Document:

DiaSys Corporation - Exhibit 10.7

 Exhibit 10.7

INDEMNIFICATION AND MUTUAL CONTRIBUTION AGREEMENT 

                
INDEMNIFICATION AND MUTUAL CONTRIBUTION AGREEMENT, dated as of the 13th day of
August, 2004, by and among MORRIS SILVERMAN (the "Lender"), GREGORY WITCHEL, ROBERT
M. WIGODA, HOWARD M. BLOOM , SHERWIN GILBERT, KENNETH GROSSMAN and JEFFREY B.
AARONSON (all of whom are hereinafter sometimes collectively referred to as the
"Guarantors") and DIASYS CORPORATION , a Delaware corporation (the "Company").

RECITALS

                
The Lender is the Chairman of the Board of Directors of the Company and the Guarantors
are officers directors of the Company. 

                
The Company has entered into a Settlement and General Release Agreement with Todd
M. DeMatteo pursuant to which the Company is obliged to make certain payments
on or before August 16, 2004 and certain additional payments on or before September
16, 2004 (the "Settlement Payments"). The Company will suffer severe adverse effects
if it does not make the Settlement Payments at the times required. 

                
The Company does not have funds to make such Settlement Payments and is in urgent
need of additional working capital. 

                
The Company has used its best efforts to borrow necessary funds from a commercial
lending institution but has been unable to do so because it lacks the cash flow
and tangible assets necessary to support such borrowing. 

                
As an accommodation to the Company and to enable it to avoid default under the
terms of the DeMatteo settlement, the Lender is willing to make a personal loan
or loans to the Company in the amount of up to $600,000 (collectively, the "Loan"),
but only on the terms and conditions set forth herein and in the Loan and Security
Agreement between the Lender and the Company being executed and delivered concurrently
herewith (the "Loan Agreement"). 

                

AGREEMENT

                
In consideration of the premises and the mutual covenants contained herein,
the parties do hereby agree as follows:

                
1. The Loan. Concurrently herewith, the Lender is making the Loan to the
Company in the amount of $475,000 upon the terms and conditions set forth herein.
The Lender, in his 

- 1 -

 discretion, may make advance additional sums up to an aggregate
of $600,000 principal amount of the Loan. The Loan is evidenced by two or more
Convertible Promissory Notes (the "Notes"), which are convertible into shares
of Common Stock of the Company, as provided in the Loan Agreement and the Notes.

                
2. Guarantors. Each of the Guarantors will execute a Personal Guaranty
Agreement in the form delivered herewith (each a "Guaranty Agreement") pursuant
to which such Guarantor will personally guaranty repayment of a portion of the
Loan and related costs as set forth on Schedule I attached hereto. 

                
3. Company Indemnity. The Company hereby agrees to indemnify the Lender
and each of the Guarantors and hold them harmless from and against any and all
loss, cost or expense of any and every nature arising out of this Agreement, the
Loan Agreement and/or the individual Guaranty Agreements, as the case may be.
Such indemnity shall include any and all direct or indirect loss, cost, expense
or damages of any and every nature, including without limitation any and all legal
fees and expenses incurred in enforcing the Lender's or the Guarantor's rights
hereunder and all amounts constituting "Indemnified Amounts" as hereinafter defined.

                
4. Compensation of Lender and Guarantors. In consideration of agreements
of the Lender to make the Loan and the Guarantors to execute and deliver the Guaranty
Agreements and this Agreement, the Company agrees to compensate the Lender and
the Guarantors through the issuance of shares of its Common Stock, $.001 par value
("Common Stock"), which shares shall be deemed fully paid and nonassessable, as
follows:

                
(a) With respect to the Lender, as additional compensation for the making of the
Loan, as provided in the Loan Agreement, the Company shall issue to the Lender,
without further payment or consideration, One (1) share of Common Stock for each
Four (4) Dollars principal amount of the Loan. Accordingly, based on the $475,000
initial principal amount of the Loan, 118,750 shares of Common Stock are being
issued concurrently herewith and up to an additional 31,250 shares may be issued
as additional amounts are advanced in respect of the Loan. 

