Document:

SETTLEMENT AGREEMENT
                              --------------------

     This Settlement Agreement (the "Agreement") dated this ___ day of August,
2006, is by and between ENCAPSULATION SYSTEMS, INC., a Pennsylvania corporation
with an address at Mills of Victoria, Bldg. 9, 1489 Baltimore Pike, Springfield,
PA 19064 ("ESI"), DERMISONICS, INC., a Nevada corporation with an address at 2
Park Plaza, Suite 450, Irvine, California 92614 ("Dermisonics") and DR. SANDRA
MCELLIGOTT, an adult individual with an address at 27 Long Point Lane, Rose
Valley, Pennsylvania 19063 ("McElligott").

                                    RECITALS
                                    --------

     WHEREAS, on February 12, 2004, an involuntary bankruptcy petition was filed
against ESI under chapter 7 of the Bankruptcy Code bearing case number 04-12089
(the "Bankruptcy Case"); and

     WHEREAS, on April 30, 2004, the United States Bankruptcy Court for the
Eastern District of Pennsylvania (the "Bankruptcy Court") entered an order
converting the case to a case under chapter 11, and ESI has owned its property
and managed its business as a debtor in possession since then; and

     WHEREAS, subsequently, the Bankruptcy Court entered an order approving the
sale of certain of ESI's intellectual property relating to its U-Strip
Technology (the "Intellectual Property") to Second Stage Ventures, Inc. ("SSV")
for $2,500,000 in deferred cash payments and the equivalent of $18,000,000 in
stock in SSV; and

     WHEREAS, subsequently, SSV changed its name to "Dermisonics, Inc."
(referred to herein as "Dermisonics"), which holds all legal right, title and
interest in and to the Intellectual Property; and

     WHEREAS, McElligott filed two proofs of claim bearing numbers 5 and 23 on
the claims register in ESI's bankruptcy case (the "Claims") in which McElligott
asserted claims as follows: (1) payment on account of a promissory note dated
February 8, 2001; (2) accrued and unpaid fees under a certain Consulting
Agreement II dated March 2, 2000 (the "Consulting Agreement"); (3) a royalty
under the Consulting Agreement equal to 1.5% of the consideration paid for the
Intellectual Property; and (4) additional shares of stock in ESI based upon a
split of shares owned by McElligott; and

     WHEREAS, ESI filed an objection to the Claims in which ESI disputed
McElligott's right to recover under any of the four basis asserted in the
Claims; and

     WHEREAS, the Bankruptcy Court entered an order confirming ESI's Amended
Second Plan of Reorganization dated February 8, 2005(the "Plan"); and

     WHEREAS, pursuant to the Plan, McElligott had a Class 1B Claim inasmuch as
her Claims, once liquidated, would be an unsecured claim in the case, and ESI
and McElligott agreed

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that McElligott elected to receive a combination of cash and Dermisonics stock
under the Plan as opposed solely to Dermisonics' stock for those who failed to
make such an election; and

     WHEREAS, to avoid the expense, rigors and uncertainties associated with
litigating ESI's objection to the Claims, at a hearing on June 29, 2006, ESI and
McElligott reached an agreement in principle to resolve the Claims and various
other matters (including those involving Dermisonics) in dispute between the
parties; and

     WHEREAS, the terms and conditions of that settlement are set forth in their
entirety in this Agreement.

     NOW, THEREFORE, incorporating the background herein and in consideration of
the premises and covenants herein contained and for other good and valuable
consideration, the receipt and legal sufficiency of which is hereby
acknowledged, and intending to be legally bound hereby, the parties hereto agree
as follows:

     1.     ESI's and Dermisonics' Undertakings.
            -----------------------------------

          (a)     ESI acknowledges and agrees that McElligott has an allowed
     unsecured claim in the Bankruptcy Case that will be treated as follows (the
     "Claim Treatment"): (i) within five business days of the date on which the
     official docket in the Bankruptcy Case reflects that the Bankruptcy Court
     has entered an order approving this Agreement in its entirety (that date
     being known as the "Effective Date"), ESI will pay McElligott the sum of
     $30,000 from the monies held in escrow from the sale of the Intellectual
     Property; (ii) Dermisonics agrees to pay to McElligott the total sum of
     $30,000 as follows: contemporaneous with the final two installment payments
     paid to ESI under the terms of the sale of the Intellectual Property, the
     sum of $15,000 on each such date; provided, however, that the first payment
     by Dermisonics to McElligott shall occur no later than September 30, 2006
     and the second payment no later than December 31, 2006; (iii) within five
     days of the Effective Date, ESI shall take all steps necessary to cause the
     transfer agent for Dermisonics to transfer 200,000 shares owned by ESI in
     Dermisonics to McElligott (subject to whatever restrictions on trading or
     otherwise that exist with respect to such shares); provided, however, that
     McElligott acknowledges and agrees that ESI has no control over or
     responsibility for any delays that may occur with respect to the transfer
     agent or otherwise so long as ESI has complied with its obligations timely;
     and (iv) within five days of the Effective Date, Dermisonics shall take all
     steps to issue 200,000 shares of Dermisonics' stock to McElligott subject
     to the same restrictions and possibilities of delay described in subpart
     (iii) of this Section 1(a). ESI's objection to the Claims shall be deemed
     "settled" under the foregoing terms. McElligott acknowledges that the
     shares of Dermisonics being transferred to her are "restricted securities,"
     as that term is defined in federal securities laws, will be subject to a
     legend restricting transfer, and may be transferred only in compliance with
     state and federal securities laws and the receipt by Dermisonics of an
     opinion of legal counsel as to the legality of such transfer from an
     attorney reasonably satisfactory to Dermisonics.

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<PAGE>
          (b)     With the exception of McElligott's obligations under this
     Agreement, ESI, on behalf of itself and any person or entity claiming by,
     through or under it (the "ESI Releasors"), hereby unconditionally remises,
     releases and forever discharges McElligott, including her executors,
     administrators, heirs, and permitted successors and assigns (the
     "McElligott Releasees"), of and from any and all manner of actions, causes
     of action, suits, debts, dues, accounts, bonds, covenants, contracts,
     agreements, promises, warranties, guaranties, representations, liens,
     judgments, claims, counterclaims, cross claims, defenses and/or demands
     whatsoever, including claims for contribution and/or indemnity, whether now
     known or unknown, past or present, asserted or unasserted, contingent or
     liquidated, at law or in equity, or resulting from any assignment, if any,
     which any of the ESI Releasors ever had or now have against the McElligott
     Releasees, for or by reason of any cause, matter or thing whatsoever,
     arising from the beginning of time to the date of execution of this
     Agreement. Within five days of the Effective Date, ESI agrees to file with
     the Office of Judicial Support (Civil) for the Court of Common Pleas of
     Delaware County a praecipe to mark the case at Encapsulation Systems, Inc.
                                                    ---------------------------
     v. Sandra McElligott and SMcE Consultants, No. 01-11157 (the "Delaware
     -----------------------------------------
     County Civil Action") "settled, discontinued and ended." ESI warrants and
     represents that it has not assigned, pledged, hypothecated and/or otherwise
     divested itself and/or encumbered all or any part of the claims being
     released hereby and that it hereby agrees to indemnify and hold harmless
     any and all of McElligott Releasees against any party who asserts or claims
     that such an assignment, pledge, hypothecation, divestiture and/or
     encumbrance was made.

     2.     McElligott's Undertakings.
            --------------------------

          (a)     McElligott acknowledges and agrees that (i) the Claim
     Treatment shall be in full and final satisfaction of all of ESI's and
     Dermisonics' obligations to McElligott with respect to the Claims and any
     other claims that McElligott has against ESI and Dermisonics; (ii)
     McElligott irrevocably waives any past, present or future claim for
     royalties or any other claims arising under, related to or in connection
     with the Consulting Agreement or otherwise; (iii) McElligott has no
     ownership interest in the Intellectual Property or any other intellectual
     property rights or know-how that ESI created, developed, or conceived
     during her relationship with ESI or that McElligott created, developed or
     conceived in connection with her relationship with ESI, including but not
     limited to ideas, concepts, themes, inventions, methods, processes,
     devices, apparatus, compositions of matter, designs, improvements,
     discoveries, designations, patents, patent applications, copyrights, trade
     secrets and trademarks, conceived, developed, reduced to practice,
     discovered and/or written by McElligott, either individually or jointly in
     collaboration with others (collectively, the "ESI Intellectual Property");
     and (iv) McElligott will not, directly or indirectly, seek to patent or
     otherwise disclose or claim any of the ESI Intellectual Property.

