Document:

Trust D 10-KSB Ex. 4.2 12-31-03

 

THIRD AMENDED AND RESTATED 

DECLARATION OF TRUST 

OF 

AFG INVESTMENT TRUST D 

(as of October 1, 2003) 

 

Third Amended and Restated 

Declaration of Trust 

of 

AFG Investment Trust D 

 

 

 

	
 
	
RECITALS 
	
1 

	
 
	
DECLARATION 
	
1 

	
 
	
 
	
 

	
 
	
ARTICLE I - THE TRUST 
	
1 

	
 
	
 
	
 

	
1.1 
	
NAME 
	
1 

	
1.2 
	
LOCATION 
	
2 

	
1.3 
	
NATURE OF TRUST 
	
2 

	
1.4 
	
PURPOSES 
	
2 

	
1.5 
	
POWERS 
	
2 

	
1.6 
	
TERM AND DISSOLUTION 
	
3 

	
 
	
 
	
 

	
 
	
ARTICLE II - DEFINITIONS 
	
4 

	
 
	
 
	
 

	
 
	
ARTICLE III - CAPITAL 
	
17 

	
 
	
 
	
 

	
3.1 
	
CAPITAL CONTRIBUTION OF THE SPECIAL BENEFICIARY AND MANAGING TRUSTEE 
	
17 

	
3.2 
	
CLASS A BENEFICIARIES; OFFERING OF CLASS B INTERESTS; BENEFICIARY INTERESTS 
	
17 

	
3.3 
	
CAPITAL ACCOUNTS 
	
18 

	
3.4 
	
ADDITIONAL CAPITAL CONTRIBUTIONS 
	
19 

	
 
	
 
	
 

	
 
	
ARTICLE IV - TRUSTEES 
	
19 

	
 
	
 
	
 

	
4.1 
	
THE TRUSTEES; LIABILITY FOR TRUST OBLIGATIONS 
	
19 

	
4.2 
	
EXTENT OF MANAGING TRUSTEE POWERS AND DUTIES 
	
20 

	
4.3 
	
DELEGATION OF POWERS 
	
27 

	
4.4 
	
RELIANCE BY THIRD PARTIES 
	
27 

	
4.5 
	
LIMITATIONS ON THE EXERCISE OF POWERS OF MANAGING TRUSTEE 
	
27 

	
4.6 
	
LIABILITY FOR ACTS OR OMISSIONS AND INDEMNIFICATION 
	
28 

	
4.7 
	
COMPENSATION OF TRUSTEES 
	
30 

	
4.8 
	
RESIGNATION OF TRUSTEES 
	
30 

	
4.9 
	
REMOVAL OF TRUSTEES 
	
31 

	
4.10 
	
CONSEQUENCES OF RESIGNATION OR REMOVAL 
	
31 

	
4.11 
	
LIABILITY OF RESIGNED OR REMOVED TRUSTEE 
	
32 

	
4.12 
	
CONTINUATION OF TRUST BUSINESS 
	
32 

	
4.13 
	
POWERS AND LIMITATIONS OF DELAWARE TRUSTEE 
	
33 

	
 
	
 
	
 

	
 
	
ARTICLE V - ADVISOR SERVICES AND COMPENSATION 
	
34 

	
 
	
 
	
 

	
5.1 
	
COMPENSATION TO ADVISOR AND CERTAIN AFFILIATES 
	
34 

	
5.2 
	
OTHER INTERESTS OF THE ADVISOR AND ITS AFFILIATES 
	
36 

	
5.3 
	
OTHER TRANSACTIONS INVOLVING THE TRUST, PLM, THE ADVISOR AND THEIR AFFILIATES 
	
37 

	
 
	
 
	
 

	
 
	
ARTICLE VI - TRUST BENEFICIARIES 
	
38 

	
 
	
 
	
 

	
6.1 
	
ABSENCE OF CONTROL OVER TRUST BUSINESS 
	
38 

	
6.2 
	
LIMITED LIABILITY 
	
38 

	
6.3 
	
FIDUCIARY DUTY OF MANAGING TRUSTEE TO TRUST BENEFICIARIES 
	
39 

	
 
	
 
	
 

	
 
	
ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES 
	
39 

	
 
	
 
	
 

	
7.1 
	
INVESTMENT OBJECTIVES AND POLICIES 
	
39 

	
7.2 
	
ASSETS AND LESSEES 
	
39 

	
7.3 
	
PURCHASES, SALES AND LEASES OF ASSETS FROM OR TO THE MANAGING TRUSTEE 
	
 

	
 
	
AND ITS AFFILIATES 
	
39 

	
7.4 
	
LOANS TO OR FROM THE MANAGING TRUSTEE AND ITS AFFILIATES 
	
40 

	
7.5 
	
JOINT INVESTMENTS 
	
41 

	
7.6 
	
RESALES 
	
42 

	
7.7 
	
IN-KIND DISTRIBUTIONS 
	
42 

	
7.8 
	
ROLL-UPS 
	
42 

	
7.9 
	
CHANGE IN INVESTMENT OBJECTIVE AND POLICIES 
	
43 

	
 
	
 
	
 

	
 
	
ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS 
	
43 

	
 
	
 
	
 

	
8.1 
	
DISTRIBUTION OF DISTRIBUTABLE CASH 
	
43 

	
8.2 
	
ALLOCATION OF PROFITS AND LOSSES 
	
45 

	
8.3 
	
RECOURSE TO TRUST ASSETS ONLY 
	
46 

	
8.4 
	
SPECIAL PROVISIONS 
	
46 

	
 
	
 
	
 

	
 
	
ARTICLE IX - TRANSFER OF INTERESTS 
	
50 

	
 
	
 
	
 

	
9.1 
	
WITHDRAWAL OF A BENEFICIARY 
	
50 

	
9.2 
	
ASSIGNMENT 
	
51 

	
9.3 
	
SUBSTITUTION 
	
51 

	
9.4 
	
PROHIBITED ASSIGNMENT 
	
52 

	
9.5 
	
CHANGE OF STATUS OF BENEFICIARY 
	
53 

	
9.6 
	
RIGHT TO TENDER INTERESTS FOR REDEMPTION 
	
53 

	
9.7 
	
STATUS OF AN ASSIGNING BENEFICIARY 
	
54 

	
9.8 
	
WITHDRAWAL OF SPECIAL BENEFICIARY; SUBSTITUTION 
	
55 

	
 
	
 
	
 

	
 
	
ARTICLE X - FISCAL MATTERS 
	
56 

	
 
	
 
	
 

	
10.1 
	
TITLE TO PROPERTY AND BANK ACCOUNTS 
	
56 

	
10.2 
	
MAINTENANCE OF, AND ACCESS TO, BASIC TRUST DOCUMENTS 
	
56 

	
10.3 
	
FINANCIAL BOOKS AND ACCOUNTING 
	
57 

	
10.4 
	
TRUST EXPENSES 
	
57 

	
10.5 
	
FISCAL YEAR 
	
59 

	
10.6 
	
REPORTS AND ACCOUNTING DECISIONS 
	
59 

	
10.7 
	
PARTNERSHIP CLASSIFICATION; FEDERAL TAX ELECTIONS 
	
62 

	
 
	
 
	
 

	
 
	
ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES 
	
62 

	
 
	
 
	
 

	
11.1 
	
MEETINGS 
	
62 

	
11.2 
	
VOTING PROCEDURES; VOTING RIGHTS OF BENEFICIARIES 
	
64 

	
11.3 
	
VALUATION OF INTERESTS OF THE MANAGING TRUSTEE 
	
64 

	
 
	
 
	
 

	
 
	
ARTICLE XII - AMENDMENTS 
	
65 

	
 
	
 
	
 

	
12.1 
	
CERTAIN AMENDMENTS REQUIRING MAJORITY CONSENT 
	
65 

	
12.2 
	
OTHER AMENDMENTS 
	
65 

	
 
	
 
	
 

	
 
	
ARTICLE XIII - POWER OF ATTORNEY 
	
66 

	
 
	
 
	
 

	
13.1 
	
APPOINTMENT 
	
66 

	
13.2 
	
AMENDMENTS TO AGREEMENT 
	
67 

	
13.3 
	
POWER COUPLED WITH AN INTEREST 
	
67 

	
13.4 
	
POWER OF ATTORNEY BY SUBSTITUTE BENEFICIARIES 
	
67 

	
 
	
 
	
 

	
 
	
ARTICLE XIV - GENERAL PROVISIONS 
	
67 

	
 
	
 
	
 

	
14.1 
	
NOTICES, APPROVALS AND CONSENTS 
	
67 

	
14.2 
	
FURTHER ASSURANCES 
	
68 

	
14.3 
	
CAPTIONS 
	
68 

	
14.4 
	
BINDING EFFECT 
	
68 

	
14.5 
	
SEPARABILITY 
	
68 

	
14.6 
	
INTEGRATION 
	
68 

	
14.7 
	
APPLICABLE LAW 
	
69 

	
14.8 
	
COUNTERPARTS 
	
69 

	
14.9 
	
CREDITORS 
	
69 

	
14.10 
	
INTERPRETATION 
	
69 

	
14.11 
	
ARBITRATION; VENUE 
	
69 

	
 
	
 
	
 

	
 
	
SCHEDULE A 
	
71 

 

 

 

 

 

THIRD AMENDED AND RESTATED 

DECLARATION OF TRUST 

OF 

AFG INVESTMENT TRUST D 

The SECOND AMENDED AND RESTATED DECLARATION OF TRUST OF AFG INVESTMENT TRUST D made and agreed to by the Trustees and the Trust Beneficiaries as of April 15, 1997, as amended by Amendment No. 1 as of June 15, 1998 and by Amendment No. 2 as of June 25, 1999, is hereby amended and restated pursuant to this THIRD AMENDED AND RESTATED DECLARATION OF TRUST dated as of October 1, 2003 to read in its entirety as follows (certain capitalized terms used and not otherwise defined herein shall have the respective meanings specified in Article II): 

RECITALS 

A.  A Certificate of Trust for the Trust has been filed in the Filing Office in accordance with the Business Trust Act. The Trust has been created as a Delaware business trust to acquire a diversified portfolio of new and used capital equipment (the "Assets"). The business of the Trust will be controlled by the Managing Trustee for the benefit of the Trust Beneficiaries. 

B.  The Managing Trustee may acquire, hold, invest and dispose of Trust Assets on behalf of the Trust in the manner provided in this Agreement. 

C.  The beneficial interest in the Trust Assets shall be divided into units of beneficial interest (the "Interests"), as provided in this Agreement. 

DECLARATION 

NOW, THEREFORE, the Trustees hereby declare that they will hold all property of every type and description which they may acquire as trustees, together with the proceeds thereof, in trust, and carry on the business of the Trust for the benefit of the Trust Beneficiaries, in the manner and subject to the provisions of this Agreement. 

ARTICLE I - THE TRUST 

1.1  Name. 

The name of the Trust shall be "AFG INVESTMENT TRUST D" and so far as may be practicable, the Managing Trustee shall conduct the Trust's activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" whenever used in this Agreement, except where the context otherwise requires) shall refer to the Trustees in their capacity as Trustees, and not individually or personally, and shall not refer to the Trust Beneficiaries or to the agents or employees of the Trust or of such Trustees. Should the Managing Trustee determine that the use of such name is not practicable, legal, or convenient in any jurisdiction, the Managing Trustee may use such other designation or adopt such other name for the Trust in such jurisdiction as the Managing Trustee deems proper and the Trust may hold property and conduct its activities under such designation or name, subject, however, to the limitations contained in Section 1.3. 

1.2  Location. 

The Trust shall maintain an office 200 Nyala Farms, Westport, CT 06880, and may have such other offices or places of business as the Managing Trustee may from time to time determine as necessary or expedient. 

1.3  Nature of Trust. 

The Trust shall be of the type commonly termed a Delaware business trust. The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general partnership, limited partnership, joint venture, corporation or joint stock company (provided, however, that the Trust shall be classified as a partnership for tax purposes, as provided in Section 10.7(a)). The Trust Beneficiaries shall be beneficiaries and their relationship to the Trustees shall be solely in that capacity in accordance with the rights conferred upon them hereunder. 