                
(b) With respect to each Guarantor, as compensation for the execution and delivery
of such Guarantor's Guaranty Agreement, the Company shall issue to such Guarantor,
without further payment or consideration, One (1) share of Common Stock for each
Six (6) Initial Exposure Dollars, as hereinafter defined, which shares shall be
deemed fully paid and nonassessable. Accordingly, shares are being issued to the
Guarantors as set forth on Schedule I attached hereto. 

                
(c) As used herein, the term "Exposure Dollars" shall mean with respect to each
Guarantor an amount equal to the portion of the Loan for which each Guarantor
is responsible as provided in the several Guaranty Agreements and as set forth
on Schedule I attached hereto (collectively, the "Guaranty Percentages"). 

                
6. Mutual Indemnity. (a) The Lender and each of the Guarantors agree that
all 

- 2 -

Indemnified Amounts (as hereinafter defined) shall be borne by
the Lender and the Guarantors in accordance with the Guaranty Percentages. 

                
(b) As used herein, the term "Indemnified Amounts" shall mean the unpaid amount
of any sums due to the Lender under the Loan Agreement following a Loss Event
(as hereinafter defined), including without limitation the amount of any costs
or expense incurred by the Lender in collecting or managing the Loan or as a result
of any foreclosure against, or taking possession of, any assets of the Company

                
(c) As used herein the term "Loss Event" shall mean the occurrence of any event
of default under the Loan Agreement, including without limitation, the failure
of the Company to repay any indebtedness owed to the Lender when due or honor
any other obligation to the Lender in respect of the Loan when due. 

                
(d) Following any Loss Event, the Lender may make written demand upon each of
the Guarantors for payment of their respective Guaranty Percentages of the Indemnified
Amount arising from the Loss Event. Within five business days of the making of
such written demand, all Guarantors shall pay their respective Indemnification
Percentages of the Indemnified Amount directly to the Lender. 

                7.
Expenses of Lender. In the event the Lender shall be required to take legal
action to enforce the terms of any Guaranty Agreement or this Agreement against
any Guarantor (a "Delinquent Guarantor"), such Delinquent Guarantor shall pay
to the Lender, in addition to such Delinquent Guarantor's Percentage Indemnification,
all legal fees and expenses reasonably incurred by the Lender in enforcing the
Lender's rights hereunder against such Delinquent Guarantor. 

                8.
Representations of Lender and Guarantors. Each of the Lender and Guarantors
acknowledges that the transactions contemplated by the Loan Agreement, the Notes,
the Guaranty Agreements and this Agreement constitute an investments in the Common
Stock (the "Shares") issuable pursuant to this Agreement and the Loan Agreement
and upon conversion of the Notes and that such investments are suitable only for
sophisticated investors and are being offered and sold under the exemption provided
under Sections 4(2) and 4(6) of the Securities Act of 1933, as amended (the "Securities
Act"), and Rule 506 promulgated thereunder and similar state securities law exemptions
for private offerings, and makes the following representations, declarations and
warranties with the intent that the same be relied upon in determining the suitability
as a shareholder in the Company. Each Lender represents and warrants to the Company
as follows: 

                
(a) He is an accredited investor, as that term is defined in Rule 501(a) under
the Securities Act, in that he is a natural person and either (i) his individual
net worth and that of his spouse on the date hereof exceeds $1,000,000 or (ii)
he had an individual income in excess of $200,000 in each of the two most recent
years or joint income with his spouse in excess of $300,000 in each of those years
and he 

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 has a reasonable expectation of reaching the same income level
in the current year. 

                (b)
He understands: (i) that the Shares have not been registered under the Securities
Act, nor pursuant to the provisions of the securities or other laws of any other
applicable jurisdictions in reliance on exemptions for private offerings contained
in Section 4(2) and 4(6) of the Securities Act, Rule 506 promulgated thereunder
and in the laws of such jurisdictions; and (ii) that the Shares are to be issued
in reliance upon such exemptions based upon his representations, warranties and
agreements set forth herein. 

                
(c) He agrees that the Shares may not be resold pledged or otherwise transferred
unless they are registered under such securities laws or unless exemptions from
applicable registration requirements are available and that the certificate evidencing
his Shares will bear a legend to such effect. 

                
9. Construction of Agreement. This Agreement shall be construed so as to
give maximum effect to the provisions of Section 6 hereof that all burden of all
Guaranty amounts be shared in the manner provided in such Section 6 and Schedule
I hereto. 

