Exhibit 4.1


 


SECURITIES
PURCHASE AGREEMENT


THIS  SECURITIES PURCHASE AGREEMENT (this “Agreement”),
dated as of August 11, 2006, by and among WORLDGATE
COMMUNICATIONS, INC., a Delaware corporation (the “Company”),
and the Buyers listed on Schedule I attached hereto (individually, a “Buyer”
or collectively “Buyers”).


WITNESSETH


WHEREAS, the
Company and the Buyer(s) are executing and delivering this Agreement in
reliance upon an exemption from securities registration pursuant to Section
4(2) and/or Rule 506 of Regulation D (“Regulation D”) as
promulgated by the U.S. Securities and Exchange Commission (the “SEC”)
under the Securities Act of 1933, as amended (the “Securities Act”);


WHEREAS, the
parties desire that, upon the terms and subject to the conditions contained
herein, the Company shall issue and sell to the Buyer(s), as provided herein,
and the Buyer(s) shall purchase up to Eleven Million Dollars ($11,000,000) of
secured convertible debentures (the “Convertible Debentures”), which
shall be convertible into shares of the Company’s common stock, par value $0.01
(the “Common Stock”) (as converted, the “Conversion Shares”), of
which Six Million Dollars ($6,000,000) shall be funded on the date hereof (the “First
Closing”), Three Million Dollars ($3,000,000) shall be funded on the date
that the stockholders of the Company approve the issuance of the Conversion
Shares and Warrant Shares (as defined herein) as contemplated by the
Transaction Documents (as defined herein) (the “Second Closing”), and
Two Million Dollars ($2,000,000) shall be funded within three (3) business days
after the date a registration statement (the “Registration Statement”),
filed with the United States Securities and Exchange Commission (the “SEC”)
pursuant to the Investor Registration Rights Agreement (as defined herein), is
declared effective by the SEC (the “Third Closing”) (individually
referred to as a “Closing” collectively referred to as the “Closings”),
for a total purchase price of up to Eleven Million Dollars ($11,000,000), (the “Purchase
Price”) in the respective amounts set forth opposite each Buyer(s) name on
Schedule I (the “Subscription Amount”);


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering an Investor Registration Rights
Agreement (the “Investor Registration Rights Agreement”) pursuant to
which the Company has agreed to provide certain registration rights under the
Securities Act and the rules and regulations promulgated there under, and
applicable state securities laws;


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
Company, WorldGate Services, Inc., WorldGate Finance, Inc., WorldGate
Acquisition Corp., Ojo Services LLC, Ojo Video Phones LLC and the Buyers are
executing and delivering a Security Agreement; (the “Security Agreement”)
pursuant to which the Company and its wholly owned subsidiaries agreed to
provide the Buyers a security interest in Pledged Property (as this term is
defined in the each Security Agreement) to secure the Company’s obligations
under this Agreement and the Transaction Documents; and









 



 


WHEREAS,
contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering Irrevocable Transfer Agent Instructions
(the “Irrevocable Transfer Agent Instructions”).


NOW, THEREFORE, in
consideration of the mutual covenants and other agreements contained in this
Agreement the Company and the Buyer(s) hereby agree as follows:


1.     PURCHASE AND SALE OF CONVERTIBLE DEBENTURES.


(a)           Purchase
of Convertible Debentures.  Subject
to the satisfaction (or waiver) of the terms and conditions of this Agreement,
each Buyer agrees, severally and not jointly, to purchase at each Closing and
the Company agrees to sell and issue to each Buyer, severally and not jointly,
at each Closing, Convertible Debentures in amounts corresponding with the
Subscription Amount set forth opposite each Buyer’s name on Schedule I hereto.


(b)           Closing
Date.  The First Closing of the
purchase and sale of the Convertible Debentures shall take place at 4:00 p.m.
Eastern Daylight Time on the date hereof, subject to notification of
satisfaction of the conditions to the First Closing set forth herein and in
Sections 6 and 7 below (or such later date as is mutually agreed to by the
Company and the Buyer(s)) (the “First Closing Date”), the Second Closing
of the purchase and sale of the Convertible Debentures shall take place at
10:00 a.m. Eastern Standard Time on the date that the stockholders of the
Company approve the issuance of the Conversion Shares and Warrant Shares as
contemplated by the Transaction Documents, subject to notification of
satisfaction of the conditions to the Second Closing set forth herein and in
Sections 6 and 7 below (or such later date as is mutually agreed to by the
Company and the Buyer(s)) (the “Second Closing Date”), and the Third
Closing of the purchase and sale of the Convertible Debentures shall take place
at 10:00 a.m. Eastern Standard Time on the third (3rd) business day immediately
following the date the Registration Statement is declared effective by the SEC,
subject to notification of satisfaction of the conditions to the Third Closing
set forth herein and in Sections 6 and 7 below (or such earlier date as is
mutually agreed to by the Company and the Buyer(s)) (the “Third Closing Date”)
(collectively referred to a the “Closing Dates”).  The Closing shall occur on the respective
Closing Dates at the offices of Yorkville Advisors, LLC, 3700 Hudson Street,
Suite 3700, Jersey City, New Jersey 07302 (or such other place as is mutually
agreed to by the Company and the Buyer(s)).


(c)           Form
of Payment.  Subject to the
satisfaction of the terms and conditions of this Agreement, on the Closing
Dates, (i) the Buyers shall deliver to the Company such aggregate proceeds for
the Convertible Debentures to be issued and sold to such Buyer(s), minus the
fees to be paid directly from the proceeds of the Closings as set forth herein,
and (ii) the Company shall deliver to each Buyer, Convertible Debentures
which such Buyer(s) is purchasing in amounts indicated opposite such Buyer’s
name on Schedule I, duly executed on behalf of the Company.


2.     BUYER’S
REPRESENTATIONS AND WARRANTIES.


Each Buyer represents and warrants, severally and not
jointly, that:



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(a)           Investment
Purpose.  Each Buyer is acquiring the
Convertible Debentures and Warrants (as defined below) and, upon conversion of
Convertible Debentures and upon exercise of the Warrants, will acquire the
Conversion Shares or Warrant Shares then issuable, as the case may be, for its
own account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the Securities Act; provided, however, that
by making the representations herein, such Buyer reserves the right to dispose
of the Conversion Shares and Warrant Shares at any time in accordance with or
pursuant to an effective registration statement covering such Conversion Shares
and Warrant Shares or an available exemption under the Securities Act.


(b)           Accredited
Investor Status.  Each Buyer is an “Accredited
Investor” as that term is defined in Rule 501(a)(3) of Regulation D.


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


(d)           Information.  Each Buyer and its advisors (and his or, its
counsel), if any, have been furnished with all materials relating to the
business, finances and operations of the Company and information he deemed
material to making an informed investment decision regarding his purchase of
the Convertible Debentures, the Conversion Shares, the Warrants and the Warrant
Shares, which have been requested by such Buyer.  Each Buyer and its advisors, if any, have been
afforded the opportunity to ask questions of the Company and its
management.  Neither such inquiries nor
any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right
to rely on the Company’s representations and warranties contained in Section 3
below.  Each Buyer understands that its
investment in the Convertible Debentures, the Conversion Shares, the Warrants
and the Warrant Shares involves a high degree of risk.  Each Buyer is in a position regarding the
Company, which, based upon employment, family relationship or economic
bargaining power, enabled and enables such Buyer to obtain information from the
Company in order to evaluate the merits and risks of this investment.  Each Buyer has sought such accounting, legal
and tax advice, as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Convertible Debentures, the
Conversion Shares, the Warrants and the Warrant Shares.


(e)           No
Governmental Review.  Each Buyer
understands that no United States federal or state agency or any other
government or governmental agency has passed on or made any recommendation or
endorsement of the Convertible Debentures, the Conversion Shares, the Warrants
and the Warrant Shares, or the fairness or suitability of the investment in the
Convertible Debentures, the Conversion Shares, the Warrants and the Warrant
Shares, nor have such authorities passed upon or endorsed the merits of the
offering of the Convertible Debentures, the Conversion Shares, the Warrants and
the Warrant Shares.



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(f)            Transfer
or Resale.  Each Buyer understands
that except as provided in the Investor Registration Rights Agreement: (i) the
Convertible Debentures and the Warrants have not been and are not being
registered under the Securities Act or any state securities laws, and may not
be offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, or (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration requirements; (ii)
any sale of such securities made in reliance on Rule 144 under the Securities
Act (or a successor rule thereto) (“Rule 144”) may be made
only in accordance with the terms of Rule 144 and further, if Rule 144 is not
applicable, any resale of such securities under circumstances in which the
seller (or the person through whom the sale is made) may be deemed to be
an underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such securities under the Securities
Act or any state securities laws or to comply with the terms and conditions of
any exemption thereunder.  The Company
reserves the right to place stop transfer instructions against the shares and
certificates for the Conversion Shares and Warrant Shares.


(g)           Legends.  Each Buyer understands that the certificates
or other instruments representing the Convertible Debentures, the Conversion Shares,
the Warrants or the Warrant Shares shall bear a restrictive legend in
substantially the following form (and a stop ­transfer order may be placed
against transfer of such stock certificates):


THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS.  THE SECURITIES HAVE BEEN ACQUIRED
SOLELY FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TOWARD RESALE AND MAY NOT BE
OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
APPLICABLE STATE SECURITIES LAWS.


The legend set forth above shall be removed and the
Company within three (3) business days shall issue a certificate without such
legend to the holder of the Conversion Shares or Warrant Shares upon which it is
stamped, if, unless otherwise required by state securities laws, (i) in
connection with a sale transaction, provided the Conversion Shares or Warrant
Shares, as the case may be, are registered under the Securities Act or (ii) in
connection with a sale transaction, after such holder provides the Company with
an opinion of counsel, which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions, to the 



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effect that a public sale, assignment or transfer of the
Conversion Shares or Warrant Shares, as the case may be, may be made without
registration under the Securities Act.


(h)           Authorization,
Enforcement.  This Agreement has been
duly and validly authorized, executed and delivered on behalf of such Buyer and
is a valid and binding agreement of such Buyer enforceable in accordance with
its terms, except as such enforceability may be limited by general principles
of equity or applicable bankruptcy, insolvency, reorganization, moratorium,
liquidation and other similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.


(i)            Receipt
of Documents.  Each Buyer and his or
its counsel has received and read in their entirety:  (i) this Agreement and each representation,
warranty and covenant set forth herein and the Transaction Documents; (ii) all
due diligence and other information necessary to verify the accuracy and
completeness of such representations, warranties and covenants; (iii) the
Company’s Form 10-K for the fiscal year ended December 31, 2005; (iv) the
Company’s Form 10-Q for the fiscal quarter ended March 31, 2006 and (v) answers
to all questions each Buyer submitted to the Company regarding an investment in
the Company; and each Buyer has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.


(j)            Due
Formation of Corporate and Other Buyers. 
If the Buyer(s) is a corporation, trust, partnership or other entity
that is not an individual person, it has been formed and validly exists and has
not been organized for the specific purpose of purchasing the Convertible
Debentures and is not prohibited from doing so.


(k)           No
Legal Advice From the Company.  Each
Buyer acknowledges, that it had the opportunity to review this Agreement and
the transactions contemplated by this Agreement with his or its own legal
counsel and investment and tax advisors. 
Each Buyer is relying solely on such counsel and advisors and not on any
statements or representations of the Company or any of its representatives or
agents for legal, tax or investment advice with respect to this investment, the
transactions contemplated by this Agreement or the securities laws of any
jurisdiction.


3.     REPRESENTATIONS AND WARRANTIES OF THE COMPANY.


The Company represents and warrants as of the date
hereof to each of the Buyers that, except as set forth in the SEC Documents (as
defined herein) or in the Disclosure Schedule attached hereto (the “Disclosure
Schedule”):


(a)           Organization
and Qualification.  The Company and
its subsidiaries are duly organized and validly existing in good standing under
the laws of the jurisdiction in which they are organized, and have the
requisite power to own their properties and to carry on their business as now
being conducted.  Each of the Company and
its subsidiaries is duly qualified as a foreign corporation or limited
liability company to do business and is in good 



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standing in every jurisdiction in which the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries taken as a whole.


