spa-nov2007.htm


    EXHIBIT 4.1

    
 

    SECURITIES
      PURCHASE AGREEMENT

     

    


     

    SECURITIES
      PURCHASE AGREEMENT (this “Agreement”), dated as of November 14,
      2007, by and among Avitar Inc., a Delaware corporation, with headquarters
      located at 65 Dan Road, Canton, MA 02021 (the “Company”), and
      each of the purchasers set forth on the signature pages hereto (the
“Buyers”).

     

    WHEREAS:

     

    A.  The
      Company and the Buyers are executing and delivering this Agreement in reliance
      upon the exemption from securities registration afforded by the rules and
      regulations as promulgated by the United States Securities and Exchange
      Commission (the “SEC”) under the Securities Act of 1933, as
      amended (the “1933 Act”);

     

    B.  Buyers
      desire to purchase and the Company desires to issue and sell, upon the terms
      and
      conditions set forth in this Agreement (i) 8% secured convertible notes of
      the Company, in the form attached hereto as Exhibit “A”, in the
      aggregate principal amount of Four Hundred Thousand Dollars ($400,000) (together
      with any note(s) issued in replacement thereof or as a dividend thereon or
      otherwise with respect thereto in accordance with the terms thereof, the
“Notes”), convertible into shares of common stock, par value
      $.01 per share, of the Company (the “Common Stock”), upon the
      terms and subject to the limitations and conditions set forth in such Notes
      and
      (ii) warrants, in the form attached hereto as Exhibit “B”,
      to purchase 45,000,000 shares of Common Stock (the
“Warrants”).

     

    C.  Each
      Buyer wishes to purchase, upon the terms and conditions stated in this
      Agreement, such principal amount of Notes and number of Warrants as is set
      forth
      immediately below its name on the signature pages hereto; and

     

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

     

    NOW
      THEREFORE, the Company and each of the Buyers severally (and not
      jointly) hereby agree as follows:

     

    1.  PURCHASE
      AND SALE OF NOTES AND WARRANTS.

     

    a.  Purchase
      of Notes and Warrants.  On the Closing Date (as defined
      below), the Company shall issue and sell to each Buyer and each Buyer severally
      agrees to purchase from the Company such principal amount of Notes and number
      of
      Warrants as is set forth immediately below such Buyer’s name on the signature
      pages hereto.

     

    b.  Form
      of Payment.  On the Closing Date (as defined below),
      (i) each Buyer shall pay the purchase price for the Notes and the Warrants
      to be issued and sold to it at the Closing (as defined below) (the
“Purchase Price”) by wire transfer of immediately available
      funds to the Company, in accordance with the Company’s written wiring
      instructions, against delivery of the Notes in the principal amount equal to
      the
      Purchase Price and the number of Warrants as is set forth immediately below
      such
      Buyer’s name on the signature pages hereto, and (ii) the Company shall
      deliver such Notes and Warrants duly executed on behalf of the Company, to
      such
      Buyer, against delivery of such Purchase Price.

     

    c.  Closing
      Date.  Subject to the satisfaction (or written waiver) of
      the conditions thereto set forth in Section 6 and Section 7 below, the date
      and
      time of the issuance and sale of the Notes and the Warrants pursuant to this
      Agreement (the “Closing Date”) shall be 12:00 noon, Eastern
      Standard Time on November 14, 2007, or such other mutually agreed upon
      time.  The closing of the transactions contemplated by this Agreement
      (the “Closing”) shall occur on the Closing Date at such
      location as may be agreed to by the parties.

     

    2.  BUYERS’
      REPRESENTATIONS AND WARRANTIES.  Each Buyer severally
      (and not jointly) represents and warrants to the Company solely as to such
      Buyer
      that:

     

    a.  Investment
      Purpose.  As of the date hereof, the Buyer is purchasing
      the Notes and the shares of Common Stock issuable upon conversion of or
      otherwise pursuant to the Notes (including, without limitation, such additional
      shares of Common Stock, if any, as are issuable (i) on account of interest
      on the Notes, (ii) as a result of the events described in Sections 1.3 and
      1.4(g) of the Notes and Section 2(c) of the Registration Rights Agreement or
      (iii) in payment of the Standard Liquidated Damages Amount (as defined in
      Section 2(f) below) pursuant to this Agreement, such shares of Common Stock
      being collectively referred to herein as the “Conversion
      Shares”) and the Warrants and the shares of Common Stock issuable upon
      exercise thereof (the “Warrant Shares” and, collectively with
      the Notes, Warrants and Conversion Shares, the “Securities”)
      for its own account and not with a present view towards the public sale or
      distribution thereof, except pursuant to sales registered or exempted from
      registration under the 1933 Act; provided, however, that by making
      the representations herein, the Buyer does not agree to hold any of the
      Securities for any minimum or other specific term and reserves the right to
      dispose of the Securities at any time in accordance with or pursuant to a
      registration statement or an exemption under the 1933 Act.

     

    b.  Accredited
      Investor Status.  The Buyer is an “accredited investor”
as that term is defined in Rule 501(a) of Regulation D (an “Accredited
      Investor”).

     

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

     

    d.  Information.  The
      Buyer and its advisors, if any, have been, and for so long as the Notes and
      Warrants remain outstanding will continue to be, furnished with all materials
      relating to the business, finances and operations of the Company and materials
      relating to the offer and sale of the Securities which have been requested
      by
      the Buyer or its advisors.  The Buyer and its advisors, if any, have
      been, and for so long as the Notes and Warrants remain outstanding will continue
      to be, afforded the opportunity to ask questions of the
      Company.  Notwithstanding the foregoing, the Company has not disclosed
      to the Buyer any material nonpublic information and will not disclose such
      information unless such information is disclosed to the public prior to or
      promptly following such disclosure to the Buyer.  Neither such
      inquiries nor any other due diligence investigation conducted by Buyer or any
      of
      its advisors or representatives shall modify, amend or affect Buyer’s right to
      rely on the Company’s representations and warranties contained in Section 3
      below.  The Buyer understands that its investment in the Securities
      involves a significant degree of risk.  The Buyers are not aware of
      any facts that may constitute a breach of any of the Company’s representations
      and warranties made herein.

     

    e.  Governmental
      Review.  The Buyer understands that no United States
      federal or state agency or any other government or governmental agency has
      passed upon or made any recommendation or endorsement of the
      Securities.

     

    f.  Transfer
      or Re-sale.  The Buyer understands that (i) except
      as provided in the Registration Rights Agreement, the sale or re-sale of the
      Securities has not been and is not being registered under the 1933 Act or any
      applicable state securities laws, and the Securities may not be transferred
      unless (a) the Securities are sold pursuant to an effective registration
      statement under the 1933 Act, (b) the Buyer shall have delivered to the
      Company an opinion of counsel reasonably acceptable to the Company and its
      counsel that 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 such
      registration, which opinion shall be accepted by the Company, (c) the
      Securities are sold or transferred to an “affiliate” (as defined in Rule 144
      promulgated under the 1933 Act (or a successor rule) (“Rule
      144”)) of the Buyer who agrees to sell or otherwise transfer the
      Securities only in accordance with this Section 2(f) and who is an Accredited
      Investor, (d) the Securities are sold pursuant to Rule 144, or (e) the
      Securities are sold pursuant to Regulation S under the 1933 Act (or a successor
      rule) (“Regulation S”), and the Buyer shall have delivered to
      the Company an opinion of counsel reasonably acceptable to the Company and
      its
      counsel that shall be in form, substance and scope customary for opinions of
      counsel in corporate transactions, which opinion shall be accepted by the
      Company; (ii) any sale of such Securities made in reliance on Rule 144 may
      be
      made only in accordance with the terms of said Rule and further, if said Rule
      is
      not applicable, any re-sale of such Securities under circumstances in which
      the
      seller (or the person through whom the sale is made) may be deemed to be an
      underwriter (as that term is defined in the 1933 Act) may require compliance
      with some other exemption under the 1933 Act or the rules and regulations of
      the
      SEC thereunder; and (iii) neither the Company nor any other person is under
      any
      obligation to register such Securities under the 1933 Act or any state
      securities laws or to comply with the terms and conditions of any exemption
      thereunder (in each case, other than pursuant to the Registration Rights
      Agreement).  Notwithstanding the foregoing or anything else contained
      herein to the contrary, the Securities may be pledged as collateral in
      connection with a bonafide margin account or other lending
      arrangement.  In the event that the Company does not accept the
      opinion of counsel provided by the Buyer with respect to the transfer of
      Securities pursuant to an exemption from registration, such as Rule 144 or
      Regulation S, within three (3) business days of delivery of the opinion to
      the
      Company, the Company shall pay to the Buyer liquidated damages of two percent
      (2%) of the outstanding amount of the Notes per month plus accrued and unpaid
      interest on the Notes, prorated for partial months, in cash or shares at the
      option of the Company (“Standard Liquidated Damages
      Amount”).  If the Company elects to be pay the Standard
      Liquidated Damages Amount in shares of Common Stock, such shares shall be issued
      at the Conversion Price at the time of payment.  Notwithstanding
      anything herein to the contrary, in the event the Company has to pay the
      Standards Liquidated Damages Amount pursuant to any provision of this Agreement,
      the Buyers shall first have to give the Company advance written notice of such
      breach and in such event, the Company shall have 30 days from the receipt of
      such notice to cure such breach before the Standard Liquidated Damages Amount
      shall be due and payable to the Buyers.

