ex10_1.htm


    
      
        

      

    

    Exhibit
10.1

     

    
      SECURITIES
PURCHASE AGREEMENT

       

      This
Securities Purchase Agreement (this “Agreement”) is dated
as of March 5, 2008 between Blue Holdings, Inc., a Nevada corporation (the
“Company”), and
each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and
collectively the “Purchasers”).

       

      WHEREAS,
subject to the terms and conditions set forth in this Agreement and pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and
Rule 506 promulgated thereunder, the Company desires to issue and sell to each
Purchaser, and each Purchaser, severally and not jointly, desires to purchase
from the Company, securities of the Company as more fully described in this
Agreement.

       

      NOW,
THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt and adequacy of which
are hereby acknowledged, the Company and each Purchaser agree as
follows:

       

      ARTICLE
I.

      DEFINITIONS

       

      1.1           Definitions.  In
addition to the terms defined elsewhere in this Agreement: (a) capitalized terms
that are not otherwise defined herein have the meanings given to such terms in
the Notes (as defined herein), and (b) the following terms have the meanings set
forth in this Section 1.1:

       

      “Action” shall have
the meaning ascribed to such term in Section 3.1(j).

       

      “Affiliate” means any
Person that, directly or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with a Person, as such terms are
used in and construed under Rule 405 under the Securities Act.  With
respect to a Purchaser, any investment fund or managed account that is managed
on a discretionary basis by the same investment manager as such Purchaser will
be deemed to be an Affiliate of such Purchaser.

       

      “Board of Directors”
means the board of directors of the Company.

       

      “Business Day” means
any day except any Saturday, any Sunday, any day which is a federal legal
holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action
to close.

       

      “Closing” shall have
the meaning ascribed to such term in Section 2.1.

       

      “Closing Date” shall
have the meaning ascribed to such term in Section 2.1.

       

      “Commission” means the
Securities and Exchange Commission.

       

      
        
          
             


          

          
             


            
              

            

          

          
             


          

        

      

       

      “Common Stock” means
the common stock of the Company, par value $0.001 per share, and any other class
of securities into which such securities may hereafter be reclassified or
changed into.

       

      “Common Stock
Equivalents” means any securities of the Company or the Subsidiaries
which would entitle the holder thereof to acquire at any time Common Stock,
including, without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or exercisable
or exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

       

      “Company Counsel”
means Stubbs Alderton & Markiles, LLP, with offices located at 15260 Ventura
Boulevard, 20th Floor,
Sherman Oaks, California 91403, fax: (818) 444-4520.

       

      “Conversion Price”
shall have the meaning ascribed to such term in the Notes.

       

      “Disclosure Schedules”
shall have the meaning ascribed to such term in Section 3.1.

       

      “Evaluation Date”
shall have the meaning ascribed to such term in Section 3.1(r).

       

      “Exchange Act” means
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.

      


      “Exempt Issuance”
means the issuance of (a) shares of Common Stock or options to employees,
officers or directors of the Company pursuant to any stock or option plan duly
adopted for such purpose by a majority of the non-employee members of the Board
of Directors or a majority of the members of a committee of non-employee
directors established for such purpose, (b) securities upon the exercise or
exchange of or conversion of any Securities issued hereunder and/or other
securities exercisable or exchangeable for or convertible into shares of Common
Stock issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to directly or
indirectly effectively increase the number of such securities or to decrease the
exercise, exchange or conversion price of such securities, and (c) shares of
Common Stock pursuant to an effective shelf-registration on Form S-3 in a firm
commitment underwritten primary offering with a reputable underwriter in a
single transaction with gross proceeds in excess of $5 million.

       

      “GAAP” shall have the
meaning ascribed to such term in Section 3.1(h).

       

      “Indebtedness” shall
have the meaning ascribed to such term in Section 3.1(aa).

       

      “Initial Closing”
shall have the meaning ascribed to such term in Section 2.1.

       

      “Intellectual Property
Rights” shall have the meaning ascribed to such term in Section
3.1(o).

       

      
        
          
             


          

          
            2

            
              

            

          

          
             


          

        

      

       

      “IP Security
Agreement” means the Intellectual Property Security Agreement, dated the
date hereof, by the Company in favor of the Purchasers, in the form of Exhibit D attached
hereto, securing the obligations of the Company under the Notes and other
Transaction Documents.

       

      “Legend Removal Date”
shall have the meaning ascribed to such term in Section 4.1(c).

       

      “Liens” means a lien,
charge, security interest, encumbrance, right of first refusal, preemptive right
or other restriction.

       

      “Lock Up Agreement”
means each agreement executed and delivered by beneficial owners of Common
Stock, dated the date hereof and in the form of Exhibit E attached
hereto, irrevocably agreeing not to sell or otherwise dispose of any shares of
Common Stock until such time as set forth in such Lock Up
Agreement.

       

      “Material Adverse
Effect” shall have the meaning assigned to such term in Section
3.1(b).

       

      “Material Permits”
shall have the meaning ascribed to such term in Section 3.1(m).

       

      “Maximum Rate” shall
have the meaning ascribed to such term in Section 5.17.

       

      “MFN Transaction”
shall have the meaning ascribed to such term in Section 4.13(b).

       

      “Notes” means the 8%
Senior Secured Convertible Notes due, subject to the terms therein, two (2)
years from their date of issuance, issued by the Company to the Purchasers
hereunder, in the form of Exhibit A attached
hereto.

       

      “Participation
Maximum” shall have the meaning ascribed to such term in Section
4.12.

       

      “Person” means an
individual or corporation, partnership, trust, incorporated or unincorporated
association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or other entity of any
kind.

       

      “Pre-Notice” shall
have the meaning ascribed to such term in Section 4.12.

       

      “Proceeding” means an
action, claim, suit, investigation or proceeding (including, without limitation,
an informal investigation or partial proceeding, such as a deposition), whether
commenced or threatened.

       

      “Purchaser Party”
shall have the meaning ascribed to such term in Section 4.10.

       

      “Required Approvals”
shall have the meaning ascribed to such term in Section 3.1(e).

       

      
        
          
             


          

          
            3

            
              

            

          

          
             


          

        

      

       

      “Required Minimum”
means, as of any date, the maximum aggregate number of shares of Common Stock
then issued or potentially issuable in the future pursuant to the Transaction
Documents, including any Underlying Shares issuable upon exercise or conversion
in full of all Warrants and Notes (including Underlying Shares issuable as
payment of interest), ignoring any conversion or exercise limits set forth
therein, and assuming that the Conversion Price is at all times on and after the
date of determination 75% of the then Conversion Price on the Trading Day
immediately prior to the date of determination.

       

      “Regulation 13D-G”
means Regulation 13D-G promulgated by the Commission pursuant to the Exchange
Act, as such Regulation and the Rules thereunder may be amended from time to
time, or any similar rule or regulation hereafter adopted by the Commission
having substantially the same effect as such Regulation.

       

      “Rule 144” means Rule
144 promulgated by the Commission pursuant to the Securities Act, as such Rule
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such
Rule.

       

      “SEC Reports” shall
have the meaning ascribed to such term in Section 3.1(h).

       

      “Securities” means the
Notes, the Warrants and the Underlying Shares.

       

      “Securities Act” means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.

       

      “Security Agreement”
means the Security Agreement, dated the date hereof, by the Company in favor of
the Purchasers, in the form of Exhibit C attached
hereto, securing the obligations of the Company under the Notes and other
Transaction Documents.

       

      “Security Documents”
means any and all means any and all security agreements, pledge agreements,
hypothecation agreements, collateral assignments, mortgages, deeds of trust,
control agreements and similar such agreements, executed and delivered by the
Company, any of its Subsidiaries and/or any third party in favor of the
Purchasers pursuant to the Transaction Documents which secures the Company’s
obligations under the Transaction Documents and/or any of the Securities, and
other documents executed, delivered and/or filed by the Company, any of its
Subsidiaries, any third party and/or the Purchasers as permitted or required
under any of the foregoing, including without limitation the Security Agreement
and the IP Security Agreement.

       

      “Shareholder Approval”
means such approval as may be required by the applicable rules and regulations
of the Nasdaq Stock Market (or any successor entity) from the shareholders of
the Company with respect to the transactions contemplated by the Transaction
Documents, including the issuance of all of the Underlying Shares in excess of
19.99% of the issued and outstanding Common Stock on the date of the Initial
Closing.

       

      
        
          
             


          

          
            4

            
              

            

          

          
             


          

        

      

       

      “Short Sales” means
all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act (but shall not be deemed to include the location and/or reservation of
borrowable shares of Common Stock). 

       

      “Subscription Amount”
means, as to each Purchaser, the aggregate amount to be paid for Notes and
Warrants purchased hereunder as specified below such Purchaser’s name on the
signature page of this Agreement and next to the heading “Subscription Amount,”
in United States dollars and in immediately available funds.

       

      “Subsequent Closing”
shall have the meaning ascribed to such term in Section 2.1.

       

      “Subsequent Financing”
shall have the meaning ascribed to such term in Section 4.12.

       

      “Subsequent Financing
Notice” shall have the meaning ascribed to such term in Section
4.12.

       

      “Subsidiary” means any
subsidiary of the Company as set forth on Schedule 3.1(a) and
shall, where applicable, include any direct or indirect subsidiary of the
Company formed or acquired after the date hereof.

       

      “Subsidiary Guarantee”
means the Subsidiary Guarantee, in the form attached hereto as Exhibit F, executed
by each Subsidiary in favor of the Purchasers, guaranteeing the Company’s
obligations under the Notes.

       

      “Trading Day” means a
day on which the Nasdaq Capital Market is open for trading.

       

      “Trading Market” means
the following markets or exchanges on which the Common Stock is listed or quoted
for trading on the date in question: the American Stock Exchange, the Nasdaq
Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.

       

      “Transaction
Documents” means this Agreement, the Notes, the Warrants, the Security
Documents, the Lock Up Agreements and all exhibits and schedules thereto and
hereto and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

       

      “Transfer Agent” means
Pacific Stock Transfer Company, the current transfer agent of the Company with a
mailing address of 500 East Warm Springs Road, Las Vegas, Nevada 89110, and a
facsimile number of (702) 433-1979, and any successor transfer agent of the
Company.

       

      “Underlying Shares”
means the shares of Common Stock issued and issuable upon conversion or
redemption of the Notes and upon exercise of the Warrants and issued and
issuable in lieu of the cash payment of interest on the Notes in accordance with
the terms of the Notes.

       

      
        
          
             


          

          
            5

            
              

            

          

          
             


          

        

      

       

      “Variable Rate
Transaction” shall have the meaning ascribed to such term in Section
4.13(b).