          (b)     With five days of the Effective Date, McElligott shall turn
     over to ESI all documents, papers or other materials in McElligott's
     possession, custody or control that are, contain information set forth in
     or in any way derived from the Intellectual Property

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<PAGE>
     or any other rights or assets of ESI, including, without limitation, all
     originals, copies, notes or electronic media (the "Confidential
     Information"). ESI and Dermisonics acknowledge and agree that Confidential
     Information does not include any information that enters the public domain
     through sources independent of McElligott through no fault or assistance of
     McElligott, including, without limitation, granted patents and published
     patent applications. Upon effectuating the foregoing turnover, McElligott
     hereby certifies that (i) all such property has been turned over to ESI;
     (ii) McElligott has not retained any such property or any rights in such
     property; and (iii) the property was not at any time given to or made
     accessible to any other third party other than McElligott's legal counsel
     in the Delaware County Civil Action or the Bankruptcy Case, any person who
     is reflected as a witness in the laboratory books of McElligott and as
     required by the presiding judge in the Delaware County Civil Action.

          (c)     McElligott acknowledges that all shares owned by her in ESI
     shall be deemed irrevocably transferred to ESI immediately upon the
     execution of this Agreement and that ESI is authorized to reflect same in
     its corporate books and records, including its stock ledger. In addition,
     McElligott waives any claim to any shares in ESI based upon a split in the
     shares that she owned or otherwise. With five days of the Effective Date,
     McElligott shall deliver to ESI any and all original certificates in
     McElligott's possession reflecting her ownership interest in ESI or a
     certification that said certificates have been lost, destroyed or stolen.

          (d)     With the exception of ESI's and Dermisonics' obligations
     under this Agreement, McElligott, on behalf of herself and any person or
     entity claiming by, through or under her (the "McElligott Releasors"),
     hereby unconditionally remises, releases and forever discharges ESI and
     Dermisonics (in its capacity as purchaser of the Intellectual Property),
     including their respective officers, directors, shareholders and all of
     their permitted successors and assigns (the "ESI/Dermisonics Releasees"),
     of and from any and all manner of actions, causes of action, suits, debts,
     dues, accounts, bonds, covenants, contracts, agreements, promises,
     warranties, guaranties, representations, liens, judgments, claims,
     counterclaims, cross claims, defenses and/or demands whatsoever, including
     claims for contribution and/or indemnity, whether now known or unknown,
     past or present, asserted or unasserted, contingent or liquidated, at law
     or in equity, or resulting from any assignment, if any, which any of the
     McElligott Releasors ever had or now have against the ESI/Dermisonics
     Releasees, for or by reason of any cause, matter or thing whatsoever,
     arising from the beginning of time to the date of execution of this
     Agreement. McElligott warrants and represents that she has not assigned,
     pledged, hypothecated and/or otherwise divested herself and/or encumbered
     all or any part of the claims being released hereby and that she hereby
     agrees to indemnify and hold harmless any and all of ESI/Dermisonics
     Releasees against any party who asserts or claims that such an assignment,
     pledge, hypothecation, divestiture and/or encumbrance was made.

          (e)     McElligott agrees that she will keep as confidential and not
     disclose any Confidential Information to any individual or entity except as
     authorized pursuant to

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<PAGE>
     subpoena or judicial or governmental order and, in that situation, only as
     follows: (i) McElligott will promptly notify ESI and Dermisonics of receipt
     of any such request, (ii) consult with ESI and Dermisonics on the
     advisability of taking steps to resist or narrow such request, and (iii)
     cooperate with ESI and Dermisonics in any attempt that it/they may make to
     obtain an order or other reliable assurance that confidential treatment
     will be accorded to designated portions or all of the Confidential
     Information. In the absence of a protective order or the receipt of a
     waiver hereunder, McElligott may disclose such portion of the Confidential
     Information as is required to be disclosed in order to avoid penalty for
     noncompliance.

          (f)     At all times following the execution of this Agreement,
     McElligott agrees to execute and deliver to ESI and/or Dermisonics or shall
     cause to be executed and delivered to ESI and/or Dermisonics, and shall do
     or cause to be done, all such other acts and things as ESI/Dermisonics may
     reasonably deem to be necessary or desirable to protect, seek, obtain,
     maintain, register, enforce, record and defend its/their intellectual
     property, including, but not limited to, the Intellectual Property. By way
     of further non-limiting example only, McElligott will:

               (i)     communicate to ESI/Dermisonics, and their successors,
     assigns, and legal representatives or nominees, any facts known respecting
     any and all to ideas, concepts, themes, inventions, methods, processes,
     devices, apparatus, compositions of matter, designs, improvements,
     discoveries, designations, patents, patent applications, copyrights, trade
     secrets and trademarks, conceived, developed, reduced to practice,
     discovered and/or written by McElligott, either individually or jointly in
     collaboration with others, in connection with and/or during her
     relationship with ESI, when requested by ESI/Dermisonics, or their
     successors, assigns, and legal representatives or nominees;

               (ii)     sign all papers, take all rightful oaths, make all
     rightful declarations, and do all acts that may be reasonably necessary,
     desirable or convenient, in ESI's/Dermisonics', or their successors',
     assigns', or nominees' sole discretion, for securing and/or maintaining
     patents and/or other forms of protection for intellectual property,
     including, but not limited to, the Intellectual Property, in any and all
     countries of the World and for vesting title thereto in ESI/Dermisonics,
     and their successors, assigns and nominees;

               (iii)     authorize and empower ESI/Dermisonics, and their
     successors, assigns and nominees, to make application for patent or other
     form of protection for any and all to ideas, concepts, themes, inventions,
     methods, processes, devices, apparatus, compositions of matter, designs,
     improvements, discoveries, designations, patents, patent applications,
     copyrights, trade secrets and trademarks, conceived, developed, reduced to
     practice, discovered and/or written by McElligott, either individually or
     jointly in collaboration with others, in connection with and/or during her
     relationship with ESI, in any and all countries of the World, and to invoke
     and claim for any application for patent or other form of protection filed
     by it or them, the benefit of the right of priority provided

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<PAGE>
     by the International Convention for the Protection of Industrial Property,
     as amended, or by any convention which may henceforth be substituted for
     it, and to invoke and claim such right of priority without further written
     or oral authorization from her; and

               (iv)     assist ESI/Dermisonics to evaluate all past and future
     inventorship issues relating to the intellectual property, including, but
     not limited to, the Intellectual Property, including, without limitation,
     submitting to interviews necessary to evaluate any inventorship issues. In
     this regard, ESI and/or Dermisonics shall make such documents and
     information available during any such interview as it/they deem appropriate
     for the limited purpose of evaluating the inventorship issues, provided
     that such access and availability shall at all times be under and subject
     to the confidentiality and non-disclosure provisions set forth in this
     Agreement.

     3.     Dermisonics Release of McElligott.  Dermisonics, on behalf of itself
            ---------------------------------
and any person or entity claiming by, through or under it (the "Dermisonics
Releasors"), hereby unconditionally remises, releases and forever discharges the
McElligott Releasees, of and from any and all manner of actions, causes of
action, suits, debts, dues, accounts, bonds, covenants, contracts, agreements,
promises, warranties, guaranties, representations, liens, judgments, claims,
counterclaims, cross claims, defenses and/or demands whatsoever, including
claims for contribution and/or indemnity, whether now known or unknown, past or
present, asserted or unasserted, contingent or liquidated, at law or in equity,
or resulting from any assignment, if any, which any of the Dermisonics Releasors
ever had or now have against the other, for or by reason of any cause, matter or
thing whatsoever, arising from the beginning of time to the date of execution of
this Agreement.   Dermisonics warrants and represents that it has not assigned,
pledged, hypothecated and/or otherwise divested itself and/or encumbered all or
any part of the claims being released hereby and that it hereby agrees to
indemnify and hold harmless any and all of McElligott Releasees against any
party who asserts or claims that such an assignment, pledge, hypothecation,
divestiture and/or encumbrance was made.

     4.     Judicial Relief.  McElligott acknowledges that disclosure of any
            ---------------
Confidential Information will give rise to immediate and irreparable injury to
ESI that would be inadequately compensated in money damages alone.  Accordingly,
ESI may seek injunctive relief against the breach, or threatened breach, of the
disclosure of any Confidential Information by McElligott, in addition to any
other legal remedies which may be available.

     5.     Amendments.  Any amendment to this Agreement shall be made in
            ----------
writing and signed by the parties hereto.