(b)           Authorization,
Enforcement, Compliance with Other Instruments.  (i) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Security Agreement, the Investor Registration Rights Agreement, the Irrevocable
Transfer Agent Agreement, and any related agreements (collectively the “Transaction
Documents”) and to issue the Convertible Debentures and the Conversion
Shares in accordance with the terms hereof and thereof, (ii) the execution and
delivery of the Transaction Documents by the Company and the consummation by it
of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Convertible Debentures, the Conversion
Shares  and the reservation for issuance
and the issuance of the Conversion Shares issuable upon conversion or exercise
thereof, have been duly authorized by the Company’s Board of Directors and no
further consent or authorization is required by the Company, its Board of
Directors or its stockholders, (iii) the Transaction Documents have been duly
executed and delivered by the Company, (iv) the Transaction Documents
constitute the valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as such enforceability may
be limited by general principles of equity or applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating
to, or affecting generally, the enforcement of creditors’ rights and
remedies.  The authorized officer of the
Company executing the Transaction Documents knows of no reason why the Company
cannot file the registration statement as required under the Investor
Registration Rights Agreement or perform any of the Company’s other obligations
under such documents.


(c)           Capitalization.  The authorized capital stock of the Company
consists of 80,000,000 shares of Common Stock and 13,500,000 shares of
Preferred Stock, par value $0.01 (“Preferred Stock”) of which 39,898,110
shares of Common Stock and 166 shares of Preferred Stock are issued and
outstanding.  All of such outstanding
shares have been validly issued and are fully paid and nonassessable.  No shares of Common Stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company.  As
of the date of this Agreement, (i) there are no outstanding options, warrants,
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its subsidiaries or options, warrants, scrip, rights to
subscribe to, calls or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock of the
Company or any of its subsidiaries, (ii) there are no outstanding debt securities
and (iii) there are no agreements or arrangements under which the Company or
any of its subsidiaries is obligated to register the sale of any of their
securities under the Securities Act (except pursuant to the Registration Rights
Agreement) and (iv) there are no outstanding registration statements and there
are no outstanding comment letters from the SEC or any other regulatory
agency.  There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Convertible Debentures as described in this
Agreement.  The Company has furnished to
the Buyer true and correct copies of the Company’s Certificate of
Incorporation, as amended and as in effect on the date hereof (the “Certificate
of Incorporation”), and the Company’s By-laws, as in effect on the date
hereof (the 



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“By-laws”), and the terms of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof in
respect thereto other than stock options issued to employees and consultants.


(d)           Issuance
of Securities.  The Convertible
Debentures are duly authorized and, upon issuance in accordance with the terms
hereof, shall be duly issued, fully paid and nonassessable, are free from all
taxes, liens and charges with respect to the issue thereof.  The Conversion Shares issuable upon
conversion of the Convertible Debentures have been duly authorized and reserved
for issuance.  Upon conversion or
exercise in accordance with the Convertible Debentures the Conversion Shares
will be duly issued, fully paid and nonassessable.


(e)           No
Conflicts.  The execution, delivery
and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby will not (i)
result in a violation of the Certificate of Incorporation, any certificate of
designations of any outstanding series of preferred stock of the Company or the
By-laws or (ii) conflict with or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
any agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations and the rules and regulations of the Nasdaq Capital Market on which
the Common Stock is quoted) applicable to the Company or any of its subsidiaries
or by which any property or asset of the Company or any of its subsidiaries is
bound or affected.  Neither the Company
nor its subsidiaries is in violation of any term of or in default under its
Certificate of Incorporation or By-laws or their organizational charter or
by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries.  The business of the Company and its
subsidiaries is not being conducted, and shall not be conducted in violation of
any material law, ordinance, or regulation of any governmental entity.  Except as specifically contemplated by this
Agreement and as required under the Securities Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof.  All consents, authorizations, orders, filings
and registrations which the Company is required to obtain pursuant to the
preceding sentence have been obtained or effected on or prior to the date
hereof.  The Company and its subsidiaries
are unaware of any facts or circumstance, which might give rise to any of the
foregoing.


(f)            SEC
Documents: Financial Statements. 
Since January 1, 2005, the Company has filed all reports, schedules,
forms, statements and other documents required to be filed by it with the SEC
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
(all of the foregoing filed prior to the date hereof or amended after the date
hereof and all exhibits included therein and financial statements and schedules
thereto and documents incorporated by reference therein, being hereinafter
referred to as the “SEC Documents”). 
The Company has delivered to the Buyers or their representatives, or
made available through the 



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SEC’s website at http://www.sec.gov., true and complete copies of the
SEC Documents.  As of their respective
dates, the financial statements of the Company disclosed in the SEC Documents
(the “Financial Statements”) complied as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto. 
Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such Financial
Statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and, fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).  No other information provided by or on behalf
of the Company to the Buyer which is not included in the SEC Documents,
including, without limitation, information referred to in this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.


(g)           10(b)-5.  The SEC Documents do not include any untrue
statements of material fact, nor do they omit to state any material fact
required to be stated therein necessary to make the statements made, in light
of the circumstances under which they were made, not misleading.


(h)           Absence
of Litigation.  There is no action,
suit, proceeding, inquiry or investigation before or by any court, public
board, government agency, self-regulatory organization or body pending against
or affecting the Company, the Common Stock or any of the Company’s
subsidiaries, wherein an unfavorable decision, ruling or finding would (i) have
a material adverse effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein, or (iii) have a material adverse effect on the
business, operations, properties, financial condition or results of  operations of the Company and its subsidiaries
taken as a whole.


(i)            Acknowledgment
Regarding Buyer’s Purchase of the Convertible Debentures.  The Company acknowledges and agrees that the
Buyer(s) is acting solely in the capacity of an arm’s length purchaser with
respect to this Agreement and the transactions contemplated hereby.  The Company further acknowledges that the
Buyer(s) is not acting as a financial advisor or fiduciary of the Company (or
in any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by the Buyer(s) or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to such Buyer’s purchase
of the Convertible Debentures or the Conversion Shares.  The Company further represents to the Buyer
that the Company’s decision to enter into this Agreement has been based solely
on the independent evaluation by the Company and its representatives.


(j)            No
General Solicitation.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf, has engaged in any form of general 



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solicitation or general advertising (within the meaning of Regulation D
under the Securities Act) in connection with the offer or sale of the Convertible
Debentures or the Conversion Shares.


(k)           No
Integrated Offering.  Neither the
Company, nor any of its affiliates, nor any person acting on its or their
behalf has, directly or indirectly, made any offers or sales of any security or
solicited any offers to buy any security, under circumstances that would
require registration of the Convertible Debentures or the Conversion Shares
under the Securities Act or cause this offering of the Convertible Debentures
or the Conversion Shares to be integrated with prior offerings by the Company
for purposes of the Securities Act.


(l)            Employee
Relations.  Neither the Company nor
any of its subsidiaries is involved in any labor dispute nor, to the knowledge
of the Company or any of its subsidiaries, is any such dispute threatened.  None of the Company’s or its subsidiaries’
employees is a member of a union and the Company and its subsidiaries believe
that their relations with their employees are good.


(m)          Intellectual
Property Rights.  The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted.  The Company
and its subsidiaries do not have any knowledge of any infringement by the
Company or its subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, and, to the
knowledge of the Company there is no claim, action or proceeding being made or
brought against, or to the Company’s knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing.


(n)           Environmental
Laws.  The Company and its
subsidiaries are (i) in compliance with any and all applicable foreign,
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants (“Environmental Laws”), (ii) have
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
are in compliance with all terms and conditions of any such permit, license or
approval.


(o)           Title.  Any real property and facilities held under
lease by the Company and its subsidiaries are held by them under valid,
subsisting and enforceable leases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.


(p)           Insurance.  The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses 



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in which the Company and its subsidiaries are engaged.  Neither the Company nor any such subsidiary
has been refused any insurance coverage sought or applied for and neither the
Company nor any such subsidiary has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely affect
the condition, financial or otherwise, or the earnings, business or operations
of the Company and its subsidiaries, taken as a whole.


(q)           Regulatory
Permits.  The Company and its
subsidiaries possess all material certificates, authorizations and permits
issued by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the Company nor
any such subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.


(r)            Internal
Accounting Controls.  The Company and
each of its 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 generally accepted accounting principles and to
maintain asset accountability, and (iii) the recorded amounts for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.


(s)           No
Material Adverse Breaches, etc. 
Neither the Company nor any of its subsidiaries is subject to any charter,
corporate or other legal restriction, or any judgment, decree, order, rule or
regulation which in the judgment of the Company’s officers has or is expected
in the future to have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.  Neither the
Company nor any of its subsidiaries is in breach of any contract or agreement
which breach, in the judgment of the Company’s officers, has or is expected to
have a material adverse effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries.


(t)            Tax
Status.  The Company and each of its
subsidiaries has made and filed all federal and state income and all other tax
returns, reports and declarations required by any jurisdiction to which it is
subject and (unless and only to the extent that the Company and each of its
subsidiaries has set aside on its books provisions reasonably adequate for the
payment of all unpaid and unreported taxes) has paid all taxes and other
governmental assessments and charges that are material in amount, shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and has set aside on its books provision
reasonably adequate for the payment of all taxes for periods subsequent to the
periods to which such returns, reports or declarations apply.  There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the
officers of the Company know of no basis for any such claim.


(u)           Certain
Transactions.  Except for arm’s
length transactions pursuant to which the Company makes payments in the
ordinary course of business upon terms no less favorable than the Company could
obtain from third parties and other than the grant of 



 10
 






 



stock options disclosed in the SEC Documents, none of the officers,
directors, or employees of the Company is presently a party to any transaction
with the Company (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.


(v)           Fees
and Rights of First Refusal.  The
Company is not obligated to offer the securities offered hereunder on a right
of first refusal basis or otherwise to any third parties including, but not
limited to, current or former stockholders of the Company, underwriters,
brokers, agents or other third parties.


4.     COVENANTS.


(a)           Best
Efforts.  Each party shall use its
best efforts to timely satisfy each of the conditions to be satisfied by it as
provided in Sections 6 and 7 of this Agreement.


(b)           Form
D.  The Company agrees to file a Form
D with respect to the Conversion Shares as required under Regulation D and to
provide a copy thereof to each Buyer promptly after such filing.  The Company shall, promptly following the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Conversion Shares, or obtain an exemption for the
Conversion Shares for sale to the Buyers at the Closing pursuant to this
Agreement under applicable securities or “Blue Sky” laws of the states of the
United States, and shall provide evidence of any such action so taken to the
Buyers promptly following the Closing Date.


(c)           Reporting
Status.  Until the earlier of (i) the
date as of which the Buyer(s) may sell all of the Conversion Shares without
restriction pursuant to Rule 144(k) promulgated under the Securities Act (or
successor thereto), or (ii) the date on which (A) the Buyer(s) shall have sold
all the Conversion Shares and (B) none of the Convertible Debentures are
outstanding (the “Registration Period”), the Company shall file in a
timely manner all reports required to be filed with the SEC pursuant to the
Exchange Act and the regulations of the SEC  
thereunder, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would otherwise permit such termination.


(d)           Use
of Proceeds.  The Company will use
the proceeds from the sale of the Convertible Debentures for general corporate
and working capital purposes.