                
10. Exclusive Jurisdiction. Each of the Lender, the Guarantors and the
Company hereby irrevocably submits to the exclusive jurisdiction of any Illinois
court or United States federal court located in the State of Illinois and irrevocably
agrees that any and all actions or proceedings relating to this Agreement or any
agreement or instrument executed hereunder shall be litigated in such courts,
and each of the parties waives any objection which it may have based on improper
venue or forum non conveniens to the conduct of any such action or proceeding
in any such court and waives personal service and any and all process upon it,
and consents to all such service of process made in the manner set forth in Section
11 hereof with respect to notices. Nothing contained on this Section10 shall affect
the right of any Lender to serve legal process on any other Lender in any other
manner permitted by law. 

                
11. Notices. All notices, requests, demands and other communications called
for or complaint contemplated hereunder shall be in writing and it shall be deemed
to have been duly given when delivered to the party to whom addressed or when
sent by telecopy, telegram, telex or wire (if promptly confirmed by registered
or certified mail, return receipt requested, prepaid and addressed) to the parties,
their successors in interest or their assignees at their respective addresses
set forth on Schedule I attached hereto, or at such other addresses as the parties
may designate by written notice in the address of such party set forth on Schedule
I attached hereto. 

                
12. Entire Agreement. This Agreement contains the entire understanding
of the parties with respect to the subject matter hereof. There are no oral understandings,
terms or conditions, and no Lender has relied upon any representation, express
or implied, not contained in this Agreement. 

- 4 -

                
13. Counterparts; Parties. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original. This Agreement shall
be binding upon and enforceable by the Lender, the Company and each Guarantor
executing the same, regardless of whether executed or not executed by any other
Guarantor named as a party hereto. 

                
14. Applicable Law. This Agreement shall be governed by, construed,
and enforced in accordance with the laws of the State of Illinois. 

                
IN WITNESS WHEREOF, the undersigned have hereunto set their hands or cause this
instrument to be duly executed as of the date first above indicated. 

	 	S/ MORRIS SILVERMAN 

      Morris Silverman 
	 	
	
       

    	S/ GREGORY WITCHEL 

      Gregory Witchel 
	
       

    	
	
       

    	S/ ROBERT M. WIGODA 

      Robert M. Wigoda 
	 	
	 	S/ HOWARD M. BLOOM 

      Howard M. Bloom 
	 	
	 	NOT SIGNED 

      Sherwin Gilbert 
	 	
	 	NOT SIGNED 

      Kenneth Grossman 
	 	
	 	S/ JEFFREY B. AARONSON 

      Jeffrey B. Aaronson 
	 	
	 	
	 	DIASYS CORPORATION 
	 	
	 	By: S/ JEFFREY B. AARONSON 

             Jeffrey B. Aaronson, President

 

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SCHEDULE I 

  Responsibility for Loan

	
      Name

    	
      

    	
      Guaranty Percentage

    	
      

    	
      Initial Principal 

        Amount Responsible

        (Exposure Dollars) 

    	
      

    	
      Shares To

        Be issued 

    	
      

    
	Morris W. Silverman 

      M.S. Management Corp. 

      790 Estate Drive 

      Suite 100 

      Deerfield, IL 60015 	 	
      51.67%

    	
      

    	
      $310,000

    	
      

    	
      118,750(1)

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Gregory Witchel

      DiaSys Corporation 

      81 W. Main Street 

      Waterbury, CT 06702 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Robert M. Wigoda

      Wigoda & Wigoda 

      444 N. Michigan Avenue 

      26th Floor, Suite 2600 

      Chicago, IL 60611 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	 	 	 	 	 	 
	Sherwin Gilbert 

      Indeck Energy Services 

      600 Buffalo Grove Road, #300 

      Buffalo Grove, IL 60089  	 	
      6.67%

    	
      

    	
      40,000

    	
      

    	
      6,667

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Kenneth Grossman

      S.G. Capital 225 

      W. Hubbard Street 

      Suite 600 

      Chicago, IL 60610 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Howard M. Bloom

      Kipnis Rosen & Bloom, Ltd. 