1.4  Purposes. 

The purposes of the Trust are to acquire, invest in, maintain, operate, lease, re-lease, finance, refinance, hold, encumber, manage, sell, exchange and otherwise in any manner deal with the Assets and to engage in the business contemplated by this Agreement, including investment in such Assets as the Managing Trustee believes will afford the Trust the potential to enhance its overall economic performance for the benefit of all the Beneficiaries. The Trust shall not engage in any other business or activity. 

1.5  Powers. 

In furtherance of its purposes, the Trust shall have the power: 

(a)  to acquire, invest in, maintain, operate, lease, re-lease, finance, refinance, hold, encumber, sell, manage, exchange and otherwise deal in Assets situated in any location and to enter into Joint Ventures, and to make any Permitted Investments, in each case as deemed appropriate by the Managing Trustee; 

(b)  subject to any applicable statutes and regulations, to borrow money from any lender to further the purposes of the Trust, to issue evidences of indebtedness in respect thereof and to secure the same by mortgage, pledge, grant of lien on, or other security interest in any Assets; and 

(c)  to do all other things, carry on any activities and enter into, perform, modify, supplement or terminate any contracts necessary to, in connection with, or incidental to the furtherance of the purposes of the Trust, all so long as such things, activities and contracts may be lawfully done, carried on or entered into by the Trust under the laws of the State and the United States of America and any other jurisdictions whose laws may apply and under the terms of this Agreement. 

1.6  Term and Dissolution. 

The Trust shall continue in full force and effect until December 31, 2006, except that the Trust shall be dissolved, its affairs wound up, and its assets liquidated prior to such date upon: 

(a)  the sale or other disposition of all or substantially all Assets unless the Managing Trustee elects to continue the Trust business for the purpose of the receipt and collection of any consideration to be received in exchange for Assets (which activities shall be deemed to be a part of such sale or other disposition and the winding-up of the affairs of the Trust); 

(b)  the occurrence of any event as a result of which no Managing Trustee remains if the Trust is not reconstituted pursuant to Section 4.12; 

(c)  the election to dissolve the Trust made in writing by the Managing Trustee with Majority Consent or, subject to compliance with Article XI, made by a Majority in Interest of the Beneficiaries without any action by the Managing Trustee; 

(d)  the entry of a final decree of dissolution of the Trust by a court of competent jurisdiction; or 

(e)  any other event which causes the dissolution or winding-up of the Trust under the Business Trust Act to the extent not otherwise provided for herein. 

In such event, the Managing Trustee shall liquidate the Assets and apply and distribute the proceeds thereof in accordance with Section 8.1(b). Notwithstanding the foregoing, if during liquidation the Managing Trustee shall determine that an immediate sale of all of the Assets would be impermissible, impractical or would cause undue loss to the Participants, the Managing Trustee may defer liquidation of, and withhold from distribution for a reasonable time, any Assets except those necessary to satisfy Trust debts and obligations. Upon completion of the winding-up of the Trust, the Managing Trustee (or its trustees, receivers or successors) shall cause the cancellation of the Certificate of Trust. 

During the period of dissolution and winding-up of the Trust, the Managing Trustee, or any other Person performing such actions, may exercise all of the powers granted to the Managing Trustee herein, and may adopt such plan, method or procedure as may be deemed reasonable in order to effectuate an orderly winding-up. If such functions shall be performed by a Person other than the Managing Trustee or an Affiliate, such Person shall be entitled to reasonable compensation from the Trust for his services. 

The Managing Trustee shall use its best efforts to cause the Trust to sell all of the Assets not later than the end of the tenth year following Final Closing, provided that market conditions existing at the time permit sale of the Assets on terms deemed reasonable by the Managing Trustee. 

ARTICLE II - DEFINITIONS 

Whenever used in this Agreement, unless the context otherwise requires, the terms defined in this Article II shall have the following respective meanings: 

"Accountants" mean Ernst & Young, LLP, or another nationally recognized firm of independent accountants selected for the Trust by the Managing Trustee. 

"Acquisition Expenses" means expenses (other than Acquisition Fees) incurred by any party attributable to selection and acquisition of Assets, whether or not acquired, including but not limited to legal fees and expenses, travel and communication expenses, costs of credit reports and appraisals, non-refundable option payments and accounting fees and expenses; provided, however, that Acquisition Expenses will not include any expenses described in Section 10.4 that relate to the operation of the Trust rather than the selection and acquisition of Assets; and provided, further, that Acquisition Expenses will not include any expenses paid by an Affiliate of the Managing Trustee for which such Affiliate does not receive any reimbursement from the Trust. 

"Acquisition Fee" means any fee or commission paid by any party in connection with the selection, purchase, evaluation, construction, acquisition, initial leasing or operation, and initial arrangement for leasing or placing in service of any Asset by the Trust, however designated and however treated for tax or accounting purposes, but not including any Acquisition Expenses. 

"Adjusted Class A Investment" means, on an aggregate basis for all Class A Interests, an amount equal to (a) the sum of (i) $25 per Class A Interest owned by all Class A Beneficiaries and (ii) the amount by which all Distributions made to the Class A Beneficiaries in the aggregate until Class A Payout are less than the Cumulative Class A Annual Distribution minus (b) the sum of (i) the amount by which all Distributions made to the Class A Beneficiaries in the aggregate until Class A Payout exceed the Cumulative Annual Distribution and (ii) all uninvested Capital Contributions which have been returned to the Class A Beneficiaries pursuant to this Agreement. 

 

"Advisor" means EFG, together with its successor and assigns as advisor under the Advisory Agreement. 

"Advisory Agreement" means the agreement between the Advisor and the Trust pursuant to which the Advisor will provide certain management and advisory services for the Trust. 

"Affiliate" means, when used with reference to a specific Person, (i) any Person that directly or indirectly through one or more intermediaries controls or is controlled by or is under common control with the specified Person, (ii) any Person that is an officer, director or partner in, the specified Person or of which the specified Person is an officer, director or partner, or (iii) any Person that is the beneficial owner of, or controls, 10% or more of any class of voting securities of the specified Person. 

"AFG Investment Trusts" means, collectively, AFG Investment Trust A and AFG Investment Trust B, until their liquidation on December 31, 2002 and their respective liquidating trusts thereafter, as the context requires, this Trust and AFG Investment Trust C. 

"Agreement" means this Third Amended and Restated Declaration of Trust, as amended from time to time. 

"Asset Base Price" means the amount paid by the Trust to the seller of an Asset for such Asset, which shall be (i) the manufacturer's invoice cost to the Trust if the Asset is acquired directly from the manufacturer, (ii) if the Asset is acquired from a seller who is not the manufacturer and not the Managing Trustee or an Affiliate thereof, the lower of (a) the price invoiced by such seller or (b) fair market value as determined by the Managing Trustee in its best judgment, or (iii) if acquired from the Managing Trustee or an Affiliate thereof, the lower of (a) the price paid by such seller plus all reasonable, necessary and actual costs accrued in maintaining the Asset (including, without limitation, the cost of storage, carrying, warehousing, interest cost, repair, marketing, financing and taxes from the date of acquisition thereof) less the amount of primary term lease rentals accrued from the date of acquisition thereof and retained by the Managing Trustee or an Affiliate thereof from leasing the Asset or (b) fair market value as determined by the Managing Trustee in its best judgment, including in each case described in (i), (ii) and (iii) the amounts of all liens and encumbrances on the Asset and all reasonable, necessary and actual expenses of the seller incurred in connection with acquiring and transferring the Asset to the Trust (including but not limited to all financing expenses, sales taxes, delivery charges and attorneys' fees paid to or on behalf of third parties) but not including any Acquisition Fees or Acquisition Expenses. In no event, however, shall any of the expense items described herein be included in the Asset Base Price for any Asset (i) which cannot be included consistent with generally accepted accounting principles or (ii) which is not actually acquired by the Trust. 

"Asset Management" means personnel and services necessary to the activities of the Trust relating to its Assets including but not limited to leasing and re-leasing of Assets, collecting revenues, paying operating expenses, determining that the Assets are used in accordance with all operative contractual arrangements, providing clerical and bookkeeping services necessary to the operation of Assets and management of any Securities. 

"Asset Management Fee" means the fee payable to the Advisor for managing the leasing, financing and re-financing of Assets pursuant to Section 5.1(c). 

"Assets" means, collectively, any personal property, including equipment, other personal property and Securities of any type and description, whether or not related to such personal property, and any interest of the Trust therein, whether directly or indirectly through a nominee, Joint Venture or otherwise. 

"Assign" means, with respect to any Interest or any part thereof, to sell, assign, transfer, give or otherwise dispose of, whether voluntarily or by operation of law, except that in the case of a bona fide pledge or other hypothecation; no Assignment shall be deemed to have occurred unless and until the secured party has exercised his right of foreclosure with respect thereto. 

"Assignment" means any transaction in which an Interest or any part thereof is Assigned. 

"B" and "Baa" mean bond ratings assigned by Moody's Investors Service, Inc., to the senior debt obligations of prospective initial Lessees which are in the middle of the Moody's rating scale of "Aaa" (highly unlikely to default) to "D" (in default). Specifically, according to Moody's, bonds rated "Baa" are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured; interest payments and principal security appear to be adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time; and such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Also, according to Moody's, bonds rated ``B'' generally lack characteristics of a desirable investment and assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. 

"Beneficiary" means the owner of a Beneficiary Interest and shall include each Class A Beneficiary and Class B Beneficiary. The term "Beneficiary" does not include the Special Beneficiary. 

"Beneficiary Interest" means the beneficial interest of a Beneficiary in this Trust created pursuant to this Agreement and shall include each Class A Interest and Class B Interest. 

"Business Trust Act" means the Delaware Business Trust Act, 12 Del. C. §3801, et. seq ., as amended from time to time. 

"Capital Account" means the capital account of the Managing Trustee, the Special Beneficiary and each Beneficiary established and maintained in accordance with Section 3.3. 

"Capital Contribution" means the total amount of money actually contributed to the Trust by each Participant (or any prior Participant) prior to the deduction of any organization and offering expenses or selling commissions. 

"Cash from Operations" means the cash provided by the Trust's normal operations (including Lease renewals and without deduction for depreciation or other non-cash charges) after the general expenses and current liabilities of the Trust (other than any portion of the Asset Management Fee which is required to be accrued and the Subordinated Resale Fee) are paid and discharged, as reduced by any reserves funded from such cash for working capital and contingent liabilities to the extent deemed reasonable by the Managing Trustee and as increased by any portion of such reserves deemed by the Managing Trustee not to be required for Trust operations. Cash from Operations does not include any Cash from Sales or Refinancings. 

"Cash from Sales or Refinancings" means the cash received by the Trust as a result of Sale or Refinancing transactions (including insurance proceeds or Lessee indemnity payments arising from the loss or destruction of Assets), as (i) reduced by (a) all debts and liabilities of the Trust required to be paid as a result of Sale or Refinancing transactions, whether or not then payable, (including without limitation, any liabilities on an Asset sold which are not assumed by the buyer and any remarketing fees required to be paid to Persons not affiliated with the Managing Trustee but not including any Subordinated Resale Fee whether or not then due and payable) and (b) general expenses and current liabilities of the Trust (other than any portion of the Asset Management Fee which is required to be accrued and the Subordinated Resale Fee) and (c) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the Managing Trustee, and (ii) increased by any portion of such reserves then deemed by the Managing Trustee not to be required for Trust operations. In the event the Trust takes back a note in connection with any Sale or Refinancing transaction, all payments subsequently received in cash by the Trust with respect to such note shall be included in Cash from Sales or Refinancings, irrespective of the treatment of such payments by the Trust for tax or accounting purposes. If, in payment for Assets sold, the Trust receives purchase money obligations secured by liens on such Assets, the amount of such obligations shall not be included in Cash from Sales or Refinancings until and to the extent the obligations are realized in cash, sold, or otherwise disposed of. 