     6.     Severability.  The provisions of this Agreement will, to the
            ------------
greatest extent possible, be interpreted in such a manner as to comply with
applicable law, but if any provision hereof is, notwithstanding such
interpretation, determined to be invalid, void or unenforceable, the remaining
provisions of this Agreement will not be affected thereby but will remain in
full force and effect and be binding upon the parties hereto, unless the
deletion of such invalid, void or unenforceable provision or provisions would
result in such a material change as to cause the

                                        6
<PAGE>
continuation of this Agreement to be unreasonable.

     7.     Assignment; Binding Effect.   The rights and obligations of the
            --------------------------
parties hereto under this Agreement shall inure to the benefit of, and shall be
binding upon, their respective successors and assigns.  Reference to McElligott
throughout this Agreement is intended to mean and be binding upon Sandra
McElligott as well as any other party or entity through which McElligott
conducts business or her affairs.

     8.     Counterparts.  This  Agreement may be signed by each party hereto by
            ------------
facsimile and in several counterparts, in which event all such counterparts
shall constitute one agreement, binding on all the parties hereto.

     9.     Fees and Costs.  In any action to enforce the terms of this
            --------------
Agreement, the prevailing party shall be entitled to recover its attorneys' fees
and court costs and other non-reimbursable litigation expenses.

     10.     Governing Law; Enforceability.  Each party agrees that the
             -----------------------------
formation, interpretation and performance of this Agreement shall be governed by
the laws of the Commonwealth of Pennsylvania excluding its conflict of law rules
and that this Agreement can be enforced by the Bankruptcy Court or any other
court having jurisdiction over the enforceability of a contract generally,
including the United States District Court for the Eastern District of
Pennsylvania and the Court of Common Pleas of Delaware County, Pennsylvania.
The language of all parts of this Agreement shall in all cases be construed as a
whole, according to its fair meaning, and not strictly for or against any party.

     11.     Integrated Agreement.  Each party agrees that this Agreement sets
             --------------------
forth the entire agreement between them on this subject and supersedes all other
oral and written understandings or agreements between the parties regarding the
subject matter of this Agreement.  The terms of this Agreement are contractual
and not mere recitals.   All heading, titles and similar items are provided for
the purpose of reference and convenience and are not intended to affect the
meaning, content or scope of this Agreement.

     12.     Representation by Counsel.  Each party hereto acknowledges that
             -------------------------
she/it has had the benefit of legal counsel of her/its own choice and has been
afforded an opportunity to review this Agreement with her/its legal counsel and
agrees that this Agreement shall be construed as if jointly drafted by all the
parties hereto.

     13.     Preservation of Legal Rights.  This Agreement shall be interpreted
             ----------------------------
consistently with, and nothing contained herein shall be deemed as an attempt to
modify or circumvent the requirement under Title 35 of the United States Code,
and corresponding foreign laws, as interpreted by the courts of competent
jurisdiction, that only the true inventor(s) may apply for patent.  Further,
nothing contained herein shall constitute a waiver on behalf of any person of
any right to be lawfully named as such an inventor, or any remedy under
applicable law, rule or regulation to enforce such right.

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<PAGE>
     IN WITNESS WHEREOF, this Agreement has been executed by the parties as of
the date first written above.

ATTEST                             ENCAPSULATION SYSTEMS, INC.

                                   By:
----------------------                   -----------------------------
                                         Name:  Bruce Redding
                                         Title:    President

ATTEST                             DERMISONICS, INC.

                                   By:   /s/ Bruce Haglund
----------------------                   -----------------------------
                                         Name: Bruce Haglund
                                         Title: Chairman

WITNESS

----------------------             --------------------------------------
                                   Sandra McElligott

                                        8EX 10.1

    EXHIBIT
      10.1

    

    SECURITIES
      PURCHASE AGREEMENT

     

    This
      Securities Purchase Agreement (this “Agreement”)
      is
      dated as of August 17, 2006 among Spectre Gaming, Inc., a Minnesota corporation
      (the “Company”),
      and
      each purchaser identified on the signature pages hereto (each, including its
      successors and assigns, a “Purchaser”
and
      collectively the “Purchasers”).

     

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

     

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

     

    ARTICLE
      I.

    DEFINITIONS

     

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

     

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

     

    “Affiliate”
means
      any Person that, directly or indirectly through one or more intermediaries,
      controls or is controlled by or is under common control with a Person, as such
      terms are used in and construed under Rule 144 under the Securities
      Act.
      With
      respect to a Purchaser, any investment fund or managed account that is managed
      on a discretionary basis by the same investment manager as such Purchaser will
      be deemed to be an Affiliate of such Purchaser.

     

    “Bridge
      Notes”
means
      (i) up to $630,000 in principal amount (plus any accrued but unpaid interest
      thereon) of the 11% Secured Promissory Note, dated July 11, 2006, issued by
      the
      Company to Rockmore Investment Master Fund Ltd. (which shall be deemed to be
      cash consideration for purposes of this Agreement) and (ii) up to $600,000
      (plus
      any accrued but unpaid interest thereon) of the Unsecured Convertible Promissory
      Notes, dated May 5, 2006 and May 9, 2006, issued by the Company to D. Bradly
      Olah, Ronald E. Eibensteiner, Thomas P. Magne, PR Partners and Woodville LLC,
      respectively.

    
      
         

      

      
         

        
          

        

      

      
         

      

       

    

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

     

    “Closing”
means
      the closing of the purchase and sale of the Securities pursuant to Section
      2.1.

     

    “Closing
      Date”
means
      the Trading Day when all of the Transaction Documents have been executed and
      delivered by the applicable parties thereto, and all conditions precedent to
      (i)
      the Purchasers’ obligations to pay the Subscription Amount and (ii) the
      Company’s obligations to deliver the Securities have been satisfied or
      waived.

     

    “Commission”
means
      the Securities and Exchange Commission.

     

    “Common
      Stock”
means
      the common stock of the Company, par value $.01 per share, and any other class
      of securities into which such securities may hereafter be reclassified or
      changed into.

     

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

     

    “Company
      Counsel”
means
      Maslon Edelman Borman & Brand, LLP, with offices located at 3300 Wells Fargo
      Centre, 90 South Seventh Street, Minneapolis, MN 55402.

     

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

     

    “Debentures”
means,
      the Variable Rate Convertible Debentures due, subject to the terms therein,
      30
      months from their date of issuance, issued by the Company to the Purchasers
      hereunder, in the form of Exhibit
      A
      attached
      hereto.

     

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

     

    “Effective
      Date”
means
      the date that the initial Registration Statement filed by the Company pursuant
      to the Registration Rights Agreement is first declared effective by the
      Commission.

     

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

     

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

    
      
        
           

        

        
          -2-

          
            

          

        

        
           

        

      

    

    

    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers,
      directors or consultants of the Company pursuant to any stock or option 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, provided that any such issuance(s)
      to
      consultants shall not exceed an aggregate of 150,000 shares (adjusted for
      reverse and forward stock splits, recapitalizations and the like) of Common
      Stock or Common Stock Equivalents in any 12-month period, (b) securities upon
      the exercise or exchange of or conversion of any Securities issued hereunder
      and/or other securities exercisable or exchangeable for or convertible into
      shares of Common Stock issued and outstanding on the date of this Agreement,
      provided that such securities have not been amended since the date of this
      Agreement to increase the number of such securities or to decrease the exercise,
      exchange or conversion price of such securities, (c) securities issued pursuant
      to acquisitions or strategic transactions approved by a majority of the
      disinterested directors of the Company, provided any such issuance shall only
      be
      to a Person which is, itself or through its subsidiaries, an operating company
      in a business synergistic with the business of the Company and in which the
      Company receives benefits in addition to the investment of funds, but shall
      not
      include a transaction in which the Company is issuing securities primarily
      for
      the purpose of raising capital or to an entity whose primary business is
      investing in securities, (d) shares of Common Stock issued in connection with
      regularly scheduled dividend payments on the Series B Preferred Stock, provided
      that the
      terms
      of such Series B Preferred Stock have not been materially amended since the
      date
      hereof
      and (e)
      Common Stock and/or Common Stock Equivalents issued and issuable from time
      to
      time to Rockmore in connection with its ownership of the Secured Promissory
      Note
      due September 30, 2006 of the Company.

    “FWS”
means
      Feldman Weinstein & Smith LLP with offices located at 420 Lexington Avenue,
      Suite 2620, New York, New York 10170-0002.

     

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

     

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

     

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

     

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

     

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

     

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

     

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

    
      
         

      

      
        -3-

        
          

        

      

      
         

      

       

    

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

     

    “Participation
      Maximum”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

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

     

    “Pre-Notice”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

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

     

    “Purchaser
      Party”
shall
      have the meaning ascribed to such term in Section 4.11.