      550 W. Touhy Avenue, Suite 300 

      Skokie, IL 60077 	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 
	 	 	
      

    	
      

    	
      

    	
      

    	
      

    	 
	Jeffrey B. Aaronson

      DiaSys Corporation 

      81 W. Main Street 

      Waterbury, CT 06702	 	
      8.33%

    	
      

    	
      50,000

    	
      

    	
      8,333

    	 

 1. Based on initial advance of $475,000. 

- 6 -DiaSys Corporation - Exhibit 10.8

 Exhibit 10.8

CONVERTIBLE PROMISSORY NOTE 

  

  	$475,000	 	
        August 12, 2004

      

                
FOR VALUE RECEIVED, the undersigned, DIASYS CORPORATION, a Delaware
Corporation, with an address at 81 West Main Street, Waterbury, Connecticut 06702
(the "Company"), promises to pay to the order of MORRIS SILVERMAN, an individual
with a place of business at 790 Estate Drive, Suite 100, Deerfield, Illinois 60015,
("Payee"), or any subsequent assignee or holder hereof (Payee or any subsequent
assignee or holder hereof sometimes being hereinafter referred to as "Holder"),
the principal sum of FOUR HUNDRED SEVENTY FIVE THOUSAND AND 00/100 DOLLARS
($475,000.00), together with: (i) interest on the unpaid principal balance
of this Note, from the date hereof until said balance shall have been paid in
full, at the rate or rates and in the manner hereinafter provided; (ii) all costs
and expenses, including reasonable attorneys' fees, incurred in collecting or
attempting to collect the indebtedness evidenced by this Note, or in enforcing
that certain Loan and Security Agreement of even date herewith by and between
Company and Payee (said agreement, as the same may be amended or modified from
time to time, hereinafter referred to as the "Loan Agreement") or any of the other
Security Documents (as hereinafter defined) or protecting or sustaining the lien
thereof or in any litigation or controversy arising from or connected with this
Note or any of the Security Documents; and (iii) all taxes or duties assessed
upon the indebtedness evidenced by this Note or by any of the Security Documents
or upon the Collateral (as hereinafter defined). All amounts owing under this
Note shall be payable in legal tender of the United States of America. This Note
is issued pursuant to the Loan and Security Agreement, dated as of the date hereof
(the "Loan Agreement"), between the Company and the Payee. 

ARTICLE I 

  

  Payment Provisions 

                
Section 1.1- Interest. The principal balance of the indebtedness evidenced
by this Note outstanding from time to time shall bear interest, from the date
hereof until said indebtedness shall have been paid in full, at the rate of six
percent (6%) per annum. Interest shall be calculated on the daily unpaid principal
balance of the indebtedness evidenced by this Note based on a 360-day year, provided
that interest shall be due for the actual number of days elapsed during each period
for which interest is being charged. Installments of accrued interest shall be
due and payable commencing on the last day of September, 2004, and continuing
on the last day of each December, March, June and September thereafter so long
as any of the indebtedness evidenced by this Note is outstanding. 

- 1 -

                 
Section 1.2- Principal. The principal amount hereof and all accrued interest
shall be due and payable on August 13, 2007. 

                
Section 1.3- Payment Days. Any payment under this Note which is stated
to be due on a day other than a "Business Day" (a day on which banks are open
for business in Waterbury, Connecticut) shall be made on the next succeeding Business
Day, and any such extension of time shall be included in the computation of the
amount of interest to be paid. 

                
Section 1.4- Prepayment. Company shall have the right to prepay the indebtedness
evidenced by this Note at, in whole or in part, at any time, without prepayment
premium or penalty. 

                
Section 1.5- Events of Default. It shall be an Event of Default hereunder
if Company shall fail to make any payment under this Note when due or if any other
Event of Default (as defined in the Loan Agreement) shall occur. Any failure by
Holder to exercise any right under this Note or under the Loan Agreement arising
or existing as a result of such Event of Default, or any delay in such exercise,
shall not constitute a waiver of the right to exercise such right at a later time
so long as such Event of Default shall remain uncured, and shall not constitute
a waiver of the right to exercise such right if any other Event of Default shall
occur. The acceptance by Holder of payment of any sum payable under this Note
after the due date of such payment shall not be a waiver of Holder's right to
require prompt payment when due of all other sums payable under this Note. 

