides for appointment of a referee is repealed
      (and no successor statute is enacted), any dispute between the parties that
      would otherwise be determined by reference procedure will be resolved and
      determined by arbitration. The arbitration will be conducted by a retired judge
      or Justice, in accordance with the California Arbitration Act Sec. 1280 through
      Sec. 1294.2 of the CCP as amended from time to time. The limitations with
      respect to discovery set forth above shall apply to any such arbitration
      proceeding.

     

    (j) THE
      PARTIES RECOGNIZE AND AGREE THAT ALL DISPUTES RESOLVED UNDER THIS REFERENCE
      PROVISION WILL BE DECIDED BY A REFEREE AND NOT BY A JURY. AFTER CONSULTING
      (OR
      HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR OWN CHOICE, EACH
      PARTY KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES,
      AGREES THAT THIS REFERENCE PROVISION WILL APPLY TO ANY CONTROVERSY, DISPUTE
      OR
      CLAIM BETWEEN OR AMONG THEM WHICH ARISES OUT OF OR IS RELATED TO THIS
      AGREEMENT.

     

    9.6 Counterparts.
      This
      Agreement may be executed in two or more counterparts, each of which shall
      be
      deemed an original and all of which together shall constitute one
      instrument.

     

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

     

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

     

    9.8 Notices.
      Any
      notice required or permitted by this Agreement or any other Transaction Document
      shall be in writing and shall be deemed sufficient upon receipt, when delivered
      personally or by a nationally-recognized delivery service (such as Federal
      Express or UPS) as follows:

     

    
      	
            	(i)	
              if
                to the Company, at:

            


    

     

    Patient
      Safety Technologies, Inc.

    1800
      Century Park East, Suite 200

    Los
      Angeles, CA 90067

    Attention:
      Lynne
      Silverstein, President

    


    
      	
            	(ii)	
              if
                to the Purchaser, at:

            


    

     

    Steven
      J.
      Caspi

    3010
      Westchester Avenue 

    Purchase,
      New York 10577

    


    with
      a
      copy to:

     

    Rothschild
      & Pearl, LLP

    245
      Main
      Street, Suite 330

    White
      Plains, New York 10601

     

    Attention:
      Alan H.
      Rothschild, Esq.

     

    Any
      party
      hereto (and such party’s permitted assigns) may by notice so given change its
      address for future notices hereunder.

     

    9.9
      Attorney’s
      Fees.
      If any
      action at law or in equity (including arbitration) is necessary to enforce
      or
      interpret the terms of any of the Transaction Documents, the prevailing party
      shall be entitled to reasonable attorneys’ fees, costs and necessary
      disbursements in addition to any other relief to which such party may be
      entitled.

     

    9.10
      Amendments
      and Waivers. Any
      term
      of this Agreement may be amended or waived only with the written consent of
      the
      Company and the Purchaser. Any amendment or waiver effected in accordance with
      this Section 9.10 shall be binding upon the Purchaser and each transferee of
      the
      Securities, each future holder of all such Securities and the
      Company.

     

    9.11
      Severability.
      Whenever possible, each provision of this Agreement will be interpreted in
      such
      manner as to be effective and valid under applicable law, but if any provision,
      subpart, sentence, phrase or term of this Agreement is held to be invalid,
      illegal or unenforceable in any respect under any applicable law or rule in
      any
      jurisdiction, such invalidity, illegality or unenforceable provision shall
      be
      modified or replaced with a valid and enforceable term or provision that most
      accurately represents the intent of the parties with respect to the invalid,
      illegal or unenforceable term.

     

    
      
         

      

      
        20

        
          

        

      

      
         

      

    

     

    9.12
      Delays
      or Omissions.
      No
      delay or omission to exercise any right, power or remedy accruing to any holder
      of any of the Securities, upon any breach or default of the Company under any
      Transaction Document, shall impair any such right, power or remedy of such
      holder nor shall it be construed to be a waiver of any such breach or default,
      or an acquiescence therein, or of or in any similar breach or default thereafter
      occurring; nor shall any waiver of any single breach or default be deemed a
      waiver of any other breach or default theretofore or thereafter occurring.
      Any
      waiver, permit, consent or approval of any kind or character on the part of
      any
      holder of any breach or default under this Agreement, must be in writing and
      shall be effective only to the extent specifically set forth in such writing.
      All remedies, either under a Transaction Document or by law or otherwise
      afforded to any holder, shall be cumulative and not alternative.

     

    9.13
      Entire
      Agreement.
      This
      Agreement, and the documents referred to herein constitute the entire agreement
      between the parties hereto pertaining to the subject matter hereof, and any
      and
      all other written or oral agreements existing between the parties hereto are
      expressly canceled.

    


     

    [Remainder
      of Page Intentionally Left Blank - 

    Signature
      Pages to Follow]

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    


    The
      parties have executed this Secured Convertible Note and Warrant Purchase
      Agreement as of the date first written above.

     

    COMPANY:

    


    PATIENT
      SAFETY TECHNOLOGIES, INC.

    


    
      	By: 	 	 	 
	 	 	 	 
	Name: 	 	 	 
	 	 	 	 
	Title: 	 	 	 
	 	 	 	 
	Date
              Signed: 	 	 	 
	 	 	 	 
	Address: 	1800 Century Park East,
              Suite
              200 	 
	 	Los Angeles, CA
              90067 	 
	 	Attention: Lynne
              Silverstein  	 
	 	 	 	 
	 	 	 	 
	PURCHASER: 	 	 
	 	 	 	 
	STEVEN J. CASPI 	 	 
	 	 	 	 
	 	 	 
	 	 	 	 
	Date
              Signed: 	 	 	 
	 	 	 	 
	Address: 	3010 Westchester
              Avenue 	 
	 	Purchase, New York
              10577 	 


    

    


     

    SIGNATURE
      PAGE TO PATIENT SAFETY TECHNOLOGIES, INC.

    SECURED
      CONVERTIBLE NOTE

    AND
      WARRANT PURCHASE AGREEMENT

     

    
      
         

      

      
        
        

        
          

        

      

      
         

      

    

     

    EXHIBITS

     

     

    
      	Exhibit A 	
              - 

            	Form of Secured Convertible Promissory
              Note 


      	 	 	 


      	
              Exhibit
                B 

            	
              -

            	
              Form
                of PST Warrant

            


    

     

    
      	
              Exhibit
                C 

            	
              -

            	
              Form
                of SurgiCount Warrant

            


      	 	 	 


      	Exhibit D 	
              - 

            	Form of Pledge Agreement 


      	 	 	 


      	Exhibit E 	
              - 

            	Schedule of
              Exceptions