     

    g.  Legends.  The
      Buyer understands that the Notes and the Warrants and, until such time as the
      Conversion Shares and Warrant Shares have been registered under the 1933 Act
      as
      contemplated by the Registration Rights Agreement or otherwise may be sold
      pursuant to Rule 144 or Regulation S without any restriction as to the number
      of
      securities as of a particular date that can then be immediately sold, the
      Conversion Shares and Warrant Shares may bear a restrictive legend in
      substantially the following form (and a stop-transfer order may be placed
      against transfer of the certificates for such Securities):

     

    “The
      securities represented by this certificate have not been registered under the
      Securities Act of 1933, as amended.  The securities may not be sold,
      transferred or assigned in the absence of an effective registration statement
      for the securities under said Act, or an opinion of counsel, in form, substance
      and scope customary for opinions of counsel in comparable transactions, that
      registration is not required under said Act or unless sold pursuant to Rule
      144
      or Regulation S under said Act.”

     

    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of any Security upon which it
      is
      stamped, if, unless otherwise required by applicable state securities laws,
      (a)
      such Security is registered for sale under an effective registration statement
      filed under the 1933 Act or otherwise may be sold pursuant to Rule 144 or
      Regulation S without any restriction as to the number of securities as of a
      particular date that can then be immediately sold, or (b) such holder provides
      the Company with an opinion of counsel, in form, substance and scope customary
      for opinions of counsel in comparable transactions, which opinion shall be
      reasonably acceptable to the Company’s counsel, to the effect that a public sale
      or transfer of such Security may be made without registration under the 1933
      Act, which opinion shall be accepted by the Company so that the sale or transfer
      is effected or (c) such holder provides the Company with reasonable assurances
      that such Security can be sold pursuant to Rule 144 or Regulation
      S.  The Buyer agrees to sell all Securities, including those
      represented by a certificate(s) from which the legend has been removed, in
      compliance with applicable prospectus delivery requirements, if
      any.

     

    h.  Authorization;
      Enforcement. This Agreement and the Registration Rights Agreement
      have been duly and validly authorized.  This Agreement has been duly
      executed and delivered on behalf of the Buyer, and this Agreement constitutes,
      and upon execution and delivery by the Buyer of the Registration Rights
      Agreement, such agreement will constitute, valid and binding agreements of
      the
      Buyer enforceable in accordance with their terms.

     

    i.  Residency.  The
      Buyer is a resident of the jurisdiction set forth immediately below such Buyer’s
      name on the signature pages hereto.

     

    3.  REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.  The Company represents
      and warrants to each Buyer that:

     

    a.  Organization
      and Qualification.  The Company and each of its
      Subsidiaries (as defined below), if any, is a corporation duly organized,
      validly existing and in good standing under the laws of the jurisdiction in
      which it is incorporated, with full power and authority (corporate and other)
      to
      own, lease, use and operate its properties and to carry on its business as
      and
      where now owned, leased, used, operated and
      conducted.  Schedule 3(a) sets forth a list of all of
      the Subsidiaries of the Company and the jurisdiction in which each is
      incorporated.  The Company and each of its Subsidiaries is duly
      qualified as a foreign corporation to do business and is in good standing in
      every jurisdiction in which its ownership or use of property or the nature
      of
      the business conducted by it makes such qualification necessary except where
      the
      failure to be so qualified or in good standing would not have a Material Adverse
      Effect.  “Material Adverse Effect” means any of (i) a
      material and adverse effect on the legality, validity or enforceability of
      any
      document executed in connection with this financing, (ii) a material and adverse
      effect on the results of operations, assets, prospects, business or condition
      (financial or otherwise) of the Company and the Subsidiaries, taken as a whole,
      or (iii) an adverse impairment to the Company’s ability to perform under any of
      the documents executed in connection with this
      financing.  “Subsidiaries” means any corporation or
      other organization, whether incorporated or unincorporated, in which the Company
      owns, directly or indirectly, any equity or other ownership
      interest.

     

    b.  Authorization;
      Enforcement.  (i) The Company has all requisite corporate
      power and authority to enter into and perform this Agreement, the Registration
      Rights Agreement, the Notes and the Warrants and to consummate the transactions
      contemplated hereby and thereby and to issue the Securities, in accordance
      with
      the terms hereof and thereof, (ii) the execution and delivery of this Agreement,
      the Registration Rights Agreement, the Notes and the Warrants by the Company
      and
      the consummation by it of the transactions contemplated hereby and thereby
      (including without limitation, the issuance of the Notes and the Warrants and
      the issuance and reservation for issuance of the Conversion Shares and Warrant
      Shares issuable upon conversion or exercise thereof) have been duly authorized
      by the Company’s Board of Directors and no further consent or authorization of
      the Company, its Board of Directors, or its shareholders is required, (iii)
      this
      Agreement has been duly executed and delivered by the Company by its authorized
      representative, and such authorized representative is the true and official
      representative with authority to sign this Agreement and the other documents
      executed in connection herewith and bind the Company accordingly, and (iv)
      this
      Agreement constitutes, and upon execution and delivery by the Company of the
      Registration Rights Agreement, the Notes and the Warrants, each of such
      instruments will constitute, a legal, valid and binding obligation of the
      Company enforceable against the Company in accordance with its
      terms.

     

    c.  Capitalization.  As
      of the date hereof, the authorized capital stock of the Company consists of
      (i)
      100,000,000 shares of Common Stock, of which 87,641,617 shares are issued and
      outstanding, 97,719 shares are reserved for issuance pursuant to the Company’s
      stock option plans, 2,260,664 shares are reserved for issuance pursuant to
      securities (other than the Notes and the Warrants) exercisable for, or
      convertible into or exchangeable for shares of Common Stock and, 10,000,000
      shares are reserved for issuance upon conversion of the Notes and exercise
      of
      the Warrants (subject to adjustment pursuant to the Company’s covenant set forth
      in Section 4(h) below); and (ii) 5,000,000 shares of preferred stock, of which
      44,630 shares are issued and outstanding.  All of such outstanding
      shares of capital stock are, or upon issuance will be, duly authorized, validly
      issued, fully paid and nonassessable.  No shares of capital stock of
      the Company are subject to preemptive rights or any other similar rights of
      the
      shareholders of the Company or any liens or encumbrances imposed through the
      actions or failure to act of the Company.  Except as disclosed in
Schedule 3(c), as of the effective date of this Agreement, (i)
      there are no outstanding options, warrants, scrip, rights to subscribe for,
      puts, calls, rights of first refusal, agreements, understandings, claims or
      other commitments or rights of any character whatsoever relating to, or
      securities or rights convertible into or exchangeable for any shares of capital
      stock of the Company or any of its Subsidiaries, or arrangements by which the
      Company or any of its Subsidiaries is or may become bound to issue additional
      shares of capital stock of the Company or any of its Subsidiaries, (ii) there
      are no agreements or arrangements under which the Company or any of its
      Subsidiaries is obligated to register the sale of any of its or their securities
      under the 1933 Act (except the Registration Rights Agreement) and (iii) there
      are no anti-dilution or price adjustment provisions contained in any security
      issued by the Company (or in any agreement providing rights to security holders)
      that will be triggered by the issuance of the Notes, the Warrants, the
      Conversion Shares or Warrant Shares.  The Company has furnished to the
      Buyer true and correct copies of the Company’s Articles of Incorporation as in
      effect on the date hereof (“Articles of Incorporation”), the
      Company’s By-laws, as in effect on the date hereof (the
“By-laws”), and the terms of all securities convertible into or
      exercisable for Common Stock of the Company and the material rights of the
      holders thereof in respect thereto.  The Company shall provide the
      Buyer with a written update of this representation signed by the Company’s Chief
      Executive or Chief Financial Officer on behalf of the Company as of the Closing
      Date.