                
Section 1.6- Remedies. Upon the occurrence of any Event of Default or upon
maturity hereof, the outstanding principal balance of the indebtedness evidenced
by this Note shall, at the option of Holder, bear interest from the date of occurrence
of such Event of Default or such maturity until collection (including any period
of time occurring after judgment), at the "Default Rate", being the lower of (a)
the highest rate allowed by applicable law, or (b) a rate per annum equal to two
percentage points (2.0%) above the higher of (A) the rate or rates that otherwise
would have been in effect under this Note, or (B) the prime rate of LaSalle Bank
as the same may vary from time to time. If the Holder shall not receive the full
amount of any installment of interest or principal due under the terms of this
Note within ten (10) days after the due date of such payment, then Company shall
pay to Holder, upon demand, a late charge equal to five percent (5%) of such installment,
to cover the additional expenses involved in handling such overdue payment. Such
charge shall be in addition to, and not in lieu of, any other remedy Holder may
have and shall be in addition to, and not in lieu of, Company's obligation to
pay any reasonable fees and charges of any agents or attorneys employed in the
event of any default hereunder. 

                
Section 1.7- Acceleration. Upon the occurrence of any Event of Default,
the indebtedness evidenced by this Note shall, at the option of and without notice
or demand by the Holder, become at once due and payable. Company shall then pay
the Holder, in addition to any and all other sums and charges due, the entire
principal of and interest accrued on this Note. 

- 2 -

                
Section 1.8- Waivers. Company and each endorser, guarantor and surety
of this Note, and each other person liable or who shall become liable for all
or any part of the indebtedness evidenced by this Note, hereby: 

		(a)		(a) waive demand, presentment, protest, notice
      of protest, notice of dishonor, diligence in collection, notice of nonpayment
      and all notices of a like nature; and
				
		(b)		 (b) to (i) the release, surrender, exchange
      or substitution of all or any part of the security for the indebtedness
      evidenced by this Note, or the taking of any additional security, (ii) the
      release of any or all other persons from liability, whether primary or contingent,
      for the indebtedness evidenced by this Note or for any related obligations,
      and (iii) the granting of any other indulgences to any such person.

 

                
Each endorser, guarantor and surety of this Note, and each other person liable
or who shall become liable for all or any part of the indebtedness evidenced by
this Note, consent to (i) all renewals, extensions or modifications of this Note
or the Security Documents (including any affecting the time of payment), and (ii)
all advances under this Note or the Security Documents. Any such renewal, extension,
modification, advance, release, surrender, exchange, substitution, taking or indulgence
may take place without notice to any such person, and, whether or not any such
notice is given, shall not impair the liability of any such person. 

                
Section 1.9- Commercial Transaction. COMPANY AND EACH ENDORSER, GUARANTOR
AND SURETY OF THIS NOTE, AND EACH OTHER PERSON LIABLE OR WHO SHALL BECOME LIABLE
FOR ALL OR ANY PART OF THE INDEBTEDNESS EVIDENCED BY THIS NOTE, HEREBY ACKNOWLEDGE
THAT THE TRANSACTION OF WHICH THIS NOTE IS A PART IS A COMMERCIAL TRANSACTION,
AND TO THE EXTENT ALLOWED UNDER CONNECTICUT GENERAL STATUTES SECTIONS 52-a TO
52-278n, INCLUSIVE, OR BY OTHER APPLICABLE LAW, HEREBY WAIVE THEIR RIGHT TO NOTICE
AND HEARING WITH RESPECT TO ANY PREJUDGMENT REMEDY WHICH HOLDER OR ITS SUCCESSORS
OR ASSIGNS MAY DESIRE TO USE. 

                
Section 1.10- Severability. If any one or more of the provisions of this
Note shall for any reason be held to be invalid, illegal or unenforceable, in
whole or in part, or in any respect, or if any one or more of the provisions of
this Note shall operate, or would prospectively operate, to invalidate this Note,
then such provision or provisions only shall be deemed to be null and void and
of no force or effect and shall not affect any other provision of this Note, and
the remaining provisions of this Note shall remain operative and in full force
and effect, shall be valid, legal and enforceable, and shall in no way be affected:
prejudiced or disturbed thereby. 

                
Section 1.11- Amendments. This Note may not be modified or terminated orally,
but only by a written instrument signed by the party against whom enforcement
of any such modification or termination is sought. Time is and shall be of the
essence in the performance of all obligations 

- 3 -

 under this Note. This Note shall be governed by and construed
in accordance with the laws of the State of Connecticut.