     

    “Registration
      Rights Agreement”
means
      the Registration Rights Agreement, dated the date hereof, among the Company
      and
      the Purchasers, in the form of Exhibit
      B
      attached
      hereto.

     

    “Registration
      Statement”
means
      a
      registration statement meeting the requirements set forth in the Registration
      Rights Agreement and covering the resale of the Underlying Shares by each
      Purchaser as provided for in the Registration Rights Agreement.

     

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

     

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

     

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

     

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

     

    “Securities”
means
      the Debentures, the Warrants, the Warrant Shares and the Underlying
      Shares.

    
      
         

      

      
        -4-

        
          

        

      

      
         

      

       

    

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

     

    “Series
      B Preferred Stock”
means
      the Series B Variable Rate Convertible Preferred Stock of the Company issued
      pursuant to the certificate of designation filed with the State of Minnesota
      on
      October 26, 2005.

     

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

     

    “Subscription
      Amount”
      means,
      as
      to each Purchaser, the aggregate amount
      to be
      paid for Debentures and Warrants purchased hereunder as specified below such
      Purchaser’s name on the signature page of this Agreement and next to the heading
“Total Subscription Amount”, in United States Dollars and in immediately
      available funds which may include (i) the surrender and cancellation of the
      Bridge Notes and (ii) the surrender and cancellation of outstanding shares
      of
      Series B Preferred Stock, provided that, for each Purchaser surrendering shares
      of Series B Preferred Stock, there is no more than a 1:1 ratio between (a)
      the
      stated value and accrued but unpaid dividends on such shares of Series B
      Preferred Stock and (b) new cash consideration paid by such Purchaser under
      this
      Agreement.

     

    “Subsequent
      Financing”
shall
      have the meaning ascribed to such term in Section 4.13.

     

    “Subsequent
      Financing Notice”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

    “Subsidiary”
means
      any subsidiary of the Company as set forth on Schedule
      3.1(a).

     

    “Trading
      Day”
means
      a
      day on which the Common Stock is traded on a Trading Market.

     

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

     

    “Transaction
      Documents”
means
      this Agreement, the Debentures, the Warrants, the Registration Rights Agreement
      and any other documents or agreements executed in connection with the
      transactions contemplated hereunder.

     

    “Transfer
      Agent”
means
      American Stock Transfer & Trust Company, with a mailing address of 59 Maiden
      Lane, New York, New York 10038 and a facsimile number of (718) 921-8355, and
      any
      successor transfer agent of the Company.

    
      
         

      

      
        -5-

        
          

        

      

      
         

      

       

    

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

     

    “Variable
      Rate Transaction”
      shall
      have the meaning ascribed to such term in Section 4.14(b).

     

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

     

    “Warrants”
means
      collectively the Common Stock purchase warrants delivered to the Purchasers
      at
      the Closing in accordance with Section 2.2(a) hereof, which Warrants shall
      be
      exercisable immediately and have a term of exercise equal to 5 years, in the
      form of Exhibit C
      attached
      hereto.

     

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

     

    ARTICLE
      II.

    PURCHASE
      AND SALE

     

    2.1 Closing.
      On the
      Closing Date, upon the terms and subject to the conditions set forth herein
      and
      substantially concurrent with the execution and delivery of this Agreement
      by
      the parties hereto, the Company agrees to sell, and each Purchaser agrees to
      purchase, severally and not jointly, up to an aggregate of $14,700,000 in
      principal amount of the Debentures (of which no more than $7,000,000 shall
      be
      purchased for cash and of which $7,700,000 is available for purchase upon the
      surrender and cancellation of the Bridge Notes and outstanding shares of Series
      B Preferred Stock). Each Purchaser shall deliver to the Company immediately
      available funds via wire transfer or a certified check (and/or the Bridge Notes
      and/or outstanding shares of Series B Preferred Stock for cancellation) equal
      to
      its Subscription Amount and the Company shall deliver to each Purchaser its
      respective Debenture and a Warrant, as determined pursuant to Section 2.2(a),
      and the Company and each Purchaser shall deliver the other items set forth
      in
      Section 2.2 deliverable at the Closing. Upon satisfaction of the conditions
      set
      forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of FWS
      or
      such other location as the parties

    
      
         

      

      
        -6-

        
          

        

      

      
         

      

    

     

    shall
      mutually agree.

     

    2.2  Deliveries.

     

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

     

    
      
        (i) 
          this
          Agreement duly executed by the Company;

         

      

    

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

     

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

     

    (iv) in
      connection with Subscription Amounts paid (a) in cash and (b) through the
      surrender and cancellation of Bridge Notes only, a Warrant registered in the
      name of such Purchaser to purchase up to a number of shares of Common Stock
      equal to 200% of such Purchaser’s Subscription Amount divided by $1.00, with an
      exercise price equal to $1.10,
      subject
      to adjustment as provided therein; and

     

    (v) the
      Registration Rights Agreement duly executed by the Company.

     

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

     

    
      
        (i) 
          this
          Agreement duly executed by such Purchaser;

         

      

    

    (ii) such
      Purchaser’s Subscription Amount by (a) wire transfer to the account as specified
      in writing by the Company, (b) the surrender and cancellation of the Bridge
      Notes, (c) the surrender and cancellation of the outstanding shares of Series
      B
      Preferred Stock or (d) a combination thereof; and

     

    (iii) the
      Registration Rights Agreement duly executed by such Purchaser.

     

    2.3 Closing
      Conditions. 

     

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

     

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

     

    (ii) all
      obligations, covenants and agreements of the Purchasers

    
      
         

      

      
        -7-

        
          

        

      

      
         

      

    

     

    required
      to be performed at or prior to the Closing Date shall have been performed;
      and

     

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

     

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

     

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

     

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

     

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

     

    (iv) the
      aggregate Subscription Amounts hereunder include at least $5,000,000 in
      cash;

     

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

     

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

    
      
         

      

      
        -8-

        
          

        

      

      
         

      

    

     

    ARTICLE
      III.

    REPRESENTATIONS
      AND WARRANTIES

     

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

     

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

     

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

     

    (c) Authorization;
      Enforcement.
      The
      Company has the requisite corporate power and authority to enter into and to
      consummate the transactions contemplated by each of the Transaction Documents
      and otherwise to carry out its obligations hereunder and thereunder. The
      execution and delivery of each of the Transaction Documents by the Company
      and
      the consummation by it of the transactions contemplated hereby and thereby
      have
      been duly authorized by all necessary action on the part of the
      Company

    
      
         

      

      
        -9-

        
          

        

      

      
         

      

    

     

    and
      no
      further action is required by the Company, its board of directors or its
      stockholders in connection therewith other than in connection with the Required
      Approvals. Each Transaction Document has been (or upon delivery will have been)
      duly executed by the Company and, when delivered in accordance with the terms
      hereof and thereof, will constitute the valid and binding obligation of the
      Company enforceable against the Company in accordance with its terms except
      (i)
      as limited by general equitable principles and applicable bankruptcy,
      insolvency, reorganization, moratorium and other laws of general application
      affecting enforcement of creditors’ rights generally, (ii) as limited by laws
      relating to the availability of specific performance, injunctive relief or
      other
      equitable remedies and (iii) insofar as indemnification and contribution
      provisions may be limited by applicable law.

     

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

     

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

    
      
         

      

      
        -10-

        
          

        

      

      
         

      

       

    

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

     

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

     

    (h) SEC
      Reports; Financial Statements.
      The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by the Company under the Securities Act and the Exchange
      Act, including pursuant to Section 13(a) or

    
      
         

      

      
        -11-

        
          

        

      

      
         

      

       

    

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

     

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

    
      
         

      

      
        -12-

        
          

        

      

      
         

      

       

    

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

     

    (k) Labor
      Relations.
      No
      material labor dispute exists or, to the knowledge of the Company, is imminent
      with respect to any of the employees of the Company which could reasonably
      be
      expected to result in a Material Adverse Effect. None of the Company’s or its
      Subsidiaries’ employees is a member of a union that relates to such employee’s
      relationship with the Company, and neither the Company or any of its
      Subsidiaries is a party to a collective bargaining agreement, and the Company
      and its Subsidiaries believe that their relationships with their employees
      are
      good. No executive officer, to the knowledge of the Company, is, or is now
      expected to be, in violation of any material term of any employment contract,
      confidentiality, disclosure or proprietary information agreement or
      non-competition agreement, or any other contract or agreement or any restrictive
      covenant, and the continued employment of each such executive officer does
      not
      subject the Company or any of its Subsidiaries to any liability with respect
      to
      any of the foregoing matters. The Company and its Subsidiaries are in compliance
      with all U.S. federal, state, local and foreign laws and regulations relating
      to
      employment and employment practices, terms and conditions of employment and
      wages and hours, except where the failure to be in compliance could not,
      individually or in the aggregate, reasonably be expected to have a Material
      Adverse Effect.