       

      “VWAP” means, for any
date, the price determined by the first of the following clauses that applies:
(a) if the Common Stock is then listed or quoted on a Trading Market, the daily
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the Trading Market on which the Common Stock is then listed
or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m.
New York City time to 4:02 p.m. New York City time); (b)  if the OTC
Bulletin Board is not a Trading Market, the volume weighted average price of the
Common Stock for such date (or the nearest preceding date) on the OTC Bulletin
Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin
Board and if prices for the Common Stock are then reported in the “Pink Sheets”
published by Pink Sheets, LLC (or a similar organization or agency succeeding to
its functions of reporting prices), the most recent bid price per share of the
Common Stock so reported; or (d) in all other cases, the fair market value
of a share of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers of a majority-in-interest of the Securities then
outstanding and reasonably acceptable to the Company, the fees and expenses of
which shall be paid by the Company.

       

      “Warrants” means the
Common Stock purchase warrants delivered to the Purchasers at any Closing in
accordance with Section 2.2(a) hereof in the form of Exhibit B
attached hereto.

       

      “Warrant Shares” means
the shares of Common Stock issuable upon exercise of the Warrants.

       

      “Weisman” means Peter
J. Weisman, P.C. with offices located at 153 East 53rd Street,
29th
Floor, New York, New York 10022.

       

      ARTICLE
II.

      PURCHASE
AND SALE

       

      2.1           Closing.  The
purchase and sale of the Notes shall take place in one or more
closings.  The first closing (“Initial Closing”)
shall take place on March 5, 2008, at 10:00 a.m., Pacific Time (the date of the
Initial Closing and each Subsequent Closing, a “Closing Date”), at
the offices of Weisman or at such other location or time or on such other date
mutually agreed upon by the Company and all of the Purchasers, subject to the
conditions precedent for a Closing as set forth in Section 2.3, and to each
party’s obligations hereunder having been satisfied or waived.  All
subsequent closings (each a “Subsequent Closing”)
shall take place within 45 days of the date of the Initial Closing, subject to
the conditions precedent for a Closing as set forth in Section 2.3, and to each
party’s obligations hereunder having been satisfied or waived.  The
Initial Closing and each Subsequent Closing shall constitute a “Closing” for purposes
of this Agreement.  Upon the terms and subject to the conditions set
forth herein, substantially concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company agrees to sell, and the Purchasers,
severally and not jointly, agree to purchase, up to, in the aggregate,
$3,000,000 in principal amount of the Notes.  On each Closing Date,
each Purchaser participating in a Closing shall deliver to the Company, via wire
transfer or a certified check, immediately available funds equal to its
Subscription Amount and the Company shall deliver to each Purchaser its
respective Note and a Warrant, as determined pursuant to Section 2.2(a), and the
Company and each Purchaser shall deliver the other items set forth in Section
2.2 deliverable at a Closing.

       

      
        
          
             


          

          
            6

            
              

            

          

          
             


          

        

      

       

      2.2           Deliveries.

       

      (a)           On
a Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:

       

      (i)            
this
Agreement duly executed by the Company;

       

      (ii)           
a legal opinion of Company Counsel, in substantially the form of Exhibit G attached
hereto;

       

      (iii)           a
Note with a principal amount equal to such Purchaser’s Subscription Amount,
registered in the name of such Purchaser;

       

      (iv)           a
Warrant, registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to 35% of such Purchaser’s Subscription Amount
divided by the initial Conversion Price of the Notes, with an exercise price
equal to $1.00, subject to
adjustment therein, exercisable commencing 6 months and 1 day from the date
hereof for a term of five years;

       

      (v)           the
Security Documents, including without limitation the Security Agreement and the
IP Security Agreement, duly executed by the Company and each
Subsidiary;

       

      (vi)           the
Subsidiary Guarantee, duly executed by each Subsidiary of the
Company;

       

      (vii)          a
copy of an irrevocable written consent executed by the holders of a majority of
the outstanding shares of Common Stock approving the transactions contemplated
under the Transaction Documents (including without limitation the issuance of
all of the Underlying Shares in excess of 19.99% of the issued and outstanding
Common Stock on the date of the Initial Closing) as described in Section
2.3(b)(v) below; and

       

      (viii)         irrevocable
Lock Up Agreement(s) duly executed and delivered by each of Paul Guez and
Elizabeth Guez.

       

      (b)           On
a Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:

       

      (i)            
this
Agreement duly executed by such Purchaser;

       

      (ii)        
   such Purchaser’s Subscription Amount by wire transfer to the
account as specified in writing by the Company; and

       

      
        
          
             


          

          
            7

            
              

            

          

          
             


          

        

      

       

      (iii)           the
Security Documents to which each Purchaser is a party and required by law to be
signed by such Party in order to be binding.

       

      2.3           Closing
Conditions.

       

      (a)             The
obligations of the Company hereunder in connection with a Closing are subject to
the following conditions being met:

       

      (i)            
the accuracy in all material respects on the Closing Date of the representations
and warranties of the Purchasers contained herein;

       

      (ii)         
  all obligations, covenants and agreements of each Purchaser required
to be performed at or prior to the Closing Date shall have been performed;
and

       

      (iii)           the
delivery by each Purchaser of the items set forth in Section 2.2(b) of this
Agreement.

       

      (b)             The
respective obligations of the Purchasers hereunder in connection with a Closing
are subject to the following conditions being met:

       

      (i)             the
accuracy in all material respects when made and on the Closing Date of the
representations and warranties of the Company contained herein;

       

      (ii)            all
obligations, covenants and agreements of the Company required to be performed at
or prior to the Closing Date shall have been performed;

       

      (iii)           the
delivery by the Company of the items set forth in Section 2.2(a) of this
Agreement;

       

      (iv)           there
shall have been no Material Adverse Effect with respect to the Company since the
date hereof;

       

      (v)            the
Company shall have obtained the written irrevocable consent of Paul Guez, as a
stockholder holding a majority of the outstanding shares of Common Stock,
approving the transactions contemplated under the Transaction Documents
(including without limitation the issuance of all of the Underlying Shares in
excess of 19.99% of the issued and outstanding Common Stock on the date of the
Initial Closing) on or prior to the date of the Initial Closing, and the
Shareholder Approval shall be subject only to the subsequent delivery to the
Company’s shareholders of an information statement in accordance with applicable
securities laws, rules and regulations (“Information
Statement”); and

       

      (vi)      
   from the date hereof to the Closing Date, trading in the Common
Stock shall not have been suspended by the Commission or the Nasdaq Stock
Market, and, at any time prior to the Closing Date, trading in securities
generally as reported by Bloomberg L.P. shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by such service, or on any Trading Market, nor shall a
banking moratorium have been declared either by the United States or New York
State authorities nor shall there have occurred any material outbreak or
escalation of hostilities or other national or international calamity of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Securities at such
Closing.

       

      
        
          
             


          

          
            8

            
              

            

          

          
             


          

        

      

       

      2.4           Conditions
Subsequent.  It shall be a condition subsequent to closing of
the transactions contemplated hereunder that the Information Statement is
delivered to all the shareholders of the Company in accordance with all
applicable securities laws, rules and regulations such that the Shareholder
Approval becomes effective within 60 days following the date of the Initial
Closing.

       

       

      ARTICLE
III.

      REPRESENTATIONS
AND WARRANTIES

       

      3.1           Representations and
Warranties of the Company.  Except as set forth under the
corresponding section of the disclosure schedules delivered to the Purchasers
concurrently herewith (“Disclosure
Schedules”) which Disclosure Schedules shall be deemed a part hereof, the
Company hereby makes the following representations and warranties to each
Purchaser:

       

      (a)           Subsidiaries.  All
of the direct and indirect subsidiaries of the Company are set forth on Schedule
3.1(a).  The Company owns, directly or indirectly, all of the
capital stock or other equity interests of each Subsidiary free and clear of any
Liens, and all of the issued and outstanding shares of capital stock of each
Subsidiary are validly issued and are fully paid, non-assessable and free of
preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no subsidiaries, all other references
to the Subsidiaries or any of them in this Section 3.1 shall be
disregarded.

       

      (b)           Organization and
Qualification.  The Company and each of the Subsidiaries is an
entity duly incorporated or otherwise organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation or organization
(as applicable), with the requisite power and authority to own and use its
properties and assets and to carry on its business as currently
conducted.  Neither the Company nor any Subsidiary is in violation or
default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter
documents.  Each of the Company and the Subsidiaries is duly qualified
to conduct business and is in good standing as a foreign corporation or other
entity in each jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, except where the
failure to be so qualified or in good standing, as the case may be, could not
have or reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its
obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse
Effect”) and no Proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing or seeking to revoke, limit or curtail such
power and authority or qualification.  The Company has furnished to
the Purchasers true and correct copies of the Company's Articles of
Incorporation and the Company's By-Laws, as each is currently in
effect.

       

      
        
          
             


          

          
            9

            
              

            

          

          
             


          

        

      

       

      (c)           Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder.  The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary action on the part of the Company and no further action is required by
the Company, the Board of Directors or the Company’s stockholders in connection
therewith other than in connection with the Required Approvals.  Each
Transaction Document has been (or upon delivery will have been) duly executed by
the Company and, when delivered in accordance with the terms hereof and thereof,
will constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except (i) as limited by
general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may be
limited by applicable law.

       

      (d)           No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by the Company of the
other transactions contemplated hereby and thereby do not and will not: (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, or (ii) conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, result
in the creation of any Lien upon any of the properties or assets of the Company
or any Subsidiary, or give to others any rights of termination, amendment,
acceleration or cancellation (with or without notice, lapse of time or both) of,
any agreement, credit facility, debt or other instrument (evidencing a Company
or Subsidiary debt or otherwise) or other understanding to which the Company or
any Subsidiary is a party or by which any property or asset of the Company or
any Subsidiary is bound or affected (other than Liens in favor of the
Purchasers), or (iii) subject to the Required Approvals, conflict with or result
in a violation of any law, rule, regulation, order, judgment, injunction, decree
or other restriction of any court or governmental authority to which the Company
or a Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected; except in the case of each of clauses (ii) and (iii), such
as could not have or reasonably be expected to result in a Material Adverse
Effect.