"Certificate of Trust" means the certificate of trust filed with the Filing Office for the Trust in accordance with the Business Trust Act, as amended or restated from time to time. 

"Class A Beneficiary" means any Beneficiary who owns a Class A Interest. 

"Class A Closings" means the dates designated by the Managing Trustee on, or as of which, subscribers acquired Class A Interests and became Class A Beneficiaries of the Trust. 

"Class A Interests" means the interests owned by Class A Beneficiaries in the Trust created pursuant to this Agreement. 

 

"Class A Offering" means the offering of Class A Interests pursuant to the Class A Prospectus. 

 

"Class A Payout" means the first time where the aggregate amount of Distributions actually made to the Class A Beneficiaries equals $25 per Class A Interest, minus all uninvested Capital Contributions which have been returned to the Class A Beneficiaries, plus the Cumulative Class A Annual Distribution. 

 

"Class A Prospectus" means the prospectus contained in the registration statement filed with the Securities and Exchange Commission for the registration of the Class A Interests under the Securities Act of 1933, as amended, in the final form in which said prospectus was filed with said Commission and as thereafter amended or supplemented pursuant to Rule 424 under said Act. 

"Class Action Lawsuit" means the class and derivative action brought on June 24, 1997, by Leonard Rosenblum, J/B Investment Partners, Small and Barbara Barmack, Partners, and Barbara Hall against EFG and a number of its Affiliates, together with any related class and derivative actions. 

"Class B Beneficiary" means any Beneficiary who owns a Class B Subordinated Interest. 

"Class B Capital Distributions" means the aggregate amount of any cash payments to the Class B Beneficiaries made by the Trust as a return of their Capital Contributions from excess Class B Offering proceeds. 

"Class B Closing" means the date designated by the Managing Trustee on, or as of which, subscribers acquire Class B Subordinated Interests and become Class B Beneficiaries. 

"Class B Distribution Reduction Factor" means the percentage determined as the fraction, the numerator which is the Class B Capital Distributions (on a per Class B Subordinated Interest basis), discounted at 8% annum from the Distribution Commencement Date, and the denominator of which is $5.00. 

"Class B Offering" means the offering of Class B Subordinated Interests by the Trust pursuant to the Class B Prospectus. 

"Class B Payout" means the first time that the Class B Beneficiaries have received cash from the Trust in an aggregate amount of $5 per Class B Subordinated Interest, together with a return from the Distribution Commencement Date of 8% per annum, compounded quarterly, with respect to the portion of their capital contributions returned to them as Class B Capital Distributions and of 10% per annum, compounded quarterly, with respect to the balance of their capital contributions. 

 

"Class B Prospectus" means the prospectus contained in the registration statement filed with the Securities and Exchange Commission for the registration of Class B Subordinated Interests under the Securities Act of 1933, as amended, in the final form in which said prospectus is filed with said Commission and as thereafter amended or supplemented pursuant to Rule 424 under said Act. 

 

"Class B Subordinated Interests" or "Class B Interests" means the beneficial interests created pursuant to this Agreement owned by Class B Beneficiaries. 

 

"Closings" means, collectively, the Class A Closings and the Class B Closing. 

"Code" means the Internal Revenue Code of 1986, as amended from time to time, or corresponding provisions of subsequent laws. 

"Competitive Asset Sale Commission" means that brokerage fee paid for services rendered in connection with the purchase and sale of equipment which is reasonable, customary and competitive in light of the size, type and location of equipment. 

"Consent" means either the consent given by vote at a meeting called and held in accordance with Section 11.1 or the written consent of a Person to do the act or thing for which the consent is solicited, or the act of granting such consent, as the context may require. 

"Controlling Person" means, with respect to the Managing Trustee or any Affiliate, any of its chairman, directors, president, secretary or clerk, treasurer, vice presidents, and holders of a 5% or larger equity interest in the Managing Trustee or Affiliate, or any Person having the power to direct or cause the direction of the Managing Trustee or Affiliate, whether through the ownership of voting securities, by contract or otherwise. 

"Cumulative Class A Annual Distribution" means an aggregate annual Distribution to the Class A Beneficiaries of 10% per annum, compounded quarterly, on Adjusted Class A Investment commencing from the last day of the month of the initial Class A Closing until Class A Payout. 

 

"Dealer-Manager" means American Finance Group Securities Corp., a Massachusetts corporation which is an Affiliate of the Managing Trustee and the Advisor. 

"Dealer-Manager Agreement" means the agreement of the Dealer-Manager and the Managing Trustee, on their own behalf and on behalf of the Trust, designating American Finance Group Securities Corp. as Dealer-Manager. 

"Delaware Trustee" means the Trustee designated as such in accordance with Section 4.1(a) which maintains its principal place of business in the State. 

"Dissolution Event" means a sale, condemnation, eminent domain taking, casualty, or other disposition affecting all or substantially all of the Trust's then remaining Assets which results in the dissolution of the Trust pursuant to Section 1.6. 

"Distributable Cash from Operations" means Cash from Operations, as reduced by (i) any accrued and unpaid Asset Management Fee and (ii) after Payout, any accrued and unpaid Subordinated Resale Fee. 

"Distributable Cash from Sales or Refinancings" means Cash from Sales or Refinancings, as reduced by (i)(a) any amounts reinvested in additional Assets in accordance with Sections 4.2(b)(v) and 4.2(b)(vi), or (b) the proceeds of the sale of an interest in a Joint Venture which are reinvested in additional Assets, (ii) any accrued and unpaid Asset Management Fee and Acquisition Fees and Acquisition Expenses paid with respect to additional Assets acquired through reinvestment of Cash from Sales or Refinancings in accordance with Section 4.2(b)(v) and (iii) after Payout, any accrued and unpaid Subordinated Resale Fee. 

"Distribution Commencement Date" means the first day of the month following Class B Closing. 

 

"Distributions" means Distributable Cash from Operations and Distributable Cash from Sales or Refinancings. 

"D-M Commission" means the commission payable to the Dealer-Manager of 7% of Gross Class A Proceeds. 

"EFG" means Equis Financial Group, a Massachusetts partnership. 

"Eligible Citizen" means (i) an individual who is a citizen of the United States or one of its possessions (a "U.S. Citizen") or a citizen of a foreign country lawfully admitted for permanent residence in the United States as an immigrant in conformity with the regulations of the Immigration and Naturalization Service of the Department of Justice (a "Resident Alien"); (ii) a partnership of which each member is a U.S. Citizen (a "U.S. Partnership"); (iii) a corporation created or organized under the laws of the United States or of any state, territory, or possession of the United States of which the president and two-thirds or more of the board of directors and other managing officers thereof are U.S. Citizens and of which at least 75% of the voting interests are owned or controlled by U.S. Citizens (a "U.S. Corporation"); (iv) an association of which each member is a U.S. Citizen; or (v) a trust of which each trustee is a U.S. Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S. Association, but only if each beneficiary under the related trust is a U.S. Citizen, a Resident Alien, a U.S. Partnership, a U.S. Corporation or a U.S. Association. 

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 

"Escrow Account" means the interest-bearing escrow account (in which subscriptions of up to $100,000 per subscriber are insured by the Federal Deposit Insurance Corporation ("FDIC")), including any savings account, bank money market account, or account investing in short-term securities issued or guaranteed by the United States government, which complies with Rule 15c-4 under the Securities Exchange Act of 1934, held by the Escrow Agent into which subscription payments from subscribers for Class B Interests are to be deposited prior to the Class B Closing. 

"Escrow Agent" means the escrow agent selected by the Managing Trustee to administer the Escrow Account, initially Trust Company of America. 

"Escrow Interest" means the interest actually earned on monies paid by each subscriber into the Escrow Account during the period that such monies are held in the Escrow Account prior to the Class B Closing (net of certain fees and expenses of the Escrow Agent). 

"FAA" means the Federal Aviation Administration. 

"Filing Office" means the Office of the Secretary of State of the State. 

"Final Closing" means the last date, or as of which, subscribers acquired Class A Interests and became Class A Beneficiaries of the Trust. 

"Foreign Beneficiary" means any Person who is a "non-resident alien individual" or "foreign partnership" within the meaning of Section 1441 of the Code, a "foreign corporation" within the meaning of Section 1442 of the Code or any Person "who is not a United States person" within the meaning of Section 1446 of the Code. 

"Foreign Investor" means any Person who is not an Eligible Citizen. 

"Front-End Fees and Expenses" means fees and expenses, however designated, paid by any Person for any services rendered during the Trust's organizational or acquisition phase, including without limitation Sales and Distribution Expenses borne by the Trust, Acquisition Fees and Acquisition Expenses and similar fees and expenses, but not including: (i) Organizational and Offering Expenses paid by the Managing Trustee for which the Managing Trustee may not be reimbursed by the Trust pursuant to Section 10.4; (ii) reserves for working capital and contingent liabilities included in Investment in Assets; and (iii) any Acquisition Fees or Acquisition Expenses paid by a manufacturer of an Asset to any of its employees unless such Persons are Affiliates of a Sponsor. Any Acquisition Fees and Acquisition Expenses from the reinvestment of Cash from Sales or Refinancings permitted under this Agreement are considered Front-End Fees and Expenses. If the Trust's Leverage Level is equal to the Minimum Leverage Level, total Front-End Fees and Expenses will not exceed 10% of Gross Proceeds. However, if the Trust's Leverage Level is greater than the Minimum Leverage Level, the maximum amount of Front-End Fees and Expenses which a Trust may incur will increase .0625% for each 1% that the Leverage Level is greater than the Minimum Leverage Level. In no event, however, will total Front-End Fees and Expenses paid by the Trust exceed 13% of Gross Proceeds. 

"Full Payout Lease" means a lease under which the aggregate rental payments during the original term are at least sufficient to permit the Trust to recover the Purchase Price of the Assets leased thereby. 

"Gross Class A Proceeds" means the aggregate Capital Contributions of all Class A Beneficiaries. 

"Gross Class B Proceeds" means the aggregate Capital Contributions of all Class B Beneficiaries. 

 

"Gross Proceeds" means, collectively, Gross Class A Proceeds and Gross Class B Proceeds. 

"Immediate Family Member" means, with respect to any Person, his spouse, parent, parent-in-law, issue, brother, sister, brother-in-law, sister-in-law or child-in-law. 

"Independent Expert" means a Person with no current material or prior business or personal relationship with the Sponsor who is engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by the Trust and who is qualified to perform such work. 

"Initial Redemption Period" is the period of time commencing with the Class B Closing through 24 months thereafter during which the Class A Interests may be redeemed by the Trust with the proceeds of the Class B Offering, as provided in the Class B Prospectus. 

 

"Interest" means any Class A Interest or Class B Interest in the Trust. 

 

"Investment in Assets" means the aggregate amount of Capital Contributions of the Class A Beneficiaries actually paid for or allocated to the purchase and refurbishment of Assets acquired by the Trust, including the Trust's equity investment in Assets and reserves for working capital and contingent liabilities (but excluding any such reserves in excess of 3% of the aggregate Capital Contributions of the Class A Beneficiaries) and other capitalizable cash payments such as interest and taxes, but excluding all Front-End Fees and Expenses. 

"IRA" means an Individual Retirement Account. 

"Joint Venture" has the meaning given it in Section 7.5. 

"Lease" means a Full Payout Lease or Operating Lease. 

"Lease Commitment" means either (i) an executed binding lease agreement under which either the Trust or an Affiliate of the Managing Trustee is the lessor, which agreement is assignable by such Affiliate to the Trust, or (ii) such other agreement or commitment to lease equipment which constitutes an enforceable obligation against the Lessee. 

"Lessee" means any lessee under any Lease. 

"Leverage Level" means the amount of indebtedness encumbering the Assets acquired from the Gross Proceeds. 

"Losses" has the meaning given it in Section 8.2(d). 

"Majority Consent" means the Consent of Beneficiaries representing a Majority in Interest of the Beneficiaries. 