     

    (l) Compliance.
      Except
      as set forth on Schedule
      3.1(l)
      attached
      hereto, neither the Company nor any Subsidiary (i) is in default under or in
      violation of (and no event has occurred that has not been waived that, with
      notice or lapse of time or both, would result in a default by the Company or
      any
      Subsidiary under), nor has the Company or any Subsidiary received notice of
      a
      claim that it is in default under or that it is in violation of, any indenture,
      loan or credit agreement or any other agreement or instrument to which it is
      a
      party or by which it or any of its properties is bound (whether or not such
      default or violation has been waived), (ii) is in violation of any order of
      any
      court, arbitrator or governmental body, or (iii) is or has been in violation
      of
      any statute, rule or regulation of any governmental authority, including without
      limitation all foreign,

    
      
         

      

      
        -13-

        
          

        

      

      
         

      

    

     

    federal,
      state and local laws applicable to its business and all such laws that affect
      the environment, except in each case as could not have or reasonably be expected
      to result in a Material Adverse Effect.

     

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

     

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

     

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

     

    (p) Insurance.
      The
      Company and the Subsidiaries are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are prudent
      and customary in the businesses in which the Company and the Subsidiaries are
      engaged, including, but not limited to, directors and officers insurance
      coverage at

    
      
         

      

      
        -14-

        
          

        

      

      
         

      

    

     

    least
      equal to the aggregate Subscription Amount. Neither the Company nor any
      Subsidiary has any reason to believe that it will not be able to renew its
      existing insurance coverage as and when such coverage expires or to obtain
      similar coverage from similar insurers as may be necessary to continue its
      business without a significant increase in cost.

     

    (q) Transactions
      With Affiliates and Employees.
      Except
      as set forth in the SEC Reports, none of the officers or directors of the
      Company and, to the knowledge of the Company, none of the employees of the
      Company is presently a party to any transaction with the Company or any
      Subsidiary (other than for services as employees, officers and directors),
      including any contract, agreement or other arrangement providing for the
      furnishing of services to or by, providing for rental of real or personal
      property to or from, or otherwise requiring payments to or from any officer,
      director or such employee or, to the knowledge of the Company, any entity in
      which any officer, director, or any such employee has a substantial interest
      or
      is an officer, director, trustee or partner, in each case in excess of $60,000
      other than (i) for payment of salary or consulting fees for services rendered,
      (ii) reimbursement for expenses incurred on behalf of the Company and (iii)
      for
      other employee benefits, including stock option agreements under any stock
      option plan of the Company.

     

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

    
      
         

      

      
        -15-

        
          

        

      

      
         

      

       

    

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

     

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

     

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

     

    (v) Registration
      Rights.
      Other
      than each of the Purchasers and as set forth on Schedule
      3.1(v)
      attached
      hereto, no Person has any right to cause the Company to effect the registration
      under the Securities Act of any securities of the Company.

     

    (w) Listing
      and Maintenance Requirements.
      The
      Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
      Exchange Act, and the Company has taken no action designed to, or which to
      its
      knowledge is likely to have the effect of, terminating the registration of
      the
      Common Stock under the Exchange Act nor has the Company received any
      notification that the Commission is contemplating terminating such registration.
      The Company has not, in the 12 months preceding the date hereof, received notice
      from any Trading Market on which the Common Stock is or has been listed or
      quoted to the effect that the Company is not in compliance with the listing
      or
      maintenance requirements of such Trading Market. The Company is, and has no
      reason to believe that it will not in the foreseeable future continue to be,
      in
      compliance with all such listing and maintenance requirements.

     

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

    
      
         

      

      
        -16-

        
          

        

      

      
         

      

    

     

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

     

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

     

    (aa) Solvency.
      Based
      on the financial condition of the Company as of the Closing Date after giving
      effect to the receipt by the Company of the proceeds from the sale of the
      Securities hereunder, (i) the fair saleable value of the Company’s assets
      exceeds the amount that will be required to be paid on or in respect of the
      Company’s existing debts and other liabilities (including known contingent
      liabilities) as they mature; (ii) the Company’s assets do not constitute
      unreasonably small capital to carry on its business as now conducted and as
      proposed to be conducted including its capital needs taking into account the
      particular capital requirements of the business conducted by the Company, and
      projected capital requirements and capital availability thereof; and (iii)
      the
      current cash flow of the Company, together with the proceeds the Company would
      receive, were it to liquidate all of its assets, after taking into account
      all
      anticipated uses of the cash, would be sufficient to pay all amounts on or
      in
      respect of its liabilities when such amounts are required to be paid. The
      Company does not intend to incur debts beyond its ability to pay such debts
      as
      they mature (taking into account the timing and amounts of cash to be payable
      on
      or in respect of its debt). The Company has no knowledge of any facts or
      circumstances which lead it to believe that it will file for

    
      
         

      

      
        -17-

        
          

        

      

      
         

      

    

     

    reorganization
      or liquidation under the bankruptcy or reorganization laws of any jurisdiction
      within one year from the Closing Date. Schedule
      3.1(aa)
      sets
      forth as of the dates thereof all outstanding secured and unsecured Indebtedness
      of the Company or any Subsidiary, or for which the Company or any Subsidiary
      has
      commitments. For the purposes of this Agreement, “Indebtedness”
shall
      mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000
      (other than trade accounts payable incurred in the ordinary course of business),
      (b) all guaranties, endorsements and other contingent obligations in respect
      of
      Indebtedness of others, whether or not the same are or should be reflected
      in
      the Company’s balance sheet (or the notes thereto), except guaranties by
      endorsement of negotiable instruments for deposit or collection or similar
      transactions in the ordinary course of business; and (c) the present value
      of
      any lease payments
      in excess of $50,000 due under leases required to be capitalized in accordance
      with GAAP. Neither
      the Company nor any Subsidiary is in default with respect to any
      Indebtedness.

     

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

     

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

     

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

     

    (ee) Accountants.
      The
      Company’s accountants are set forth on Schedule
      3.1(ee)
      of the
      Disclosure Schedule. To the knowledge of the Company, such accountants, who
      the
      Company expects will express their opinion with respect to the financial
      statements to be included in the Company’s Annual Report on Form 10-KSB for the
      year ended December 31, 2006, are a registered public accounting firm as
      required by the Exchange Act.

     

    (ff) Seniority.
      Except
      as set forth on Schedule
      3.1(ff)
      attached
      hereto, as of the Closing Date, no Indebtedness or other claim against the
      Company is senior to the

    
      
         

      

      
        -18-

        
          

        

      

      
         

      

    

     

    Debentures
      in right of payment, whether with respect to interest or upon liquidation or
      dissolution, or otherwise, other than indebtedness secured by purchase money
      security interests (which is senior only as to underlying assets covered
      thereby) and capital lease obligations (which is senior only as to the property
      covered thereby).

     

    (gg) No
      Disagreements with Accountants and Lawyers.
      There
      are no disagreements of any kind presently existing, or reasonably anticipated
      by the Company to arise, between the Company and the accountants and lawyers
      formerly or presently employed by the Company and the Company is current with
      respect to any fees owed to its accountants and lawyers.

     

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

     

    (ii) Regulation
      M Compliance.
      Anything in this Agreement or elsewhere herein to the contrary notwithstanding
      (except for Sections 3.2(f) and 4.16 hereof), it is understood and acknowledged
      by the Company (i) that none of the Purchasers have been asked to agree, nor
      has
      any Purchaser agreed, to desist from purchasing or selling, long and/or short,
      securities of the Company, or “derivative” securities based on securities issued
      by the Company or to hold the Securities for any specified term; (ii) that
      past
      or future open market or other transactions by any Purchaser, including Short
      Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
      placement transactions, may negatively impact the market price of the Company’s
      publicly-traded securities; (iii) that any Purchaser, and counter-parties in
      “derivative” transactions to which any such Purchaser is a party, directly or
      indirectly, presently may have a “short” position in the Common Stock, and (iv)
      that each Purchaser shall not be deemed to have any affiliation with or control
      over any arm’s length counter-party in any “derivative” transaction.
The
      Company further understands and acknowledges that (a) one or more Purchasers
      may
      engage in hedging activities at various times during the period that the
      Securities are outstanding, including, without limitation, during the periods
      that the value of the Underlying Shares deliverable with respect to Securities
      are being determined and (b) such hedging activities (if any) could reduce
      the
      value of the existing stockholders' equity interests in the Company at and
      after
      the time that the hedging activities are being

    
      
         

      

      
        -19-

        
          

        

      

      
         

      

    

     

    conducted. 
      The Company acknowledges that such aforementioned hedging activities do not
      constitute a breach of any of the Transaction Documents.