       

      
        
          
             


          

          
            10

            
              

            

          

          
             


          

        

      

       

      (e)           Filings, Consents and
Approvals.  The Company is not required to obtain any consent,
waiver, authorization or order of, give any notice to, or make any filing or
registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other than
(i) filings required pursuant to Section 4.6, (ii) the notice and/or
application(s) to each applicable Trading Market for the issuance and sale of
the Securities and the listing of the Underlying Shares for trading thereon in
the time and manner required thereby, (iii) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws, and (iv) filings required under the terms of the Security
Documents (collectively, the “Required
Approvals”).

       

      (f)           Issuance of the
Securities.  The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents,
will be duly and validly issued, fully paid and nonassessable, free and clear of
all Liens imposed by the Company other than restrictions on transfer provided
for in the Transaction Documents.  The Underlying Shares, when issued
in accordance with the terms of the Transaction Documents, will be validly
issued, fully paid and nonassessable, free and clear of all Liens imposed by the
Company other than restrictions on transfer provided for in the Transaction
Documents.  The Company has reserved from its duly authorized capital
stock a number of shares of Common Stock for issuance of the Underlying Shares
at least equal to the Required Minimum on the date hereof.

       

      (g)           Capitalization.  The
capitalization of the Company is as set forth on Schedule 3.1(g),
which Schedule
3.1(g) shall also include the number of shares of Common Stock owned
beneficially, and of record, by Affiliates of the Company as of the date hereof.
The Company has not issued any capital stock since its most recently filed
periodic report under the Exchange Act, other than pursuant to the exercise of
employee stock options under the Company’s stock option plans, the issuance of
shares of Common Stock to employees pursuant to the Company’s employee stock
purchase plans and pursuant to the conversion or exercise of Common Stock
Equivalents outstanding as of the date of the most recently filed periodic
report under the Exchange Act.  No Person has any right of first
refusal, preemptive right, right of participation, or any similar right to
participate in the transactions contemplated by the Transaction
Documents.  Except as set forth on Schedule 3.1(g) and a
result of the purchase and sale of the Securities, there are no outstanding
options, warrants, scrip rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any
Subsidiary is or may become bound to issue additional shares of Common Stock or
Common Stock Equivalents. The issuance and sale of the Securities will not
obligate the Company to issue shares of Common Stock or other securities to any
Person (other than the Purchasers) and will not result in a right of any holder
of Company securities to adjust the exercise, conversion, exchange or reset
price under any of such securities. All of the outstanding shares of capital
stock of the Company are validly issued, fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and none of
such outstanding shares was issued in violation of any preemptive rights or
similar rights to subscribe for or purchase securities.  No further
approval or authorization of any stockholder, the Board of Directors or others
is required for the issuance and sale of the Securities.  There are no
stockholders agreements, voting agreements or other similar agreements with
respect to the Company’s capital stock to which the Company is a party or, to
the knowledge of the Company, between or among any of the Company’s
stockholders.

       

      
        
          
             


          

          
            11

            
              

            

          

          
             


          

        

      

       

      (h)           SEC Reports; Financial
Statements.  The Company has filed all reports, schedules,
forms, statements and other documents required to be filed by the Company under
the Securities Act and the Exchange Act, including pursuant to Section 13(a) or
15(d) thereof, for the two years preceding the date hereof (or such shorter
period as the Company was required by law or regulation to file such material)
(the foregoing materials, including the exhibits thereto and documents
incorporated by reference therein, being collectively referred to herein as the
“SEC Reports”)
on a timely basis or has received a valid extension of such time of filing and
has filed any such SEC Reports prior to the expiration of any such
extension.  As of their respective dates, the SEC Reports complied in
all material respects with the requirements of the Securities Act and the
Exchange Act, as applicable, and none of the SEC Reports, when filed, contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The financial statements of the Company included in the
SEC Reports comply in all material respects with applicable accounting
requirements and the rules and regulations of the Commission with respect
thereto as in effect at the time of filing.  Such financial statements
have been prepared in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods involved
(“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated Subsidiaries as of and
for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal,
immaterial, year-end audit adjustments.

       

      (i)           Material
Changes.  Since the date of the latest audited financial
statements included within the SEC Reports, except as specifically disclosed in
a subsequent SEC Report filed prior to the date hereof, (i) there has been no
event, occurrence or development that has had or that could reasonably be
expected to result in a Material Adverse Effect, (ii) the Company has not
incurred any liabilities (contingent or otherwise) other than (A) trade payables
and accrued expenses incurred in the ordinary course of business consistent with
past practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or disclosed in filings made with the
Commission, (iii) the Company has not altered its method of accounting, (iv) the
Company has not declared or made any dividend or distribution of cash or other
property to its stockholders or purchased, redeemed or made any agreements to
purchase or redeem any shares of its capital stock and (v) the Company has not
issued any equity securities to any officer, director or Affiliate, except
pursuant to existing Company stock option plans. The Company does not have
pending before the Commission any request for confidential treatment of
information.  Except for the issuance of the Securities contemplated
by this Agreement or as set forth on Schedule 3.1(i), no
event, liability or development has occurred or exists with respect to the
Company or its Subsidiaries or their respective business, properties, operations
or financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made or
deemed made that has not been publicly disclosed at least two Trading Days prior
to the date that this representation is made.


      
        
           


        

        
          12

          
            

          

        

        
           


        

      

       

      (j)           Litigation.  There
is no action, suit, inquiry, notice of violation, proceeding or investigation
pending or, to the knowledge of the Company, threatened against or affecting the
Company, any Subsidiary or any of their respective properties before or by any
court, arbitrator, governmental or administrative agency or regulatory authority
(federal, state, county, local or foreign) (collectively, an “Action”) which (i)
adversely affects or challenges the legality, validity or enforceability of any
of the Transaction Documents or the Securities or (ii) could, if there were an
unfavorable decision, have or reasonably be expected to result in a Material
Adverse Effect.  Neither the Company nor any Subsidiary, nor any
director or officer thereof, is or has been the subject of any Action involving
a claim of violation of or liability under federal or state securities laws or a
claim of breach of fiduciary duty.  There has not been, and to the
knowledge of the Company, there is not pending or contemplated, any
investigation by the Commission involving the Company or any current or former
director or officer of the Company.  The Commission has not issued any
stop order or other order suspending the effectiveness of any registration
statement filed by the Company or any Subsidiary under the Exchange Act or the
Securities Act.

       

      (k)           Labor
Relations.  No material labor dispute exists or, to the
knowledge of the Company, is imminent with respect to any of the employees of
the Company which could reasonably be expected to result in a Material Adverse
Effect.  None of the Company’s or its Subsidiaries’ employees is a
member of a union that relates to such employee’s relationship with the Company
or such Subsidiary, and neither the Company nor any of its Subsidiaries is a
party to a collective bargaining agreement, and the Company and its Subsidiaries
believe that their relationships with their employees are good.  No
executive officer, to the knowledge of the Company, is, or is now expected to
be, in violation of any material term of any employment contract,
confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive
covenant in favor of any third party, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.  The Company
and its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices,
terms and conditions of employment and wages and hours, except where the failure
to be in compliance could not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

       

      (l)           Compliance.  Neither
the Company nor any Subsidiary (i) is in default under or in violation of (and
no event has occurred that has not been waived that, with notice or lapse of
time or both, would result in a default by the Company or any Subsidiary under),
nor has the Company or any Subsidiary received notice of a claim that it is in
default under or that it is in violation of, any indenture, loan or credit
agreement or any other agreement or instrument to which it is a party or by
which it or any of its properties is bound (whether or not such default or
violation has been waived), including without limitation any license agreements
pursuant to which the Company licenses trademarks as licensee (including without
limitation Yanuk, Taverniti and Faith Connexion) (ii) is in violation of any
order of any court, arbitrator or governmental body, or (iii) is or has been in
violation of any statute, rule or regulation of any governmental authority,
including without limitation all foreign, federal, state and local laws
applicable to its business and all such laws that affect the environment, except
in each case as could not have or reasonably be expected to result in a Material
Adverse Effect.


      
        
           


        

        
          13

          
            

          

        

        
           


        

      

       

      (m)           Regulatory
Permits.  The Company and the Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state, local or foreign regulatory authorities necessary to conduct their
respective businesses as described in the SEC Reports, except where the failure
to possess such permits could not reasonably be expected to result in a Material
Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material
Permit.

       

      (n)           Title to
Assets.  The Company and the Subsidiaries have good and
marketable title in fee simple to all real property owned by them and good and
marketable title in all personal property owned by them that is material to the
business of the Company and the Subsidiaries, in each case free and clear of all
Liens, except for Liens as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made of
such property by the Company and the Subsidiaries and Liens for the payment of
federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties.  Any real property and facilities held under
lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company and the Subsidiaries
are in compliance.

       

      (o)           Patents and
Trademarks.  The Company and the Subsidiaries have, or have
rights to use, all patents, patent applications, trademarks, trademark
applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have could have a Material Adverse
Effect (collectively, the “Intellectual Property
Rights”).  Except as set forth in the SEC Reports, neither the
Company nor any Subsidiary has received a notice (written or otherwise) that any
of the Intellectual Property Rights used by the Company or any Subsidiary
violates or infringes upon the rights of any Person. To the knowledge of the
Company, all such Intellectual Property Rights are enforceable and, except as
set forth in the SEC Reports, there is no existing infringement by another
Person of any of the Intellectual Property Rights.  The Company and
its Subsidiaries have taken reasonable security measures to protect the secrecy,
confidentiality and value of all of their Intellectual Property Rights, except
where failure to do so could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect.

       

      
        
          
             


          

          
            14

            
              

            

          

          
             


          

        

      

       

      (p)           Insurance.  The
Company and the Subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which the Company and the Subsidiaries are
engaged, including, but not limited to, directors and officers insurance
coverage at least equal to the aggregate Subscription Amount.  Neither
the Company nor any 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 without a significant increase in cost.

       

      (q)           Transactions with Affiliates
and Employees.  Except as set forth in the SEC Reports, none of
the officers or directors of the Company and, to the knowledge of the Company,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (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
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $10,000 other than for (i) payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) other employee benefits, including stock option agreements under any stock
option plan of the Company.

       

      (r)           Sarbanes-Oxley; Internal
Accounting Controls.  The Company is in material compliance
with all provisions of the Sarbanes-Oxley Act of 2002 which are applicable to it
as of the Closing Date.  The Company and the Subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with GAAP 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. The Company has established disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
designed such disclosure controls and procedures to ensure that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms.  The
Company’s certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by the
Company’s most recently filed periodic report under the Exchange Act (such date,
the “Evaluation
Date”).  The Company presented in its most recently filed
periodic report under the Exchange Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date.  Since the Evaluation
Date, there have been no changes in the Company’s internal control over
financial reporting (as such term is defined in the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.