"Majority Vote" means the vote of a majority in interest of the Trust Beneficiaries. 

"Majority in Interest of the Beneficiaries" means the Class A Beneficiaries and the Class B Beneficiaries holding more than 50% in the aggregate of the Beneficiary Interests held by all Beneficiaries; provided, however, that in cases where a Beneficiary who is also a Managing Trustee or Affiliate thereof is not entitled to participate in the Consents or votes of the Beneficiaries, the calculation of "Majority in Interest of the Beneficiaries" shall exclude the Class A Interests owned by such Beneficiary. 

"Managing Trustee" has the meaning given it in Section 4.1. 

"Maximum Class B Offering" means the sale of all 826,072 Class B Subordinated Interests in the Trust which are being offered pursuant to the Class B Offering. 

"Managing Trustee Interest" means the interest of the Managing Trustee in the Trust pursuant to this Agreement. 

"MILPI" means MILPI Holdings, LLC, a Delaware limited liability company owned by the Trust and the other AFG Investment Trusts and their successors or assigns. 

"Minimum Investment Amount" means the minimum number of Interests which a Beneficiary was or is required to purchase in the Class A Offering or Class B Offering, or, if the Beneficiary does not acquire his Interests in either such Offering, the minimum number of Class A Interests or Class B Interests which a Beneficiary is required to acquire from his transferor in accordance with this Agreement. 

"Minimum Class B Investment Amount" means the minimum number of Interests which a Class B Beneficiary is required to purchase in the Offering. 

 

"Minimum Class B Offering" means the sale of at least 413,036 Class B Subordinated Interests in the Trust (included for this purpose any Class B Subordinated Interests which are purchased by the Managing Trustee and any Affiliate, including the Special Beneficiary). 

 

"Minimum Leverage Level" means at least 12% of the Total Purchase Price of the Assets acquired from Gross Class A Proceeds. 

"NASAA Guidelines" means the Statement of Policy for Equipment Programs, as amended April 22, 1988 and October 24, 1991, by the North American Securities Administrators Association, Inc., as in effect on the date of the Class  A Prospectus. 

"Net Class A Proceeds" means Gross Class A Proceeds minus all sales commissions (including the D-M Commissions) and Organizational and Offering Expenses of the Trust relating to the Class A Offering reimbursable pursuant to Section 10.4. 

"Net Class B Proceeds" means Gross Class B Proceeds minus all offering expenses of the Trust relating to the Class B Offering payable or reimbursable pursuant to this Agreement. 

 

"Non-Eligible Beneficiary" means a Beneficiary who (i) has represented to the Trust that he is an Eligible Citizen but is no longer an Eligible Citizen, or (ii) fails at the time he acquires his Interests to certify his citizenship to the Managing Trustee pursuant to Section 9.5. 

"Operating Lease" means a lease under which the aggregate rental payments during the original term are not sufficient to permit the Trust to recover the Purchase Price of the Assets leased thereby. 

"Organizational and Offering Expenses" shall have the meaning set forth in Section 10.4(a). 

"Over-Subscription Privilege" means the right of exercising rights holders to subscribe for all or a portion of the Class B Subordinated Interests that were not otherwise subscribed for by other rights holders. 

"Participant" means the Managing Trustee, the Special Beneficiary or any Beneficiary. 

"Permitted Investments" means securities issued or guaranteed by the United States government or any agency or instrumentality thereof, certificates of deposit of United States banks having a net worth of at least $50,000,000, bankers' acceptances, bank repurchase agreements covering securities issued or guaranteed by the United States government or any agency or instrumentality thereof, money market funds having a net worth of at least $100,000,000 or similar highly liquid investments (other than tax exempt securities or obligations). No funds of the Trust will be invested in any money market fund, savings and loan, bank or other financial institution which is affiliated with any Managing Trustee or its Affiliates. 

"Person" means any individual, partnership, corporation, trust, association, governmental official, body or agency, or other legal entity of any type. 

"PLM" means PLM International, Inc., a Delaware corporation owned by MILPI. 

"Prior Solicitation Statement" means the Solicitation Statement of the Trust dated May 6, 1998, as amended or supplemented from time to time, pursuant to which the Consent of the Beneficiaries was obtained, among other things, to modify the investment objectives and policies of the Trust. 

"Profits" has the meaning given it in Section 8.2(d). 

"Prospectuses" means, collectively, the Class A Prospectus and the Class B Prospectus. 

"Purchase Price" means the price paid by the Trust, whether directly or indirectly through a Joint Venture, for an Asset, including the amount of Acquisition Fees and Acquisition Expenses and the amounts of all liens and mortgages on such Asset, but excluding points and prepaid interest. 

"Qualified Income Offset Item" means (1) an allocation of loss or deduction that, as of the end of each year, reasonably is expected to be made (a) pursuant to Section 704(e)(2) of the Code to a donee of an interest in the Trust, (b) pursuant to Section 706(d) of the Code as the result of a change in a Participant's interest in the Trust, and (c) pursuant to Treasury Regulation Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of unrealized receivables or inventory items, and (2) a distribution that, as of the end of such year, reasonably is expected to be made to a Participant to the extent it exceeds offsetting increases to the Participant's Capital Account which reasonably are expected to occur during or prior to the Trust taxable year in which such distribution reasonably is expected to occur. 

"Qualified Plan" means any qualified pension, profit-sharing, or stock bonus plan (including a Keogh Plan) and an IRA. 

"Record Date" has the meaning given it in Section 11.1(c). 

"Record Date Holders" means holders of record as of the close of business on April 1, 1997, of Class A Interests and Special Beneficiary Interests. 

"Recording Date" has the meaning given it in Section 9.3. 

"Redemption Date" means the date selected by the Managing Trustee, in its sole discretion, on which Interests tendered for redemption will be redeemed by the Trust in accordance with Section 9.6. 

"Removal" has the meaning specified in Section 4.9. 

"Removed Trustee" means a Trustee whose tenure as Trustee has been terminated by a Removal. 

"Reserve Account" means the account maintained by the Trust as reserves for working capital and contingent liabilities, including repairs, replacements, contingencies, accruals required by lenders for insurance, compensating balances required by lenders to the Trust and other appropriate items. 

"Resignation" means the resignation of a Trustee or the voluntary Assignment of all of the Managing Trustee's Interest pursuant to Section 4.8. 

"Resigned Trustee" means a Trustee whose tenure as Trustee has been terminated by a Resignation. 

"Right" means non-transferable subscription rights to Record Date Holders to acquire Class B Subordinated Interests. 

"Roll-Up" means a transaction involving the acquisition, merger, conversion or consolidation either directly or indirectly of the Trust and the issuance of securities of a Roll-Up Entity. Such term does not include: (a) a transaction involving the securities of the Trust that have been for at least 12 months listed on a national securities exchange or traded through the National Association of Securities Dealers Automated Quotation National Market System; or (b) a transaction involving the conversion to corporate, trust, partnership or association form of only the Trust if, as a consequence of the transaction, there will be no significant adverse change in any of the following: (i) Beneficiary's voting rights; (ii) the term of existence of the Trust; (iii) Sponsor compensation; and (iv) the investment objectives of the Trust. 

"Roll-Up Entity" means a partnership, corporation, trust or other entity that would be created or would survive after the successful completion of a proposed Roll-Up transaction. 

"Sale or Refinancing" means the sale, refinancing, exchange, condemnation, eminent domain taking, casualty or other disposition of any Asset or any interest in any Joint Venture. 

"Sales and Distribution Expenses" means expenses incurred in connection with preparing the Trust for registration and subsequently offering and distributing the Interests to the public, including sales commissions paid to the Dealer-Manager in connection with the distribution of the Interests and all advertising expenses relating to the leasing of the Assets. 

"Schedule A" means Schedule A to this Agreement, as amended from time to time. 

"S-D Commissions" means the commissions of 7% of Gross Proceeds payable to the Soliciting Dealers by the Dealer-Manager or such other amount to be paid to the Soliciting Dealers as the S-D Commission as specified in Section 5.1(a). 

"Securities" means securities of any type of description which are acquired by the Trust. 

"Securities Act" means the Securities Act of 1933, as amended. 

"Service" means the Internal Revenue Service. 

"Soliciting Dealers" means those member firms of the National Association of Securities Dealers, Inc. (including the Dealer-Manager) that offer Interests. 

"Solicitation Statement" means the Consent Solicitation Statement of the Trust dated February 11, 2003, as amended or supplemented from time to time. 

"Special Beneficiary" means Equis Financial Group in its capacity as Special Beneficiary pursuant to this Agreement, together with its successors and assigns in such capacity. 

"Special Beneficiary Interest" means the interest of the Special Beneficiary in the Trust created pursuant to this Agreement and representing the capital contribution set forth in Schedule A to this Agreement. 

"Sponsor" means any person directly or indirectly instrumental in organizing, wholly or in part, the Trust, or any Person who will manage or participate in the management of the Trust and any Affiliate of any such Person. Sponsor does not include the Delaware Trustee or a Person whose only relation with the Trust is that of an independent equipment manager or whose only compensation is as such. Sponsor does not include wholly independent third parties such as attorneys, accountants and underwriters whose only compensation is for professional services rendered in connection with the Class A Offering or Class B Offering. 

"State" means the State of Delaware. 

"Subordinated Resale Fee" means the fee to be paid by the Trust to the Advisor for services rendered by the Advisor in connection with the sale or other disposition of the Assets, as described in Section 5.1(e). 

"Subscription Agent" means Gemisys Corporation. 

"Subscription Agreement" means the Subscription Agreement, the form of which was attached as Exhibit B to the Class A Prospectus, containing, among other things, representations made by each Class A Beneficiary. 

"Subscription Certificates" means the subscription certificate evidencing the Rights and set forth as Appendix A to the Class B Prospectus. 

"Substitute Trustee" means an assignee of the Trustee's Interest who is admitted to the Trust as a Trustee pursuant to Section 4.12 or 11.2. 

"Substitute Beneficiary" means an assignee of a Beneficiary Interest who becomes a Beneficiary pursuant to Section 9.3. 

 

"Substitute Special Beneficiary" means an assignee of the Special Beneficiary Interest who becomes a Special Beneficiary pursuant to Section 9.8. 

"Trust" means AFG Investment Trust D, a Delaware business trust, as the same may be constituted from time to time. 

"Trust Beneficiaries" means the Beneficiaries and the Special Beneficiary. 

"Trust Beneficiary Interests" means the Beneficiary Interests and the Special Beneficiary Interest. 

"Trust Counsel" means Nixon Peabody LLP, Boston, Massachusetts, or other counsel for the Trust selected by the Managing Trustee. 

"Trustees" means the Managing Trustee, the Delaware Trustee and any Person or Persons who subsequently become additional or substitute Trustees as provided in Section 4.1(a), in each such Person's capacity as a Trustee of the Trust. At all times when there is only one Trustee so acting, the terms "Trustees" and "Managing Trustee" shall refer to such Trustee. 

"UBTI" means unrelated business taxable income determined in accordance with Sections 511-514 of the Code. 

ARTICLE III - CAPITAL 

3.1  Capital Contribution of the Special Beneficiary and Managing Trustee. 

The Managing Trustee and the Special Beneficiary have each contributed as its Capital Contribution in its capacity as Managing Trustee and Special Beneficiary cash in the amount set forth opposite its name in Schedule A. No other Trustee shall have the right or obligation to make any Capital Contribution to the Trust. 

3.2  Class A Beneficiaries; Offering of Class B Interests; Beneficiary Interests. 

(a)  The Trust has accepted Class A Beneficiaries who own 2,089,030 Class A Interests for a Purchase Price of $25 per Interest. Such Purchase Price constituted the Capital Contributions of the Class A Beneficiaries for all purposes of this Agreement. Each Class A Beneficiary acquired not less than the Minimum Class A Investment Amount and no Class A Beneficiary acquired or shall thereafter own a fractional Class A Interest. 