     

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

     

    (kk) Form
      SB-2 Eligibility.
      The
      Company is eligible to register the resale of the Underlying Shares for resale
      by the Purchaser on Form SB-2 promulgated under the Securities Act.

     

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

     

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

     

    (b) Own
      Account.
      Such
      Purchaser understands that the Securities are “restricted securities” and have
      not been registered under the Securities Act or any applicable state securities
      law and is acquiring the Securities as principal for its own account and not
      with a view to or for distributing or reselling such Securities or any part
      thereof in violation of the Securities Act or any applicable state securities
      law, has no present intention of distributing any of such Securities in
      violation of the Securities Act or any applicable state securities law and
      has
      no direct or indirect arrangement or understandings with any other persons
      to
      distribute or regarding the distribution of such

    
      
         

      

      
        -20-

        
          

        

      

      
         

      

    

     

    Securities
      (this representation and warranty not limiting such Purchaser’s right to sell
      the Securities pursuant to the Registration Statement or otherwise in compliance
      with applicable federal and state securities laws) in violation of the
      Securities Act or any applicable state securities law. Such Purchaser is
      acquiring the Securities hereunder in the ordinary course of its
      business.

     

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

     

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

     

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

     

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

    
      
         

      

      
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    ARTICLE
      IV.

    OTHER
      AGREEMENTS OF THE PARTIES

     

    4.1 Transfer
      Restrictions.

     

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

     

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

     

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

     

    The
      Company acknowledges and agrees that a Purchaser may from time to time pledge
      pursuant to a bona fide margin agreement with a registered broker-dealer or
      grant a security interest in some or all of the Securities to a financial
      institution that is an “accredited investor” as defined in Rule 501(a) under the
      Securities Act and who agrees to be bound by the provisions of this Agreement
      and the Registration Rights Agreement and, if required under the terms of such
      arrangement, such Purchaser may transfer pledged or secured Securities to the
      pledgees or secured parties. Such a pledge or

    
      
         

      

      
        -22-

        
          

        

      

      
         

      

    

     

    transfer
      would not be subject to approval of the Company and no legal opinion of legal
      counsel of the pledgee, secured party or pledgor shall be required in connection
      therewith. Further, no notice shall be required of such pledge. At the
      appropriate Purchaser’s expense, the Company will execute and deliver such
      reasonable documentation as a pledgee or secured party of Securities may
      reasonably request in connection with a pledge or transfer of the Securities,
      including, if the Securities are subject to registration pursuant to the
      Registration Rights Agreement, the preparation and filing of any required
      prospectus supplement under Rule 424(b)(3) under the Securities Act or other
      applicable provision of the Securities Act to appropriately amend the list
      of
      Selling Stockholders thereunder.

     

    (c) Certificates
      evidencing the Underlying Shares shall, upon their issuance or reissuance,
      not
      contain any legend (including the legend set forth in Section 4.1(b) hereof):
      (i) while a registration statement (including the Registration Statement)
      covering the resale of such security is effective under the Securities Act,
      or
      (ii) following any sale of such Underlying Shares pursuant to Rule 144, or
      (iii)
      if such Underlying Shares are eligible for sale under Rule 144(k), or (iv)
      if
      such legend is not required under applicable requirements of the Securities
      Act
      (including judicial interpretations and pronouncements issued by the staff
      of
      the Commission). The Company shall cause its counsel to issue a legal opinion
      to
      the Company’s transfer agent promptly after the Effective Date if required by
      the Company’s transfer agent to effect the removal of the legend hereunder. If
      all or any portion of a Debenture or Warrant is converted or exercised (as
      applicable) at a time when there is an effective registration statement to
      cover
      the resale of the Underlying Shares, or if such Underlying Shares may be sold
      under Rule 144(k) or if such legend is not otherwise required under applicable
      requirements of the Securities Act (including judicial interpretations and
      pronouncements issued by the staff of the Commission) then such Underlying
      Shares shall be issued free of all legends. The Company agrees that following
      the Effective Date or at such time as such legend is no longer required under
      this Section 4.1(c), it will, no later than three Trading Days following the
      delivery by a Purchaser to the Company or the Company’s transfer agent, as
      applicable, of a certificate representing Underlying Shares, together with
      all
      required paperwork relating to Rule 144, issued with a restrictive legend (such
      third Trading Day, the “Legend
      Removal Date”),
      deliver or cause to be delivered to such Purchaser a certificate representing
      such shares that is free from all restrictive and other legends. The Company
      may
      not make any notation on its records or give instructions to any transfer agent
      of the Company that enlarge the restrictions on transfer set forth in this
      Section. Certificates for Underlying Shares subject to legend removal hereunder
      shall be transmitted by the transfer agent of the Company to the Purchasers
      by
      crediting the account of the Purchaser’s prime broker with the Depository Trust
      Company System.

    

    (d) In
      addition to such Purchaser’s other available remedies, the Company shall pay to
      a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
      each $1,000 of Underlying Shares (based on the VWAP of the Common Stock on
      the
      date such Securities are submitted to the Company’s transfer agent) delivered
      for removal of the restrictive legend and subject to Section 4.1(c), $10 per
      Trading Day (increasing to $20 per Trading Day 5 Trading Days after such damages
      have begun to accrue) for each

    
      
         

      

      
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    Trading
      Day after the second Trading Day following the Legend Removal Date until such
      certificate is delivered without a legend. Nothing herein shall limit such
      Purchaser’s right to pursue actual damages for the Company’s failure to deliver
      certificates representing any Securities as required by the Transaction
      Documents, and such Purchaser shall have the right to pursue all remedies
      available to it at law or in equity including, without limitation, a decree
      of
      specific performance and/or injunctive relief.

     

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

     

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

     

    4.3 Furnishing
      of Information.
      As long
      as any Purchaser owns Securities, the Company covenants to timely file (or
      obtain extensions in respect thereof and file within the applicable grace
      period) all reports required to be filed by the Company after the date hereof
      pursuant to the Exchange Act. As long as any Purchaser owns Securities, if
      the
      Company is not required to file reports pursuant to the Exchange Act, it will
      prepare and furnish to the Purchasers and make publicly available in accordance
      with Rule 144(c) such information as is required for the Purchasers to sell
      the
      Securities under Rule 144. The Company further covenants that it will take
      such
      further action as any holder of Securities may reasonably request, to the extent
      required from time to time to enable such Person to sell such Securities without
      registration under the Securities Act within the requirements of the exemption
      provided by Rule 144.

     

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

    
      
         

      

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

     

    4.6 Securities
      Laws Disclosure; Publicity.
      The
      Company shall, by 8:30 a.m. New York City time on the Trading Day following
      the
      date hereof, issue a Current Report on Form 8-K disclosing the material terms
      of
      the transactions contemplated hereby and filing the Transaction Documents as
      attachments thereto. The Company and each Purchaser shall consult with each
      other in issuing any other press releases with respect to the transactions
      contemplated hereby, and, except as set forth in Section 4.8 below, neither
      the
      Company nor any Purchaser shall issue any such press release or otherwise make
      any such public statement without the prior consent of the Company, with respect
      to any press release of any Purchaser, or without the prior consent of each
      Purchaser, with respect to any press release of the Company, which consent
      shall
      not unreasonably be withheld or delayed, except if such disclosure is required
      by law, in which case the disclosing party shall promptly provide the other
      party with prior notice of such public statement or communication.
      Notwithstanding the foregoing, the Company shall not publicly disclose the
      name
      of any Purchaser, or include the name of any Purchaser in any filing with the
      Commission or any regulatory agency or Trading Market, without the prior written
      consent of such Purchaser, except (i) as required by federal securities law
      in
      connection with (A) any registration statement contemplated by the Registration
      Rights Agreement and (B) the filing of final Transaction Documents (including
      signature pages thereto) with the Commission and (ii) to the extent such
      disclosure is required by law or Trading Market regulations, in which case
      the
      Company shall provide the Purchasers with prior notice of such disclosure
      permitted under this subclause (ii).

     

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

     

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

    
      
         

      

      
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    requirements
      in Section 4.6, in the event of a breach of the foregoing covenant by the
      Company, any of its Subsidiaries or any of its or their respective officers,
      directors, employees or agents, the Purchaser shall have, in addition to any
      other remedy provided herein or in the Transaction Documents, the right to
      make
      a public disclosure in the form of a press release, public advertisement or
      otherwise of such material, non-public information without the prior approval
      of
      the Company, its Subsidiaries or any of its or their respective officers,
      directors, employees or agents. No Purchaser shall have any liability to the
      Company, its Subsidiaries or any of its or their respective officers, directors,
      employees, stockholders or agents for any such disclosure.