     

    d.  Issuance
      of Shares.  The Conversion Shares and Warrant Shares are
      duly authorized and reserved for issuance and, upon conversion of the Notes
      and
      exercise of the Warrants in accordance with their respective terms, will be
      validly issued, fully paid and non-assessable, and free from all taxes, liens,
      claims and encumbrances with respect to the issue thereof and shall not be
      subject to preemptive rights or other similar rights of shareholders of the
      Company and will not impose personal liability upon the holder
      thereof.

     

    e.  Acknowledgment
      of Dilution.   The Company understands and
      acknowledges the potentially dilutive effect to the Common Stock upon the
      issuance of the Conversion Shares and Warrant Shares upon conversion of the
      Note
      or exercise of the Warrants.  The Company further acknowledges that
      its obligation to issue Conversion Shares and Warrant Shares upon conversion
      of
      the Notes or exercise of the Warrants in accordance with this Agreement, the
      Notes and the Warrants is absolute and unconditional regardless of the dilutive
      effect that such issuance may have on the ownership interests of other
      shareholders of the Company.

     

    f.  No
      Conflicts.  The execution, delivery and performance of
      this Agreement, the Registration Rights Agreement, the Notes and the Warrants
      by
      the Company and the consummation by the Company of the transactions contemplated
      hereby and thereby (including, without limitation, the issuance and reservation
      for issuance of the Conversion Shares and Warrant Shares) will not (i) conflict
      with or result in a violation of any provision of the Certificate of
      Incorporation or By-laws or (ii) violate or conflict with, or result in a breach
      of any provision of, or constitute a default (or an event which with notice
      or
      lapse of time or both could become a default) under, or give to others any
      rights of termination, amendment, acceleration or cancellation of, any
      agreement, indenture, patent, patent license or instrument to which the Company
      or any of its Subsidiaries is a party, or (iii)  to the Company’s
      knowledge, result in a violation of any law, rule, regulation, order, judgment
      or decree (including federal and state securities laws and regulations and
      regulations of any self-regulatory organizations to which the Company or its
      securities are subject) applicable to the Company or any of its Subsidiaries
      or
      by which any property or asset of the Company or any of its Subsidiaries is
      bound or affected (except for such conflicts, defaults, terminations,
      amendments, accelerations, cancellations and violations as would not,
      individually or in the aggregate, have a Material Adverse
      Effect).  Neither the Company nor any of its Subsidiaries is in
      violation of its Certificate of Incorporation, By-laws or other organizational
      documents and neither the Company nor any of its Subsidiaries is in default
      (and
      no event has occurred which with notice or lapse of time or both could put
      the
      Company or any of its Subsidiaries in default) under, and neither the Company
      nor any of its Subsidiaries has taken any action or failed to take any action
      that would give to others any rights of termination, amendment, acceleration
      or
      cancellation of, any agreement, indenture or instrument to which the Company
      or
      any of its Subsidiaries is a party or by which any property or assets of the
      Company or any of its Subsidiaries is bound or affected, except for possible
      defaults as would not, individually or in the aggregate, have a Material Adverse
      Effect. The businesses of the Company and its Subsidiaries, if any, are not
      being conducted, and shall not be conducted so long as a Buyer owns any of
      the
      Securities, in violation of any law, ordinance or regulation of any governmental
      entity.  Except as specifically contemplated by this Agreement and as
      required under the 1933 Act and any applicable state securities laws, the
      Company is not required to obtain any consent, authorization or order of, or
      make any filing or registration with, any court, governmental agency, regulatory
      agency, self regulatory organization or stock market or any third party in
      order
      for it to execute, deliver or perform any of its obligations under this
      Agreement, the Registration Rights Agreement, the Notes or the Warrants in
      accordance with the terms hereof or thereof or to issue and sell the Notes
      and
      Warrants in accordance with the terms hereof and to issue the Conversion Shares
      upon conversion of the Notes and the Warrant Shares upon exercise of the
      Warrants.  Except as disclosed in Schedule 3(f), all
      consents, authorizations, orders, filings and registrations which the Company
      is
      required to obtain pursuant to the preceding sentence have been obtained or
      effected on or prior to the date hereof.  The Company is not in
      violation of the quotation requirements of the Over-the-Counter Bulletin Board
      (the “OTCBB”) and does not reasonably anticipate that the
      Common Stock will be removed by the OTCBB in the foreseeable
      future.  The Company and its Subsidiaries are unaware of any facts or
      circumstances which might give rise to any of the foregoing.

     

    g.  SEC
      Documents; Financial Statements.  Except as disclosed in
Schedule 3(g), since September 30, 2004 the Company has timely
      filed all reports, schedules, forms, statements and other documents required
      to
      be filed by it with the SEC pursuant to the reporting requirements of the
      Securities Exchange Act of 1934, as amended (the “1934 Act”)
      (all of the foregoing filed prior to the date hereof and all exhibits included
      therein and financial statements and schedules thereto and documents (other
      than
      exhibits to such documents) incorporated by reference therein, being hereinafter
      referred to herein as the “SEC Documents”).  As of
      their respective dates, the SEC Documents complied in all material respects
      with
      the requirements of the 1934 Act and the rules and regulations of the SEC
      promulgated thereunder applicable to the SEC Documents, and none of the SEC
      Documents, at the time they were filed with the SEC, contained any untrue
      statement of a material fact or omitted to state a material fact required to
      be
      stated therein or necessary in order to make the statements therein, in light
      of
      the circumstances under which they were made, not misleading.  None of
      the statements made in any such SEC Documents is, or has been, required to
      be
      amended or updated under applicable law (except for such statements as have
      been
      amended or updated in subsequent filings prior the date hereof).  As
      of their respective dates, the financial statements of the Company included
      in
      the SEC Documents complied as to form in all material respects with applicable
      accounting requirements and the published rules and regulations of the SEC
      with
      respect thereto.  Such financial statements have been prepared in
      accordance with United States generally accepted accounting principles,
      consistently applied, during the periods involved (except (i) as may be
      otherwise indicated in such financial statements or the notes thereto, or (ii)
      in the case of unaudited interim statements, to the extent they may not include
      footnotes or may be condensed or summary statements) and fairly present in
      all
      material respects the consolidated financial position of the Company and its
      consolidated Subsidiaries as of the dates thereof and the consolidated results
      of their operations and cash flows for the periods then ended (subject, in
      the
      case of unaudited statements, to normal year-end audit
      adjustments).  Except as set forth in the financial statements of the
      Company included in the SEC Documents, the Company has no liabilities,
      contingent or otherwise, other than (i) liabilities incurred in the ordinary
      course of business subsequent to September 30, 2004 and (ii) obligations under
      contracts and commitments incurred in the ordinary course of business and not
      required under generally accepted accounting principles to be reflected in
      such
      financial statements, which, individually or in the aggregate, are not material
      to the financial condition or operating results of the Company.

     

    h.  Absence
      of Certain Changes.  Except as set forth in Schedule
      3(h), since September 30, 2005, there has been no material adverse change
      and no material adverse development in the assets, liabilities, business,
      properties, operations, financial condition, results of operations or prospects
      of the Company or any of its Subsidiaries.

     

    i.  Absence
      of Litigation.  There is no action, suit, claim,
      proceeding, inquiry or investigation before or by any court, public board,
      government agency, self-regulatory organization or body pending or, to the
      knowledge of the Company or any of its Subsidiaries, threatened against or
      affecting the Company or any of its Subsidiaries, or their officers or directors
      in their capacity as such, that could have a Material Adverse
      Effect.  Schedule 3(i) contains a complete list and
      summary description of any pending or, to the knowledge of the
      Company,  threatened proceeding against or affecting the Company or
      any of its Subsidiaries, without regard to whether it would have a Material
      Adverse Effect.  The Company and its Subsidiaries are unaware of any
      facts or circumstances which might give rise to any of the
      foregoing.