(e)           Reservation
of Shares.  On the date hereof, the
Company shall reserve for issuance to the Buyers 7,798,333 shares for issuance
upon conversions of the Convertible Dentures and for issuance upon exercise of
the Warrants (collectively, the “Initial Share Reserve”).  The Company represents that it has sufficient
authorized and unissued shares of Common Stock available to create the Initial
Share Reserve after considering all other commitments that may require the
issuance of Common Stock.  If the Company
obtains 



 11
 






 



Stockholder Approval pursuant to Section 4(o) hereof, the Company shall
promptly increase the Initial Share Reserve by 22,201,667 shares to a total reserve of 30,000,000 shares for issuance upon conversions of
the Convertible Debentures and upon exercise of the Warrants (collectively, the
“Share Reserve”).  The Company
shall take all action reasonably necessary to at all times have authorized, and
reserved for the purpose of issuance, such number of shares of Common Stock as
shall be necessary to effect the full conversion of the Convertible Debentures
and the full exercise of the Warrants. 
If at any time the Share Reserve is insufficient to effect the full
conversion of the Convertible Debentures or the full exercise of the Warrants,
the Company shall increase the Share Reserve accordingly.  If the Company does not have sufficient
authorized and unissued shares of Common Stock available to increase the Share
Reserve, the Company shall call and hold a meeting of the stockholders within
seventy five (75) days of such occurrence (or within one hundred twenty (120)
days of such occurrence if the SEC initiates a review of any proxy statement
filed by the Company in connection with such meeting), for the purpose of
increasing the number of shares authorized. 
The Company’s management shall recommend to the stockholders to vote in
favor of increasing the number of shares of Common Stock authorized.  Management shall also vote all of its shares
in favor of increasing the number of authorized shares of Common Stock.


(f)            Listings
or Quotation.  The Company’s Common
Stock shall be listed or quoted for trading on any of (a) the American Stock
Exchange, (b) New York Stock Exchange, (c) the Nasdaq National Market, (d) the
Nasdaq Capital Market, or (e) the Nasdaq OTC Bulletin Board (“OTC”)
(each, a “Primary Market”) and the Company shall promptly secure the
listing or quotation of the Conversion Shares and Warrant Shares for trading on
the same Primary Market upon which the shares of Common Stock are then listed
or quoted.


(g)           Fees
and Expenses.


(i)            Each
of the Company and the Buyer(s) shall pay all costs and expenses incurred by
such party in connection with the negotiation, investigation, preparation,
execution and delivery of the Transaction Documents.  The Company shall pay Yorkville Advisors LLC
a fee equal to six percent (6%) of the Purchase Price, payable pro rata at each
Closing.


(ii)           The
Company has paid a structuring fee to Yorkville Advisors LLC of Twenty Thousand
Dollars ($20,000).


(iii)          The
Company has paid Yorkville Advisors, LLC a non-refundable due diligence fee of
Five Thousand Dollars ($5,000).


(iv)          The
Company shall issue to each Buyer warrants to purchase shares of Common Stock,
each in the form of the warrant attached hereto as Exhibit A, in the
respective amounts and exercise prices as set forth next to each Buyer in
respect of each Closing as outlined on Schedule II attached hereto
(collectively, the “Warrants”).


(v)           The
shares of Common Stock issuable under the Warrants shall collectively be
referred to as the “Warrant Shares”. 
The Warrant Shares shall have “piggy-back” and demand registration
rights.


 



 12














 


(vi)          On
the date hereof, the Company shall issue to the Buyers shares of Common Stock
(the “Commitment Shares”) in the amount set forth in column 8 next to
each Buyer’s name on Schedule I attached hereto.


(h)           Corporate
Existence.  So long as any of the Convertible
Debentures remain outstanding, the Company shall not directly or indirectly
consummate any merger, reorganization, restructuring, reverse stock split
consolidation, sale of all or substantially all of the Company’s assets or any
similar transaction or related transactions (each such transaction, an “Organizational
Change”) unless, in any such case, the Company makes appropriate provision
with respect to such holders’ rights and interests to insure that the
provisions of this Section 4(h) will thereafter be applicable to the
Convertible Debentures.


(i)            Transactions
With Affiliates.  So long as any
Convertible Debentures are outstanding, the Company shall not, and shall cause
each of its subsidiaries not to, enter into, amend, modify or supplement, or
permit any subsidiary to enter into, amend, modify or supplement any agreement,
transaction, commitment, or arrangement with any of its or any subsidiary’s
officers, directors, person who were officers or directors at any time during
the previous two (2) years, stockholders who beneficially own five percent (5%)
or more of the Common Stock, or Affiliates (as defined below) or with any
individual related by blood, marriage, or adoption to any such individual or
with any entity in which any such entity or individual owns a five percent (5%)
or more beneficial interest (each a “Related Party”), except for (a)
customary employment arrangements and benefit programs on reasonable terms, (b)
any investment in an Affiliate of the Company, 
(c) any agreement, transaction, commitment, or arrangement on an
arms-length basis on terms no less favorable than terms which would have been
obtainable from a person other than such Related Party, or (d) any agreement,
transaction, commitment, or arrangement which is approved by a majority of the
disinterested directors of the Company; for purposes hereof, any director who
is also an officer of the Company or any subsidiary of the Company shall not be
a disinterested director with respect to any such agreement, transaction, commitment,
or arrangement.  “Affiliate” for
purposes hereof means, with respect to any person or entity, another person or
entity that, directly or indirectly, (i) has a ten percent (10%) or more equity
interest in that person or entity, (ii) has ten percent (10%) or more common
ownership with that person or entity, (iii) controls that person or entity, or
(iv) shares common control with that person or entity.  “Control” or “controls” for
purposes hereof means that a person or entity has the power, direct or indirect,
to conduct or govern the policies of another person or entity.


(j)            Transfer
Agent.  The Company covenants and
agrees that, in the event that the Company’s agency relationship with the
transfer agent should be terminated for any reason prior to a date which is two
(2) years after the Closing Date, the Company shall immediately appoint a new
transfer agent and shall require that the new transfer agent execute and agree
to be bound by the terms of the Irrevocable Transfer Agent Instructions (as
defined herein).


(k)           Restriction
on Issuance of the Capital Stock. So long as any Convertible Debentures are
outstanding, the Company shall not, without the prior written consent of the
Buyer(s), (i) issue or sell shares of Common Stock without consideration or for
a consideration per share less than 80% of the volume weighted average price of
the Common



 13
 






 



Stock, as quoted by Bloomberg, LP, on the
trading day immediately prior to the issuance (the “Volume Weighted Average
Price”), or (ii) issue any preferred stock, warrant, option, right,
contract, call, or other security or instrument (an “Option”) granting
the holder thereof the right to acquire shares of Common Stock without
consideration or for a consideration less than 80% of the Volume Weighted
Average Price.  Notwithstanding the
immediately preceding sentence, the Company may, without consent, issue or sell
for any consideration it deems appropriate (A) in any three (3) month period,
up to 250,000 shares of Common Stock (including shares of Common Stock issuable
upon conversion, exercise, or exchange of Options granted in such three (3)
month period), (B) capital stock in connection with strategic transactions
completed with third party entities in connection with the operating business,
and which are not primarily considered capital raising events, and (C) capital
stock to consultants, employees, officers, or directors of the Company pursuant
to any stock or option or other incentive plan duly adopted by a majority of
the non-employee members of the Board of Directors of the Company or a majority
of the members of a committee of non-employee directors established for such
purpose.


(l)            Neither
the Buyer(s) nor any of its affiliates have, or has had within the 60 days
preceding this Agreement, an open short position in the Common Stock of the
Company, and the Buyer(s) agrees that it shall not, and that it will cause its
affiliates not to, engage in any short sales of (including the lending of
shares to facilitate the short selling by others) or hedging transactions with
respect to the Common Stock as long as any Convertible Debentures shall remain
outstanding.


(m)          Rights
of Participation.  For a period of 15 months from the date hereof,
if the Company intends to raise additional capital by the issuance or sale of
capital stock of the Company, including without limitation shares of any class
of common stock, any class of preferred stock, options, warrants or any other
securities convertible or exercisable into shares of common stock (whether the
offering is conducted by the Company, underwriter, placement agent or any third
party) the Company shall be obligated to offer to the Buyers the lesser of (a)
one half of the total contemplated issuance or sale of capital stock or (b) the
outstanding amount of the Convertible Debentures at the time of such issuance
or sale of capital stock, by providing in writing the principal amount of
capital it intends to raise and outline of the material terms of such capital
raise, prior to the offering such issuance or sale of capital stock  to
any third parties including, but not limited to, current or former officers or
directors, current or former stockholders and/or investors of the obligor,
underwriters, brokers, agents or other third parties.  The Buyers shall
have ten (10) business days from receipt of such notice of the sale or issuance
of capital stock to accept or reject all or a portion of such capital raising
offer.  This right of participation set
forth in this Section shall not apply to issuances or sales of capital stock
(i) for strategic transactions completed with third party entities in
connection with the operating business, and which are not primarily considered
capital raising events (ii) to consultants, employees, officers or directors of
the Company pursuant to any stock or option or other incentive plan duly
adopted by a majority of the non-employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee
directors established for such purpose, or (iii) 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.


(n)           Rule
144 Acknowledgement and Agreement.



 14
 






 



(i)            On
the date hereof, the Company shall obtain from each officer and director
beneficially owning (without taking into account the effect of any ownership
caps) more than 0.8% of the Company’s outstanding Common Stock as the date
hereof a Rule 144 Acknowledgement and Agreement in the form attached hereto as Exhibit
B.


(ii)           At
any time while the Debentures remain outstanding, if any officer or director
shall become the beneficial owner (without taking into account the effect of
any ownership caps) of more than 0.8% of the Company’s outstanding Common
Stock, the Company shall obtain a Rule 144 Acknowledgement and Agreement in the
form attached hereto as Exhibit B.


(o)           Stockholder
Approval.  The Company shall provide
each stockholder entitled to vote at a special meeting or annual meeting of
stockholders of the Company (the “Stockholder Meeting”), which shall be
promptly called and held not later than one hundred twenty (120) calendar days
from the date hereof, a proxy statement soliciting each such stockholder’s
affirmative vote at the Stockholder Meeting for approval of resolutions (a)
providing for the Company’s issuance of all of the Conversion Shares and
Warrant Shares and (b) increasing the Company’s authorized Common Stock to at
least 120,000,000 (the “Stockholder Approval”) in accordance with law
and the rules and regulations of the Principal Market and the Company’s state
of incorporation, and the Company shall use its reasonable best efforts to
solicit its stockholder’s approval of such resolutions and to cause the Board
of Directors of the Company to recommend to the stockholders that they approve
such resolutions.  Notwithstanding any
other provision of this Agreement, the aggregate number of shares that may be
issued pursuant to this Agreement and the Convertible Debenture and Warrants
issued in connection herewith shall not be greater than 19.99% of the
outstanding shares of Common Stock as of the date of this Agreement unless and
until Stockholder Approval (without the vote of any shares acquired in this
transaction and related transactions) is obtained.


(p)           Listing
of Additional Shares.  Within five
(5) business days after the First Closing, the Company shall file an
application to list all of the additional shares issuable pursuant to this
Agreement with the Primary Market upon which the shares of Common Stock are
then listed or quoted.