(b)  A subscriber for Class B Interests shall become a Class B Beneficiary in accordance with his Subscription Certificate and the subscription procedures described in the Class B Prospectus. All subscriptions for Class B Interests shall be received by the Escrow Agent in trust and deposited in the Escrow Account. Any Escrow Interest shall be paid to the subscribers who become Class B Beneficiaries by the Escrow Agent within fifteen (15) days after the Class B Closing; provided, however, that no Escrow Interest shall be paid with respect to subscription payments received fewer than three days prior to such Closing. If the Escrow Agent does not receive subscriptions for at least Class B Interests on or before December 31, 1997 (or such earlier date as of which the Managing Trustee shall have terminated the Offering), the subscribers shall not acquire any Class B Interests and the Escrow Agent shall return all monies deposited by subscribers for Class B Interests to such subscribers, together with any Escrow Interest, within fifteen (15) business days after such date. All subscriptions shall be accepted or rejected by the Managing Trustee within thirty (30) days of their receipt. Subscription payments which are rejected shall be promptly returned to the subscriber without Escrow Interest. Upon receipt of subscriptions for not less than the Minimum Offering acceptable to the Managing Trustee and the determination of the Managing Trustee to proceed to the Class B Closing, the Escrow Agent shall release the proceeds of such subscriptions to the Trust. 

(c)  The Managing Trustee is hereby authorized to do all things necessary and desirable to allow subscribers to subscribe for Class B Interests and become Class B Beneficiaries in accordance with this Agreement and the Class B Prospectus, including registering the Class B Interests under the Securities Act of 1933, as amended, pursuant to the rules and regulations of the Securities and Exchange Commission and qualifying the Class B Interests for sale with state securities regulatory authorities or perfecting exemptions from qualification. 

3.3  Capital Accounts. 

A Capital Account shall be established and maintained for each Participant. Subject to such other adjustments as may be required under the Code, the Capital Account of each Participant shall consist of (i) the sum of (a) the amount of cash actually contributed to the Trust by such Participant, (b) the fair market value of any property contributed to the Trust by or on behalf of such Participant net of any liabilities assumed by the Trust or to which such property is subject, and (c) the amount of Profits or gain or tax-exempt income of the Trust allocated to such Participant, minus (ii) the sum of (a) the amount of Losses and deductions of the Trust allocated to such Participant, (b) the amount of Distributions made by the Trust to such Participant, (c) any amount distributed by the Trust to such Participant pursuant to Section 8.4, and (d) the fair market value of any property distributed by the Trust to such Participant net of any liabilities assumed by such Participant or to which such property is subject. Any special basis adjustments resulting from Section 743 of the Code shall not be taken into account for any purpose in establishing and maintaining Capital Accounts for such Participant pursuant to this Section 3.3. The Capital Account of each Beneficiary shall be reduced by the actual sales commissions and other non-deductible, non-capitalizable expenses paid by the Trust with respect to Interests acquired by such Beneficiary. 

Except where this Agreement otherwise requires, a Substitute Beneficiary or Substitute Special Beneficiary shall be deemed to have received the Capital Account and made the Capital Contributions to the Trust which were made by the Beneficiary or Special Beneficiary whom such Substitute Beneficiary or Substitute Special Beneficiary succeeds, and to have received from the Trust the Distributions and allocations received from the Trust by such former Beneficiary or Special Beneficiary. 

3.4  Additional Capital Contributions. 

No Participant shall be required to make any Capital Contribution or be entitled to bring an action for partition against the Trust, or to demand or receive any distribution of or with respect to his Capital Contribution, except as specifically provided under this Agreement. No loan made by a Participant to the Trust as permitted by this Agreement shall constitute a Capital Contribution for any purpose. 

ARTICLE IV - TRUSTEES 

4.1  The Trustees; Liability for Trust Obligations. 

(a)  The number of Trustees shall not be less than two nor more than four and shall be fixed from time to time by the Managing Trustee. One Trustee shall be designated as the Managing Trustee and one Trustee shall be designated as the Delaware Trustee. The Managing Trustee is AFG ASIT Corporation and the Delaware Trustee is Wilmington Trust Company. Each Person designated as a Trustee shall serve as Trustee hereunder until such Trustee's Removal or Resignation, as provided in this Article IV. In the event of the Removal or Resignation of the Delaware Trustee, the Managing Trustee shall designate a Substitute Delaware Trustee. 

(b)  The Managing Trustee shall have complete exclusive discretion in the management and control of the affairs and business of the Trust, as more particularly provided in Section 4.2. Any action required or permitted to be taken by a corporate Managing Trustee hereunder may be taken by such of its officers or agents as it shall validly designate for such purposes. The Managing Trustee shall devote so much of its time as may be necessary to carry out the purposes and conduct the business of the Trust in accordance with this Agreement and to carry out its duties as Managing Trustee hereunder. The Delaware Trustee shall have only the rights and obligations of the Delaware Trustee specifically provided in this Agreement and shall have no Interest, make no Capital Contribution and have no right to Consent to any matters affecting the Trust except as otherwise specifically provided herein. In the event that the Managing Trustee shall designate additional Trustees pursuant to Section 4.1(a), such Trustees shall have such rights and obligations as shall be delegated to them by the Managing Trustee but any such delegation shall not relieve the Managing Trustee of its primary responsibility for the affairs of the Trust hereunder. 

(c)  If any Managing Trustee shall become unable to serve in such capacity or shall Resign or be Removed as Trustee and the Beneficiaries shall not have designated a successor Managing Trustee pursuant to Section 4.12, the Persons acting as Trustees may from time to time designate from among themselves by mutual consent a successor Managing Trustee. If for any reason no designation is in effect, the powers of the Managing Trustee shall be exercised by majority consent of the remaining Persons acting as Trustees (including, without limitation, the Delaware Trustee). 

(d)  The Managing Trustee, when acting in such capacity, shall be personally liable for the acts, omissions or obligations of the Trust, except as may be provided to the contrary in any contractual agreement of the Trust. Neither the Delaware Trustee nor any other Trustee, other than the Managing Trustee, shall have any personal liability to any other Person for any act, omission or obligation of the Trust or any other Trustee. 

4.2  Extent of Managing Trustee Powers and Duties. 

Except as expressly limited by this Agreement, the Managing Trustee shall have complete and exclusive discretion in the management and control of the affairs and business of the Trust and all power necessary, convenient or appropriate to carry out the purposes, conduct the business and exercise the powers of the Trust. 

(a)  General Powers and Duties. The Managing Trustee shall use its best efforts during so much of its time as may be necessary to carry out its duties in accordance with this Agreement and in the best interest of the Trust and so as to protect the interests of the Trust Beneficiaries as a group. The Managing Trustee shall be accountable as a fiduciary for the safekeeping and use of all funds and Assets of the Trust and shall not employ or permit another Person to employ such funds or Assets in any manner except for the benefit of the Trust. In particular, the Managing Trustee, solely, shall be responsible for and shall use its best efforts and exercise discretion to the best of its ability: 

(i)  to cause Assets to be acquired, held, leased, re-leased, financed and refinanced, sold, exchanged or otherwise disposed of (except as limited by Section 1.6 and Article VII); 

(ii)  to lease, maintain and operate the Assets so as to comply with the provisions of any indebtedness relating thereto; 

(iii)  to select and supervise the activities of the Advisor (which may be an Affiliate); 

(iv)  to ensure the proper application of revenues of the Trust; 

(v)  to maintain proper books of account for the Trust and to prepare all reports of operations and tax returns which are to be furnished to the Trust Beneficiaries pursuant to this Agreement or which are required by taxing bodies or other governmental agencies; 

(vi)  in general to supervise the redemption of Class A Interests pursuant to Section 9.6; 

(vii)  in particular to cause the Trust to purchase and redeem Class A Interests pursuant to the last paragraph of Section 9.6. 

(viii)  to maintain or cause to be maintained, to the extent it deems necessary or appropriate, adequate insurance with respect to all insurable Assets of the Trust pursuant to policies of insurance in form and coverage customary to property similar to the Assets; 

(ix)  to supervise the offer and sale of Class A Interests and Class B Interests; 

(x)  to establish reasonable procedures for the transfer of Interests (including actions which may impose restrictions on the transferability of Interests as set forth in Section 9.2, provided such restrictions on transfers do not cause the assets of the Trust to be deemed to be plan assets with respect to Beneficiaries which are Qualified Plans) and to take such other actions with respect to the manner in which Interests are transferred as it, in its sole discretion, deems necessary or appropriate in order to preserve the status of the Trust as an entity taxable as a partnership for federal income tax purposes, to prevent the Trust from being deemed a publicly traded partnership under the Code, to prevent the Trust from being terminated for federal income tax purposes, to prevent the deregistration of any FAA-registered aircraft or vessels documented under the laws of the United States and to assure that the Beneficiaries will be treated as owners of the Interests for federal income tax purposes under the Code (and to amend this Agreement without the Consent of any Beneficiary in order to effect the foregoing); provided, however, that any transfer restrictions imposed without the Majority Consent to prevent adverse tax consequences to the Beneficiaries will only be imposed to the extent necessary to prevent such adverse tax consequences and will be modified or eliminated to the extent that such restrictions become unnecessary in the future; 

(xi)  to execute and file with any state tax authority, if necessary or appropriate to comply with or minimize withholding obligations under the laws of that state, a statement on behalf of the Trust Beneficiaries acknowledging and confirming their obligations to file tax returns with such state; 

(xii)  in the event that either (y) the Assets would constitute plan assets for purposes of ERISA or (z) the transactions contemplated under this Agreement would constitute prohibited transactions under ERISA or the Code and an exemption for such transactions is not obtainable or not sought by the Managing Trustee from the Department of Labor, to restructure the Trust's activities to the extent necessary to comply with any exemption in any final plan asset regulation adopted by the Department of Labor or any condition which the Department of Labor might impose as a condition to granting a prohibited transaction exemption, including, but not limited to, establishing a fixed percentage of Interests permitted to be held by Qualified Plans or other tax-exempt Beneficiaries and/or discontinuing sales to such Entities after a given date. The Managing Trustee is empowered to amend this Section 4.2(a)(xii) to the extent it deems necessary or appropriate in order to comply with any applicable federal or state legislation, rules or regulations enacted or promulgated or administrative pronouncements or interpretations and/or judicial interpretations thereof after the date of this Agreement; provided, however, that any amendments imposed without Majority Consent to prevent adverse consequences to the Trust Beneficiaries under ERISA or the Code shall only be imposed to the extent necessary to prevent such adverse tax consequences and will be modified or eliminated to the extent that such restrictions become unnecessary in the future. Any amendments made by the Managing Trustee under the circumstances described above shall be deemed to be made pursuant to the fiduciary duty of the Managing Trustee to the Trust and the Trust Beneficiaries; 

(xiii)  to determine whether any Foreign Investors may be admitted as Beneficiaries and establish requirements for the admission of Foreign Investors; 

(xiv)  to establish a fixed percentage of Interests permitted to be held by or discontinue sales to Foreign Investors after a given date and take any additional actions as the Managing Trustee deems necessary or appropriate in order to maintain the registration with the FAA of any FAA-registered aircraft and the documentation of any vessels documented under the laws of the United States; 

(xv)  to take such actions as the Managing Trustee deems necessary or appropriate, including, without limitation, borrowing funds on behalf of the Trust, to comply with the requirements of Sections 1441, 1442 and 1446 of the Code or setting aside Distributions otherwise payable to Foreign Beneficiaries in an escrow account to meet future requirements under Sections 1441, 1442 and 1446 of the Code; and 

(xvi)  to do all things and to execute all documents the Managing Trustee shall deem necessary or advisable in connection with the supervision of the affairs, business and assets of the Trust. 

In establishing criteria for the resolution of conflicts of interest among the Trust and the Managing Trustee and its Affiliates, the Managing Trustee will act in conformity with its fiduciary duty to the Trust and the Beneficiaries. 