     

    j.  Patents,
      Copyrights, etc.   The Company and each of its
      Subsidiaries owns or possesses the requisite licenses or rights to use all
      patents, patent applications, patent rights, inventions, know-how, trade
      secrets, trademarks, trademark applications, service marks, service names,
      trade
      names and copyrights (“Intellectual Property”) necessary to
      enable it to conduct its business as now operated (and, except as set forth
      in
Schedule 3(j) hereof, to the best of the Company’s knowledge,
      as presently contemplated to be operated in the future); there is no claim
      or
      action by any person pertaining to, or proceeding pending, or to the Company’s
      knowledge threatened, which challenges the right of the Company or of a
      Subsidiary with respect to any Intellectual Property necessary to enable it
      to
      conduct its business as now operated (and, except as set forth in
Schedule 3(j) hereof, to the best of the Company’s knowledge,
      as presently contemplated to be operated in the future); to the best of the
      Company’s knowledge, the Company’s or its Subsidiaries’ current and intended
      products, services and processes do not infringe on any Intellectual Property
      or
      other rights held by any person; and the Company is unaware of any facts or
      circumstances which might give rise to any of the foregoing.  The
      Company and each of its Subsidiaries have taken reasonable security measures
      to
      protect the secrecy, confidentiality and value of their Intellectual
      Property.

     

    k.  No
      Materially Adverse Contracts, Etc.  Neither the Company
      nor any of its Subsidiaries is subject to any charter, corporate or other legal
      restriction, or any judgment, decree, order, rule or regulation which in the
      judgment of the Company’s officers has or is expected in the future to have a
      Material Adverse Effect.  Neither the Company nor any of its
      Subsidiaries is a party to any contract or agreement which in the judgment
      of
      the Company’s officers has or is expected to have a Material Adverse
      Effect.

     

    l.  Tax
      Status.  Except as set forth on Schedule
      3(l), the Company and each of its Subsidiaries has made or filed all
      federal, state and foreign income and all other tax returns, reports and
      declarations required by any jurisdiction to which it is subject (unless and
      only to the extent that the Company and each of its Subsidiaries has set aside
      on its books provisions reasonably adequate for the payment of all unpaid and
      unreported taxes) and has paid all taxes and other governmental assessments
      and
      charges that are material in amount, shown or determined to be due on such
      returns, reports and declarations, except those being contested in good faith
      and has set aside on its books provisions reasonably adequate for the payment
      of
      all taxes for periods subsequent to the periods to which such returns, reports
      or declarations apply.  There are no unpaid taxes in any material
      amount claimed to be due by the taxing authority of any jurisdiction, and the
      officers of the Company know of no basis for any such claim.  The
      Company has not executed a waiver with respect to the statute of limitations
      relating to the assessment or collection of any foreign, federal, state or
      local
      tax.  Except as set forth on Schedule 3(l), none of
      the Company’s tax returns is presently being audited by any taxing
      authority.

     

    m.  Certain
      Transactions.  Except as set forth on Schedule
      3(m) and except for arm’s length transactions pursuant to which the
      Company or any of its Subsidiaries makes payments in the ordinary course of
      business upon terms no less favorable than the Company or any of its
      Subsidiaries could obtain from third parties and other than the grant of stock
      options disclosed on Schedule 3(c), none of the officers,
      directors, or employees of the Company is presently a party to any transaction
      with the Company or any of its Subsidiaries (other than for services as
      employees, officers and directors), including any contract, agreement or other
      arrangement providing for the furnishing of services to or by, providing for
      rental of real or personal property to or from, or otherwise requiring payments
      to or from any officer, director or such employee or, to the knowledge of the
      Company, any corporation, partnership, trust or other entity in which any
      officer, director, or any such employee has a substantial interest or is an
      officer, director, trustee or partner.

     

    n.  Disclosure.  All
      information relating to or concerning the Company or any of its Subsidiaries
      set
      forth in this Agreement and provided to the Buyers pursuant to Section 2(d)
      hereof and otherwise in connection with the transactions contemplated hereby
      is
      true and correct in all material respects and the Company has not omitted to
      state any material fact necessary in order to make the statements made herein
      or
      therein, in light of the circumstances under which they were made, not
      misleading.  No event or circumstance has occurred or exists with
      respect to the Company or any of its Subsidiaries or its or their business,
      properties, prospects, operations or financial conditions, which, under
      applicable law, rule or regulation, requires public disclosure or announcement
      by the Company but which has not been so publicly announced or disclosed
      (assuming for this purpose that the Company’s reports filed under the 1934 Act
      are being incorporated into an effective registration statement filed by the
      Company under the 1933 Act).

     

    o.  Acknowledgment
      Regarding Buyers’ Purchase of Securities.  The Company
      acknowledges and agrees that the Buyers are acting solely in the capacity of
      arm’s length purchasers with respect to this Agreement and the transactions
      contemplated hereby.  The Company further acknowledges that no Buyer
      is acting as a financial advisor or fiduciary of the Company (or in any similar
      capacity) with respect to this Agreement and the transactions contemplated
      hereby and any statement made by any Buyer or any of their respective
      representatives or agents in connection with this Agreement and the transactions
      contemplated hereby is not advice or a recommendation and is merely incidental
      to the Buyers’ purchase of the Securities.  The Company further
      represents to each Buyer that the Company’s decision to enter into this
      Agreement has been based solely on the independent evaluation of the Company
      and
      its representatives.

     

    p.  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 in any security or solicited any offers
      to
      buy any security under circumstances that would require registration under
      the
      1933 Act of the issuance of the Securities to the Buyers.  The
      issuance of the Securities to the Buyers will not be integrated with any other
      issuance of the Company’s securities (past, current or future) for purposes of
      any shareholder approval provisions applicable to the Company or its
      securities.

     

    q.  No
      Brokers.  Except as set forth in Schedule
      3(q), the Company has taken no action which would give rise to any
      claim by any person for brokerage commissions, transaction fees or similar
      payments relating to this Agreement or the transactions contemplated
      hereby.

     

    r.  Permits;
      Compliance.  The Company and each of its Subsidiaries is
      in possession of all franchises, grants, authorizations, licenses, permits,
      easements, variances, exemptions, consents, certificates, approvals and orders
      necessary to own, lease and operate its properties and to carry on its business
      as it is now being conducted (collectively, the “Company
      Permits”), and there is no action pending or, to the knowledge of the
      Company, threatened regarding suspension or cancellation of any of the Company
      Permits.  Neither the Company nor any of its Subsidiaries is in
      conflict with, or in default or violation of, any of the Company Permits, except
      for any such conflicts, defaults or violations which, individually or in the
      aggregate, would not reasonably be expected to have a Material Adverse
      Effect.  Since September 30, 2004, neither the Company nor any of its
      Subsidiaries has received any notification with respect to possible conflicts,
      defaults or violations of applicable laws, except for notices relating to
      possible conflicts, defaults or violations, which conflicts, defaults or
      violations would not have a Material Adverse Effect.

     

    s.  Environmental
      Matters.

     

    (i)  Except
      as
      set forth in Schedule 3(s), there are, to the best of the
      Company’s knowledge, with respect to the Company or any of its Subsidiaries or
      any predecessor of the Company, no past or present violations of Environmental
      Laws (as defined below), releases of any material into the environment, actions,
      activities, circumstances, conditions, events, incidents, or contractual
      obligations which may give rise to any common law environmental liability or
      any
      liability under the Comprehensive Environmental Response, Compensation and
      Liability Act of 1980 or similar federal, state, local or foreign laws and
      neither the Company nor any of its Subsidiaries has received any notice with
      respect to any of the foregoing, nor is any action pending or, to the Company’s
      knowledge, threatened in connection with any of the foregoing.  The
      term “Environmental Laws” means all federal, state, local or
      foreign laws relating to pollution or protection of human health or the
      environment (including, without limitation, ambient air, surface water,
      groundwater, land surface or subsurface strata), including, without limitation,
      laws relating to emissions, discharges, releases or threatened releases of
      chemicals, pollutants contaminants, or toxic or hazardous substances or wastes
      (collectively, “Hazardous Materials”) into the environment, or
      otherwise relating to the manufacture, processing, distribution, use, treatment,
      storage, disposal, transport or handling of Hazardous Materials, as well as
      all
      authorizations, codes, decrees, demands or demand letters, injunctions,
      judgments, licenses, notices or notice letters, orders, permits, plans or
      regulations issued, entered, promulgated or approved thereunder.