                
Section 1.12- Gender. As used in this Note, words of any gender shall be
deemed to apply equally to any other gender, the plural shall include the singular
and the singular shall include the plural (as the context shall require), and
the word "person" shall refer to individuals, entities, authorities and other
natural and juridical persons of every type.

                
Section 1.13- Assignment. If this Note is now, or hereafter shall be, signed
by more than one person, it shall be the joint and several obligation of all such
persons (including, without limitation, all makers, endorsers, guarantors and
sureties, if any) and shall be binding on all such persons and their respective
heirs, executors, administrators, legal representatives, successors and assigns.
This Note and all covenants, agreements and provisions set forth in this Note
shall inure to the benefit of Holder and its successors and assigns. 

                
Section 1.14- Submission to Jurisdiction. The Company hereby consents and
submits to the jurisdiction of any state or Federal court located within the state
of Illinois and waives statutory service of any and all process upon the Company
and consents to the fullest extent permitted by applicable law that all such service
of process be made by registered mail or actual delivery to the Borrower at the
address stated at the beginning of this Promissory Note and service so made shall
be deemed to be completed upon the earlier of mailing or actual delivery thereof.
Without limiting the generality of the foregoing, the Company specifically waives
any defense of lack of jurisdiction, improper venue or forum non conveniens. 

ARTICLE II 

  

  Conversion Right

                
Section 2.1- Conversion. At the election of the Holder, this Note and accrued
interest thereon may be converted, in whole or in part, at any time, into shares
of the Common Stock, $.001 par value (the "Common Stock") of the Company at a
conversion price equal to Forty-three Cents ($.43) per share, subject to adjustment
as hereinafter provided, by surrender of this Note to the Company together with
a notice of conversion executed by the Holder specifying the amount hereof to
be so converted.

                
                
TThe Company shall, as promptly as practicable and in any event within seven days
after receipt of such notice and payment, execute and deliver or cause to be executed
and delivered, in accordance with such notice, a certificate or certificates representing
the aggregate number of a share of Common Stock specified in said notice. The
certificate or certificates so delivered shall be in such denominations as may
be specified in such notice, and shall be issued in the name of the Holder or
such other name or names as shall be designated in such notice. This Note shall
be deemed to have been converted and such certificate or certificates shall be
deemed to have been issued, and such Holder or any other person so designated
to be named therein shall be deemed for all purposes to have become a holder of
record of Common Stock, as of the date

- 4 -

the aforementioned notice is received by the Company. If this Note
shall have been converted only in part, the Company shall, at the time of delivery
of such certificate or certificates, deliver to the Holder a new Note evidencing
the balance of the unconverted indebtedness represented by this Note as hereinabove
provided, which new Note shall in all other respects be identical with this Note,
or, at the request of the Holder, appropriate notation may be made on this Note
which shall then be returned to the Holder. The Company shall pay all expenses,
stamp, documentary and similar taxes and other charges payable in connection with
the preparation, issuance and delivery of share certificates and any new Note
under this provision. 

                
Section 2.2- When Conversion Effective. The conversion of this Note
shall be deemed to have been effected immediately prior to the close of business
on the business day on which the Company shall have received a completed notice
of conversion as hereinabove provided, and at such time the person in whose name
any certificate for shares of Common Stock shall be issuable upon such conversion,
as provided in Section 3.3, shall be deemed to have become the Holder of record
of such Common Stock.

                
Section 2.3- Shares to Be Fully Paid and Nonassessable. All shares of Common
Stock issued upon the conversion of this Note shall be validly issued, fully paid
and nonassessable and, if such Common Stock is then quoted on NASDAQ or listed
on any national securities exchange (as defined in the Exchange Act), such Common
Stock shall, to the extent permitted under the applicable rules of such exchange
or NASDAQ), be duly quoted or listed thereon, as the case may be. 

                
Section 2.4- No Fractional Shares Required to Be Issued. The Company shall
not be required to issue fractional shares of Common Stock upon conversion of
this Note. If any fraction of a share of Common Stock would, but for this Section
1.3, be issuable upon final conversion of this Note, in lieu of such fractional
share of Common Stock, the Company shall pay to the Holder in cash an amount equal
to the same fraction of the Fair Market Value of the Company per share of Common
Stock outstanding on the Business Day immediately prior to the date of such conversion.