(b)  Amplification of Powers and Duties. As amplification of, and not by way of limitation on, the powers expressed herein, the Managing Trustee shall have, subject to the express provisions of this Agreement, full power and authority on behalf of the Trust, in order to carry out and accomplish its purposes and functions: 

(i)  to expend Trust capital and income; 

(ii)  to purchase, lease, sell, exchange, improve, repair, refurbish, upgrade, divide, combine and otherwise transact business with respect to interests in real and personal property, in each case on terms that the Managing Trustee deems to be in the best interests of the Trust, and in that connection to employ engineers, contractors, attorneys, accountants, brokers, appraisers and such other consultants, advisors, artisans and workmen as may be necessary or advisable for such purpose; 

(iii)  to borrow money or otherwise to procure extensions of credit for the Trust in accordance with the borrowing policies set forth in the Prospectus (as such policies may be altered in accordance with the Class A Prospectus and Section 7.1), and in connection therewith to execute, seal, acknowledge and deliver agreements, promissory notes, guarantees and other written documents constituting obligations or evidences of indebtedness, and as security therefor to pledge, hypothecate, mortgage, assign, transfer or convey mortgages or security interests in the Assets; 

(iv)  for a period continuing through December 31, 2002, to reinvest Cash from Sales and Refinancings in additional Assets; provided, however, that the Lease of any Asset so acquired shall have a term which shall expire not later than eleven years after Final Closing, or, if such term is scheduled to expire more than eleven years after Final Closing, that such asset will be sold within such period; and provided, further, that sufficient Distributions are made during the relevant period of Trust operations to enable the Beneficiaries to pay any state and federal income taxes arising from the Sale or Refinancing transaction (assuming the Beneficiaries are in a combined federal and state marginal tax bracket of 33% or the rate effective at the time of the Sale or Refinancing transaction); 

However, nothing in this Agreement generally, and in the foregoing specifically, shall be interpreted to limit in any way the ability of MILPI, PLM and the Affiliates that they control to operate their ongoing businesses making investments after December 31, 2002, notwithstanding the end of the reinvestment period of the Trust, utilizing their own funds. 

(v)  to invest any Sale or Refinancing proceeds resulting from the loss or destruction of any Asset in replacement assets; 

(vi)  to execute, deliver, amend, modify and cancel documents and instruments relating to real and personal property of whatever kind and description, including, but not limited to, mortgages, leases, and other documents of title or conveyance, assumption agreements pertaining to such agreements, powers of attorney and other contracts, instruments and agreements of all kinds; 

(vii)  to hold all or any portion of the Assets in the name of one or more trustees (including trustees which are Affiliates of the Managing Trustee or the Advisor), nominees, or other agents of or for the Trust (including the Managing Trustee) for the purpose of facilitating transactions involving said Assets; 

(viii)  to establish reserves for normal repairs, replacements, and contingencies and, in its discretion, for any other proper Trust purpose; 

(ix)  to amend this Agreement to reflect the addition or substitution of Trustees or Trust Beneficiaries or the reduction of Capital Accounts upon the return of Capital Contributions to Participants; 

(x)  to determine the time and amount of Distributions, if any, to the Participants; 

(xi)  to designate depositories of the Trust's funds and the terms and conditions of such deposits and drawings thereon; 

(xii)  to invest in one or more Joint Ventures in accordance with Section 7.5; 

(xiii)  to utilize Cash from Operations and Cash from Sales or Refinancings to redeem Class A Interests in accordance with the terms of Section 9.6; and 

(xiv)  in general to do all things and execute all documents it shall deem necessary or convenient to accomplish the purposes of the Trust or to protect and preserve the Assets to the same extent as if it owned such Assets individually. 

(c)  Right to Acquire Interests. The Managing Trustee shall have the right in its sole discretion, without the Consent of any Beneficiary, the Special Beneficiary or other Trustee: 

(i)  to acquire Interests to the extent required to prevent the Assets of the Trust from being deemed plan assets with respect to Beneficiaries which are Qualified Plans and to prevent a prohibited transaction from occurring under ERISA; provided that such Interests shall be acquired at fair market value (as determined by an independent appraiser retained by the Managing Trustee); and 

(ii)  to become a Substitute Beneficiary with respect to Interests held by a Non-Eligible Beneficiary in accordance with Section 9.5. 

(d)  Authority to Enter into Dealer-Manager Agreement. The Managing Trustee shall cause the Trust to enter into the Dealer-Manager Agreement pursuant to which the Dealer-Manager shall act as dealer-manager for the Class A Offering. 

(e)  Authority to Enter into Advisory Agreement. The Managing Trustee shall cause the Trust to enter into the Advisory Agreement with the Advisor. The Managing Trustee may not amend the Advisory Agreement in any manner which would adversely affect the Beneficiaries without Majority Consent. The Advisory Agreement shall provide that the Trust shall have the right to terminate the Advisory Agreement effective immediately and without penalty in the event of the Removal of the Managing Trustee. 

(f)  Reserves. The Managing Trustee shall endeavor to maintain an adequate Reserve Account at all times. Such amount may be increased if necessary to comply with the conditions of lenders requiring compensating balances or other reserves. If used, cash reserves need not be restored, but, if restored, will be restored from revenues derived from Trust operations including the proceeds from the sale of Assets or from borrowings. Funds in the Reserve Account may be distributed in accordance with Section 8.1(a) if and when deemed advisable by the Managing Trustee. The Trust's reserves will not be reduced below a level which the Managing Trustee deems necessary for Trust operations. 

(g)  Designation, Duties, and Expenses of Tax Matters Participant. The Managing Trustee shall from time to time (but at least as frequently as required by law) designate a Tax Matters Participant pursuant to Section 6231 of the Code and hereby designates itself as the initial Tax Matters Participant. The Tax Matters Participant shall have the following duties: 

(i)  to the extent and in the manner required by applicable law and regulations, to furnish the name, address, profits, interest, and taxpayer identification number of each Trust Beneficiary to the Secretary of the Treasury or his delegate (the "Secretary"); and 

(ii)  to the extent and in the manner required by applicable law and regulations, to keep each Trust Beneficiary informed of administrative and judicial proceedings for the adjustment at the Trust level of any item required to be taken into account by a Trust Beneficiary for federal income tax purposes (such administrative and judicial proceedings referred to hereinafter as judicial review). 

The Trust shall indemnify and reimburse the Tax Matters Participant for any and all expenses, including legal and accounting fees, claims, liabilities, losses and damages incurred in connection with any judicial or administrative review with respect to the tax liability of the Trust Beneficiaries, subject to the provisions of Section 4.6. The payment of all such expenses shall be made before any Distributions are made. Neither the Managing Trustee nor any Affiliate nor any other Person shall have any obligation to provide funds for such purpose. The taking of any action and the incurring of any expense by the Tax Matters Participant in connection with any such proceeding, except to the extent required by law, is a matter in the sole discretion of the Tax Matters Participant; and the provisions on limitations of liability of the Managing Trustee and indemnification set forth in Section 4.6 shall be fully applicable to the Tax Matters Participant in its capacity as such. 

The Tax Matters Participant is hereby authorized, but not required: 

(i)  to enter into any settlement agreement with the Service with respect to any tax audit or judicial review, in which agreement the Tax Matters Participant may expressly state that such agreement shall bind the Trustees and the Trust Beneficiaries, except that such settlement agreement shall not bind any Person who is entitled to file and who (within the time prescribed pursuant to the Code and regulations thereunder) files a statement with the Service stating that the Tax Matters Participant shall not have the authority to enter into a settlement agreement on the behalf of such Person; 

(ii)  in the event that a notice of a final administrative adjustment at the Trust level of any item required to be taken into account by a Trustee or Trust Beneficiary for tax purposes (a final adjustment) is mailed to the Tax Matters Participant, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court, the District Court of the United States for the district in which the Trust's principal place of business is located or the United States Claims Court; 

(iii)  to intervene in any action brought by a Trustee or Trust Beneficiary for judicial review of a final adjustment; 

(iv)  to file a request for an administrative adjustment with the Service at any time and, if any part of such request is not allowed by the Service, to file a petition for judicial review with respect to such request; 

(v)  to enter into an agreement with the Service to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Trustee or Trust Beneficiary for tax purposes, or an item affected by such item; and 

(vi)  to take any other action on behalf of any other Trustee or Trust Beneficiary in connection with any administrative or judicial tax proceeding to the extent permitted by applicable law or regulations. 

(h)  Insurance Policies. The Managing Trustee shall cause the Trust to purchase and maintain such insurance policies as the Managing Trustee deems reasonably necessary to protect the interests of the Trust (to the extent that such policies are not maintained by the Lessees or other parties for the benefit of the Trust). The Trust shall not pay for any insurance covering liability of the Managing Trustee, its Affiliates, agents or employees for actions or omissions to act for which indemnification is not permitted hereunder. The Trust may purchase and pay for such types of insurance, including extended coverage liability and casualty and workmen's compensation, as would be customary for any person owning comparable property and engaged in a similar business and may name the Trustees and their Affiliates as additional insured parties thereunder, provided that such addition does not add to the cost of premiums payable by the Trust. The Trust may not incur the cost of any insurance which would insure the Trustees or their Affiliates against liabilities to which they are prohibited from being indemnified under Section 4.6; provided, however, that this prohibition shall not preclude the addition of such parties as additional insureds on any public liability insurance to the extent that such added parties do not increase the cost of such insurance to the Trust or to the extent that any additional cost is not borne by the Trust. Notwithstanding the foregoing, the Delaware Trustee shall be named as an additional insured on any public liability insurance policy at the expense of the Trust. 

(i)  Determination of Adjusted Basis in Connection with Section 754 Election. The Managing Trustee is authorized to make the election under Section 754 of the Code, but is not obligated and does not expect to make the Section 754 election. If a Section 754 election is made, in determining the adjustment to any Beneficiary's proportionate share of the adjusted basis of Assets in connection with the Section 754 election, the Managing Trustee, for purposes of accounting simplicity, shall treat each Beneficiary who acquires one or more Interests at any time during a calendar month as having acquired the same at a price equal to the weighted average of the price paid for all Interests transferred during such month, irrespective of the date on or price at which such Interests actually were acquired by such Beneficiary during such month. The Managing Trustee shall be authorized to alter these accounting conventions and to conform such conventions with any regulations issued by the Treasury Department or rulings or advice of the Service, as the Managing Trustee shall determine necessary or appropriate, without Consent of any Beneficiary or the Special Beneficiary. To the extent the Managing Trustee is required to determine the adjusted basis of any Assets with respect to which the Code requires that records of such adjusted basis be kept and maintained by the Trust Beneficiaries, the Managing Trustee may request information regarding such adjusted basis from such Trust Beneficiary, in writing, and such Trust Beneficiary shall furnish such information to the Managing Trustee within 30 calendar days after such request is mailed by the Managing Trustee. 

4.3  Delegation of Powers. 

Except as otherwise provided under this Agreement or by law and subject to the provisions of Section 5.3 and 10.4, the Managing Trustee may delegate all or any of its duties under this Agreement to any of its officers, employees and agents and in furtherance of such delegation may elect, employ, contract or deal with any Person (including any Affiliate of the Managing Trustee). 

4.4  Reliance by Third Parties. 

No Person dealing with the Trust, or its assets, whether as mortgagee, assignee, purchaser, lessee, grantee or otherwise, shall be required to investigate the authority of the Managing Trustee in selling, assigning, leasing, mortgaging, conveying or otherwise dealing with any Assets or any part thereof, nor shall any such assignee, lessee, purchaser, mortgagee, grantee or other Person entering into a contract with the Trust be required to inquire as to whether the approval of the Trust Beneficiaries for any such sale, assignment, lease, mortgage, transfer or other transaction has been first obtained. Any such Person shall be conclusively protected in relying upon a certificate of authority or any other material fact signed by the Managing Trustee, or in accepting any instrument signed by the Managing Trustee in the name and on behalf of the Trust or the Managing Trustee. 