5.     TRANSFER
AGENT INSTRUCTIONS.


(a)           The Company shall
issue the Irrevocable Transfer Agent Instructions to its transfer agent
irrevocably appointing, subject to Section 5(b) of this Agreement, David
Gonzalez, Esq. as the Company’s agent for purposes of having certificates to be
issued, registered in the name of the Buyer(s) or its respective nominee(s),
for the Conversion Shares representing such amounts of Convertible Debentures
as specified from time to time by the Buyer(s) to the Company upon conversion
of the Convertible Debentures, for interest owed pursuant to the Convertible
Debenture, and for any and all Liquidated Damages (as this term is defined in the
Investor Registration Rights Agreement). 
The Company shall not change its transfer agent without the express
written consent of the Buyer(s), which consent shall not be unreasonably
withheld, delayed or conditioned.  Prior
to registration of the Conversion Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of
this Agreement.  The Company warrants
that no instruction other than the Irrevocable



 15
 






 



Transfer Agent
Instructions referred to in this Section 5, and stop transfer instructions to
give effect to Section 2(g) hereof (in the case of the Conversion Shares prior
to registration of such shares under the Securities Act) will be given by the
Company to its transfer agent and that the Conversion Shares shall otherwise be
freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Investor Registration Rights
Agreement.  Nothing in this Section 5
shall affect in any way the Buyer’s obligations and agreement to comply with
all applicable securities laws upon resale of Conversion Shares.  If the Buyer(s) provides the Company with an
opinion of counsel, in form, scope and substance customary for opinions of
counsel in comparable transactions to the effect that registration of a resale
by the Buyer(s) of any of the Conversion Shares is not required under the
Securities Act, the Company shall within two (2) business days instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by the Buyer. 
The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer by vitiating the intent and
purpose of the transaction contemplated hereby. 
Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 5 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 5, that the Buyer(s) shall be entitled, in addition to all
other available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.


(b)           Upon the occurrence
and continuation of an Event of Default (as defined in the Convertible
Debentures), the Buyer(s) shall provide written notice (the “Notice of
Appointment”) to the Company that an Event of Default has occurred and is
continuing and upon delivery of the Notice of Appointment David Gonzalez, Esq.
shall thereafter be deemed to be irrevocably appointed the Company’s agent for
the purposes enumerated in the Irrevocable Transfer Agent Instructions and
authorized to act in accordance therewith.


6.     CONDITIONS
TO THE COMPANY’S OBLIGATION TO SELL.


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


(a)           Each Buyer shall have executed the Transaction Documents
and delivered them to the Company.


(b)           The Buyer(s) shall have delivered to the Company the
Purchase Price for Convertible Debentures in respective amounts as set forth
next to each Buyer in respect of such Closing as outlined on Schedule I
attached hereto, minus any fees to be paid directly from the proceeds at such
Closing as set forth herein, by wire transfer of immediately available U.S.
funds pursuant to the wire instructions provided by the Company.


(c)           The representations and warranties of the Buyer(s) shall
be true and correct in all material respects as of the date when made and as of
the applicable Closing Date as though made at that time (except for
representations and warranties that speak as of a



 16
 






 



specific date), and the Buyer(s) shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Buyer(s) at or prior to such Closing Date.


7.     CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE.


(a)           The obligation of the Buyer(s) hereunder to purchase the
Convertible Debentures at the First Closing is subject to the satisfaction, at
or before the First Closing Date, of each of the following conditions:


(i)            The Company shall have executed the Transaction Documents
and delivered the same to the Buyer(s).


(ii)           The Common Stock shall be authorized for quotation on the
Primary Market and trading in the Common Stock shall not have been suspended
for any reason.


(iii)          The representations and warranties of the Company shall be
true and correct in all material respects (except to the extent that any of
such representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall be
true and correct without further qualification) as of the date when made and as
of the First Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the First
Closing Date.


(iv)          The Company shall have executed and delivered to the
Buyer(s) the Convertible Debentures in the respective amounts set forth
opposite each Buyer(s) name on Schedule I attached hereto.


(v)           The Buyer(s) shall have received an opinion of counsel
from counsel to the Company in a form satisfactory to the Buyer(s).


(vi)          The Company shall have provided to the Buyer(s) a
certificate of good standing as of a date within 15 days of the date hereof
from the secretary of state from the state in which the company is
incorporated.


(vii)         A form UCC-1 or such other forms as may be required to
perfect the Buyer’s interest in the Pledged Property as detailed in the
Security Agreement dated the date hereof shall have been filed.


(viii)        The Company shall have provided to the Buyer an
acknowledgement, to the satisfaction of the Buyer, from Marcum and Kliegman LLP
as to the Company’s ability to provide all consents required in order to file a
registration statement in connection with this transaction.



 17
 






 



(ix)           The Company shall have reserved out of its authorized and
unissued Common Stock, solely for the purpose of effecting the conversion of
the Convertible Debentures and exercise of the Warrants, the Initial Share
Reserve.


(x)            The Irrevocable Transfer Agent Instructions, in form and
substance satisfactory to the Buyer, shall have been delivered to and
acknowledged in writing by the Company’s transfer agent.


(b)           The obligation of the Buyer(s) hereunder to accept the
Convertible Debentures at the Second Closing is subject to the satisfaction, at
or before the Second Closing Date, of each of the following conditions:


(i)            The Common Stock shall be authorized for quotation on the
Primary Market and trading in the Common Stock shall not have been suspended
for any reason, and all the Conversion Shares shall be approved by the Primary
Market.


(ii)           The representations and warranties of the Company shall be
true and correct in all material respects (except to the extent that any of
such representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall be
true and correct without further qualification) as of the date when made and as
of the Second Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Second
Closing Date.


(iii)          The Company shall have executed and delivered to the
Buyer(s) the Convertible Debentures in the respective amounts set forth
opposite each Buyer(s) name on Schedule I attached hereto.


(iv)          The Company shall have obtained Stockholder Approval as
contemplated by Section 4(o) hereof.


(v)           The Company shall have certified, in a certificate
executed by two officers of the Company and dated as of the Second Closing
Date, that all conditions to the Second Closing have been satisfied.


(vi)          All of the conditions to the First Closing shall have been
satisfied.


(c)           The obligation of the Buyer(s) hereunder to accept the
Convertible Debentures at the Third Closing is subject to the satisfaction, at
or before the Third Closing Date, of each of the following conditions:


(i)            The Common Stock shall be authorized for quotation on the
Primary Market and trading in the Common Stock shall not have been suspended
for any reason, and all the Conversion Shares shall be approved by the Primary
Market.



 18
 






 



(ii)           The representations and warranties of the Company shall be
true and correct in all material respects (except to the extent that any of
such representations and warranties is already qualified as to materiality in
Section 3 above, in which case, such representations and warranties shall be true
and correct without further qualification) as of the date when made and as of
the Third Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by the Company at or prior to the Third Closing Date.


(iii)           The Company shall have executed and delivered to the
Buyer(s) the Convertible Debentures in the respective amounts set forth
opposite each Buyer(s) name on Schedule I attached hereto.


(iv)          The Company shall have filed the Registration Statement
with the SEC in compliance with the rules and regulations promulgated by the
SEC for filing thereof.


(v)           The Registration Statement shall have been declared
effective by the SEC.


(vi)          All of the conditions to the Second Closing shall have been
satisfied.


(vii)         The Company shall have certified, in a certificate executed
by two officers of the Company and dated as of the Third Closing Date, that all
conditions to the Third Closing have been satisfied.


8.     INDEMNIFICATION.


(a)           In consideration of the Buyer’s execution and delivery of
this Agreement and acquiring the Convertible Debentures and the Conversion
Shares hereunder, and in addition to all of the Company’s other obligations
under this Agreement, the Company shall defend, protect, indemnify and hold
harmless the Buyer(s) and each other holder of the Convertible Debentures and
the Conversion Shares, and all of their officers, directors, employees and
agents (including, without limitation, those retained in connection with
the transactions contemplated by this Agreement) (collectively, the “Buyer
Indemnitees”) from and against any and all actions, causes of action,
suits, claims, losses, costs, penalties, fees, liabilities and damages, and
expenses in connection therewith (irrespective of whether any such Buyer
Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by the Buyer Indemnitees or any of them as a result
of, or arising out of, or relating to (a) any misrepresentation or breach of
any representation or warranty made by the Company in this Agreement, the
Convertible Debentures or the Investor Registration Rights Agreement or any
other certificate, instrument or document contemplated



 19
 






 



hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement, or the
Investor Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, or (c) any cause of action, suit or
claim brought or made against such Indemnitee and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement or
any other instrument, document or agreement executed pursuant hereto by any of
the parties hereto.  To the extent that
the foregoing undertaking by the Company may be unenforceable for any reason,
the Company shall make the maximum contribution to the payment and satisfaction
of each of the Indemnified Liabilities, which is permissible under applicable
law.


(b)           In consideration of the Company’s execution and delivery
of this Agreement, and in addition to all of the Buyer’s other obligations
under this Agreement, the Buyer shall defend, protect, indemnify and hold
harmless the Company and all of its officers, directors, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Company
Indemnitees”) from and against any and all Indemnified Liabilities incurred
by the Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Buyer(s) in this Agreement, instrument or document
contemplated hereby or thereby executed by the Buyer, (b) any breach of any
covenant, agreement or obligation of the Buyer(s) contained in this
Agreement,  the Investor Registration
Rights Agreement or any other certificate, instrument or document contemplated
hereby or thereby executed by the Buyer, or (c) any cause of action, suit or
claim brought or made against such Company Indemnitee based on material
misrepresentations or due to a material breach and arising out of or resulting
from the execution, delivery, performance or enforcement of this Agreement, the
Investor Registration Rights Agreement or any other instrument, document or
agreement executed pursuant hereto by any of the parties hereto.  To the extent that the foregoing undertaking
by each Buyer may be unenforceable for any reason, each Buyer shall make the
maximum contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.


9.     GOVERNING LAW: MISCELLANEOUS.


(a)           Governing Law. 
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New Jersey without regard to the principles of
conflict of laws.  The parties further
agree that any action between them shall be heard in Hudson County, New Jersey,
and expressly consent to the jurisdiction and venue of the Superior Court of
New Jersey, sitting in Hudson County and the United States District Court for
the District of New Jersey sitting in Newark, New Jersey for the adjudication
of any civil action asserted pursuant to this Paragraph.


(b)           Counterparts. 
This Agreement may be executed in two or more identical counterparts,
all of which 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.


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



 20
 






 



(d)           Severability. 
If any provision of this Agreement shall be invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.


(e)           Entire Agreement, Amendments.  This Agreement supersedes all other prior
oral or written agreements between the Buyer(s), the Company, their affiliates
and persons acting on their behalf with respect to the matters discussed
herein, and this Agreement and the instruments referenced herein contain the
entire understanding of the parties with respect to the matters covered herein
and therein and, except as specifically set forth herein or therein, neither
the Company nor any Buyer makes any representation, warranty, covenant or undertaking
with respect to such matters.  No
provision of this Agreement may be waived or amended other than by an
instrument in writing signed by the party to be charged with enforcement.


(f)            Notices. 
Any notices, consents, waivers, or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered (i) upon receipt, when delivered
personally; (ii) upon confirmation of receipt, when sent by facsimile; (iii)
three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and
facsimile numbers for such communications shall be:


	
  If to the Company, to:

  	
  WorldGate Communications, Inc.

  
	
   

  	
  3190 Tremont Avenue

  
	
   

  	
  Trevose, PA 19053

  
	
   

  	
  Attention: Joel Boyarski

  
	
   

  	
  Telephone:

  	
  (215) 354-5312

  
	
   

  	
  Facsimile:

  	
  (215) 354-1049

  
	
   

  	
   

  
	
  With a copy to:

  	
  Drinker Biddle & Reath LLP

  
	
   

  	
  1000 Westlakes Drive, Suite 300

  
	
   

  	
  Berwyn, PA 19312-2409

  
	
   

  	
  Attention:

  	
  Walter Mostek

  
	
   

  	
  Telephone:

  	
  (610) 993-2233

  
	
   

  	
  Facsimile:

  	
  (610) 993-8585

  



 


If to the Buyer(s), to its address and facsimile
number on Schedule I, with copies to the Buyer’s counsel as set forth on
Schedule I.  Each party shall provide
five (5) days’ prior written notice to the other party of any change in address
or facsimile number.


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



 21
 






 



(h)           No
Third Party Beneficiaries.  This
Agreement is intended for the benefit of the parties hereto and their
respective permitted successors and assigns, and is not for the benefit of, nor
may any provision hereof be enforced by, any other person.