       

      
        
          
             


          

          
            15

            
              

            

          

          
             


          

        

      

       

      (s)           Certain
Fees.  No brokerage or finder’s fees or commissions are or will
be payable by the Company to any broker, financial advisor or consultant,
finder, placement agent, investment banker, bank or other Person with respect to
the transactions contemplated by the Transaction Documents.  The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type contemplated
in this Section that may be due in connection with the transactions contemplated
by the Transaction Documents.

       

      (t)           Private
Placement.  Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, no registration under
the Securities Act is required for the offer and sale of the Securities by the
Company to the Purchasers as contemplated hereby. The issuance and sale of the
Securities hereunder does not contravene the rules and regulations of the
Trading Market.

       

      (u)           Investment Company.
The Company is not, and is not an Affiliate of, and immediately after receipt of
payment for the Securities, will not be or be an Affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its business in a manner so that
it will not become subject to the Investment Company Act of 1940, as
amended.

       

      (v)           Registration
Rights.  No Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the
Company.

       

      (w)           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 to its knowledge 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 Commission is contemplating terminating such
registration.  Except as set forth in the SEC Reports, the Company has
not, in the 12 months preceding the date hereof, received notice from 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. Except as set forth in the SEC Reports, the
Company is, and has no reason to believe that it will not in the foreseeable
future continue to be, in compliance with all such listing and maintenance
requirements.

       

      (x)           Application of Takeover
Protections.  The Company and the Board of Directors have taken
all necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution under
a rights agreement) or other similar anti-takeover provision under the Company’s
articles of incorporation or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation as a result of the Company’s
issuance of the Securities and the Purchasers’ ownership of the
Securities.

       

      
        
          
             


          

          
            16

            
              

            

          

          
             


          

        

      

       

      (y)           Disclosure.  Except
with respect to the material terms and conditions of the transactions
contemplated by the Transaction Documents, the Company confirms that neither it
nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that it believes constitutes or
might constitute material, nonpublic information.  The Company
understands and confirms that the Purchasers will rely on the foregoing
representation in effecting transactions in securities of the
Company.  All disclosure furnished by or on behalf of the Company to
the Purchasers regarding the Company, its business and the transactions
contemplated hereby, including the Disclosure Schedules to this Agreement, is
true and correct and does not contain any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading.   The press releases disseminated by the Company
during the twelve months preceding the date of this Agreement taken as a whole
do not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made and
when made, not misleading.  The Company acknowledges and agrees that
no Purchaser makes or has made any representations or warranties with respect to
the transactions contemplated hereby other than those specifically set forth in
Section 3.2 hereof.

       

      (z)           No Integrated
Offering. Assuming the accuracy of the Purchasers’ representations and
warranties set forth in Section 3.2, neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of
(i) the Securities Act which would require the registration of any such
securities under the Securities Act, or (ii) any applicable shareholder approval
provisions of any Trading Market on which any of the securities of the Company
are listed or designated.

       

      (aa)         Solvency.  Based
on the consolidated financial condition of the Company as of the Closing Date
after giving effect to the receipt by the Company of the proceeds from the sale
of the Securities hereunder, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the
Company’s existing debts and other liabilities (including known contingent
liabilities) as they mature, (ii) the Company’s assets do not constitute
unreasonably small capital to carry on its business as now conducted and as
proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and
projected capital requirements and capital availability thereof, and (iii) the
current cash flow of the Company, together with the proceeds the Company would
receive, were it to liquidate all of its assets, after taking into account all
anticipated uses of the cash, would be sufficient to pay all amounts on or in
respect of its liabilities when such amounts are required to be
paid.  The Company does not intend to incur debts beyond its ability
to pay such debts as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debt).  The Company has no
knowledge of any facts or circumstances which lead it to believe that it will
file for reorganization or liquidation under the bankruptcy or reorganization
laws of any jurisdiction within one year from the Closing Date.  Schedule 3.1(aa) sets
forth as of the date hereof all outstanding secured and unsecured Indebtedness
of the Company or any Subsidiary, or for which the Company or any Subsidiary has
commitments.  For the purposes of this Agreement, “Indebtedness” means
(a) any liabilities for borrowed money or amounts owed in excess of $50,000
(other than trade accounts payable incurred in the ordinary course of business),
(b) all guaranties, endorsements and other contingent obligations in respect of
indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business, and (c) the present value of
any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP.  Neither the Company nor any
Subsidiary is in default with respect to any Indebtedness.

       

      
        
          
             


          

          
            17

            
              

            

          

          
             


          

        

      

       

      (bb)         Tax
Status.  Except for matters that would not, individually or in
the aggregate, have or reasonably be expected to result in a Material Adverse
Effect, the Company and each Subsidiary has filed all necessary federal, state
and foreign income and franchise tax returns and has paid or accrued all taxes
shown as due thereon, and the Company has no knowledge of a tax deficiency which
has been asserted or threatened against the Company or any
Subsidiary.

       

      (cc)         No General
Solicitation. Neither the Company nor any person acting on behalf of the
Company has offered or sold any of the Securities by any form of general
solicitation or general advertising.  The Company has offered the
Securities for sale only to the Purchasers and certain other “accredited
investors” within the meaning of Rule 501 under the Securities Act.

       

      (dd)         Foreign Corrupt
Practices.  Neither the Company, nor to the knowledge of the
Company, any agent or other person acting on behalf of the Company, has (i)
directly or indirectly, used any funds for unlawful contributions, gifts,
entertainment or other unlawful expenses related to foreign or domestic
political activity, (ii) made any unlawful payment to foreign or domestic
government officials or employees or to any foreign or domestic political
parties or campaigns from corporate funds, (iii) failed to disclose fully any
contribution made by the Company (or made by any person acting on its behalf of
which the Company is aware) which is  in violation of law, or (iv)
violated in any material respect any provision of the Foreign Corrupt Practices
Act of 1977, as amended.

       

      (ee)         Accountants.  The
Company’s accounting firm is Weinberg & Company, P.A.  To the
knowledge and belief of the Company, such accounting firm (i) is a registered
public accounting firm as required by the Exchange Act and (ii) shall express
its opinion with respect to the financial statements to be included in the
Company’s Annual Report for the year ending December 31, 2007.

       

      (ff)           Seniority.  As
of the Closing Date, except for Indebtedness to the Company’s factor, FTC
Commercial Corp., which is secured by all of the assets of the Company and its
subsidiaries, no Indebtedness or other claim against the Company is senior to
the Notes in right of payment, whether with respect to interest or upon
liquidation or dissolution, or otherwise, other than indebtedness secured by
purchase money security interests (which is senior only as to underlying assets
covered thereby) and capital lease obligations (which is senior only as to the
property covered thereby).

       

      
        
          
             


          

          
            18

            
              

            

          

          
             


          

        

      

       

      (gg)         No Disagreements with
Accountants and Lawyers.  There are no disagreements of any
kind presently existing, or reasonably anticipated by the Company to arise,
between the Company and the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees owed
to its accountants and lawyers which could affect the Company’s ability to
perform any of its obligations under any of the Transaction
Documents.

       

      (hh)         Acknowledgment Regarding
Purchasers’ Purchase of Securities.  The Company acknowledges
and agrees that each of the Purchasers is acting solely in the capacity of an
arm’s length purchaser with respect to the Transaction Documents and the
transactions contemplated thereby.  The Company further acknowledges
that no Purchaser is acting as a financial advisor or fiduciary of the Company
(or in any similar capacity) with respect to the Transaction Documents and the
transactions contemplated thereby and any advice given by any Purchaser or any
of their respective representatives or agents in connection with the Transaction
Documents and the transactions contemplated thereby is merely incidental to the
Purchasers’ purchase of the Securities.  The Company further
represents to each Purchaser that the Company’s decision to enter into this
Agreement and the other Transaction Documents has been based solely on the
independent evaluation of the transactions contemplated hereby by the Company
and its representatives.

       

      (ii)           Acknowledgment Regarding
Purchasers’ Trading Activity.  Notwithstanding anything in this
Agreement or elsewhere herein to the contrary (except for Sections 3.2(f)
and 4.15 hereof), it is understood and acknowledged by the Company that (i) none
of the Purchasers has been asked to agree by the Company, nor has any Purchaser
agreed, to desist from purchasing or selling, long and/or short, securities of
the Company, or “derivative” securities based on securities issued by the
Company or to hold the Securities for any specified term, (ii) past or future
open market or other transactions by any Purchaser, specifically including,
without limitation, Short Sales or “derivative” transactions, before or after
the closing of this or future private placement transactions, may negatively
impact the market price of the Company’s publicly-traded securities, (iii) any
Purchaser, and counter-parties in “derivative” transactions to which any such
Purchaser is a party, directly or indirectly, may presently have a “short”
position in the Common Stock, and (iv) each Purchaser shall not be deemed to
have any affiliation with or control over any arm’s length counter-party in any
“derivative” transaction.  The Company further understands and
acknowledges that (a) one or more Purchasers may engage in hedging activities at
various times during the period that the Securities are outstanding, including,
without limitation, during the periods that the value of the Underlying Shares
deliverable with respect to Securities are being determined and (b) such hedging
activities (if any) could reduce the value of the existing stockholders' equity
interests in the Company at and after the time that the hedging activities are
being conducted.  The Company acknowledges that such aforementioned hedging
activities do not constitute a breach of any of the Transaction
Documents.

       

      
        
          
             


          

          
            19

            
              

            

          

          
             


          

        

      

       

      (jj)           Regulation M
Compliance.  The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or paid any compensation for
soliciting purchases of, any of the securities of the Company or (iii) paid or
agreed to pay to any Person any compensation for soliciting another to purchase
any other securities of the Company, other than, in the case of clauses (ii) and
(iii), compensation paid to the Company’s placement agent in connection with the
placement of the Securities.

       

      (kk)         Form S-3 Eligibility.
Company is eligible to register the resale of the Underlying Shares for resale
by the Purchaser on Form S-3 promulgated under the Securities Act.

       

      (ll)           Significant
Shareholders. Except for Paul Guez and Elizabeth Guez, no Person has any
direct or indirect beneficial ownership (as determined in accordance with
Regulation 13D-G) of shares of Common Stock which exceeds in the aggregate
(together with other Persons which would constitute a “group” under Regulation
13D-G) 5% of the total number of outstanding shares of Common Stock as of the
date hereof and the Closing Date, including without limitation as a result of
any Person’s beneficial interest in a trust. For purposes of the calculations
under this paragraph, any limitations on beneficial ownership contained in any
instrument directly or indirectly convertible, exchangeable or exercisable into
or for Common Stock shall be ignored and any such instruments shall be deemed to
be currently convertible, exchangeable or exercisable in full.