     

    4.9 Use
      of
      Proceeds.
      The
      Company shall use the net proceeds from the sale of the Securities hereunder
      specifically as set forth on Schedule
      4.9
      attached
      hereto and not for the satisfaction of any portion of the Company’s debt (other
      than as set forth thereon), to redeem Common Stock or Common Stock Equivalents
      or to settle any outstanding litigation.

     

    4.10 [RESERVED]

     

    4.11 Indemnification
      of Purchasers.
      Subject
      to the provisions of this Section 4.11, the Company will indemnify and hold
      each
      Purchaser and its directors, officers, shareholders, members, partners,
      employees and agents (and any other Persons with a functionally equivalent
      role
      of a Person holding such titles notwithstanding a lack of such title or any
      other title), each Person who controls such Purchaser (within the meaning of
      Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
      directors, officers, shareholders, agents, members, partners or employees (and
      any other Persons with a functionally equivalent role of a Person holding such
      titles notwithstanding a lack of such title or any other title) of such
      controlling person (each, a “Purchaser
      Party”)
      harmless from any and all losses, liabilities, obligations, claims,
      contingencies, damages, costs and expenses, including all judgments, amounts
      paid in settlements, court costs and reasonable attorneys’ fees and costs of
      investigation that any such Purchaser Party may suffer or incur as a result
      of
      or relating to (a) any breach of any of the representations, warranties,
      covenants or agreements made by the Company in this Agreement or in the other
      Transaction Documents or (b) any action instituted against a Purchaser, or
      any
      of them or their respective Affiliates, by any stockholder of the Company who
      is
      not an Affiliate of such Purchaser, with respect to any of the transactions
      contemplated by the Transaction Documents (unless such action is based upon
      a
      breach of such Purchaser’s representations, warranties or covenants under the
      Transaction Documents or any agreements or understandings such Purchaser may
      have with any such stockholder or any violations by the Purchaser of state
      or
      federal securities laws or any conduct by such Purchaser which constitutes
      fraud, gross negligence, willful misconduct or malfeasance). If any action
      shall
      be brought against any Purchaser Party in respect of which indemnity may be
      sought pursuant to this Agreement, such Purchaser Party shall promptly notify
      the Company in writing, and the Company shall have the right to assume the
      defense thereof with counsel of its own choosing reasonably acceptable to the
      Purchaser Party. Any Purchaser Party shall have the right to employ separate
      counsel in any such action and participate in the defense thereof, but the
      fees
      and expenses of such counsel shall be at the expense of such Purchaser Party
      except to the extent that (i) the employment thereof, at the Company’s expense,
      has been specifically authorized by the Company in writing, (ii) the Company
      has
      failed after a reasonable period of time to assume such defense and to
      employ

    
      
         

      

      
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    counsel
      or (iii) in such action there is, in the reasonable opinion of such separate
      counsel, a material conflict on any material issue between the position of
      the
      Company and the position of such Purchaser Party, in which case the Company
      shall be responsible for the reasonable fees and expenses of no more than one
      such separate counsel. The Company will not be liable to any Purchaser Party
      under this Agreement (i) for any settlement by a Purchaser Party effected
      without the Company’s prior written consent, which shall not be unreasonably
      withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
      claim, damage or liability is attributable to any Purchaser Party’s breach of
      any of the representations, warranties, covenants or agreements made by such
      Purchaser Party in this Agreement or in the other Transaction
      Documents.

     

    4.12 Reservation
      and Listing of Securities.

     

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

     

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

     

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

     

    4.13 Participation
      in Future Financing.
      

     

    (a) Subject
      to the first rights of the holders of the Series B Preferred Stock, from the
      date hereof until the date that is the 12 month anniversary of the Effective
      Date, upon any issuance by the Company or any of its Subsidiaries of Common
      Stock or Common Stock Equivalents for cash consideration (a “Subsequent
      Financing”),
      each
      Purchaser shall have the right to participate in up to an amount of the
      Subsequent Financing equal to 100% of the Subsequent Financing (the
“Participation
      Maximum”)
      on the
      same terms, conditions and price provided for in the Subsequent Financing.
      

     

    (b) At
      least
      5 Trading Days prior to the closing of the Subsequent Financing, the Company
      shall deliver to each Purchaser a written notice of its intention to effect
      a
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Purchaser if it

    
      
         

      

      
        -27-

        
          

        

      

      
         

      

    

     

    wants
      to
      review the details of such financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of a Purchaser, and only upon a request by such Purchaser, for
      a
      Subsequent Financing Notice, the Company shall promptly, but no later than
      1
      Trading Day after such request, deliver a Subsequent Financing Notice to such
      Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
      the proposed terms of such Subsequent Financing, the amount of proceeds intended
      to be raised thereunder, the Person or Persons through or with whom such
      Subsequent Financing is proposed to be effected, and attached to which shall
      be
      a term sheet or similar document relating thereto. 

     

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

     

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

     

    (e) If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Purchasers have received the Pre-Notice, the Company
      receives responses to a Subsequent Financing Notice from Purchasers seeking
      to
      purchase more than the aggregate amount of the Participation Maximum, each
      such
      Purchaser shall have the right to purchase the greater of (a) their Pro Rata
      Portion (as defined below) of the Participation Maximum and (b) the difference
      between the Participation Maximum and the aggregate amount of participation
      by
      all other Purchasers.  “Pro
      Rata Portion”
is
      the
      ratio of (x) the Subscription Amount of Securities purchased on the Closing
      Date
      by a Purchaser participating under this Section 4.13 and (y) the sum of the
      aggregate Subscription Amounts of Securities purchased on the Closing Date
      by
      all Purchasers participating under this Section 4.13.

     

    (f) The
      Company must provide the Purchasers with a second Subsequent Financing Notice,
      and the Purchasers will again have the right of participation set forth above
      in
      this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on the terms set forth in
      such Subsequent Financing Notice within 90 Trading Days after the date of the
      initial Subsequent Financing Notice.

    
      
         

      

      
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    (g) Notwithstanding
      the foregoing, this Section 4.13 shall not apply in respect of (i) an Exempt
      Issuance or (ii) an underwritten public offering of Common Stock.

     

    4.14 Subsequent
      Equity Sales.
      

     

    (a) From
      the
      date hereof until 90 days after the Effective Date, neither the Company nor
      any
      Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
      provided,
      however,
      the 90
      day period set forth in this Section 4.14 shall be extended for the number
      of
      Trading Days during such period in which (i) trading in the Common Stock is
      suspended by any Trading Market, or (ii) following the Effective Date, the
      Registration Statement is not effective or the prospectus included in the
      Registration Statement may not be used by the Purchasers for the resale of
      the
      Underlying Shares. 

     

    (b) From
      the
      date hereof until such time as no Purchaser holds any of the Securities, the
      Company shall be prohibited from effecting or entering into an agreement to
      effect any Subsequent Financing involving a Variable Rate Transaction;
provided,
      however,
      that
      the Company may effect or enter such agreement involving a Variable Rate
      Transaction upon the prior written consent of Purchasers holding in the
      aggregate at least 55% in principal amount of the Debentures. The term
“Variable
      Rate Transaction”
shall
      mean a transaction in which the Company issues or sells (i) any debt or equity
      securities that are convertible into, exchangeable or exercisable for, or
      include the right to receive additional shares of Common Stock either (A) at
      a
      conversion, exercise or exchange rate or other price that is based upon and/or
      varies with the trading prices of or quotations for the shares of Common Stock
      at any time after the initial issuance of such debt or equity securities, or
      (B)
      with a conversion, exercise or exchange price that is subject to being reset
      at
      some future date after the initial issuance of such debt or equity security
      or
      upon the occurrence of specified or contingent events directly or indirectly
      related to the business of the Company or the market for the Common Stock or
      (ii) enters into any agreement, including, but not limited to, an equity line
      of
      credit, whereby the Company may sell securities at a future determined price.
      

     

    (c) Notwithstanding
      the foregoing, this Section 4.14 shall not apply in respect of an Exempt
      Issuance, except that no Variable Rate Transaction shall be an Exempt
      Issuance. 