(i)            Survival.  The representations and warranties of the
Company and the Buyer(s) contained in Sections 2 and 3, the agreements and
covenants set forth in Sections 4, 5 and 9, and the indemnification provisions
set forth in Section 8, shall survive the Closing for a period of two (2) years
following the date on which the Convertible Debentures are converted in
full.  The Buyer(s) shall be responsible
only for its own representations, warranties, agreements and covenants
hereunder.


(j)            Publicity.  The Company and the Buyer(s) shall have the
right to approve, before issuance any press release or any other public
statement with respect to the transactions contemplated hereby made by any
party; provided, however, that the Company shall be entitled, without the prior
approval of the Buyer(s), to issue any press release or other public disclosure
with respect to such transactions required under applicable securities or other
laws or regulations (the Company shall use its best efforts to consult the
Buyer(s) in connection with any such press release or other public disclosure
prior to its release and Buyer(s) shall be provided with a copy thereof upon
release thereof).


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


(l)            Brokerage.  The Company represents that no broker, agent,
finder or other party has been retained by it in connection with the
transactions contemplated hereby and that no other fee or commission has been
agreed by the Company to be paid for or on account of the transactions
contemplated hereby.


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


[REMAINDER
PAGE INTENTIONALLY LEFT BLANK]



 22
 






 



IN WITNESS WHEREOF, each Buyer and the Company have caused
their respective signature page to this Securities Purchase Agreement to be
duly executed as of the date first written above.


	
  

  	
  COMPANY:

  
	
   

  	
  WORLDGATE COMMUNICATIONS,

  
	
   

  	
  INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Joel Boyarski

  
	
   

  	
  Name:

  	
  Joel Boyarski

  
	
   

  	
  Title:

  	
  Chief Financial Officer

  



 



 23
 






 



IN WITNESS WHEREOF, each Buyer and the Company have caused
their respective signature page to this Securities Purchase Agreement to be
duly executed as of the date first written above.


	
  

  	
  BUYERS:

  
	
   

  	
  CORNELL CAPITAL PARTNERS, LP

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Yorkville Advisors, LLC

  
	
   

  	
  Its:

  	
  General Partner

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Mark Angelo

  
	
   

  	
  Name:

  	
  Mark Angelo

  
	
   

  	
  Its:

  	
  Portfolio Manager

  



 



 24














 


SCHEDULE I


SCHEDULE OF BUYERS


 


	
  (1)

  	
   

  	
  (2)

  	
   

  	
  (3)

  	
   

  	
  (4)

  	
   

  	
  (5)

  	
   

  	
  (6)

  	
   

  	
  (7)

  	
   

  	
  (8)

  	
   

  	
  (9)

  	
   

  
	
   

  	
   

  	
  Address and Facsimile

  	
   

  	
  Subscription Amount

  	
   

  	
  Purchase

  	
   

  	
  Number of

  Warrant

  	
   

  	
  Number of

  Commitment

  	
   

  	
  Legal Representative’s Address

  	
   

  
	
  Buyer

  	
   

  	
  Number

  	
   

  	
  First Closing

  	
   

  	
  Second Closing

  	
   

  	
  Third Closing

  	
   

  	
  Price

  	
   

  	
  Shares

  	
   

  	
  Shares

  	
   

  	
  and Facsimile Number

  	
   

  
	
  Cornell Capital

  Partners, LP

  	
   

  	
  101
  Hudson Street
 Suite 3700

  Jersey City, NJ 07303

  Attention: Mark Angelo

  Facsimile: (201)

  985-8266

  Telephone: (201)

  985-8300

  Residence: Delaware

  	
   

  	
  $

  	
  6,000,000

  	
   

  	
  $

  	
  3,000,000

  	
   

  	
  $

  	
  2,000,000

  	
   

  	
  $

  	
  11,000,000

  	
   

  	
  2,595,000

  	
   

  	
  177,419

  	
   

  	
  David
  Gonzalez, Esq.

  101 Hudson Street — Suite 3700

  Jersey City, New Jersey 07302

  Telephone: (201) 985-8300

  Facsimile: (201) 985-8266

  	
   

  
	
  TOTAL

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
																						



 















 


SCHEDULE II


WARRANT ALLOCATION


 


	
   

  	
   

  	
  Number of Warrant Shares/Warrant Exercise Price

  	
   

  
	
  Buyer

  	
   

  	
  First Closing

  	
   

  	
  Second Closing

  	
   

  	
  TOTAL

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cornell Capital Partners, LP

  	
   

  	
  624,545/$1.85

  600,000/$2.35

  190,909/$2.60

  	
   

  	
  520,455/$1.85

  500,000/$2.35

  159,091/$2.60

  	
   

  	
  1,145,000/$1.85

  1,100,000/$2.35

  350,000/$2.60

  	
   

  



 



 1
 






 



 


DISCLOSURE
SCHEDULE


The sections of this
Disclosure Schedule relate to the corresponding sections of the Securities
Purchase Agreement (the “Agreement”), dated as of August 11, 2006, by
and among WORLDGATE COMMUNICATIONS,
INC., a Delaware corporation (the “Company”), and the Buyers
listed on Schedule I attached thereto. 
Capitalized terms not defined herein shall have the meaning ascribed to
them in the Agreement.


Section 3(c):                             The following registration
statements of the Company are outstanding:


1.             Registration
Statement No. 333-117641,

2.             Registration Statement No.
333-129109, and

3.             Registration Statement No.
333-125205.


The SEC has requested that the Company file an amendment to its Current
Report on Form 8-K, filed on November 23, 2005, to provide the effective date
for the resignation of Grant Thornton LLP as the Company’s independent
registered public accounting firm.


The Company has a board approved equity incentive plan from which
grants can be and are made to consultants, employees and directors.


The Company has entered into an agreement with a third party consultant
with respect to strategic introductions to third parties selected by the
Company and with whom the consultant has a pre-existing relationship.  Under the terms of this contract the Company
has agreed to pay the consultant a success-based introduction fee if the
introduced party ultimately concludes a business relationship with the Company.  This fee will be based upon the extent of the
business relationship and can be paid in non-registered common stock (with
piggyback rights) or stock options.  No
fees have been earned to date.


Section 3(d):                             As of the date hereof, the
Company has reserved 7,775,752 shares of its common stock, par value $0.01, for
issuance upon conversion of the Convertible Debentures and exercise of the
Warrants.


Section 3(e):                              As provided in the
Registration Rights Agreement, the Company is required to file a registration
statement with the SEC in regard to the Conversion Shares, Warrant Shares and
Commitment Shares.


In accordance with its reporting requirements under the Securities
Exchange Act of 1934, as amended, the Company is required to report to the SEC
the sale of its securities as contemplated by the Transaction Documents.


Section 3(f):                                The SEC has requested
that the Company file an amendment to its Current Report on Form 8-K, filed on
November 23, 2005, to provide the effective date for the resignation of Grant
Thornton LLP as the Company’s independent registered



 2
 






 



 


public accounting firm.


On November 14, 2005, the Company filed a Current Report on Form 8-K
announcing that investors should not rely on the its Annual Report on Form 10-K
for the fiscal year ended December 31, 2004 or its Quarterly Reports on Form
10-Q from the first quarter of 2004 through the second quarter of 2005 pending
the release of amendments to such reports (the “Amendments”).  On January 24, 2006, the Company filed the
Amendments.



 3
 






 



 


EXHIBIT A


FORM OF WARRANT


WARRANT


THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS.  THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO
THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE
SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THIS WARRANT
MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.


WORLDGATE COMMUNICATIONS,
INC.


Warrant To Purchase
Common Stock


	
  Warrant No.: WGAT-[    ]

  	
   

  	
  Number of Shares:

  	
   

  	
  [              
  ]

  	
   

  
	
   

  	
   

  	
  Warrant Exercise Price:

  	
   

  	
  [$           ]

  	
   

  
	
   

  	
   

  	
  Expiration Date:

  	
   

  	
  August       , 2011

  	
   

  



 


Date of Issuance: August   , 2006


WorldGate
Communications, Inc., a Delaware corporation (the “Company”), hereby
certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Cornell
Capital Partners, LP (the “Holder”), the registered holder
hereof or its permitted assigns, is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
or times on or after the date hereof, but not after 11:59 P.M. Eastern
Time on the Expiration Date (as defined herein) [             ] fully paid and
nonassessable shares of Common Stock (as defined herein) of the Company (the “Warrant
Shares”) at the exercise price per share provided in Section 1(b)
below or as subsequently adjusted; provided, however, that in no event shall
the Holder be entitled to exercise this Warrant for a number of Warrant Shares
in excess of that number of Warrant Shares which, upon giving effect to such
exercise, would cause the aggregate number of shares of Common Stock
beneficially owned by the Holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such exercise, except within
sixty (60) days of the Expiration Date (however, such restriction may be waived
by Holder (but only as to itself and not to any other holder) upon not less
than 65 days prior notice to the Company). 
For purposes of the foregoing proviso, the aggregate number of shares of
Common Stock beneficially owned by the Holder and its affiliates shall include
the number of shares of Common Stock issuable upon exercise of this Warrant
with respect to which the determination of such proviso is being made, but
shall exclude



 4
 






 



 


shares of Common Stock
which would be issuable upon (i) exercise of the remaining, unexercised
Warrants beneficially owned by the Holder and its affiliates and
(ii) exercise or conversion of the unexercised or unconverted portion of
any other securities of the Company beneficially owned by the Holder and its
affiliates (including, without limitation, any convertible notes or preferred
stock) subject to a limitation on conversion or exercise analogous to the
limitation contained herein.  Except as
set forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. 
For purposes of this Warrant, in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in (1) the Company’s most recent Form 10-Q or Form
10-K, as the case may be, (2) a more recent public announcement by the Company
or (3) any other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. 
Upon the written request of the Holder, the Company shall promptly, but
in no event later than one (1) Business Day following the receipt of such
notice, confirm in writing to the Holder the number of shares of Common Stock
then outstanding.  In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the exercise of Warrants (as defined below) by the Holder and its
affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.


This Warrant
is one of the warrants issued pursuant to Section 4(g) of the Securities
Purchase Agreement (“Securities Purchase Agreement”) dated the date
hereof between the Company and the Buyers listed on Schedule I thereto or
issued in exchange or substitution thereafter or replacement thereof.  Each Capitalized term used, and not otherwise
defined herein, shall have the meaning ascribed thereto in the Securities
Purchase Agreement.


Definitions.  The following words and terms as used in this
Warrant shall have the following meanings:


“Approved
Stock Plan” means any stock or option or other incentive plan that has been
duly adopted by a majority of the non-employee members of the Board of
Directors of the Company, or a majority of the members of a committee of
non-employee directors established for such purpose, pursuant to which the
Company’s securities may be issued to consultants, employees, officers or
directors of the Company.


 “Business Day” means any day other than
Saturday, Sunday or other day on which commercial banks in the City of New York
are authorized or required by law to remain closed.


“Common
Stock” means (i) the Company’s common stock, par value $0.01 per
share, and (ii) any capital stock into which such Common Stock shall have
been changed or any capital stock resulting from a reclassification of such
Common Stock.


“Event of
Default” means an event of default under the Securities Purchase Agreement
or the Convertible Debentures issued in connection therewith.



 5
 






 



 


“Excluded
Securities” means (a) shares of Common Stock issued or deemed to have been
issued pursuant to an Approved Stock Plan; (b) shares of Common Stock issued or
deemed to be issued by the Company upon the conversion, exchange or exercise of
any right, option, obligation or security outstanding on the date of the
Securities Purchase Agreement; provided that (1) the terms of such right,
option, obligation or security are not amended or otherwise modified on or
after the date of the Securities Purchase Agreement, and (2) the conversion
price, exchange price, exercise price or other purchase price is not reduced,
adjusted or otherwise modified (except by operation of, or in accordance with,
the relevant governing documents) and the number of shares of Common Stock
issued or issuable is not increased (except by operation of, or in accordance
with, the relevant governing documents) on or after the date of the Securities
Purchase Agreement; and provided further that, notwithstanding anything to the
contrary set forth herein, the term “Excluded Securities” shall include,
subject to the consent of the Holder which shall not be unreasonably withheld,
shares of Common Stock issued or deemed to be issued by the Company upon the
exercise of additional investment rights issued or issuable by the Company in
satisfaction of claims against the Company by the investors party to the
private placement of the Company’s securities on August 3, 2005; (c) the
shares of Common Stock issued or deemed to be issued by the Company upon
exercise of this Warrant and any other warrants issued pursuant to the
Securities Purchase Agreement or upon conversion of the Convertible Debentures;
and (d) shares of Common Stock issued or deemed to have been issued pursuant to
any strategic transaction with a third party Person in connection with the business
of the Company, which transaction is not primarily for the purpose of raising
capital for the Company.