     

    (ii)  Other
      than those that are or were stored, used or disposed of in compliance with
      applicable law, no Hazardous Materials are contained on or about any real
      property currently owned, leased or used by the Company or any of its
      Subsidiaries, and no Hazardous Materials were released on or about any real
      property previously owned, leased or used by the Company or any of its
      Subsidiaries during the period the property was owned, leased or used by the
      Company or any of its Subsidiaries, except in the normal course of the Company’s
      or any of its Subsidiaries’ business.

     

    (iii)  Except
      as
      set forth in Schedule 3(s), to the best of the Company’s
      knowledge there are no underground storage tanks on or under any real property
      owned, leased or used by the Company or any of its Subsidiaries that are not
      in
      compliance with applicable law.

     

    t.  Title
      to Property.  The Company and its Subsidiaries have good
      and marketable title in fee simple to all real property and good and marketable
      title to all personal property owned by them which is material to the business
      of the Company and its Subsidiaries, in each case free and clear of all liens,
      encumbrances and defects except such as are described in Schedule
      3(t) or such as would not have a Material Adverse
      Effect.  Any real property and facilities held under lease by the
      Company and its Subsidiaries are held by them under valid, subsisting and
      enforceable leases with such exceptions as would not have a Material Adverse
      Effect.

     

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

     

    v.  Internal
      Accounting Controls.  The Company and each of its
      Subsidiaries maintain a system of internal accounting controls sufficient,
      in
      the judgment of the Company’s board of directors, to provide reasonable
      assurance that (i) transactions are executed in accordance with management’s
      general or specific authorizations, (ii) transactions are recorded as necessary
      to permit preparation of financial statements in conformity with generally
      accepted accounting principles and to maintain asset accountability, (iii)
      access to assets is permitted only in accordance with management’s general or
      specific authorization and (iv) the recorded accountability for assets is
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences.

     

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

     

    x.  Solvency.  The
      Company (after giving effect to the transactions contemplated by this Agreement)
      is solvent (i.e., its assets have a fair market value in excess of the
      amount required to pay its probable liabilities on its existing debts as they
      become absolute and matured) and currently the Company has no information that
      would lead it to reasonably conclude that the Company would not, after giving
      effect to the transaction contemplated by this Agreement, have the ability
      to,
      nor does it intend to take any action that would impair its ability to, pay
      its
      debts from time to time incurred in connection therewith as such debts
      mature.

     

    y.  No
      Investment Company.  The Company is not, and upon the
      issuance and sale of the Securities as contemplated by this Agreement will
      not
      be an “investment company” required to be registered under the Investment
      Company Act of 1940 (an “Investment Company”).  The
      Company is not controlled by an Investment Company.

     

    z.  Certain
      Registration Matters. Assuming the accuracy of the Buyers'
      representations and warranties set forth in Section 3, no registration under
      the
      Securities Act is required for the offer and sale of the Conversion Shares
      and
      Warrant Shares by the Company to the Buyers under the transaction documents.
      Except as specified in Schedule 3(z), the Company has not
      granted or agreed to grant to any Person any rights (including "piggy-back"
      registration rights) to have any securities of the Company registered with
      the
      Commission or any other governmental authority that have not been
      satisfied.

     

    aa.  Breach
      of Representations and Warranties by the Company.  If the
      Company materially breaches any of the representations or warranties set forth
      in this Section 3, and in addition to any other remedies available to the Buyers
      pursuant to this Agreement, the Company shall pay to the Buyer the Standard
      Liquidated Damages Amount in cash or in shares of Common Stock at the option
      of
      the Company, until such breach is cured.  If the Company elects to pay
      the Standard Liquidated Damages Amounts in shares of Common Stock, such shares
      shall be issued at the Conversion Price at the time of payment.

     

    4.  COVENANTS.

     

    a.  Best
      Efforts.  The parties shall use their best efforts to
      satisfy timely each of the conditions described in Section 6 and 7 of this
      Agreement.

     

    b.  Form
      D; Blue Sky Laws.  The Company agrees to file a Form D
      with respect to the Securities as required under Regulation D and to provide
      a
      copy thereof to each Buyer promptly after such filing.  The Company
      shall, on or before the Closing Date, take such action as the Company shall
      reasonably determine is necessary to qualify the Securities for sale to the
      Buyers at the applicable closing pursuant to this Agreement under applicable
      securities or “blue sky” laws of the states of the United States (or to obtain
      an exemption from such qualification), and shall provide evidence of any such
      action so taken to each Buyer on or prior to the Closing Date; provided,
however, that the Company shall not be required in connection therewith
      or as a condition thereto to (a) qualify to do business in any jurisdiction
      where it would not otherwise be required to qualify but for this Section 4(b),
      (b) subject itself to general taxation in any such jurisdiction,
      (c) file a general consent to service of process in any such jurisdiction,
      (d) provide any undertakings that cause the Company undue expense or
      burden, or (e) make any change in its charter or bylaws, which in each case
      the Board of Directors of the Company determines to be contrary to the best
      interests of the Company and its shareholders.

     

    c.  Reporting
      Status; Eligibility to Use Form S-3, SB-2 or Form

     

    S-1. The
      Company’s Common Stock is registered under Section 12(g) of the 1934 Act. The
      Company represents and warrants that it meets the requirements for the use
      of
      Form S-3 (or if the Company is not eligible for the use of Form S-3 as of the
      Filing Date (as defined in the Registration Rights Agreement), the Company
      may
      use the form of registration for which it is eligible at that time) for
      registration of the sale by the Buyer of the Registrable Securities (as defined
      in the Registration Rights Agreement).  So long as the Buyer
      beneficially owns any of the Securities, the Company shall timely file all
      reports required to be filed with the SEC pursuant to the 1934 Act, and the
      Company shall not terminate its status as an issuer required to file reports
      under the 1934 Act even if the 1934 Act or the rules and regulations thereunder
      would permit such termination.  The Company further agrees to file all
      reports required to be filed by the Company with the SEC in a timely manner
      so
      as to become eligible, and thereafter to maintain its eligibility, for the
      use
      of Form S-3.  The Company shall issue a press release describing the
      material terms of the transaction contemplated hereby as soon as practicable
      following the Closing Date but in no event more than two (2) business days
      of
      the Closing Date, which press release shall be subject to prior review by the
      Buyers.  The Company agrees that such press release shall not disclose
      the name of the Buyers unless expressly consented to in writing by the Buyers
      or
      unless required by applicable law or regulation, and then only to the extent
      of
      such requirement.

     

    d.  Use
      of Proceeds.  The Company shall use the net proceeds from
      the sale of the Notes and the Warrants in the manner set forth in
Schedule 4(d) attached hereto and made a part hereof and shall
      not, directly or indirectly, use such proceeds for (i) any loan to or investment
      in any other corporation, partnership, enterprise or other person (except in
      connection with its currently existing direct or indirect Subsidiaries); (ii)
      the satisfaction of any portion of the Company’s debt (other than payment of
      trade payables and accrued expenses in the ordinary course of the Company’s
      business and consistent with prior past practices), or (iii) the redemption
      of
      any Common Stock.