     

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

     

    4.16 Short
      Sales and Confidentiality After The Date Hereof.
      Each
      Purchaser severally and not jointly with the other Purchasers covenants that
      neither it nor any Affiliate acting on its behalf or pursuant to any
      understanding with it will execute any Short Sales during the
      period

    
      
         

      

      
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    commencing
      at the Discussion Time and ending at the time that the transactions contemplated
      by this Agreement are first publicly announced as described in Section 4.6.
      Each
      Purchaser, severally and not jointly with the other Purchasers, covenants that
      until such time as the transactions contemplated by this Agreement are publicly
      disclosed by the Company as described in Section 4.6, such Purchaser will
      maintain the confidentiality of all disclosures made to it in connection with
      this transaction (including the existence and terms of this transaction). Each
      Purchaser understands and acknowledges, severally and not jointly with any
      other
      Purchaser, that the Commission currently takes the position that coverage of
      short sales of shares of the Common Stock “against the box” prior to the
      Effective Date of the Registration Statement with the Securities is a violation
      of Section 5 of the Securities Act, as set forth in Item 65, Section A, of
      the
      Manual of Publicly Available Telephone Interpretations, dated July 1997,
      compiled by the Office of Chief Counsel, Division of Corporation Finance.
      Notwithstanding the foregoing, no Purchaser makes any representation, warranty
      or covenant hereby that it will not engage in Short Sales in
      the
      securities of the Company after the time that the transactions contemplated
      by
      this Agreement are first publicly announced as described in Section 4.6.
      Notwithstanding the foregoing, in the case of a Purchaser that is a
      multi-managed investment vehicle whereby separate portfolio managers manage
      separate portions of such Purchaser's assets and the portfolio managers have
      no
      direct knowledge of the investment decisions made by the portfolio managers
      managing other portions of such Purchaser's assets, the covenant set forth
      above
      shall only apply with respect to the portion of assets managed by the portfolio
      manager that made the investment decision to purchase the Securities covered
      by
      this Agreement.

     

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

     

    4.18 Capital
      Changes.
      Until
      the one year anniversary of the Effective Date, the Company shall not undertake
      a reverse or forward stock split or reclassification of the Common Stock without
      the prior written consent of the Purchasers holding a majority in principal
      amount outstanding of the Debentures.

     

    ARTICLE
      V.

    MISCELLANEOUS

     

    5.1 Termination. 
      This Agreement may be terminated by any Purchaser, as to such Purchaser’s
      obligations hereunder only and without any effect whatsoever on the obligations
      between the Company and the other Purchasers, by written notice to the other
      parties, if the Closing has not been consummated on or before August __, 2006;
      provided,
      however,
      that
      such termination will not affect the right of any party to sue for any breach
      by
      the other party (or parties).

    
      
         

      

      
        -30-

        
          

        

      

      
         

      

    

     

    5.2 Fees
      and Expenses.
      At the
      Closing, the Company has agreed to reimburse Rockmore Investment Master Fund
      Limited (“Rockmore”)
      the
      non-accountable sum of $45,000, for its legal fees and expenses. Accordingly,
      in
      lieu of the foregoing payments, the aggregate amount that Rockmore is to pay
      for
      the Securities at the Closing shall be reduced by $45,000 in lieu thereof.
      The
      Company shall deliver to each Purchaser, prior to the Closing, a completed
      and
      executed copy of the Closing Statement attached hereto as Annex
      A.
      Except
      as expressly set forth in the Transaction Documents to the contrary, each party
      shall pay the fees and expenses of its advisers, counsel, accountants and other
      experts, if any, and all other expenses incurred by such party incident to
      the
      negotiation, preparation, execution, delivery and performance of this Agreement.
      The Company shall pay all transfer agent fees, stamp taxes and other taxes
      and
      duties levied in connection with the delivery of any Securities to the
      Purchasers.

     

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

     

    5.4 Notices.
      Any and
      all notices or other communications or deliveries required or permitted to
      be
      provided hereunder shall be in writing and shall be deemed given and effective
      on the earliest of (a) the date of transmission, if such notice or communication
      is delivered via facsimile at the facsimile number set forth on the signature
      pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading
      Day,
      (b) the next Trading Day after the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto on a day that is not a Trading Day or later
      than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd
      Trading
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

     

    5.5 Amendments;
      Waivers.
      Except
      as otherwise set forth herein, any provision of this Agreement may be waived,
      modified, supplemented or amended in a written instrument signed by the Company
      and Purchasers holding at least 55% in principal amount of the then-outstanding
      Debentures. No waiver of any default with respect to any provision, condition
      or
      requirement of this Agreement shall be deemed to be a continuing waiver in
      the
      future or a waiver of any subsequent default or a waiver of any other provision,
      condition or requirement hereof, nor shall any delay or omission of any party
      to
      exercise any right hereunder in any manner impair the exercise of any such
      right.

     

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

     

    5.7 Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and permitted assigns. The Company may not assign this
      Agreement or any rights or obligations hereunder without the prior written
      consent of each Purchaser (other than by merger). Any Purchaser may assign
      any
      or all of its rights under this

    
      
         

      

      
        -31-

        
          

        

      

      
         

      

    

     

    Agreement
      to any Person to whom such Purchaser assigns or transfers any Securities,
      provided such transferee agrees in writing to be bound, with respect to the
      transferred Securities, by the provisions of the Transaction Documents that
      apply to the “Purchasers”.

     

    5.8 No
      Third-Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      successors and permitted assigns and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person, except as otherwise set
      forth
      in Section 4.11.

     

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

     

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

     

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

    
      
         

      

      
        -32-

        
          

        

      

      
         

      

    

     

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

     

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

     

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

     

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

     

    5.16 Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to any Purchaser pursuant
      to
      any Transaction Document or a Purchaser enforces or exercises its rights
      thereunder, and such payment or payments or the proceeds of such enforcement
      or
      exercise or any part thereof are subsequently invalidated, declared to be
      fraudulent or preferential, set aside, recovered from, disgorged by or are
      required to be refunded, repaid or otherwise restored to the Company, a trustee,
      receiver or any other person under any law (including, without limitation,
      any
      bankruptcy law, state or federal law, common law or equitable cause of action),
      then to the extent of any such restoration the obligation or part
      thereof

    
      
         

      

      
        -33-

        
          

        

      

      
         

      

    

     

    originally
      intended to be satisfied shall be revived and continued in full force and effect
      as if such payment had not been made or such enforcement or setoff had not
      occurred.

     

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

     

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

     

    5.19 Liquidated
      Damages.
      The
      Company’s obligations to pay any partial liquidated damages or other amounts
      owing under the Transaction Documents is a continuing obligation of

    
      
         

      

      
        -34-

        
          

        

      

      
         

      

    

     

    the
      Company and shall not terminate until all unpaid partial liquidated damages
      and
      other amounts have been paid notwithstanding the fact that the instrument or
      security pursuant to which such partial liquidated damages or other amounts
      are
      due and payable shall have been canceled.

     

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

     

    (Signature
      Pages Follow)

      
        
           

        

        
          -35-

          
            

          

        

        
           

        

      

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

     

    
      	
              SPECTRE
                GAMING, INC.

            	
              Address
                for Notice:

            
	 	 
	
              By:__________________________________________

              Name:
                Kevin M. Greer

              Title:
                Chief Financial Officer

            	
              14200
                23rd
                Avenue North

              Minneapolis,
                MN 55447

              Attention:
                Chief Financial Officer

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

              Maslon
                Edelman Borman & Brand, LLP

              3300
                Wells Fargo Centre

              90
                South Seventh Street

              Minneapolis,
                MN 55402

              Attention:
                Paul D. Chestovich

            	 

    

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR PURCHASER FOLLOWS]

      
        
           

        

        
          -36-

          
            

          

        

        
           

        

      

    [PURCHASER
      SIGNATURE PAGES TO SGMG SECURITIES PURCHASE AGREEMENT]

    

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

     

    Name
      of
      Purchaser: ________________________________________________________

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

    Name
      of
      Authorized Signatory:
      ____________________________________________________

    Title
      of
      Authorized Signatory:
      _____________________________________________________

    Email
      Address of Purchaser:
      ________________________________________________

    Facsimile
      Number of Purchaser:
      ________________________________________________

    

    Address
      for Notice of Purchaser:

    

    

    

    

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

    

    

    

    Principal
      amount plus accrued 

    but
      unpaid interest of Bridge Notes: ____________

    

    Stated
      value plus accrued but unpaid 

    dividends
      of shares of Series B Preferred Stock: ___________

    

    Cash
      Payable at Closing: ____________

    

    Total
      Subscription Amount: _____________

    

    Warrant
      Shares: _________________

    

    

    EIN
      Number: [PROVIDE
      THIS UNDER SEPARATE COVER]

    

    [SIGNATURE
      PAGES CONTINUE]

      
        
           

        

          -37-

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