4.5  Limitations on the Exercise of Powers of Managing Trustee. 

The Managing Trustee shall not: 

(i)  do any act in contravention of this Agreement or any applicable law or regulation; 

(ii)  possess Trust property or assign the Trust's rights in specific Trust property for other than a Trust purpose; 

(iii)  permit any Person to become a Trust Beneficiary, except as provided in or contemplated by this Agreement; 

(iv)  knowingly commit any act that would subject any Trust Beneficiary to unlimited liability in any jurisdiction; 

(v)  change the Trust's purposes from those set forth in Section 1.4; 

(vi)  acquire any Assets in exchange for interests in the Trust; 

(vii)  [intentionally omitted]; 

(viii)  invest in or underwrite the securities of other issuers, except as provided in Sections 7.1 and 7.5; 

(ix)  do any act required to be approved or ratified in writing by some or all Trust Beneficiaries under the Business Trust Act without such approval or ratification unless the right to do so is expressly otherwise given in this Agreement; 

(x)  reinvest Distributable Cash from Operations in Assets; or 

(xi)  cause the Trust to engage in any purchase or redemption of Interests if, and to the extent that, such purchase or redemption would result in the Trust being treated as a publicly traded partnership for purposes of Section 7704 of the Code. 

4.6  Liability for Acts or Omissions and Indemnification. 

Neither any Trustee nor its Affiliates shall have any liability to the Trust or to any other Trustee or any Trust Beneficiary for any loss suffered by the Trust which arises out of any action or inaction of the Trustee or its Affiliates while acting on behalf of, or in the course of performing services for, the Trust, if the Trustee, in good faith, determined that such course of conduct was in the best interest of the Trust and such course of conduct did not constitute negligence or misconduct of the Trustee or its Affiliates. Each Trustee and its Affiliates shall be indemnified by the Trust against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Trust, provided that the same were not the result of negligence or misconduct on the part of the Trustee or its Affiliates and the Trustee determined in good faith that the course of conduct that caused the loss, judgment, liability or claim was in the best interest of the Trust. Notwithstanding the above, the Managing Trustee and its Affiliates shall not be indemnified for any losses, liabilities or expenses arising from or out of any alleged violation of any obligations any such Person might have as ERISA fiduciaries unless (i) there has been a successful adjudication on the merits of each count involving alleged violations of such obligations as to the particular indemnitee and such court approves the indemnification of litigation costs, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and such court approves the indemnification of litigation costs, or (iii) a court of competent jurisdiction approves the settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. Further, notwithstanding the above, the Managing Trustee and its Affiliates and any Person acting as a broker-dealer shall not be indemnified for any losses, liabilities, or expenses arising from or out of any alleged violation of federal or state securities laws unless (i) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and a court of competent jurisdiction approves the indemnification of litigation costs, (ii) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and a court of competent jurisdiction approves the indemnification of litigation costs, or (iii) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Massachusetts Securities Division, the Michigan Corporations & Securities Bureau, the Pennsylvania Securities Commission, the Tennessee Securities Commission and the Commissioner of Corporations of the State of California with respect to the issue of indemnification for securities law violations. The Trust shall not incur the cost of a portion of any insurance which insures any party against any liability the indemnification of which is herein prohibited; provided, however, that this prohibition shall not preclude the addition of such parties as additional insureds on any public liability insurance to the extent that such added parties do not increase the cost of such insurance to the Trust or to the extent that any additional cost is not borne by the Trust. Furthermore, any amount recoverable under this Section shall be recoverable only out of the assets of the Trust and not from the assets of any Trust Beneficiary. 

The Trust may make advances from Trust funds for legal expenses and other costs incurred as a result of any legal action to any Person permitted indemnification hereby (the "Indemnitee") provided (i) such suit, action or proceeding relates to or arises out of, or is alleged to relate to or arise out of, any action or inaction on the part of the Indemnitee in the performance of its duties or provision of its services by the Managing Trustee or its Affiliates on behalf of the Trust; (ii) the Indemnitee undertakes to repay any funds advanced pursuant to this Section 4.6 in cases in which the indemnitee would not be entitled to indemnification hereunder; and (iii) such suit, action or proceeding is initiated by a third party who is not a holder of the Interests; and (iv) such suit, action or proceeding is not initiated against the Managing Trustee or its Affiliates. If advances are permissible under this Section 4.6, the Indemnitee shall furnish the Trust with an undertaking as set forth in the preceding sentence and shall thereafter bill the Trust from time to time for such amounts as the indemnitee is obligated to make payment therefor. The Trust shall pay any and all such bills and shall honor any and all such requests for payment for which the Trust is liable hereunder. In the event that a final determination is made that the Trust is not obligated hereunder for all or any portion of the amounts advanced to the Indemnitee, such Indemnitee shall refund such amount, plus interest thereon at the prevailing market rate of interest, within 45 days of such final determination, and in the event that a final determination is made that the Trust is so obligated in respect of any amount not paid by the Trust to a particular Indemnitee, the Trust shall pay such amount to such Indemnitee within 45 days of such determination. 

For purposes of this Section 4.6 only, the term "Affiliate" shall mean any person performing services on behalf of the Trust and acting on behalf of the Managing Trustee who (i) directly or indirectly controls, is controlled by, or is under common control with the Managing Trustee; (ii) owns or controls 10% or more of the outstanding voting securities of the Managing Trustee; (iii) is an officer, director, partner or trustee of the Managing Trustee; or (iv) if the Managing Trustee is an officer, director, partner or trustee, in any company for which the Managing Trustee acts in any such capacity. 

4.7  Compensation of Trustees. 

(a)  Managing Trustee. The Managing Trustee shall not, in its capacity as Managing Trustee, receive any salary, fees, profits or Distributions except: 

(i)  the Managing Trustee shall be entitled to receive the allocations and Distributions which are provided under Article VIII in respect of its Managing Trustee Interest; and 

(ii)  the Managing Trustee and its Affiliates shall be entitled to receive reimbursement for expenses incurred by them in connection with the operation of the Trust, subject to the limitations set forth in Section 10.4. 

(b)  Delaware Trustee. The Delaware Trustee shall receive an annual fee of $1,000, payable quarterly in advance, commencing with the first quarter following Closing. The Delaware Trustee shall also receive an initial fee of $1,000 payable at Closing. The Delaware Trustee shall also be entitled to reimbursement for any expenses incurred by it in the performance of its obligations hereunder. The Delaware Trustee, as such, shall not receive any other salary, fees, allocations of Profits or Losses or any Distributions. The fee of the Delaware Trustee may be modified from time to time as determined by the Managing Trustee in its sole discretion to compensate the Delaware Trustee appropriately for the performance of its duties hereunder. 

(c)  Specific Fees. Notwithstanding the foregoing, the Managing Trustee and its Affiliates have the right to receive all fees and compensation specifically provided for in this Agreement. If the Managing Trustee or an Affiliate purchases Interests, it shall be entitled to the same benefits to which each Beneficiary is entitled with respect to his Interests, except as otherwise provided in Section 11.2(b). 

(d)  Liability of Managing Trustee. The Managing Trustee, when acting in such capacity, shall be personally liable for the acts, omissions or obligations of the Trust, except as may be expressly provided to the contrary in any contractual agreement of the Trust. No other Trustee shall have any personal liability to any other Person for any act, omission or obligation of the Trust or any other Trustee. 

4.8  Resignation of Trustees. 

(a)  No Managing Trustee may Resign unless (i) the Trust Beneficiaries have received 60 days' advance written notice of the Managing Trustee's intention to Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the effect that such Resignation will not constitute a termination of the Trust or otherwise materially adversely affect the status of the Trust as an entity taxable as a partnership for federal income tax purposes, and (iii) a new Managing Trustee shall have been selected who, or which, (x) shall have expressed a willingness to become (and shall in fact duly become) the Substitute Managing Trustee, (y) shall satisfy the then applicable provisions of the Code and any applicable procedures, regulations, rules and rulings (including published private rulings) thereunder, including applicable net worth requirements, so that the Trust shall be classified as an entity taxable as a partnership for federal income tax purposes, and (z) shall have received the specific written Consent to such admission of a Majority in Interest of the Beneficiaries. In the event of the Resignation of a Managing Trustee, such Resigned Managing Trustee shall be liable for any costs or expenses incurred by the Trust as a result of such Resignation. 

(b)  No Delaware Trustee may Resign unless (i) the Managing Trustee has received 60 days' advance written notice of the Delaware Trustee's intention to Resign, (ii) the Trust shall have received the opinion of Trust Counsel to the effect that such Resignation will not constitute a termination of the Trust or otherwise materially adversely affect the status of the Trust as an entity taxable as a partnership for federal income tax purposes, and (iii) a new Delaware Trustee shall have been admitted who, or which, shall satisfy the then applicable provisions of the Business Trust Act. In the event of the Resignation of a Delaware Trustee, such Resigned Delaware Trustee shall be liable for any costs or expenses incurred by the Trust as a result of such Resignation unless such resignation is at the request of the Managing Trustee. 

4.9  Removal of Trustees. 

A Trustee shall be deemed to have been removed (a "Removal") as a Trustee from the Trust upon the occurrence of any of the following events: (a) the Removal of the Trustee pursuant to a vote of the Beneficiaries made in accordance with Article XI, (b) the making of an assignment for the benefit of creditors, the filing of a voluntary petition in bankruptcy, or an adjudication of bankruptcy, (c) the termination of the Trustee, or (d) any other involuntary event which constitutes an event of removal under the Business Trust Act. 

4.10  Consequences of Resignation or Removal. 

(a)  Any Resigned or Removed Trustee or its legal representatives shall be entitled to receive from the Trust (i) (in the case of a Managing Trustee), any positive balance in its Capital Account (as adjusted to the date of such Resignation or Removal), provided, however, that in no event shall such amount exceed the fair market value of the Resigned or Removed Trustee's Interest, (ii) any amounts due and owing to it by the Trust less any amounts due and owing by it to the Trust, and (iii) the remaining balance, if any, of fees payable as and when due pursuant to this Agreement or any other written agreements between the Trust and such Trustee in its capacity as Trustee; provided, however, that the Resigned or Removed Trustee shall not be entitled to any such fees which had not yet been earned by it prior to its Resignation or Removal. The right of the Resigned or Removed Trustee or its legal representatives to payment of said amounts and fees shall be subject to any claim for damages which the Trust or any other Trustee or Trust Beneficiary may have against such Trustee or its legal representatives if such Resignation or Removal is in contravention of this Agreement. 

(b)  The Managing Trustee hereby covenants and agrees, in the event of its Resignation or Removal, to transfer to a Substitute Managing Trustee selected as provided in Section 4.8 or Section 4.12 or to the Trust, such portion, if any, of its Managing Trustee's Interest as the Substitute Managing Trustee or the Trust shall elect to purchase. Any such transfer will be made in consideration of the payment by the Substitute Managing Trustee to the Resigned or Removed Managing Trustee or its legal representatives, of 86.5% of the fair market value of such Interest less any amounts payable pursuant to Section 4.10(a) by the Trust. The fair market value of the Trustee's Interest shall be as determined by the parties to the transfer, or otherwise in accordance with Section 11.3. The method of payment to the Resigned or Removed Managing Trustee must be fair and must protect the solvency and liquidity of the Trust. In the event of the Resignation of the Managing Trustee, payment may be made by means of a non-interest-bearing unsecured promissory note with principal payable, if at all, from Distributions which the Resigned Managing Trustee would have received but for its Resignation. In the event of the Removal of the Managing Trustee, the Substitute Managing Trustee or the Trust shall make such payment by means of a promissory note bearing interest at a floating annual rate equal to the prime rate of interest announced by Fleet Bank of Massachusetts, N.A., maturing in not less than five years with equal installments of principal and interest payable each year. Any portion of such Removed Managing Trustee's Interest which is not required to be transferred as aforesaid may be retained by such Removed Managing Trustee or its estate or legal representatives as appropriate. The Managing Trustee acknowledges and agrees that the payment of 86.5% of the fair market value of any portion of its Trustee's Interest which has been transferred shall be full payment for such Trustee's Interest. To the extent of such retained Trustee's Interest, if any, such Resigned or Removed Managing Trustee or its estate or legal representatives shall be treated as Trust Beneficiaries. 