“Expiration
Date” means August     , 2011.


“Issuance
Date” means the date hereof.


“Options”
means any rights, warrants or options to subscribe for or purchase Common Stock
or Convertible Securities.


 “Person” means an individual, a limited
liability company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.


“Principal
Market” means on any of (a) the American Stock Exchange, (b) New York Stock
Exchange, (c) the Nasdaq National Market, (d) the Nasdaq Capital Market, or (e)
the Nasdaq OTC Bulletin Board (“OTCBB”)


“Securities
Act” means the Securities Act of 1933, as amended.


“Volume
Weighted Average Price” means, with respect to a trading day, the volume
weighted average price of the Common Stock for such trading day as quoted by
Bloomberg Financial Markets (“Bloomberg”).


 “Warrant” means this Warrant and all
Warrants issued in exchange, transfer or replacement thereof.



 6
 






 



 


“Warrant
Exercise Price” shall be [           ] or as subsequently
adjusted as provided in Section 8 hereof.


Other
Definitional Provisions.


Except as
otherwise specified herein, all references herein (A) to the Company shall
be deemed to include the Company’s successors and (B) to any applicable
law defined or referred to herein shall be deemed references to such applicable
law as the same may have been or may be amended or supplemented from time to time.


When used in
this Warrant, the words “herein”, “hereof”, and “hereunder” and words of similar import, shall refer to this Warrant
as a whole and not to any provision of this Warrant, and the words “Section”,
“Schedule”, and “Exhibit” shall refer to Sections of, and
Schedules and Exhibits to, this Warrant unless otherwise specified.


Whenever the
context so requires, the neuter gender includes the masculine or feminine, and
the singular number includes the plural, and vice versa.


Exercise of Warrant.


Subject to the
terms and conditions hereof, this Warrant may be exercised by the holder hereof
then registered on the books of the Company, pro rata as hereinafter provided,
at any time on any Business Day on or after the opening of business on such
Business Day, commencing with the first day after the date hereof, and prior to
11:59 P.M. Eastern Time on the Expiration Date (i) by delivery of a
written notice, in the form of the subscription notice attached as Exhibit A
hereto (the “Exercise Notice”), of such holder’s election to exercise
this Warrant, which notice shall specify the number of Warrant Shares to be
purchased, payment to the Company of an amount equal to the Warrant
Exercise Price(s) applicable to the Warrant Shares being purchased multiplied
by the number of Warrant Shares (at the applicable Warrant Exercise Price)
as to which this Warrant is being exercised (plus any applicable issue or
transfer taxes) (the “Aggregate Exercise Price”) in cash or wire
transfer of immediately available funds and the surrender of this Warrant (or
an indemnification undertaking with respect to this Warrant in the case of its
loss, theft or destruction) to a common carrier for overnight delivery to the
Company as soon as practicable following such date (“Cash Basis”) or
(ii) if at the time of exercise, the Warrant Shares are not subject to an
effective registration statement or if an Event of Default has occurred, by
delivering an Exercise Notice and in lieu of making payment of the Aggregate
Exercise Price in cash or wire transfer, elect instead to receive upon such
exercise the “Net Number” of shares of Common Stock determined according to the
following formula (the “Cashless Exercise”):


Net Number = (A x B) —
(A x C)


                                     
B


For purposes of the foregoing formula:


A = the total number of Warrant Shares with respect to which this
Warrant is then being exercised.



 7
 






 



 


B = the Volume Weighted Average Price of the Common Stock on the date
of exercise of the Warrant.


C = the Warrant Exercise Price then in effect for the applicable
Warrant Shares at the time of such exercise.


In the event of any exercise of the rights represented by this Warrant
in compliance with this Section 2, the Company shall on or before the
fifth (5th) Business Day following the date of receipt of the Exercise
Notice, the Aggregate Exercise Price and this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction) and the receipt of the representations of the Holder specified in
Section 6 hereof, if requested by the Company (the “Exercise Delivery
Documents”), and if the Common Stock is DTC eligible, credit such aggregate
number of shares of Common Stock to which the Holder shall be entitled to the
Holder’s or its designee’s balance account with The Depository Trust Company;
provided, however, if the Holder who submitted the Exercise Notice requested
physical delivery of any or all of the Warrant Shares, or, if the Common Stock
is not DTC eligible then the Company shall, on or before the fifth (5th) Business Day following
receipt of the Exercise Delivery Documents, issue and surrender to a common
carrier for overnight delivery to the address specified in the Exercise Notice,
a certificate, registered in the name of the Holder, for the number of shares
of Common Stock to which the Holder shall be entitled pursuant to such
request.  Upon delivery of the Exercise
Notice and Aggregate Exercise Price referred to in clause (i) or (ii)
above, the Holder shall be deemed for all corporate purposes to have become the
holder of record of the Warrant Shares with respect to which this Warrant has
been exercised.  In the case of a dispute
as to the determination of the Warrant Exercise Price, the Volume Weighted
Average Price or the arithmetic calculation of the Warrant Shares, the Company
shall promptly issue to the Holder the number of Warrant Shares that is not
disputed and shall submit the disputed determinations or arithmetic
calculations to the Holder via facsimile within three (3) Business Days of
receipt of the Holder’s Exercise Notice.


If the Holder
and the Company are unable to agree upon the determination of the Warrant
Exercise Price or arithmetic calculation of the Warrant Shares within one (1)
day of such disputed determination or arithmetic calculation being submitted to
the Holder, then the Company shall immediately submit via facsimile (i) the
disputed determination of the Warrant Exercise Price or the Volume Weighted
Average Price to an independent, reputable investment banking firm or (ii) the
disputed arithmetic calculation of the Warrant Shares to its independent,
outside accountant.  The Company shall
cause the investment banking firm or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the Holder of the
results no later than forty-eight (48) hours from the time it receives the
disputed determinations or calculations. 
Such investment banking firm’s or accountant’s determination or
calculation, as the case may be, shall be deemed conclusive absent manifest
error.


Unless the
rights represented by this Warrant shall have expired or shall have been fully
exercised, the Company shall, as soon as practicable and in no event later than
five (5) Business Days after any exercise and at its own expense, issue a new
Warrant identical in all respects to this Warrant exercised except it shall
represent rights to purchase the number of



 8
 






 



 


Warrant Shares purchasable immediately prior
to such exercise under this Warrant exercised, less the number of Warrant
Shares with respect to which such Warrant is exercised.


No fractional
Warrant Shares are to be issued upon any pro rata exercise of this Warrant, but
rather the number of Warrant Shares issued upon such exercise of this Warrant
shall be rounded up or down to the nearest whole number.


If the Company
or its Transfer Agent shall fail for any reason or for no reason to issue to
the Holder within ten (10) days of receipt of the Exercise Delivery
Documents, a certificate for the number of Warrant Shares to which the Holder
is entitled or to credit the Holder’s balance account with The Depository Trust
Company for such number of Warrant Shares to which the Holder is entitled upon
the Holder’s exercise of this Warrant, the Company shall, in addition to any
other remedies under this Warrant or otherwise available to the Holder, pay as
additional damages in cash to the Holder on each day the issuance of such
certificate for Warrant Shares is not timely effected an amount equal to 0.025%
of the product of (A) the sum of the number of Warrant Shares not issued to the
Holder on a timely basis and to which the Holder is entitled, and (B) the
Volume Weighted Average Price of the Common Stock for the trading day
immediately preceding the last possible date which the Company could have
issued such Common Stock to the Holder without violating this Section 2.


If within ten
(10) days after the Company’s receipt of the Exercise Delivery Documents, the
Company fails to deliver a new Warrant to the Holder for the number of Warrant
Shares to which the Holder is entitled pursuant to Section 2 hereof, then, in
addition to any other available remedies under this Warrant, or otherwise
available to the Holder, the Company shall pay as additional damages in cash to
the Holder on each day after such tenth (10th) day that such delivery of such new
Warrant is not timely effected in an amount equal to 0.015% of the product of (A) the number of Warrant Shares
represented by the portion of this Warrant which is not being exercised and
(B) the Volume Weighted Average Price of the Common Stock for the trading
day immediately preceding the last possible date which the Company could have
issued such Warrant to the Holder without violating this Section 2.


Covenants as to Common Stock.  The Company hereby covenants and agrees as
follows:


This Warrant
is, and any Warrants issued in substitution for or replacement of this Warrant
will upon issuance be, duly authorized and validly issued.


All Warrant
Shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.


During the
period within which the rights represented by this Warrant may be exercised,
the Company will at all times have authorized and reserved at least one hundred
percent (100%) of the number of shares of Common Stock needed to provide for
the exercise of the rights then represented by this Warrant and the par value
of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.  If at any time
the Company does not have a sufficient number of shares of Common Stock authorized
and available, then the



 9
 






 



 


Company shall call and hold a meeting of its
stockholders within one hundred twenty (120) days of that time for the
purpose of increasing the number of authorized shares of Common Stock.


The Company
will not, by amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed by it
hereunder, but will at all times in good faith assist in the carrying out of
all the provisions of this Warrant and in the taking of all such action as may
reasonably be requested by the Holder in order to protect the exercise
privilege of the Holder against dilution or other impairment, consistent with
the tenor and purpose of this Warrant. 
The Company will not increase the par value of any shares of Common
Stock receivable upon the exercise of this Warrant above the Warrant Exercise
Price then in effect, and (ii) will take all such actions as may be
necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock upon the exercise of
this Warrant.


This Warrant
will be binding upon any entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company’s
assets.


Taxes. 
The Company shall pay any and all taxes, except any applicable
withholding, which may be payable with respect to the issuance and delivery of
Warrant Shares upon exercise of this Warrant.


Warrant Holder Not Deemed a Stockholder.  Except as otherwise specifically provided
herein, no holder, as such, of this Warrant shall be entitled to vote or
receive dividends or be deemed the holder of shares of capital stock of the
Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to
any corporate action (whether any reorganization, issue of stock,
reclassification of stock, consolidation, merger, conveyance or otherwise),
receive notice of meetings, receive dividends or subscription rights, or
otherwise, prior to the issuance to the holder of this Warrant of the Warrant
Shares which he or she is then entitled to receive upon the due exercise of
this Warrant.  In addition, nothing
contained in this Warrant shall be construed as imposing any liabilities on
such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company.  Notwithstanding this Section 5, the Company
will provide the holder of this Warrant with copies of the same notices and
other information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.


Representations of Holder.  The Holder, by the acceptance hereof,
represents that it is acquiring this Warrant and the Warrant Shares for its own
account for investment only and not with a view towards, or for resale in
connection with, the public sale or distribution of this Warrant or the Warrant
Shares, except pursuant to sales registered or exempted under the Securities
Act; provided, however, that by making the representations herein, the Holder
does not agree to hold this Warrant or any of the Warrant Shares for any
minimum or other specific term and reserves the right to dispose of this Warrant
and the Warrant Shares at any time in accordance with or pursuant to a
registration statement or an exemption under the Securities Act.