       

      3.2           Representations and
Warranties of the Purchasers. Each Purchaser, for itself and for no other
Purchaser, hereby represents and warrants as of the date hereof and as of the
Closing Date to the Company as follows:

       

      (a)           Organization;
Authority.  Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization with full right, corporate or partnership power and authority to
enter into and to consummate the transactions contemplated by the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder.
The execution and delivery of the Transaction Documents and performance by such
Purchaser of the transactions contemplated by the Transaction Documents have
been duly authorized by all necessary corporate or similar action on the part of
such Purchaser.  Each Transaction Document to which it is a party has
been duly executed by such Purchaser, and when delivered by such Purchaser in
accordance with the terms hereof, will constitute the valid and legally binding
obligation of such Purchaser, enforceable against it in accordance with its
terms, except (i) as limited by general equitable principles and applicable
bankruptcy, insolvency, reorganization, moratorium and other laws of general
application affecting enforcement of creditors’ rights generally, (ii) as
limited by laws relating to the availability of specific performance, injunctive
relief or other equitable remedies and (iii) insofar as indemnification and
contribution provisions may be limited by applicable law.

       

      
        
          
             


          

          
            20

            
              

            

          

          
             


          

        

      

       

      (b)           Own
Account.  Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or
any applicable state securities law and is acquiring the Securities as principal
for its own account and not with a view to or for distributing or reselling such
Securities or any part thereof in violation of the Securities Act or any
applicable state securities law, has no present intention of distributing any of
such Securities in violation of the Securities Act or any applicable state
securities law and has no direct or indirect arrangement or understandings with
any other persons to distribute or regarding the distribution of such Securities
(this representation and warranty not limiting such Purchaser’s right to sell
the Securities pursuant to any registration statement filed under the Securities
Act or otherwise in compliance with applicable federal and state securities
laws) in violation of the Securities Act or any applicable state securities
law.  Such Purchaser is acquiring the Securities hereunder in the
ordinary course of its business.

       

      (c)           Purchaser
Status.  At the time such Purchaser was offered the Securities,
it was, and at the date hereof it is, and on each date on which it exercises any
Warrants or converts any Notes it will be either: (i) an “accredited investor”
as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the
Securities Act or (ii) a “qualified institutional buyer” as defined in Rule
144A(a) under the Securities Act.  Such Purchaser is not required to
be registered as a broker-dealer under Section 15 of the Exchange
Act.

       

      (d)           Experience of Such
Purchaser.  Such Purchaser, either alone or together with its
representatives, has such knowledge, sophistication and experience in business
and financial matters so as to be capable of evaluating the merits and risks of
the prospective investment in the Securities, and has so evaluated the merits
and risks of such investment.  Such Purchaser is able to bear the
economic risk of an investment in the Securities and, at the present time, is
able to afford a complete loss of such investment.

       

      (e)           General
Solicitation.  Such Purchaser is not purchasing the Securities
as a result of any advertisement, article, notice or other communication
regarding the Securities published in any newspaper, magazine or similar media
or broadcast over television or radio or presented at any seminar or any other
general solicitation or general advertisement.

       

      (f)           Short Sales and Confidentiality Prior To The
Date Hereof.  Other than consummating the transactions
contemplated hereunder, such Purchaser has not directly or indirectly, nor has
any Person acting on behalf of or pursuant to any understanding with such
Purchaser, executed any purchases or sales, including Short Sales, of the
securities of the Company during the period commencing from the time that such
Purchaser first received a term sheet (written or oral) from the Company or any
other Person representing the Company setting forth the material terms of the
transactions contemplated hereunder until the date hereof (“Discussion
Time”).  Notwithstanding the foregoing, in the case of a
Purchaser that is a multi-managed investment vehicle whereby separate portfolio
managers manage separate portions of such Purchaser's assets and the portfolio
managers have no direct knowledge of the investment decisions made by the
portfolio managers managing other portions of such Purchaser's assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to
other Persons party to this Agreement, such Purchaser has maintained the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this
transaction).

       

      
        
          
             


          

          
            21

            
              

            

          

          
             


          

        

      

       

      ARTICLE
IV.

      OTHER
AGREEMENTS OF THE PARTIES

       

      4.1           Transfer
Restrictions.

       

      (a)           The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any transfer of Securities other
than pursuant to an effective registration statement or Rule 144, to the Company
or to an Affiliate of a Purchaser or in connection with a pledge as contemplated
in Section 4.1(b), the Company may require the transferor thereof to provide to
the Company an opinion of counsel selected by the transferor and reasonably
acceptable to the Company, the form and substance of which opinion shall be
reasonably satisfactory to the Company, to the effect that such transfer does
not require registration of such transferred Securities under the Securities
Act.  As a condition of transfer, any such transferee shall agree in
writing to be bound by the terms of this Agreement and shall have the rights of
a Purchaser under this Agreement.

       

      (b)           The
Purchasers agree to the imprinting, so long as is required by this Section 4.1,
of a legend on any of the Securities in the following form:

       

      [NEITHER]
THIS SECURITY [NOR THE SECURITIES INTO WHICH THIS SECURITY IS [EXERCISABLE]
[CONVERTIBLE]] HAS [NOT] BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
APPLICABLE STATE SECURITIES LAWS.  THIS SECURITY [AND THE SECURITIES
ISSUABLE UPON [EXERCISE] [CONVERSION] OF THIS SECURITY] MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
SECURITIES.

       

      The
Company acknowledges and agrees that a Purchaser may from time to time pledge
pursuant to a bona fide margin agreement with a registered broker-dealer or
grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and, if required under the terms of such arrangement, such Purchaser may
transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer would not be subject to approval
of the Company and no legal opinion of legal counsel of the pledgee, secured
party or pledgor shall be required in connection therewith.  Further,
no notice shall be required of such pledge.  At the appropriate
Purchaser’s expense, the Company will execute and deliver such reasonable
documentation as a pledgee or secured party of Securities may reasonably request
in connection with a pledge or transfer of the Securities, including, if the
Securities are subject to a registration statement filed under the Securities
Act, the preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the
Securities Act to appropriately amend the list of Selling Stockholders
thereunder.


      
        
           


        

        
          22

          
            

          

        

        
           


        

      

       

      (c)           Certificates
evidencing the Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (i) while a registration statement
covering the resale of such security is effective under the Securities Act, or
(ii) if such Underlying Shares are eligible for resale under Rule 144 and the
holder thereof is not an Affiliate of the Company, or (iii) if such legend is
not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the staff of the
Commission).  If required by the Transfer Agent to effect the removal
of the legend hereunder, the Company shall cause its counsel to issue a legal
opinion to the Transfer Agent promptly after the date which is six months
following the applicable Closing Date (if the Company has been subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act for the then
preceding 90 days and has filed all reports required to be filed thereunder
during the then preceding 12 months (or such shorter period that the Company was
required to file such reports) and the holder thereof is not an Affiliate of the
Company).  If all or any portion of a Note or Warrant is converted or
exercised (as applicable) at a time when there is an effective registration
statement to cover the resale of the Underlying Shares, or if such Underlying
Shares may be sold under Rule 144 or if such legend is not otherwise required
under applicable requirements of the Securities Act (including judicial
interpretations and pronouncements issued by the staff of the Commission) then
such Underlying Shares shall be issued free of all legends.  The
Company agrees that at such time as such legend is no longer required under this
Section 4.1(c), it will, no later than three Trading Days following the delivery
by a Purchaser to the Company or the Transfer Agent of a certificate
representing Underlying Shares, as applicable, issued with a restrictive legend
(such third Trading Day, the “Legend Removal
Date”), deliver or cause to be delivered to such Purchaser a certificate
representing such shares that is free from all restrictive and other
legends.  The Company may not make any notation on its records or give
instructions to the Transfer Agent that enlarge the restrictions on transfer set
forth in this Section.  Certificates for Underlying Shares subject to
legend removal hereunder shall be transmitted by the Transfer Agent to the
Purchaser by crediting the account of the Purchaser’s prime broker with the
Depository Trust Company System as directed by such Purchaser.


      
        
           


        

        
          23

          
            

          

        

        
           


        

      

       

      (d)           In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Transfer Agent) delivered for removal
of the restrictive legend and subject to Section 4.1(c), $10 per Trading Day
(increasing to $20 per Trading Day 5 Trading Days after such damages have begun
to accrue) for each Trading Day after the Legend Removal Date until such
certificate is delivered without a legend.  Nothing herein shall limit
such Purchaser’s right to pursue actual damages for the Company’s failure to
deliver certificates representing any Securities as required by the Transaction
Documents, and such Purchaser shall have the right to pursue all remedies
available to it at law or in equity including, without limitation, a decree of
specific performance and/or injunctive relief.

       

      (e)           Each
Purchaser, severally and not jointly with the other Purchasers, agrees that such
Purchaser will sell any Securities pursuant to either Rule 144 or the
registration requirements of the Securities Act, including any applicable
prospectus delivery requirements, or an exemption therefrom, and that if
Securities are sold pursuant to a registration statement filed under the
Securities Act, they will be sold in compliance with the plan of distribution
set forth therein, and acknowledges that the removal of the restrictive legend
from certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s reliance upon this understanding.

       

      (f)           The
Company represents and warrants that, except as may otherwise be set forth in
the Disclosure Schedules, none of the Purchasers is currently nor has been, nor
upon consummation of the Closing will become, an affiliate of the Company for
purposes of Rule 144.  With respect to each Purchaser, the Company
covenants and agrees to take the position at all times in the future that such
Purchaser is not an affiliate of the Company for purposes of Rule 144 solely as
result of such Purchaser’s ownership of the Securities, except that this
covenant shall not apply if such Purchaser beneficially owns (as determined in
accordance with Regulation 13D-G of the Exchange Act) in excess of 10% of the
outstanding shares of Common Stock.

       

      4.2           Acknowledgment of
Dilution.  The Company acknowledges that the issuance of the
Securities may result in dilution of the outstanding shares of Common Stock,
which dilution may be substantial under certain market
conditions.  The Company further acknowledges that its obligations
under the Transaction Documents, including without limitation its obligation to
issue the Underlying Shares pursuant to the Transaction Documents, are
unconditional and absolute and not subject to any right of set off,
counterclaim, delay or reduction, regardless of the effect of any such dilution
or any claim the Company may have against any Purchaser and regardless of the
dilutive effect that such issuance may have on the ownership of the other
stockholders of the Company.