                
Section 2.5- Reservation of Stock, Etc. The Company will at all times reserve
and keep available, solely for issuance and delivery upon the conversion of this
Note, all shares of Common Stock issuable upon the conversion of this Note. All
shares of Common Stock issued upon the conversion of this Note shall be duly authorized,
validly issued, fully paid and non-assessable. 

                
Section 2.6- Adjustments for Consolidation, Merger, Sale of Assets, Reorganization,
Etc. In case the Company, after the date hereof, (a) shall effect a capital
reorganization or reclassification of any or all of its capital stock, or (b)
shall consolidate with or merge into any other organization, company, corporation,
partnership, trust, business organization, individual, or group of individuals
(a "Person") and shall not be the continuing or surviving corporation of such
consolidation or merger, or (c) shall permit any other Person to consolidate with
or merge into the Company, and the Company shall be the continuing or surviving
Person but, in connection with such consolidation or merger, the Common Stock
shall be changed into or exchanged for stock or the securities or property of
any other Person, or (d) shall transfer all or substantially all 

- 5 -

of its properties and assets to any other Person; then proper provision
shall be made so that the Holder of this Note, upon the conversion hereof at any
time after the consummation of such consolidation, merger, transfer, reorganization
or reclassification, shall be entitled to receive the stock and other securities
and property to which such Holder would have been entitled to, as if such Holder
had so converted this Note immediately prior to the consummation of any such transaction.

                
Section 2.7- Adjustments for Stock Dividends; Combinations. In the event
that the Company, at any time or from time to time hereafter, shall (i) declare
or pay any dividend on its capital stock payable in Common Stock; (ii) effect
a subdivision of its outstanding shares into a greater number of shares of Common
Stock or any equity securities convertible into Common Stock (by reclassification
or otherwise than by payment of a dividend in Common Stock); or (iii) combine
or consolidate its outstanding shares of Common Stock, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then, upon the conversion
hereof, at any time after the occurrence of any event described above, the Holder
shall be entitled to receive the Common Stock to which such Holder would have
been entitled if such Holder had converted this Note immediately prior to the
occurrence of such event. 

                
Section 2.8- No Impairment. The Company will not, by any means, avoid or
seek to avoid the observance or performance of any of the terms of this Note.
Without limiting the foregoing, the Company (a) will not permit the par value,
if any, of any shares of stock receivable upon the conversion of this Note to
exceed the amount payable therefore upon such conversion, (b) will take such action
as may be necessary in order that the Company may validly and legally issue fully
paid and non-assessable shares of Common Stock upon the conversion of this Note,
and (c) will not (i) transfer all or substantially all of its assets to any other
Person, or (ii) consolidate with or merge into any other Person where the Company
is not the surviving Person, unless the other Person acquiring such properties
and assets or surviving after such consolidation or merger shall expressly assume
in writing all the terms of this Note. 

                
Section 2.9- Transfer Without Registration. Neither this Note nor the shares
of Common Stock issuable hereunder have been registered under the Securities Act
of 1933, as amended (the "1933 Act"), or any state securities laws. Until such
time, if any, as such shares shall have been so registered neither this Note nor
any shares of Common Stock issued upon the conversion of this Note shall be transferred,
sold or assigned, except upon delivery of (a) an opinion (in form and substance
satisfactory to the Company) of counsel satisfactory to the Company to the effect
that such registration is not required or (b) such information as, in the reasonable
opinion of the Company, is necessary in order to establish that such transfer
may be made without registration. Each certificate for shares of Common Stock
issued upon conversion of this Note, unless at the time of conversion such shares
are registered under the 1933 Act, shall bear a legend to such effect. Any certificate
issued at any time in exchange or substitution for any certificate bearing such
legend (except a new certificate issued upon completion of a public offering pursuant
to a registration statement under the 1933 Act) shall also bear such legend unless,
in the opinion of counsel selected by the Holder of such certificate (who may
be an employee of such Holder) and reasonably acceptable to the Company, the securities
represented thereby need no longer be 

- 6 -

subject to restrictions on resale under the
Securities Act.

                
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by
its authorized officer as of the day and year first above written. 

	 	DIASYS CORPORATION
	 	 
	 	 
	 	 
	
       

    	By: S/ JEFFREY B. AARONSON 

             Jeffrey B. Aaronson, President
      
	
       

    	 
	
       

    	 

 

- 7 -

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