 



 10














 


The Holder
further represents, by acceptance hereof, that, as of this date, the Holder is
an “accredited investor” as such term is defined in Rule 501(a)(1) of
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act (an “Accredited Investor”).  Upon exercise of this Warrant, the Holder
shall, if requested by the Company, confirm in writing, in a form satisfactory
to the Company, that the Warrant Shares so purchased are being acquired solely
for the Holder’s own account and not as a nominee for any other party, for
investment, and not with a view toward distribution or resale and that the
Holder is an Accredited Investor.  If the
Holder cannot make such representations because they would be factually
incorrect, it shall be a condition to the Holder’s exercise of this Warrant
that the Company receive such other representations as the Company considers
reasonably necessary to assure the Company that the issuance of its securities
upon exercise of this Warrant shall not violate any United States or state
securities laws.


Ownership and Transfer.


The Company
shall maintain at its principal executive offices (or such other office or
agency of the Company as it may designate by notice to the holder hereof), a
register for this Warrant, in which the Company shall record the name and
address of the person in whose name this Warrant has been issued, as well as
the name and address of each transferee. 
The Company may treat the person in whose name any Warrant is registered
on the register as the owner and holder thereof for all purposes,
notwithstanding any notice to the contrary, but in all events recognizing any
transfers made in accordance with the terms of this Warrant.


Adjustment of Warrant Exercise Price and Number of Shares.  The Warrant Exercise Price and the number of
shares of Common Stock issuable upon exercise of this Warrant shall be adjusted
from time to time as follows:


Adjustment of
Warrant Exercise Price and Number of Shares upon Issuance of Common Stock.  If and whenever on or after the Issuance Date
of this Warrant, the Company issues or sells, or is deemed to have issued or
sold, any shares of Common Stock (other than Excluded Securities) for a
consideration per share less than a price (the “Applicable Price”) equal
to the Warrant Exercise Price in effect immediately prior to such issuance or
sale (a “Dilutive Issuance”), then, effective immediately upon the
Dilutive Issuance, the Warrant Exercise Price shall be adjusted so as to equal
an amount determined by multiplying such Warrant Exercise Price by the
following fraction:


	
  

  	
   

  	
  N0 + N1

  	
   

  	
   

  
	
   

  	
   

  	
  N0 + N2

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  



 


where:


	
  

  	
   

  	
   

  	
   

  	
   

  
	
  

  	
   

  	
  N0 =

  	
   

  	
  the number of shares of Common Stock outstanding
  immediately prior to the issuance or sale, or deemed issuance or sale, of
  such additional shares of Common Stock in such Dilutive Issuance (without
  taking into account any shares of Common Stock issuable upon conversion,
  exchange or exercise of any securities or other instruments which are
  convertible into or exercisable or exchangeable for Common Stock (“Convertible
  Securities”) or options, warrants or other rights to purchase or
  subscribe for Common Stock or Convertible Securities, other than shares of
  Common Stock issuable upon conversion of the Convertible Debentures or
  exercise of the Warrants, which shall be taken into account in determining
  such number;

  



 



 11
 






 



 


	
  

  	
   

  	
  N1 =

  	
   

  	
  the number of shares of Common Stock which the
  aggregate consideration, if any, received or receivable by the Company for
  the total number of such additional shares of Common Stock so issued, sold or
  deemed issued or sold in such Dilutive Issuance would purchase at the Warrant
  Exercise Price in effect immediately prior to such Dilutive Issuance; and

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  N2 =

  	
   

  	
  the number of such additional shares of Common Stock
  so issued, sold or deemed issued or sold in such Dilutive Issuance.

  



 


Upon each such adjustment of the Warrant Exercise Price hereunder, the
number of Warrant Shares issuable upon exercise of this Warrant shall be
adjusted to the number of shares determined by multiplying the Warrant Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares issuable upon exercise of this Warrant immediately prior to such
adjustment and dividing the product thereof by the Warrant Exercise Price
resulting from such adjustment.


Effect on
Warrant Exercise Price of Certain Events.  For purposes of determining the adjusted
Warrant Exercise Price under Section 8(a) above, the following shall be
applicable:


Issuance of Options.  If, after the date hereof, the Company in any
manner grants any Options (other than pursuant to an Approved Stock Plan) and
the lowest price per share for which one share of Common Stock is issuable upon
the exercise of any such Option or upon conversion or exchange of any
convertible securities issuable upon exercise of any such Option is less than
the Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
granting or sale of such Option for such price per share.  For purposes of this Section 8(b)(i), the
lowest price per share for which one share of Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities shall be equal to the sum of the lowest amounts of consideration (if
any) received or receivable by the Company with respect to any one share of
Common Stock upon the granting or sale of the Option, upon exercise of the
Option or upon conversion or exchange of any convertible security issuable upon
exercise of such Option.  No further
adjustment of the Warrant Exercise Price shall be made upon the actual issuance
of such Common Stock or of such convertible securities upon the exercise of
such Options or upon the actual issuance of such Common Stock upon conversion
or exchange of such convertible securities.


Issuance of Convertible Securities.  If the Company in any manner issues or sells
any convertible securities (other than Excluded Securities) and the lowest
price per share for which one share of Common Stock is issuable upon the
conversion or exchange thereof is



 12
 






 



less than the
Applicable Price, then such share of Common Stock shall be deemed to be
outstanding and to have been issued and sold by the Company at the time of the
issuance or sale of such convertible securities for such price per share.  For the purposes of this
Section 8(b)(ii), the lowest price per share for which one share of Common
Stock is issuable upon such conversion or exchange shall be equal to the sum of
the lowest amounts of consideration (if any) received or receivable by the
Company with respect to one share of Common Stock upon the issuance or sale of
the convertible security and upon conversion or exchange of such convertible
security.  No further adjustment of the
Warrant Exercise Price shall be made upon the actual issuance of such Common
Stock upon conversion or exchange of such convertible securities, and if any such
issue or sale of such convertible securities is made upon exercise of any
Options for which adjustment of the Warrant Exercise Price had been or are to
be made pursuant to other provisions of this Section 8(b), no further
adjustment of the Warrant Exercise Price shall be made by reason of such issue
or sale.


Change in Option Price or Rate of Conversion.  If the purchase price provided for in any
Options, the additional consideration, if any, payable upon the issue,
conversion or exchange of any convertible securities, or the rate at which any
convertible securities are convertible into or exchangeable for Common Stock
(other than with respect to Excluded Securities) changes at any time, the
Warrant Exercise Price in effect at the time of such change shall be adjusted
to the Warrant Exercise Price which would have been in effect at such time had
such Options or convertible securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold and the number of Warrant Shares
issuable upon exercise of this Warrant shall be correspondingly
readjusted.  For purposes of this Section
8(b)(iii), if the terms of any Option or convertible security that was
outstanding as of the Issuance Date of this Warrant are changed in the manner
described in the immediately preceding sentence, then such Option or
convertible security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change.  No adjustment
pursuant to this Section 8(b) shall be made if such adjustment would
result in an increase of the Warrant Exercise Price then in effect.


Calculation of Consideration Received.  If any Common Stock, Options or convertible
securities are issued or sold or deemed to have been issued or sold for cash,
the consideration received therefore will be deemed to be the net amount
received by the Company therefore.  If
any Common Stock, Options or convertible securities are issued or sold for a
consideration other than cash, the amount of such consideration received by the
Company will be the fair value of such consideration, except where such
consideration consists of marketable securities, in which case the amount of
consideration received by the Company will be the market price of such
securities on the date of receipt of such securities.  If any Common Stock, Options or convertible
securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefore will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or convertible securities, as the case may be.  The fair value of any consideration other
than cash or securities will be determined jointly by the Company and the
holders of Warrants representing at least two-thirds of the Warrant Shares
issuable upon exercise of the Warrants then outstanding.  If such parties are unable to reach agreement
within ten (10) days after the occurrence of an



 13
 






 



event
requiring valuation (the “Valuation Event”), the fair value of such
consideration will be determined within five (5) Business Days after the
tenth (10th)
day following the Valuation Event by an independent, reputable appraiser
jointly selected by the Company and the holders of Warrants representing at
least two-thirds of the Warrant Shares issuable upon exercise of the Warrants
then outstanding.  The determination of
such appraiser shall be final and binding upon all parties and the fees and
expenses of such appraiser shall be borne jointly by the Company and the holders
of Warrants.


Integrated Transactions.  In case any Option is issued in connection
with the issue or sale of other securities of the Company, together comprising
one integrated transaction in which no specific consideration is allocated to
such Options by the parties thereto, the Options will be deemed to have been
issued for a consideration of $.01.


Treasury Shares.  The number of shares of Common Stock
outstanding at any given time does not include shares owned or held by or for
the account of the Company, and the disposition of any shares so owned or held
will be considered an issue or sale of Common Stock.


Record Date. 
If the Company takes a record of the holders of Common Stock for the
purpose of entitling them (1) to receive a dividend or other distribution
payable in Common Stock, Options or in convertible securities or (2) to
subscribe for or purchase Common Stock, Options or convertible securities, then
such record date will be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the declaration
of such dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.


Adjustment of
Warrant Exercise Price upon Subdivision or Combination of Common Stock.  If the Company at any time after the date of
issuance of this Warrant subdivides (by any stock split, stock dividend,
recapitalization or otherwise) one or more classes of its outstanding shares of
Common Stock into a greater number of shares, any Warrant Exercise Price in
effect immediately prior to such subdivision will be proportionately reduced
and the number of shares of Common Stock obtainable upon exercise of this
Warrant will be proportionately increased. 
If the Company at any time after the date of issuance of this Warrant
combines (by combination, reverse stock split or otherwise) one or more classes
of its outstanding shares of Common Stock into a smaller number of shares, any
Warrant Exercise Price in effect immediately prior to such combination will be
proportionately increased and the number of Warrant Shares issuable upon
exercise of this Warrant will be proportionately decreased.  Any adjustment under this Section 8(c)
shall become effective at the close of business on the date the subdivision or
combination becomes effective.


Distribution
of Assets.  If
the Company shall declare or make any dividend or other distribution of its
assets (or rights to acquire its assets) to holders of Common Stock, by way of
return of capital or otherwise (including, without limitation, any distribution
of cash, stock or other securities, property or options by way of a dividend,
spin off, reclassification, corporate rearrangement or other similar
transaction) (a “Distribution”), at any time after the issuance of this
Warrant, then, in each such case:



 14
 






 



any Warrant
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of Common Stock entitled to
receive the Distribution shall be reduced, effective as of the close of
business on such record date, to a price determined by multiplying such Warrant
Exercise Price by a fraction of which (A) the numerator shall be the Closing
Sale Price of the Common Stock on the trading day immediately preceding such
record date minus the value of the Distribution (as determined in good faith by
the Company’s Board of Directors) applicable to one share of Common Stock, and
(B) the denominator shall be the Closing Sale Price of the Common Stock on the
trading day immediately preceding such record date; and


in the event
that the Distribution is of common stock of a company whose common stock is
traded on a national securities exchange or a national automated quotation
system, then the holder of this Warrant shall receive an additional warrant to
purchase Common Stock, the terms of which shall be identical to those of this
Warrant, except that such warrant shall be exercisable into the amount of the
assets that would have been payable to the holder of this Warrant pursuant to
the Distribution had the holder exercised this Warrant immediately prior to
such record date and with an exercise price equal to the amount by which the
exercise price of this Warrant was decreased with respect to the Distribution
pursuant to the terms of the immediately preceding clause (i).


Certain Events.  If any event occurs of the type contemplated
by the provisions of this Section 8 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), other than
pursuant to an Approved Plan, then the Company’s Board of Directors will make
an appropriate adjustment in the Warrant Exercise Price and the number of
shares of Common Stock obtainable upon exercise of this Warrant so as to
protect the rights of the holders of the Warrants; provided, except as set
forth in section 8(c).


Notices.


Promptly upon
any adjustment of the Warrant Exercise Price, the Company will give written
notice thereof to the holder of this Warrant, setting forth in reasonable
detail, and certifying, the calculation of such adjustment.