     

    e.  Future
      Offerings.  Subject to the exceptions described below,
      the Company will not, without the prior written consent of a
      majority-in-interest of the Buyers, which consent shall not be unreasonably
      withheld, negotiate or contract with any party to obtain additional equity
      financing (including debt financing with an equity component) that involves
      (A)
      the issuance of Common Stock for cash at a discount to the market price of
      the
      Common Stock on the date of issuance (taking into account the value of any
      warrants or options to acquire Common Stock issued in connection therewith)
      or
      (B) the issuance of convertible securities that are convertible into an
      indeterminate number of shares of Common Stock or (C) the issuance of warrants
      during the period (the “Lock-up Period”) beginning on the
      Closing Date and ending on the later of (i) two hundred seventy (270) days
      from
      the Closing Date and (ii) one hundred eighty (180) days from the date the
      Registration Statement (as defined in the Registration Rights Agreement) is
      declared effective (plus any days in which sales cannot be made
      thereunder).  In addition, subject to the exceptions described below,
      the Company will not conduct any equity financing (including debt with an equity
      component) (“Future Offerings”) during the period beginning on
      the Closing Date and ending two (2) years after the end of the Lock-up Period
      unless it shall have first delivered to each Buyer, at least twenty (20)
      business days prior to the closing of such Future Offering, written notice
      describing the proposed Future Offering, including the terms and conditions
      thereof and proposed definitive documentation to be entered into in connection
      therewith, and providing each Buyer an option during the fifteen (15) day period
      following delivery of such notice to purchase its pro rata share (based on
      the
      ratio that the aggregate principal amount of Notes purchased by it hereunder
      bears to the aggregate principal amount of Notes purchased hereunder) of the
      securities being offered in the Future Offering on the same terms as
      contemplated by such Future Offering (the limitations referred to in this
      sentence and the preceding sentence are collectively referred to as the
“Capital Raising Limitations”).  In the
      event the terms and conditions of a proposed Future Offering are amended in
      any
      respect after delivery of the notice to the Buyers concerning the proposed
      Future Offering, the Company shall deliver a new notice to each Buyer describing
      the amended terms and conditions of the proposed Future Offering and each Buyer
      thereafter shall have an option during the fifteen (15) day period following
      delivery of such new notice to purchase its pro rata share of the securities
      being offered on the same terms as contemplated by such proposed Future
      Offering, as amended.  The foregoing sentence shall apply to
      successive amendments to the terms and conditions of any proposed Future
      Offering.  The Capital Raising Limitations shall not apply to any
      transaction involving (i) issuances of securities in a firm commitment
      underwritten public offering (excluding a continuous offering pursuant to Rule
      415 under the 1933 Act, an equity line of credit or similar financing
      arrangement) resulting in net proceeds to the Company of in excess of
      $1,500,000, or (ii) issuances of securities as consideration for a merger,
      consolidation or purchase of assets, or in connection with any strategic
      partnership or joint venture (the primary purpose of which is not to raise
      equity capital), or in connection with the disposition or acquisition of a
      business, product or license by the Company.  The Capital Raising
      Limitations also shall not apply to the issuance of securities upon exercise
      or
      conversion of the Company’s options, warrants or other convertible securities
      outstanding as of the date hereof or to the grant of additional options or
      warrants, or the issuance of additional securities, under any Company stock
      option or restricted stock plan approved by the shareholders of the
      Company.

     

    f.  Expenses.  At
      the Closing, the Company shall reimburse Buyers for expenses incurred by them
      in
      connection with the negotiation, preparation, execution, delivery and
      performance of this Agreement and the other agreements to be executed in
      connection herewith (“Documents”), including, without limitation, attorneys’ and
      consultants’ fees and expenses, transfer agent fees, fees for stock quotation
      services, fees relating to any amendments or modifications of the Documents
      or
      any consents or waivers of provisions in the Documents, fees for the preparation
      of opinions of counsel, escrow fees, and costs of restructuring the transactions
      contemplated by the Documents.  When possible, the Company must pay
      these fees directly, otherwise the Company must make immediate payment for
      reimbursement to the Buyers for all fees and expenses immediately upon written
      notice by the Buyer or the submission of an invoice by the
      Buyer.  Notwithstanding anything herein to the contrary, the Company’s
      obligation to reimburse Buyers’ expenses shall not exceed $20,000 in the
      aggregate.

     

    g.  Financial
      Information.  The Company agrees to send the following
      reports to each Buyer until such Buyer transfers, assigns, or sells all of
      the
      Securities: (i) within ten (10) days after the filing with the SEC, a copy
      of its Annual Report on Form 10-KSB its Quarterly Reports on Form 10-QSB and
      any
      Current Reports on Form 8-K; (ii) within one (1) day after release, copies
      of all press releases issued by the Company or any of its Subsidiaries; and
      (iii) contemporaneously with the making available or giving to the
      shareholders of the Company, copies of any notices or other information the
      Company makes available or gives to such shareholders.

     

    h.  Authorization
      and Reservation of Shares.  Subject to Stockholder
      Approval, the Company shall at all times have authorized, and reserved for
      the
      purpose of issuance, a sufficient number of shares of Common Stock to provide
      for the full conversion or exercise of the outstanding Notes and Warrants and
      issuance of the Conversion Shares and Warrant Shares in connection therewith
      (based on the Conversion Price of the Notes or Exercise Price of the Warrants
      in
      effect from time to time) and as otherwise required by the Notes.  The
      Company shall not reduce the number of shares of Common Stock reserved for
      issuance upon conversion of Notes and exercise of the Warrants without the
      consent of each Buyer.  The Company shall at all times maintain the
      number of shares of Common Stock so reserved for issuance at an amount
      (“Reserved Amount”) equal to no less than two (2) times the
      number that is then actually issuable upon full conversion of the Notes and
      upon
      exercise of the Warrants (based on the Conversion Price of the Notes or the
      Exercise Price of the Warrants in effect from time to time).  If at
      any time the number of shares of Common Stock authorized and reserved for
      issuance (“Authorized and Reserved Shares”) is below the
      Reserved Amount, the Company will promptly take all corporate action necessary
      to authorize and reserve a sufficient number of shares, including, without
      limitation, calling a special meeting of shareholders to authorize additional
      shares to meet the Company’s obligations under this Section 4(h), in the case of
      an insufficient number of authorized shares, obtain shareholder approval of
      an
      increase in such authorized number of shares, and voting the management shares
      of the Company in favor of an increase in the authorized shares of the Company
      to ensure that the number of authorized shares is sufficient to meet the
      Reserved Amount.  If the Company fails to obtain such shareholder
      approval within thirty (30) days following the date on which the number of
      Reserved Amount exceeds the Authorized and Reserved Shares, the Company shall
      pay to the Borrower the Standard Liquidated Damages Amount, in cash or in shares
      of Common Stock at the option of the Buyer.  If the Buyer elects to be
      paid the Standard Liquidated Damages Amount in shares of Common Stock, such
      shares shall be issued at the Conversion Price at the time of
      payment.  In order to ensure that the Company has authorized a
      sufficient amount of shares to meet the Reserved Amount at all times, the
      Company must deliver to the Buyer at the end of every month a list detailing
      (1)
      the current amount of shares authorized by the Company and reserved for the
      Buyer; and (2) amount of shares issuable upon conversion of the Notes and upon
      exercise of the Warrants and as payment of interest accrued on the Notes for
      one
      year.  If the Company fails to provide such list within five (5)
      business days of the end of each month, the Company shall pay the Standard
      Liquidated Damages Amount, in cash or in shares of Common Stock at the option
      of
      the Buyer, until the list is delivered.  If the Buyer elects to be
      paid the Standard Liquidated Damages Amount in shares of Common Stock, such
      shares shall be issued at the Conversion Price at the time of
      payment.

     

    i.  Listing.  The
      Company shall promptly secure the listing of the Conversion Shares and Warrant
      Shares upon each national securities exchange or automated quotation system,
      if
      any, upon which shares of Common Stock are then listed (subject to official
      notice of issuance) and, so long as any Buyer owns any of the Securities, shall
      maintain, so long as any other shares of Common Stock shall be so listed, such
      listing of all Conversion Shares and Warrant Shares from time to time issuable
      upon conversion of the Notes or exercise of the Warrants.  The Company
      will obtain and, so long as any Buyer owns any of the Securities, maintain
      the
      listing and trading of its Common Stock on the OTCBB or any equivalent
      replacement exchange, the Nasdaq National Market (“Nasdaq”),
      the Nasdaq SmallCap Market (“Nasdaq SmallCap”), the New York
      Stock Exchange (“NYSE”), or the American Stock Exchange
      (“AMEX”) and will comply in all respects with the Company’s
      reporting, filing and other obligations under the bylaws or rules of the
      National Association of Securities Dealers (“NASD”) and such
      exchanges, as applicable.  The Company shall promptly provide to each
      Buyer copies of any notices it receives from the OTCBB and any other exchanges
      or quotation systems on which the Common Stock is then listed regarding the
      continued eligibility of the Common Stock for listing on such exchanges and
      quotation systems.

     

    j.  Corporate
      Existence.  So long as a Buyer beneficially owns any
      Notes or Warrants, the Company shall maintain its corporate existence and shall
      not sell all or substantially all of the Company’s assets, except in the event
      of a merger or consolidation or sale of all or substantially all of the
      Company’s assets, where the surviving or successor entity in such transaction
      (i) assumes the Company’s obligations hereunder and under the agreements and
      instruments entered into in connection herewith and (ii) is a publicly traded
      corporation whose Common Stock is listed for trading on the OTCBB, Nasdaq,
      Nasdaq SmallCap, NYSE or AMEX.