       

      4.3           Furnishing of
Information.  Until the earliest of the time that (i) no
Purchaser owns Securities or (ii) the Warrants have expired, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the date hereof pursuant to the Exchange Act even if the Company
is not then subject to the reporting requirements of the Exchange
Act.  As long as any Purchaser owns Securities, if the Company is not
required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144.  The Company further covenants that it will take such
further action as any holder of Securities may reasonably request, to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the requirements of the exemption
provided by Rule 144.  So long as any Securities are outstanding, the
Company shall cause itself to be subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act and timely file all reports required to
be filed thereunder.

       

      
        
          
             


          

          
            24

            
              

            

          

          
             


          

        

      

       

      4.4           Integration.  The
Company shall not sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities
Act) that would be integrated with the offer or sale of the Securities to the
Purchasers in a manner that would require the registration under the Securities
Act of the sale of the Securities to the Purchasers or that would be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.

       

      4.5           Conversion and Exercise
Procedures.  The form of Notice of Exercise included in the
Warrants and the form of Notice of Conversion included in the Notes set forth the totality
of the procedures required of the Purchasers in order to exercise the Warrants
or convert the Notes.  No additional legal opinion or other
information or instructions shall be required of the Purchasers to exercise
their Warrants or convert their Notes.  The Company shall honor
exercises of the Warrants and conversions of the Notes and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

       

      4.6           Securities Laws Disclosure;
Publicity.  The Company shall, by 8:30 a.m. (New York City
time) on the Trading Day following the date hereof, issue a Current Report on
Form 8-K disclosing the material terms of the transactions contemplated hereby
and attaching the Transaction Documents as exhibits thereto.  The
Company and each Purchaser shall consult with each other in issuing any other
press releases with respect to the transactions contemplated hereby, and neither
the Company nor any Purchaser shall issue any such press release or otherwise
make any such public statement without the prior consent of the Company, with
respect to any press release of any Purchaser, or without the prior consent of
each Purchaser, with respect to any press release of the Company, which consent
shall not unreasonably be withheld or delayed, except if such disclosure is
required by law, in which case the disclosing party shall promptly provide the
other party with prior notice of such public statement or
communication.  Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any
Purchaser in any filing with the Commission or any regulatory agency or Trading
Market, without the prior written consent of such Purchaser, except (i) as
required by federal securities law in connection with (A) any registration
statement filed under the Securities Act covering the resale of the Securities,
and (B) the filing of final Transaction Documents (including signature pages
thereto) with the Commission and (ii) to the extent such disclosure is required
by law or Trading Market regulations, in which case the Company shall provide
the Purchasers with prior notice of such disclosure permitted under this clause
(ii).

       

      
        
          
             


          

          
            25

            
              

            

          

          
             


          

        

      

       

      4.7           Shareholder Rights
Plan.  No claim will be made or enforced by the Company or,
with the consent of the Company, any other Person, that any Purchaser is an
“Acquiring Person” under any control share acquisition, business combination,
poison pill (including any distribution under a rights agreement) or similar
anti-takeover plan or arrangement in effect or hereafter adopted by the Company,
or that any Purchaser could be deemed to trigger the provisions of any such plan
or arrangement, by virtue of receiving Securities under the Transaction
Documents or under any other agreement between the Company and the
Purchasers.

       

      4.8           Non-Public
Information.  Except with respect to the material terms and
conditions of the transactions contemplated by the Transaction Documents, the
Company covenants and agrees that neither it nor any other Person acting on its
behalf will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company
understands and confirms that each Purchaser shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

       

      4.9           Use of
Proceeds.  Except as set forth on Schedule 4.9 attached
hereto, the Company shall use the net proceeds from the sale of the Securities
hereunder for working capital purposes and shall not use such proceeds for (a)
the satisfaction of any portion of the Company’s debt (other than payment of
trade payables in the ordinary course of the Company’s business and prior
practices), (b) the redemption of any Common Stock or Common Stock Equivalents
or (c) the settlement of any outstanding litigation.

       

      4.10         Indemnification of
Purchasers.   Subject to the provisions of this Section
4.10, the Company will indemnify and hold each Purchaser and its directors,
officers, shareholders, members, partners, employees and agents (and any other
Persons with a functionally equivalent role of a Person holding such titles
notwithstanding a lack of such title or any other title), each Person who
controls such Purchaser (within the meaning of Section 15 of the Securities Act
and Section 20 of the Exchange Act), and the directors, officers, shareholders,
agents, members, partners or employees (and any other Persons with a
functionally equivalent role of a Person holding such titles notwithstanding a
lack of such title or any other title) of such controlling person (each, a
“Purchaser
Party”) harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys’ fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a Purchaser
in any capacity, or any of them or their respective Affiliates, by any
stockholder of the Company who is not an Affiliate of such Purchaser, with
respect to any of the transactions contemplated by the Transaction Documents
(unless such action is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by the Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance).  If any action shall be brought against any Purchaser
Party in respect of which indemnity may be sought pursuant to this Agreement,
such Purchaser Party shall promptly notify the Company in writing, and the
Company shall have the right to assume the defense thereof with counsel of its
own choosing reasonably acceptable to the Purchaser Party.  Any
Purchaser Party shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Purchaser Party except to the extent
that (i) the employment thereof has been specifically authorized by the Company
in writing, (ii) the Company has failed after a reasonable period of time to
assume such defense and to employ counsel or (iii) in such action there is, in
the reasonable opinion of such separate counsel, a material conflict on any
material issue between the position of the Company and the position of such
Purchaser Party, in which case the Company shall be responsible for the
reasonable fees and expenses of no more than one such separate
counsel.  The Company will not be liable to any Purchaser Party under
this Agreement (i) for any settlement by a Purchaser Party effected without the
Company’s prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party’s breach of any of
the representations, warranties, covenants or agreements made by such Purchaser
Party in this Agreement or in the other Transaction Documents.

       

      
        
          
             


          

          
            26

            
              

            

          

          
             


          

        

      

       

      4.11         Reservation and Listing of
Securities.

       

      (a)           The
Company shall maintain a reserve from its duly authorized shares of Common Stock
for issuance pursuant to the Transaction Documents in such amount as may be
required to fulfill its obligations in full under the Transaction
Documents.

       

      (b)           If,
on any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock is less than the Required Minimum on such date, then the
Board of Directors shall use commercially reasonable efforts to amend the
Company’s certificate or articles of incorporation to increase the number of
authorized but unissued shares of Common Stock to at least the Required Minimum
at such time, as soon as possible and in any event not later than the 75th day
after such date.

       

      (c)           The
Company shall (i) in the time and manner required by the principal Trading
Market, prepare and file with such Trading Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the
Required Minimum on the date of such application, (ii) take all steps necessary
to cause such shares of Common Stock to be approved for listing on such Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers evidence
of such listing, and (iv) maintain the listing of such Common Stock on any date
at least equal to the Required Minimum on such date on such Trading Market or
another Trading Market.

       

      (d)           The
Company shall cause the Information Statement to be delivered to all the
shareholders of the Company in accordance with all applicable securities laws,
rules and regulations within 60 days following the date of the Initial Closing
and cause the Shareholder Approval to become effective within such time
period.  If for any reason such Shareholder Approval does not become
effective within such 60-day period, without limiting any of the Purchasers’
rights or remedies hereunder the Company shall hold a special meeting of
shareholders (which may also be at the annual meeting of shareholders) no later
than June 30, 2008 for the purpose of obtaining Shareholder Approval, with the
recommendation of the Company’s Board of Directors that such proposal be
approved, and the Company shall solicit proxies from its shareholders in
connection therewith in the same manner as all other management proposals in
such proxy statement and all management-appointed proxyholders shall vote their
proxies in favor of such proposal.  If the Company does not obtain
Shareholder Approval at the first such meeting, the Company shall call a meeting
every four months thereafter to seek Shareholder Approval until the earlier of
the date Shareholder Approval is obtained or the Notes are no longer
outstanding.

       

      
        
          
             


          

          
            27

            
              

            

          

          
             


          

        

      

       

      4.12         Participation in Future
Financing.

       

      (a)           From
the date hereof until the date that is the 12 month anniversary of the date of
the Initial Closing, upon any issuance by the Company or any of its Subsidiaries
of Common Stock or Common Stock Equivalents (a “Subsequent
Financing”), each Purchaser shall have the right to participate in up to
an amount of the Subsequent Financing equal to 100% of the Subsequent Financing
(the “Participation
Maximum”) on the same terms, conditions and price provided for in the
Subsequent Financing.

       

      (b)           At
least 5 Trading Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Purchaser a written notice of its intention to
effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing
Notice”).  Upon the request of a Purchaser, and only upon a
request by such Purchaser, for a Subsequent Financing Notice, the Company shall
promptly, but no later than 1 Trading Day after such request, deliver a
Subsequent Financing Notice to such Purchaser.  The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder
and the Person or Persons through or with whom such Subsequent Financing is
proposed to be effected and shall include a term sheet or similar document
relating thereto as an attachment.

       

      (c)           Any
Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City time)
on the 5th Trading
Day after all of the Purchasers have received the Pre-Notice that the Purchaser
is willing to participate in the Subsequent Financing, the amount of the
Purchaser’s participation, and that the Purchaser has such funds ready, willing,
and available for investment on the terms set forth in the Subsequent Financing
Notice.  If the Company receives no notice from a Purchaser as of such
5th
Trading Day, such Purchaser shall be deemed to have notified the Company that it
does not elect to participate.

       

      (d)           If
by 5:30 p.m. (New York City time) on the 5th Trading
Day after all of the Purchasers have received the Pre-Notice, notifications by
the Purchasers of their willingness to participate in the Subsequent Financing
(or to cause their designees to participate) is, in the aggregate, less than the
total amount of the Subsequent Financing, then the Company may effect the
remaining portion of such Subsequent Financing on the terms and with the Persons
set forth in the Subsequent Financing Notice.

       

      
        
           


        

        
          28

          
            

          

        

        
           


        

      

       

      (e)           If
by 5:30 p.m. (New York City time) on the 5th Trading
Day after all of the Purchasers have received the Pre-Notice, the Company
receives responses to a Subsequent Financing Notice from Purchasers seeking to
purchase more than the aggregate amount of the Participation Maximum, each such
Purchaser shall have the right to purchase its Pro Rata Portion (as defined
below) of the Participation Maximum.  “Pro Rata Portion”
means the ratio of (x) the Subscription Amount of Securities purchased on the
applicable Closing Date by a Purchaser participating under this Section 4.12 and
(y) the sum of the aggregate Subscription Amounts of Securities purchased by all
Purchasers participating under this Section 4.12.