The Company
will give written notice to the holder of this Warrant at least ten (10) days
prior to the date on which the Company closes its books or takes a record
(A) with respect to any dividend or distribution upon the Common Stock,
(B) with respect to any pro rata subscription offer to holders of Common
Stock or (C) for determining rights to vote with respect to any Organic
Change (as defined below), dissolution or liquidation, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.


The Company
will also give written notice to the holder of this Warrant at least ten (10)
days prior to the date on which any Organic Change, dissolution or liquidation
will take place, provided that such information shall be made known to the
public prior to or in conjunction with such notice being provided to such holder.



 15
 






 



(g)           Share Limitation.  Notwithstanding the above provisions of this
Section 8, the number of shares of Common Stock issuable upon exercise of this
Warrant shall in no event be increased to an amount such that the total number
of shares issuable under the transactions contemplated by the Securities
Purchase Agreement exceed 19.99% of the outstanding shares of Common  Stock as of the date of Securities Purchase
Agreement, until the Company’s shareholders approve (without the vote of any
shares acquired in this transaction and related transactions) the issuance of
the  shares issuable under the
transactions contemplated by the Securities Purchase Agreement.


Purchase Rights; Reorganization,
Reclassification, Consolidation, Merger or Sale.


In addition to
any adjustments pursuant to Section 8 above, if at any time the Company grants,
issues or sells any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property pro rata to the record holders of
any class of Common Stock (the “Purchase Rights”), then the holder of
this Warrant will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock
acquirable upon complete exercise of this Warrant immediately before the date
on which a record is taken for the grant, issuance or sale of such Purchase
Rights, or, if no such record is taken, the date as of which the record holders
of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.


Any
recapitalization, reorganization, reclassification, consolidation, merger, sale
of all or substantially all of the Company’s assets to another Person or other
transaction in each case which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent liquidation)
stock, securities or assets with respect to or in exchange for Common Stock is
referred to herein as an “Organic Change.”  Prior to the consummation of any (i) sale of
all or substantially all of the Company’s assets to an acquiring Person or (ii)
other Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the “Acquiring Entity”)
a written agreement (in form and substance satisfactory to the holders of
Warrants representing at least two-thirds of the Warrant Shares issuable upon
exercise of the Warrants then outstanding) to deliver to each holder of
Warrants in exchange for such Warrants, a security of the Acquiring Entity
evidenced by a written instrument substantially similar in form and substance
to this Warrant and satisfactory to the holders of the Warrants (including an
adjusted warrant exercise price equal to the value for the Common Stock
reflected by the terms of such consolidation, merger or sale, and exercisable
for a corresponding number of shares of Common Stock acquirable and receivable
upon exercise of the Warrants without regard to any limitations on exercise, if
the value so reflected is less than any Applicable Warrant Exercise Price
immediately prior to such consolidation, merger or sale).  Prior to the consummation of any other
Organic Change, the Company shall make appropriate provision (in form and
substance satisfactory to the holders of Warrants representing a majority of the Warrant Shares issuable upon exercise of the
Warrants then outstanding) to insure that each of the holders of the Warrants
will thereafter have the right to acquire and receive in lieu of or in addition
to (as the case may be) the Warrant Shares immediately theretofore issuable and
receivable upon the exercise of such holder’s Warrants (without regard to
any limitations on exercise), such shares of stock, securities or assets that
would have been issued or payable in such Organic Change with



 16
 






 



respect to or
in exchange for the number of Warrant Shares which would have been issuable and
receivable upon the exercise of such holder’s Warrant as of the date of such
Organic Change (without taking into account any limitations or restrictions on
the exercisability of this Warrant).


Lost, Stolen, Mutilated or Destroyed Warrant.  If this Warrant is lost, stolen, mutilated or
destroyed, the Company shall promptly, on receipt of an indemnification
undertaking (or, in the case of a mutilated Warrant, the Warrant), issue a new
Warrant of like denomination and tenor as this Warrant so lost, stolen, mutilated
or destroyed.


Notice.  Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this
Warrant must be in writing and will be deemed to have been delivered:  (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of receipt is received by the sending party transmission is
mechanically or electronically generated and kept on file by the sending
party); or (iii) one Business Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same.  The addresses
and facsimile numbers for such communications shall be:


	
  If to Holder:

  	
   

  	
  Cornell Capital Partners, LP

  
	
   

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Attention:

  	
  Mark A. Angelo

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
  With Copy to:

  	
   

  	
  David Gonzalez, Esq.

  
	
   

  	
   

  	
  101 Hudson Street — Suite 3700

  
	
   

  	
   

  	
  Jersey City, NJ 07302

  
	
   

  	
   

  	
  Telephone:

  	
  (201) 985-8300

  
	
   

  	
   

  	
  Facsimile:

  	
  (201) 985-8266

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  If to the Company, to:

  	
   

  	
  WorldGate Communications, Inc.

  
	
   

  	
   

  	
  3190 Tremont Avenue

  
	
   

  	
   

  	
  Trevose, PA 19053

  
	
   

  	
   

  	
  Attention:

  	
  Joel Boyarski

  
	
   

  	
   

  	
  Telephone:

  	
  (215) 354-5312

  
	
   

  	
   

  	
  Facsimile:

  	
  (215) 354-1049

  
	
   

  	
   

  	
   

  
	
  With a copy to:

  	
   

  	
  Drinker Biddle & Reath LLP

  
	
   

  	
   

  	
  1000 Westlakes Drive, Suite 300

  
	
   

  	
   

  	
  Berwyn, PA 19312-2409

  
	
   

  	
   

  	
  Attention:

  	
  Walter Mostek

  
	
   

  	
   

  	
  Telephone:

  	
  (610) 993-2233

  
	
   

  	
   

  	
  Facsimile:

  	
  (610) 993-8585

  



 



 17
 






 



If to a holder of this
Warrant, to it at the address and facsimile number set forth on Exhibit C
hereto, with copies to such holder’s representatives as set forth on Exhibit C,
or at such other address and facsimile as shall be delivered to the Company
upon the issuance or transfer of this Warrant. 
Each party shall provide five days’ prior written notice to the other
party of any change in address or facsimile number.  Written confirmation of receipt
(A) given by the recipient of such notice, consent, facsimile, waiver or
other communication, or (B) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.


Date. 
The date of this Warrant is set forth on page 1 hereof.  This Warrant, in all events, shall be
wholly void and of no effect after the close of business on the Expiration
Date.


Amendment and Waiver.  Except as otherwise provided herein, the
provisions of the Warrants may be amended and the Company may take any action
herein prohibited, or omit to perform any act herein required to be performed
by it, only if the Company has obtained the written consent of the holders of
Warrants representing at least two-thirds of the Warrant Shares issuable upon
exercise of the Warrants then outstanding; provided that, except for Section
8(c) or (e), no such action may increase the Warrant Exercise Price or decrease
the number of shares or class of stock obtainable upon exercise of any Warrant
without the written consent of the holder of such Warrant.


Descriptive Headings; Governing Law.  The descriptive headings of the several
sections and paragraphs of this Warrant are inserted for convenience only and
do not constitute a part of this Warrant. 
The corporate laws of the State of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders.  All other questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New Jersey, without giving
effect to any choice of law or conflict of law provision or rule (whether of
the State of New Jersey or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of New
Jersey.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in Hudson County and the United States District Court for the District of New
Jersey, for the adjudication of any dispute hereunder or in connection herewith
or therewith, or with any transaction contemplated hereby or discussed herein,
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 brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper.  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 to such party at the
address for such 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 manner
permitted by law.



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Waiver of Jury Trial.  AS A MATERIAL INDUCEMENT
FOR EACH PARTY HERETO TO ENTER INTO THIS WARRANT, THE PARTIES HERETO HEREBY
WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO
THIS WARRANT AND/OR ANY AND ALL OF THE OTHER DOCUMENTS ASSOCIATED WITH THIS
TRANSACTION.


REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK



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IN
WITNESS WHEREOF, the Company has caused this Warrant to be
signed as of the date first set forth above.


	
  

  	
  WORLDGATE COMMUNICATIONS, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  



 


 



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EXHIBIT A TO WARRANT


EXERCISE NOTICE


TO
BE EXECUTED 

BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT


WORLDGATE
COMMUNICATIONS, INC.


The undersigned holder hereby exercises the right to
purchase ______________ shares of Common Stock (“Warrant Shares”) of WorldGate
Communications, Inc. (the “Company”), evidenced by the attached Warrant
(the “Warrant”).  Capitalized
terms used herein and not otherwise defined shall have the respective meanings
set forth in the Warrant.


Specify Method of exercise by check mark:


1.  ___    Cash Exercise


(a) Payment of Warrant
Exercise Price. The holder shall pay the Aggregate Exercise Price of
$______________ to the Company in accordance with the terms of the Warrant.


(b) Delivery of
Warrant Shares.  The Company shall
deliver to the holder _________ Warrant Shares in accordance with the
terms of the Warrant.


2.  ___    Cashless Exercise


(a) Payment of Warrant
Exercise Price.  In lieu of making
payment of the Aggregate Exercise Price, the holder elects to receive upon such
exercise the Net Number of shares of Common Stock determined in accordance with
the terms of the Warrant.


(b) Delivery of
Warrant Shares.  The Company shall
deliver to the holder _________ Warrant Shares in accordance with the
terms of the Warrant.




	
  Date:
  _______________ __, ______

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Name of Registered Holder

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  






 









 



EXHIBIT B TO WARRANT


FORM OF WARRANT POWER


FOR VALUE RECEIVED,
the undersigned does hereby assign and transfer to ________________, Federal
Identification No. __________, a warrant to purchase ____________ shares
of the common stock of WorldGate Communications, Inc. represented by warrant
certificate no. _____, standing in the name of the undersigned on the
books of said corporation.  The
undersigned does hereby irrevocably constitute and appoint ______________,
attorney to transfer the warrants of said corporation, with full power of
substitution in the premises.




	
  Dated:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  






 









 



 


EXHIBIT B


RULE 144 ACKNOWLEDGEMENT AND AGREEMENT


For so long as the undersigned (i) beneficially
owns more than 0.8% of the outstanding shares WorldGate Communications, Inc.
(the “Company”) and (ii) is an “affiliate” of the Company (as
defined in Rule 144 of the General Rules and Regulations under the
Securities Act of 1933, as amended (the “Act”)), the undersigned hereby agrees
that for a period commencing on August ___, 2006 and expiring on the date
thirty (30) days after the date that 80% of the amounts owed to Cornell
Capital Partners, LP (the “Investor”), under the Secured
Convertible Debentures issued to the Investor pursuant to the Securities
Purchase Agreement between Company and the Investor dated August ___, 2006
have been paid (the “Lock-up Period”), he, she or it will not, directly
or indirectly, without the prior written consent of the Investor, issue, offer,
agree or offer to sell, sell, grant an option for the purchase or sale of,
transfer, pledge, assign, hypothecate, distribute or otherwise encumber or
dispose of any securities of the Company, including common stock or options,
rights, warrants or other securities underlying, convertible into, exchangeable
or exercisable for or evidencing any right to purchase or subscribe for any
common stock (whether or not beneficially owned by the undersigned), or any
beneficial interest therein (collectively, the “Securities”) on the
American Stock Exchange, New York Stock Exchange, the Nasdaq National Market,
the Nasdaq Capital Market or the Nasdaq OTC Bulletin Board except in accordance
with the volume limitations set forth in Rule 144(e) of the General Rules
and Regulations under the Act.


In order to enable the aforesaid covenants to be
enforced, the undersigned hereby consents to the placing of legends and/or stop-transfer
orders with the transfer agent of the Company’s securities with respect to any
of the Securities registered in the name of the undersigned or beneficially
owned by the undersigned, and the undersigned hereby confirms the undersigned’s
investment in the Company.


Dated: _______________,
2006


 




	
   

  	
  Signature

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Address:

  	
   

  
	
   

  	
  City, State, Zip Code:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Print Social Security Number

  
	
   

  	
  or Taxpayer I.D. Number