     

    k.  No
      Integration.  The Company shall not make any offers or
      sales of any security (other than the Securities) under circumstances that
      would
      require registration of the Securities being offered or sold hereunder under
      the
      1933 Act or cause the offering of the Securities to be integrated with any
      other
      offering of securities by the Company for the purpose of any stockholder
      approval provision applicable to the Company or its securities.

     

    l.  Restriction
      on Short Sales. The Buyers agree that, so long as any of the Notes
      remain outstanding, but in no event less than two (2) years from the date
      hereof, the Buyers will not enter into or effect any “short sales” (as such term
      is defined in Rule 3b-3 of the 1934 Act) of the Common Stock or hedging
      transaction which establishes a net short position with respect to the Common
      Stock.

     

    m.  Breach
      of Covenants.  If the Company breaches
      any of the covenants set forth in this Section 4, and in addition to any other
      remedies available to the Buyers pursuant to this Agreement, the Company shall
      pay to the Buyers the Standard Liquidated Damages Amount, in cash or in shares
      of Common Stock at the option of the Company, until such breach is
      cured.  If the Company elects to pay the Standard Liquidated Damages
      Amount in shares, such shares shall be issued at the Conversion Price at the
      time of payment.

     

    5.  TRANSFER
      AGENT INSTRUCTIONS.  The Company shall issue irrevocable
      instructions to its transfer agent to issue certificates, registered in the
      name
      of each Buyer or its nominee, for the Conversion Shares and Warrant Shares
      in
      such amounts as specified from time to time by each Buyer to the Company upon
      conversion of the Notes or exercise of the Warrants in accordance with the
      terms
      thereof (the “Irrevocable Transfer Agent
      Instructions”).  Prior to registration of the Conversion
      Shares and Warrant Shares under the 1933 Act or the date on which the Conversion
      Shares and Warrant Shares may be sold pursuant to Rule 144 without any
      restriction as to the number of Securities as of a particular date that can
      then
      be immediately sold, all such certificates shall bear the restrictive legend
      specified in Section 2(g) of this Agreement.  The Company warrants
      that no instruction other than the Irrevocable Transfer Agent Instructions
      referred to in this Section 5, and stop transfer instructions to give effect
      to
      Section 2(f) hereof (in the case of the Conversion Shares and Warrant Shares,
      prior to registration of the Conversion Shares and Warrant Shares under the
      1933
      Act or the date on which the Conversion Shares and Warrant Shares may be sold
      pursuant to Rule 144 without any restriction as to the number of Securities
      as
      of a particular date that can then be immediately sold), will be given by the
      Company to its transfer agent and that the Securities shall otherwise be freely
      transferable on the books and records of the Company as and to the extent
      provided in this Agreement and the Registration Rights
      Agreement.  Nothing in this Section shall affect in any way the
      Buyer’s obligations and agreement set forth in Section 2(g) hereof to comply
      with all applicable prospectus delivery requirements, if any, upon re-sale
      of
      the Securities.  If a Buyer provides the Company with (i) an opinion
      of counsel reasonably acceptable to the Company and its counsel in form,
      substance and scope customary for opinions in comparable transactions, to the
      effect that a public sale or transfer of such Securities may be made without
      registration under the 1933 Act and such sale or transfer is effected or (ii)
      the Buyer provides reasonable assurances that the Securities can be sold
      pursuant to Rule 144, the Company shall permit the transfer, and, in the case
      of
      the Conversion Shares and Warrant Shares, promptly instruct its transfer agent
      to issue one or more certificates, free from restrictive legend, in such name
      and in such denominations as specified by such Buyer.  The Company
      acknowledges that a breach by it of its obligations hereunder will cause
      irreparable harm to the Buyers, by vitiating the intent and purpose of the
      transactions contemplated hereby.  Accordingly, the Company
      acknowledges that the remedy at law for a breach of its obligations under this
      Section 5 may be inadequate and agrees, in the event of a breach or threatened
      breach by the Company of the provisions of this Section, that the Buyers shall
      be entitled, in addition to all other available remedies, to an injunction
      restraining any breach and requiring immediate transfer, without the necessity
      of showing economic loss and without any bond or other security being
      required.

     

    6.  CONDITIONS
      TO THE COMPANY’S OBLIGATION TO SELL.  The obligation of
      the Company hereunder to issue and sell the Notes and Warrants to a Buyer at
      the
      Closing is subject to the satisfaction, at or before the Closing Date 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:

     

    a.  The
      applicable Buyer shall have executed this Agreement and the Registration Rights
      Agreement, and delivered the same to the Company.

     

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

     

    c.  The
      representations and warranties of the applicable Buyer shall be true and correct
      in all material respects as of the date when made and as of the Closing Date
      as
      though made at that time (except for representations and warranties that speak
      as of a specific date), and the applicable Buyer shall have performed, satisfied
      and complied in all material respects with the covenants, agreements and
      conditions required by this Agreement to be performed, satisfied or complied
      with by the applicable Buyer at or prior to the Closing Date.

     

    d.  No
      litigation, statute, rule, regulation, executive order, decree, ruling or
      injunction shall have been enacted, entered, promulgated or endorsed by or
      in
      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 EACH BUYER’S OBLIGATION TO PURCHASE.  The obligation
      of each Buyer hereunder to purchase the Notes and Warrants at the Closing is
      subject to the satisfaction, at or before the Closing Date of each of the
      following conditions, provided that these conditions are for such Buyer’s sole
      benefit and may be waived by such Buyer at any time in its sole
      discretion:

     

    a.  The
      Company shall have executed this Agreement and the Registration Rights
      Agreement, and delivered the same to the Buyer.

     

    b.  The
      Company shall have delivered to such Buyer duly executed Notes (in such
      denominations as the Buyer shall request) and Warrants in accordance with
      Section 1(b) above.

     

    c.  The
      Irrevocable Transfer Agent Instructions, in form and substance satisfactory
      to a
      majority-in-interest of the Buyers, shall have been delivered to and
      acknowledged in writing by the Company’s Transfer Agent.

     

    d.  The
      representations and warranties of the Company shall be true and correct in
      all
      material respects as of the date when made and as of the Closing Date as though
      made at such time (except for representations and warranties that speak as
      of a
      specific 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 Closing Date.  The Buyer shall have received a
      certificate or certificates, executed by the chief executive officer of the
      Company, dated as of the Closing Date, to the foregoing effect and as to such
      other matters as may be reasonably requested by such Buyer including, but not
      limited to certificates with respect to the Company’s Certificate of
      Incorporation, By-laws and Board of Directors’ resolutions relating to the
      transactions contemplated hereby.

     

    e.  No
      litigation, statute, rule, regulation, executive order, decree, ruling or
      injunction shall have been enacted, entered, promulgated or endorsed by or
      in
      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.

     

    f.  No
      event
      shall have occurred which could reasonably be expected to have a Material
      Adverse Effect on the Company.

     

    g.  The
      Conversion Shares and Warrant Shares shall have been authorized for quotation
      on
      the OTCBB and trading in the Common Stock on the OTCBB shall not have been
      suspended by the SEC or the OTCBB.

     

    h.  The
      Buyer
      shall have received an opinion of the Company’s counsel, dated as of the Closing
      Date, in form, scope and substance reasonably satisfactory to the Buyer and
      in
      substantially the same form as Exhibit “D” attached
      hereto.

     

    i.  The
      Buyer
      shall have received an officer’s certificate described in Section 3(c) above,
      dated as of the Closing Date.

     

    8.  GOVERNING
      LAW; MISCELLANEOUS.

     

    a.  Governing
      Law.  THIS AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND
      CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
      AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD
      TO THE PRINCIPLES OF CONFLICT OF LAWS.  THE PARTIES HERETO HEREBY
      SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED
      IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS AGREEMENT,
      THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS
      CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE
      OF AN
      INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR
      PROCEEDING.  BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A
      PARTY MAILED BY REGISTERED FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT
      EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
      PROCEEDING.  NOTHING HEREIN SHALL AFFECT EITHER PARTY’S RIGHT TO SERVE
      PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.  BOTH PARTIES AGREE THAT
      A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE
      CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT
      OR IN ANY OTHER LAWFUL MANNER.  THE PARTY WHICH DOES NOT PREVAIL IN
      ANY DISPUTE ARISING UNDER THIS AGREEMENT SHALL BE RESPONSIBLE FOR ALL FEES
      AND
      EXPENSES, INCLUDING REASONABLE ATTORNEYS’ FEES, INCURRED BY THE PREVAILING PARTY
      IN CONNECTION WITH SUCH DISPUTE.