       

      (f)           The
Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above in
this Section 4.12, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice.

       

      (g)           Notwithstanding
the foregoing, this Section 4.12 shall not apply (i) in respect of an Exempt
Issuance, or (ii) as to any particular Purchaser, to the extent that such
Purchaser, following its participation in such Subsequent Financing, would
(together with its Affiliates, and any other person or entity acting as a group
together with such Purchaser or any of its Affiliates) beneficially own in
excess of 9.9% of the Company’s outstanding Common Stock (as such beneficial
ownership is calculated in accordance with Section 4(c) of the
Notes).

       

      4.13         Subsequent Equity
Sales.

       

      (a)           From
the date hereof until the first anniversary of the date of the Initial Closing,
neither the Company nor any Subsidiary shall issue shares of Common Stock or
Common Stock Equivalents without the prior written consent of the
Purchasers.

       

      (b)           From
the date hereof until such time as no Purchaser holds any of the Securities, the
Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a Variable Rate Transaction or MFN
Transaction.  “Variable Rate
Transaction” means a transaction in which the Company issues or sells (i)
any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.  “MFN Transaction”
means a transaction in which the Company issues or sells any securities to an
investor in one or a series of related capital raising transactions which grants
to such investor the right to receive additional securities or better terms
based in some manner upon future sales or issuances of Common Stock or Common
Stock Equivalents on terms more favorable than those granted to such investor in
such capital raising transaction(s).

       

      
        
           


        

        
          29

          
            

          

        

        
           


        

      

       

      (c)           From
the date hereof until the date that the Notes and Warrants are no longer
outstanding, neither the Company nor any Subsidiary, as applicable, shall sell
or grant any option to purchase or sell or grant any right to reprice, or
otherwise dispose of or issue (or announces any sale, grant or any option to
purchase or other disposition) any Common Stock or Common Stock Equivalents
entitling any Person to acquire shares of Common Stock at an effective price per
share that is lower than $0.80, subject to adjustment for reverse and forward
stock splits, stock dividends, stock combinations and other similar transactions
of the Common Stock that occur after the date of this Agreement (if the holder
of the Common Stock or Common Stock Equivalents so issued shall at any time,
whether by operation of purchase price adjustments, reset provisions, floating
conversion, exercise or exchange prices or otherwise, or due to warrants,
options or rights per share which are issued in connection with such issuance,
be entitled to receive shares of Common Stock at an effective price per share
that is lower than the Exercise Price, such issuance shall be deemed to have
occurred for less than the Exercise Price on such date of such
issuance).

       

      (d)           Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction or MFN Transaction shall be
an Exempt Issuance.

       

      4.14        
Equal Treatment of
Purchasers.  No consideration shall be offered or paid to any
Person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents unless the same consideration is also offered to
all of the parties to the Transaction Documents. Further, the Company shall not
make any payment of principal or interest on the Notes in amounts which are
disproportionate to the respective principal amounts outstanding on the Notes at
any applicable time.  For clarification purposes, this provision
constitutes a separate right granted to each Purchaser by the Company and
negotiated separately by each Purchaser, and is intended for the Company to
treat the Purchasers as a class and shall not in any way be construed as the
Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

       

      4.15       
Short Sales and
Confidentiality After The Date Hereof.  Each Purchaser,
severally and not jointly with the other Purchasers, covenants that neither it
nor any Affiliate acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period commencing at the Discussion Time
and ending at the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.6.  Each Purchaser,
severally and not jointly with the other Purchasers, covenants that until such
time as the transactions contemplated by this Agreement are publicly disclosed
by the Company as described in Section 4.6, such Purchaser will maintain the
confidentiality of the existence and terms of this transaction and the
information included in the Disclosure Schedules.  Notwithstanding the
foregoing, no Purchaser makes any representation, warranty or covenant hereby
that it will not engage in Short Sales in the securities of the Company after
the time that the transactions contemplated by this Agreement are first publicly
announced as described in Section 4.6.  Notwithstanding the foregoing, in
the case of a Purchaser that is a multi-managed investment vehicle whereby
separate portfolio managers manage separate portions of such Purchaser’s assets
and the portfolio managers have no direct knowledge of the investment decisions
made by the portfolio managers managing other portions of such Purchaser’s
assets, the covenant set forth above shall only apply with respect to the
portion of assets managed by the portfolio manager that made the investment
decision to purchase the Securities covered by this Agreement.

       

      
        
           


        

        
          30

          
            

          

        

        
           


        

      

       

      4.16         Form D; Blue Sky
Filings.  The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy
thereof, promptly upon request of any Purchaser. The Company shall take such
action as the Company shall reasonably determine is necessary in order to obtain
an exemption for, or to qualify the Securities for, sale to the Purchasers at a
Closing under applicable securities or “Blue Sky” laws of the states of the
United States, and shall provide evidence of such actions promptly upon request
of any Purchaser.

       

      4.17        [Intentionally
left blank]

       

      4.18         Piggy-Back
Registration.  If the Company shall determine to prepare and
file with the Commission a registration statement relating to an offering for
its own account or the account of others under the Securities Act of any of its
equity securities (other than on Form S-3, Form S-4 or Form S-8 (each as
promulgated under the Securities Act) or its then equivalents relating to equity
securities to be issued in a primary offering by the Company, solely in
connection with any acquisition of any entity or business or issuable in
connection with stock option or other employee benefit plans, respectively),
then the Company shall send to each Purchaser written notice of such
determination and, if within seven (7) Business Days after receipt of such
notice, any such Purchaser shall so request in writing (which request shall
specify the Underlying Shares intended to be disposed of by the Purchaser), the
Company will cause the registration under the Securities Act of all Underlying
Shares which the Company has been so requested to register by the Purchaser, to
the extent required to permit the disposition of such Underlying Shares so to be
registered.  The Company shall include in such registration statement
all or any part of such Underlying Shares such Purchaser requests to be
registered; provided, however, that the Company shall not be required to
register any Underlying Shares pursuant to this Section that are eligible for
sale pursuant to Rule 144 of the Securities Act, or that the Company determines,
acting in its sole and absolute discretion, would cause the registration
statement to not comply with the provisions of Rule 415, as promulgated under
the Securities Act and interpreted by the staff of the Securities and Exchange
Commission.  In connection with any registration of Underlying Shares
pursuant to this Section, the Company and the Purchasers participating in such
registration shall enter into a registration rights agreement containing
customary and reasonable provisions regarding the registration of
securities.

       

      4.19      
  Lock-Up
Agreements.  The Company shall enforce the provisions of the
Lock-Up Agreements and shall place or cause to be placed “stop orders” on its
books to prevent any transfer of shares of Common Stock or other securities of
the Company in violation of the Lock-Up Agreements.  The Company
agrees not to take any action or allow any act to be taken which would be
inconsistent with the Lock-Up Agreements nor amend or terminate any Lock-Up
Agreement without the consent of the Purchasers.

       

      
        
           


        

        
          31

          
            

          

        

        
           


        

      

       

      4.20         Security.  The
Company’s and any Subsidiaries’ obligations under the Notes and other
Transaction Documents shall be secured by all the assets of the Company and its
Subsidiaries.  As of any Closing, the Purchasers participating therein
shall be granted a security interest in all the assets of the Company, including
without limitation all of its Intellectual Property Rights and its ownership of
any and all Subsidiaries, and in the assets of any such Subsidiaries, to be
memorialized in the Security Documents.  The Company shall execute
such other agreements, documents and financing statements reasonably requested
by Purchasers, which will be filed at the Company’s expense with the applicable
jurisdictions and authorities.  The Company shall also execute all
such documents reasonably necessary in the opinion of the Purchasers to
memorialize and further protect the security interests described
herein.  The Purchasers may appoint a collateral agent to represent
them collectively in connection with the security interests being granted to the
Purchasers.

       

      4.21         Additional
Guarantors.   The Company shall cause each of its
Subsidiaries formed or acquired on or after the date hereof to execute and
deliver to the Purchasers a Subsidiary Guarantee and a Security Agreement in
conformity with those executed and delivered at the Closings.

       

      ARTICLE
V.

      MISCELLANEOUS

       

      5.1           Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the Initial Closing has not been consummated on or before March 20,
2008, and all Subsequent Closings have not been consummated on or before May 4,
2008; provided,
however, that
such termination will not affect the right of any party to sue for any breach by
the other party (or parties).

       

      5.2           Fees and
Expenses.  At the Initial Closing, the Company has agreed to
reimburse Gemini Strategies, LLC and/or Gemini Master Fund Ltd. (collectively,
“Gemini”) the
non-accountable sum of $25,000 for its legal fees and
expenses.  Accordingly, in lieu of the foregoing payments, the
aggregate amount that Gemini is to pay for the Securities at the Initial Closing
shall be reduced by $25,000 in lieu thereof.  In addition, the Company
shall reimburse Gemini for estimated UCC searches and filing fees, and fees and
expenses of any local or third party patent and trademark counsel engaged by
Gemini in connection with the security interests granted to the Purchasers,
which will be payable on the date of the Initial Closing out of funds otherwise
deliverable by Gemini for its Subscription Amount hereunder.  Except
as expressly set forth in the Transaction Documents to the contrary, each party
shall pay the fees and expenses of its advisers, counsel, accountants and other
experts, if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement.  The Company shall pay all transfer agent fees, stamp taxes
and other taxes and duties levied in connection with the delivery of any
Securities to the Purchasers.  The amounts set forth in this paragraph
as payable by the Company shall be so payable regardless of whether the Initial
Closing occurs.

       

      
        
           


        

        
          32

          
            

          

        

        
           


        

      

       

      5.3           Entire
Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements and
understandings, oral or written, with respect to such matters, which the parties
acknowledge have been merged into such documents, exhibits and
schedules.

       

      5.4           Notices.  Any
and all notices or other communications or deliveries required or permitted to
be provided hereunder shall be in writing and shall be deemed given and
effective on the earliest of (a) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number set forth on
the signature pages attached hereto prior to 5:30 p.m. (New York City time) on a
Trading Day, (b) the next Trading Day after the date of transmission, if such
notice or communication is delivered via facsimile at the facsimile number set
forth on the signature pages attached hereto on a day that is not a Trading Day
or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second
Trading Day following the date of mailing, if sent by U.S. nationally recognized
overnight courier service, or (d) upon actual receipt by the party to whom such
notice is required to be given.  The address for such notices and
communications shall be as set forth on the signature pages attached
hereto.

       

      5.5           Amendments;
Waivers.  No provision of this Agreement may be waived,
modified, supplemented or amended except in a written instrument signed, in the
case of an amendment, by the Company and the Purchasers of at least a majority
in interest of the Securities still held by Purchasers or, in the case of a
waiver, by the party against whom enforcement of any such waived provision is
sought.  No waiver of any default with respect to any provision,
condition or requirement of this Agreement shall be deemed to be a continuing
waiver in the future or a waiver of any subsequent default or a waiver of any
other provision, condition or requirement hereof, nor shall any delay or
omission of any party to exercise any right hereunder in any manner impair the
exercise of any such right.

       

      5.6           Headings.  The
headings herein are for convenience only, do not constitute a part of this
Agreement and shall not be deemed to limit or affect any of the provisions
hereof.

       

      5.7           Successors and
Assigns.  This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted
assigns.  The Company may not assign this Agreement or any rights or
obligations hereunder without the prior written consent of each Purchaser (other
than by merger).  Any Purchaser may assign any or all of its rights
under this Agreement to any Person to whom such Purchaser assigns or transfers
any Securities, provided that such transferee agrees in writing to be bound,
with respect to the transferred Securities, by the provisions of the Transaction
Documents that apply to the “Purchasers.”

       

      5.8           No Third-Party
Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective successors and permitted assigns and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person, except as otherwise set forth in Section 4.10.

       

      5.9           Governing
Law.  All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law
thereof.  Each party agrees that all legal proceedings concerning the
interpretations, enforcement and defense of the transactions contemplated by
this Agreement and any other Transaction Documents (whether brought against a
party hereto or its respective affiliates, directors, officers, shareholders,
employees or agents) shall be commenced exclusively in the state and federal
courts sitting in the City of New York.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting in
the City of New York, borough of Manhattan for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby
or discussed herein (including with respect to the enforcement of any of the
Transaction Documents), and hereby irrevocably waives, and agrees not to assert
in any suit, action or proceeding, any claim that it is not personally subject
to the jurisdiction of any such court, that such suit, action or proceeding is
improper or is an inconvenient venue for such proceeding.  Each party
hereby irrevocably waives personal service of process and consents to process
being served in any such suit, action or proceeding by mailing a copy thereof
via registered or certified mail or overnight delivery (with evidence of
delivery) to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing contained herein shall
be deemed to limit in any way any right to serve process in any other manner
permitted by law.   If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its reasonable attorneys’ fees and other costs and expenses incurred
with the investigation, preparation and prosecution of such action or
proceeding.

       

      
        
           


        

        
          33

          
            

          

        

        
           


        

      

       

      5.10         Survival.  The
representations and warranties shall survive the Closings and the delivery of
the Securities for the applicable statue of limitations.

       

      5.11         Execution.  This
Agreement may be executed in two or more counterparts, all of which when taken
together shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the
other party, it being understood that both parties need not sign the same
counterpart.  In the event that any signature is delivered by
facsimile transmission or by e-mail delivery of a “.pdf” or other document image
format data file, such signature shall create a valid and binding obligation of
the party executing (or on whose behalf such signature is executed) with the
same force and effect as if such facsimile or “.pdf” or other document image
format data file signature page were an original thereof.

       

      5.12         Severability. If any
term, provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their commercially reasonable
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction.  It is hereby stipulated and declared to be
the intention of the parties that they would have executed the remaining terms,
provisions, covenants and restrictions without including any of such that may be
hereafter declared invalid, illegal, void or unenforceable.

       

      
        
           


        

        
          34

          
            

          

        

        
           


        

      

       

      5.13         Rescission and Withdrawal
Right.  Notwithstanding anything to the contrary contained in
(and without limiting any similar provisions of) any of the other Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option
under a Transaction Document and the Company does not timely perform its related
obligations within the periods therein provided, then such Purchaser may rescind
or withdraw, in its sole discretion from time to time upon written notice to the
Company, any relevant notice, demand or election in whole or in part without
prejudice to its future actions and rights; provided, however, in the case
of a rescission of a conversion of a Note or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock delivered in
connection with any such rescinded conversion or exercise notice.

       

      5.14         Replacement of
Securities.  If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or
cause to be issued in exchange and substitution for and upon cancellation
thereof (in the case of mutilation), or in lieu of and substitution therefor, a
new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction.  The
applicant for a new certificate or instrument under such circumstances shall
also pay any reasonable third-party costs (including customary indemnity)
associated with the issuance of such replacement Securities.

       

      5.15         Remedies.  In
addition to being entitled to exercise all rights provided herein or granted by
law, including recovery of damages, each of the Purchasers and the Company will
be entitled to specific performance under the Transaction
Documents.  The parties agree that monetary damages may not be
adequate compensation for any loss incurred by reason of any breach of
obligations contained in the Transaction Documents and hereby agrees to waive
and not to assert in any action for specific performance of any such obligation
the defense that a remedy at law would be adequate.

       

      5.16         Payment Set Aside. To
the extent that the Company makes a payment or payments to any Purchaser
pursuant to any Transaction Document or a Purchaser enforces or exercises its
rights thereunder, and such payment or payments or the proceeds of such
enforcement or exercise or any part thereof are subsequently invalidated,
declared to be fraudulent or preferential, set aside, recovered from, disgorged
by or are required to be refunded, repaid or otherwise restored to the Company,
a trustee, receiver or any other person under any law (including, without
limitation, any bankruptcy law, state or federal law, common law or equitable
cause of action), then to the extent of any such restoration the obligation or
part thereof originally intended to be satisfied shall be revived and continued
in full force and effect as if such payment had not been made or such
enforcement or setoff had not occurred.

       

      5.17         Usury.  To
the extent it may lawfully do so, the Company hereby agrees not to insist upon
or plead or in any manner whatsoever claim, and will resist any and all efforts
to be compelled to take the benefit or advantage of, usury laws wherever
enacted, now or at any time hereafter in force, in connection with any claim,
action or proceeding that may be brought by any Purchaser in order to enforce
any right or remedy under any Transaction Document.  Notwithstanding
any provision to the contrary contained in any Transaction Document, it is
expressly agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate.  It is agreed that if
the maximum contract rate of interest allowed by law and applicable to the
Transaction Documents is increased or decreased by statute or any official
governmental action subsequent to the date hereof, the new maximum contract rate
of interest allowed by law will be the Maximum Rate applicable to the
Transaction Documents from the effective date forward, unless such application
is precluded by applicable law.  If under any circumstances
whatsoever, interest in excess of the Maximum Rate is paid by the Company to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
such excess shall be applied by such Purchaser to the unpaid principal balance
of any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser’s election.

       

      
        
           


        

        
          35

          
            

          

        

        
           


        

      

       

      5.18         Independent Nature of
Purchasers’ Obligations and Rights.  The obligations of each
Purchaser under any Transaction Document are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance or non-performance of the obligations of any other
Purchaser under any Transaction Document.  Nothing contained herein or
in any other Transaction Document, and no action taken by any Purchaser pursuant
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser
has been represented by its own separate legal counsel in their review and
negotiation of the Transaction Documents.  For reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through Weisman.  Weisman does
not represent all of the Purchasers but only Gemini.  The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.

       

      5.19         Liquidated
Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been
canceled.

       

      5.20         Saturdays, Sundays,
Holidays, etc. If the last or appointed day for the taking of any
action or the expiration of any right required or granted herein shall not be a
Business Day, then such action may be taken or such right may be exercised on
the next succeeding Business Day.

       

      5.21         Construction. The
parties agree that each of them and/or their respective counsel has reviewed and
had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.

       

      
        
          
             


          

          
            36

            
              

            

          

          
             


          

        

      

       

      5.22         Waiver of
Jury Trial.  In any action, suit or
proceeding in any jurisdiction brought by any party against any other party, the
parties each knowingly and intentionally, to the greatest extent permitted by
applicable law, hereby absolutely, unconditionally, irrevocably and expressly
waives forever trial by jury.

       

       

      (Signature
Pages Follow)


      
        
           


        

        
          37

          
            

          

        

        
           


        

      


      IN
WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

       

      
        	
                Blue
      Holdings, Inc.

              	 
      	
                Address
      for Notice:

              	 
	 
      	 
      	
                5804
      East Slauson Avenue

              	 
	 
      	 
      	
                Commerce,
      California 90040

              	 
	
                By: 
      

              	
                /s/ Glenn S. Palmer

              	 
      	
                Fax:
      (323)

              	
                 

              	 
	 
      	
                Name:
      Glenn S. Palmer

              	 
      	 
      	 
      	 
	 
      	
                Title:
      Chief Executive Officer

              	 
      	 
      	 
      	 
	 
      	 
      	 
      	 
      	 
      	 
	
                With
      a copy to (which shall not constitute notice):

              	 
      	 
      	 
      	 
	 
      	 
      	 
      	 
      	 
      	 
	 
      	 
      	 
      	 
      	 
      	 


      

      


      


      [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK

      SIGNATURE
PAGES FOR PURCHASERS FOLLOWS]

       

      
        
          
             


          

          
            38

            
              

            

          

          
             


          

        

      

      


      [PURCHASER
SIGNATURE PAGES TO BLUE SECURITIES PURCHASE AGREEMENT]

      


      IN
WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
to be duly executed by their respective authorized signatories as of the date
first indicated above.

       

      
        	
                Name
      of Purchaser:

              	
                GEMINI
      MASTER FUND, LTD.

              


      

      By:
GEMINI STRATEGIES, LLC, as investment manager

       

      
        	
                Signature of Authorized
      Signatory of Purchaser:

              	
                /s/ Steven Winters

              	 
      


      

       

      Name of
Authorized Signatory: Steven Winters

       

      Title of
Authorized Signatory: President

       

      Email
Address of Purchaser: steve@geministrategies.com

       

      Facsimile
Number of Purchaser: (858) 509-8808

       

      Address
for Notice of Purchaser:

      


      
        	
                c/o
      Gemini Strategies, LLC

              	
                with
      copy to

              
	
                12220
      El Camino Real, Ste. 400

              	
                Peter
      J. Weisman, P.C.

              
	
                San
      Diego, CA 92130

              	
                153
      East 53rd
      Street, 29th
      Floor

              
	
                Attn:  Steven
      Winters

              	
                New
      York, NY  10022

              
	
                Fax:
      (858) 509-8808

              	
                Fax:
      (212) 433-1368

              
	
                Email:  steve@geministrategies.com

              	
                Email:  pweisman@pweisman.com

              


      

      


      Address
for Delivery of Securities for Purchaser (if not same as address for
notice):

      


      


      Subscription
Amount: $2,000,000

      


      Warrant
Shares: 875,000

       

       

      39