     

    b.  Counterparts;
      Signatures by Facsimile.  This Agreement may be executed
      in one or more counterparts, each of which shall be deemed an original but
      all
      of which shall constitute one and the same agreement and shall become effective
      when counterparts have been signed by each party and delivered to the other
      party.  This Agreement, once executed by a party, may be delivered to
      the other party hereto by facsimile transmission of a copy of this Agreement
      bearing the signature of the party so delivering this Agreement.

     

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

     

    d.  Severability.  In
      the event that any provision of this Agreement is invalid or unenforceable
      under
      any applicable statute or rule of law, then such provision shall be deemed
      inoperative to the extent that it may conflict therewith and shall be deemed
      modified to conform with such statute or rule of law.  Any provision
      hereof which may prove invalid or unenforceable under any law shall not affect
      the validity or enforceability of any other provision hereof.

     

    e.  Entire
      Agreement; Amendments.  This Agreement and the
      instruments referenced herein contain the entire understanding of the parties
      with respect to the matters covered herein and therein and, except as
      specifically set forth herein or therein, neither the Company nor the Buyer
      makes any representation, warranty, covenant or undertaking with respect to
      such
      matters.  No provision of this Agreement may be waived or amended
      other than by an instrument in writing signed by the party to be charged with
      enforcement.

     

    f.  Notices.  Any
      notices required or permitted to be given under the terms of this Agreement
      shall be sent by certified or registered mail (return receipt requested) or
      delivered personally or by courier (including a recognized overnight delivery
      service) or by facsimile and shall be effective five days after being placed
      in
      the mail, if mailed by regular United States mail, or upon receipt, if delivered
      personally or by courier (including a recognized overnight delivery service)
      or
      by facsimile, in each case addressed to a party.  The addresses for
      such communications shall be:

     

    If
      to the
      Company:

    


    Avitar
      Inc.

     

    65
      Dan
      Road

     

    Canton,
      MA 02021

     

    Attention:
      Chief Executive Officer

     

    Telephone:  (781)
      821-2440

     

    Facsimile:
      (781)

     

    With
      a
      copy to:

     

    
      Dolgenos
        Newman & Cronin LLP

    

    271
      Madison Avenue

    New
      York,
      NY  10016

    Attention:   Eugene
      Cronin, Esq.

    Telephone:  (212)
      925-2800

    Facsimile:   (212)
      925-0690

     

    If
      to a
      Buyer:  To the address set forth immediately below such Buyer’s name
      on the signature pages hereto.

     

    With
      copy
      to:

    


    Ballard
      Spahr Andrews & Ingersoll, LLP

     

    1735
      Market Street

     

    51st
      Floor

     

    Philadelphia,
      Pennsylvania  19103

     

    Attention:  Gerald
      J. Guarcini, Esq.

     

    Telephone:  215-864-8625

     

    Facsimile:  215-864-8999

     

    


     

    Each
      party shall provide notice to the other party of any change in
      address.

     

    g.  Successors
      and Assigns.  This Agreement shall be binding upon and
      inure to the benefit of the parties and their successors and
      assigns.  Neither the Company nor any Buyer shall assign this
      Agreement or any rights or obligations hereunder without the prior written
      consent of the other.

     

    h.  Third
      Party Beneficiaries.  This Agreement is intended for the
      benefit of the parties hereto and their respective permitted successors and
      assigns, and is not for the benefit of, nor may any provision hereof be enforced
      by, any other person.

     

    i.  Survival.  The
      representations and warranties of the Company and the agreements and covenants
      set forth in Sections 3, 4, 5 and 8 shall survive the closing hereunder
      notwithstanding any due diligence investigation conducted by or on behalf of
      the
      Buyers.  The Company agrees to indemnify and hold harmless each of the
      Buyers and all their officers, directors, employees and agents for loss or
      damage arising as a result of or related to any breach or alleged breach by
      the
      Company of any of its representations, warranties and covenants set forth in
      Sections 3 and 4 hereof or any of its covenants and obligations under this
      Agreement or the Registration Rights Agreement, including advancement of
      expenses as they are incurred.

     

    j.  Publicity.  The
      Company and each of the Buyers shall have the right to review a reasonable
      period of time before issuance of any press releases, SEC, OTCBB or NASD
      filings, or any other public statements with respect to the transactions
      contemplated hereby; provided, however, that the Company shall be
      entitled, without the prior approval of each of the Buyers, to make any press
      release or SEC, OTCBB (or other applicable trading market) or NASD filings
      with
      respect to such transactions as is required by applicable law and regulations
      (although each of the Buyers shall be consulted by the Company in connection
      with any such press release prior to its release and shall be provided with
      a
      copy thereof and be given an opportunity to comment thereon).

     

    k.  Further
      Assurances.  Each party shall do and perform, or cause to
      be done and performed, all such further acts and things, and shall execute
      and
      deliver all such other agreements, certificates, instruments and documents,
      as
      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.

     

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

     

    m.  Remedies.  The
      Company acknowledges that a breach by it of its obligations hereunder will
      cause
      irreparable harm to the Buyers by vitiating the intent and purpose of the
      transaction contemplated hereby.  Accordingly, the Company
      acknowledges that the remedy at law for a breach of its obligations under this
      Agreement will be inadequate and agrees, in the event of a breach or threatened
      breach by the Company of the provisions of this Agreement, that the Buyers
      shall
      be entitled, in addition to all other available remedies at law or in equity,
      and in addition to the penalties assessable herein, to an injunction or
      injunctions restraining, preventing or curing any breach of this Agreement
      and
      to enforce specifically the terms and provisions hereof, without the necessity
      of showing economic loss and without any bond or other security being
      required.

     


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF, the undersigned Buyers and the Company have caused
      this Agreement to be duly executed as of the date first above
      written.

     

    


    


    AVITAR
      INC.

    


    ________________________________

    Peter
      Phildius

    Chief
      Executive Officer

    


    


    AJW
      PARTNERS, LLC

    By:  SMS
      Group, LLC

    


    


    ______________________________________

    Corey
      S.
      Ribotsky

    Manager

    


    


    RESIDENCE:  Delaware

    


    ADDRESS:                                1044
      Northern Boulevard

    Suite
      302

    Roslyn,
      New York 11576

    Facsimile:  (516)
      739-7115

    Telephone:  (516)
      739-7110

    


    AGGREGATE
      SUBSCRIPTION AMOUNT:

    


    Aggregate
      Principal Amount of
      Notes:                                                                            $________

    Number
      of
      Warrants:                                                                                                             ________

    Aggregate
      Purchase
      Price:                                                                                                 $________


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


    


    


    AJW
      MASTER FUND, LTD.

    By:  First
      Street Manager II, LLC

    


    


    ______________________________________

    Corey
      S.
      Ribotsky

    Manager

    


    


    RESIDENCE:                                    Cayman
      Islands

    


    ADDRESS:                                AJW
      Offshore, Ltd.

    P.O.
      Box
      32021 SMB

    Grand
      Cayman, Cayman Island, B.W.I.

    


    AGGREGATE
      SUBSCRIPTION AMOUNT:

    


    Aggregate
      Principal Amount of Notes: $_______

    Number
      of
      Warrants: _______

    Aggregate
      Purchase Price: $_______


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    


    


    


    NEW
      MILLENNIUM CAPITAL PARTNERS II, LLC

     

    By:  First
      Street Manager II, LLP

     

    ____________________________________

     

    Corey
      S.
      Ribotsky

     

    Manager

     

    


    


    RESIDENCE:                                    New
      York

    


    ADDRESS:                                1044
      Northern Boulevard

    Suite
      302

    Roslyn,
      New York 11576

    Facsimile:                                (516)
      739-7115

    Telephone:                                (516)
      739-7110

    


    


    AGGREGATE
      SUBSCRIPTION AMOUNT:

    


    Aggregate
      Principal Amount of Notes: $______

    Number
      of
      Warrants: ______

    Aggregate
      Purchase Price: $______