(c)  The Delaware Trustee hereby covenants and agrees, in the event of its Resignation or Removal, to transfer to a Substitute Delaware Trustee selected as provided in Sections 4.1 and 4.8, or to the Trust, such portion, if any, of its Trustee's Interest as the Substitute Delaware Trustee or the Trust shall elect to purchase. Any such transfer will be made in consideration of the payment by the Trust of one dollar, plus any amounts payable pursuant to Section 4.10(a) by the Trust. 

(d)  If the Removal of the Managing Trustee shall occur as part of a removal and replacement of such Managing Trustee effected in accordance with Article XI, the provisions of Article XI shall govern to the extent (if any) that the provisions of said Article XI are inconsistent with the provisions of this Section 4.10. 

4.11  Liability of Resigned or Removed Trustee. 

If the business of the Trust is continued after Resignation or Removal of the Trustee, the Resigned or Removed Trustee or its legal representatives shall remain liable for all obligations and liabilities incurred by it while a Trustee and for which it was liable as a Trustee, but shall be free of any obligation or liability incurred on account of or arising from the activities of the Trust from and after the time such Resignation or Removal shall have become effective. 

4.12  Continuation of Trust Business. 

Upon any Removal of the sole Managing Trustee, such Removed Managing Trustee or its representatives shall promptly notify the Trust Beneficiaries. In the event of a failure to give such notice, any Trust Beneficiary may notify the other Trust Beneficiaries of such circumstances. Any Trust Beneficiary may then propose for admission a Substitute Managing Trustee, unless a Substitute Managing Trustee shall have already been proposed by the Trust Beneficiaries pursuant to Article XI. If any remaining Managing Trustee is a sole Managing Trustee at the time of its Removal, then that subsequent Removal will be governed by the provisions of this Agreement relating to the Removal of a sole Managing Trustee. Any Substitute Managing Trustee proposed pursuant to this Section 4.12 or Section 11.2 shall, with Majority Vote, become a Substitute Managing Trustee upon his or its execution of this Agreement and may thereupon elect to continue the Trust business. If no Substitute Managing Trustee has received such Majority Vote and executed this Agreement within one hundred eighty (180) days from the date of the Managing Trustee's Removal, then the Trust shall dissolve and its affairs shall be wound up. 

4.13  Powers and Limitations of Delaware Trustee. 

(a)  Notwithstanding any other provision of this Agreement, unless specifically authorized in writing by the Managing Trustee and consented to by the Delaware Trustee, the Delaware Trustee shall not participate in any decisions or possess any authority or approval right with respect to the operation of any business of the Trust, the investment of Trust property or the payment of Distributions to the Beneficiaries. No amendment to this Agreement shall require the approval or signature of the Delaware Trustee. The Delaware Trustee shall have the power and authority to execute, deliver, acknowledge and file all necessary documents and to maintain all necessary records of the Trust as required by the Business Trust Act. The Delaware Trustee shall provide prompt notice to the Managing Trustee of its performance of the foregoing acts. 

(b)  The Delaware Trustee shall not be liable for acts or omissions of the Managing Trustee and shall owe no other fiduciary duties to the Beneficiaries other than as expressly provided for in this Section 4.13. 

(c)  The Delaware Trustee accepts the Trust hereby created and agrees to perform its duties hereunder with respect to the same but only upon the terms of this Agreement. The Delaware Trustee shall not be personally liable under any circumstances except (x) for its own misconduct or negligence or (y) for taxes, fees or other charges on, based on or measured by any fees, commissions or compensation received by the Delaware Trustee in connection with the provision of its services hereunder. In particular, but not by way of limitation: 

(i)  No provision of this Agreement shall require the Delaware Trustee to expend or risk its personal funds, or otherwise incur any financial liability in the performance of its rights or powers hereunder, if the Delaware Trustee shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured or provided to it; 

(ii)  Under no circumstances shall the Delaware Trustee be personally liable for any indebtedness or obligation of the Trust; 

(iii)  In the exercise or administration of its duties hereunder, the Delaware Trustee may, at the expense of the Trust, consult with counsel and it shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of such counsel; and 

(iv)  The Delaware Trustee shall not be liable for the default or misconduct of the Managing Trustee and shall not be liable for any act or omission taken at the discretion of the Managing Trustee. 

(d)  Notwithstanding anything in this Section 4.13, the Delaware Trustee shall be subject to the indemnification provisions contained in Section 4.6 of this Agreement. 

ARTICLE V - ADVISOR SERVICES AND COMPENSATION 

5.1  Compensation to Advisor and Certain Affiliates. 

The Advisor and other Affiliates of the Managing Trustee shall receive fees and compensation as follows: 

(a)  For services rendered in connection with the sale of Class A Interests, the Trust will pay the Dealer-Manager a D-M Commission of 7% of the Gross Proceeds. The Dealer-Manager will reallow to each Soliciting Dealer a commission of 7% of the Gross Class A Proceeds per Class A Interest sold by such Soliciting Dealer. In addition, the Dealer-Manager, in its sole discretion, may reallow to a Soliciting Dealer all or a portion of the non-accountable expense allowance of 1.5% of Gross Class A Proceeds per Class A Interest and the accountable due diligence expense allowance of 0.5% of Gross Proceeds per Class A Interest under the Dealer-Manager Agreement payable with respect to the Interests sold by such Soliciting Dealer. The Dealer-Manager may retain the entire D-M Commission earned with respect to sales of Interests to the Managing Trustee or its Affiliates. Total payments, including commissions, expense allowances, any sales incentives, wholesaling fees and any and all other underwriting compensation made to the Dealer-Manager and the Soliciting Dealers in connection with the Class A Offering from all sources, including the Trust and the Dealer-Manager, will never exceed ten percent (10%) of Gross Class A Proceeds, except that up to an additional one-half of one percent (0.5%) of Gross Class A Proceeds may be paid for reimbursement of bona fide due diligence expenses. 

(b)  For rendering services in connection with the initial acquisition of Assets by the Trust, the Trust shall pay to the Advisor Acquisition Fees and Acquisition Expenses equal to the lesser of (A) 0.28% of the Asset Base Price paid by the Trust for each Asset acquired or (B) a fee, which in conjunction with all other fees paid by or on behalf of the Trust to all Persons in connection with the acquisition of an Asset, the Managing Trustee believes to be competitive with that charged by non-Affiliated Persons for rendering comparable services. For rendering services in connection with the acquisition of additional Assets by the Trust through the reinvestment of Cash from Sales or Refinancings, the Trust shall pay to the Advisor Acquisition Fees and Acquisition Expenses equal to the lesser of (A) 3% of the Asset Base Price paid by the Trust for each Asset acquired (1% of the Asset Base Price of each Asset acquired from June 15, 1998 through December 31, 2002), or (B) a fee, which in conjunction with all other fees paid by or on behalf of the Trust to all Persons in connection with the acquisition of an Asset, the Managing Trustee believes to be competitive with that charged by non-Affiliated Persons for rendering comparable services. Notwithstanding the foregoing, the Trust's Investment in Assets shall not be less than the greater of (A) 80% of the Gross Proceeds, reduced by .0625% for each 1% of leverage encumbering Trust Assets, or (B) 75% of Gross Class A Proceeds. In no event, however, will the Trust's Investment in Assets be less than 90% of the Gross Class A Proceeds (including 1% of Gross Class A Proceeds for working capital reserves). To the extent that such limitation is not otherwise satisfied, Acquisition Fees and Acquisition Expenses payable or paid by the Trust to the Advisor will be reduced or refunded to the extent necessary to comply with such limitation. In addition, if Acquisition Fees or Acquisition Expenses are paid to the Advisor or an Affiliate thereof in connection with the reinvestment of Cash from Sales or Refinancings, such fees and expenses shall be limited so that the Trust's Investment in Assets, after taking into account the Front-End Fees and Expenses incurred in connection with the initial acquisition of the Trust's Assets, shall be equal to at least 90% of Gross Class A Proceeds (including up to 3% of Gross Class A Proceeds for working capital reserves) reduced by .0625% for each 1% of leverage encumbering the Trust's Assets, but not less than 85% of Gross Class A Proceeds (including up to 3% of Gross Class A Proceeds for working capital reserves). The total of all fees paid to all Persons in connection with the acquisition of Assets, when aggregated with all travel, communication and overhead reimbursements paid to the Managing Trustee or its Affiliates, shall not exceed a fee competitive with that charged by non-Affiliated Persons for rendering comparable services. No Acquisition Fees and Acquisition Expenses are payable with respect to Assets acquired with insurance proceeds or other indemnity payments to be leased under the original leases of lost or destroyed Assets except to the extent that insurance proceeds or indemnity payments are sufficient to pay such Acquisition Fees and Acquisition Expenses after deducting the Asset Base Price of the replacement Asset and payment of all existing indebtedness secured by the lost or destroyed Asset. 

(c)  For Asset Management, the Trust shall pay an Asset Management Fee to either the Advisor or the Managing Trustee, as hereafter provided, payable monthly, equal to the lesser of (A) the fees which the Managing Trustee reasonably believes to be competitive for similar services for similar assets or (B) either (i) to the Advisor, 5% of gross lease rental revenues of the Trust from Operating Leases and 2% of gross lease rental revenues of the Trust from Full Payout Leases for the month for which such payment is being made with respect to any Assets acquired by the Trust on or prior to March 31, 1998, or (ii) to the Advisor, 2% of gross monthly lease rentals with respect to leases of Assets acquired on or after April 1, 1998, or (iii) to the Managing Trustee, 1/12 th of 1% of the fair market value (or, if unattainable, the cost) of any Securities or other Assets (other than equipment). To the extent that the Trust does not have sufficient cash to pay the Asset Management Fee in full when due, any unpaid amount will be accrued and paid in the next succeeding month or months. No interest shall accrue on unpaid amounts of Asset Management Fee. The Advisory Agreement shall provide that it may be terminated by the Trust without penalty on no more than sixty (60) days' written notice to the Advisor. The Advisory Agreement shall also provide that it may be terminated by the Trust effective immediately and without penalty in the event of the Removal of the Managing Trustee. 

(d)  For rendering services in connection with the sale of any Assets, the Trust shall pay to the Advisor a Subordinated Resale Fee in an amount equal to the lesser of (A) 3% of the gross sales proceeds of the Asset, or (B) one-half of a Competitive Asset Sale Commission; provided that in no event shall any such Subordinated Resale Fee be paid prior to Payout; and provided, further, that the Advisor shall not be entitled to receive any amount of Subordinated Resale Fee to the extent that such amount would cause the total compensation paid to all Persons, in connection with the sale of such Asset, to exceed a Competitive Asset Sale Commission. No interest shall accrue on unpaid amounts of the Subordinated Resale Fee. After Payout any and all Subordinated Resale Fees previously earned by the Advisor shall be paid by the Trust prior to any Distributions to the Participants. 

(e)  The Trust shall pay the Managing Trustee and its Affiliates an amount equal to 1% of the Gross Class B Proceeds as a non-accountable expense allowance in connection with the Class B Offering. 

5.2  Other Interests of the Advisor and its Affiliates. 

The Advisor, the Managing Trustee and any other Affiliate of the Advisor may engage in or possess an interest in other business ventures (unconnected with the Trust) of every kind and description, independently or with others, including, but not limited to, serving as general partner of partnerships or trustees of trusts and participating in the equipment leasing business in all of its phases, which shall include, without limitation, ownership, operation, leasing, re-leasing, financing, refinancing, management and syndication of equipment and which may involve equipment competitive with any Asset. The officers and directors of the Managing Trustee and the Advisor will devote only such time to the affairs of the Trust as they, in their sole discretion, determine in good faith to be necessary for the business and operations of the Trust. Neither the Trust nor the Trust Beneficiaries shall have any rights in and to such independent ventures or the income or profits therefrom by reason of the Advisor's or Managing Trustee's position with the Trust. Notwithstanding the foregoing, the Managing Trustee will act at all times in a manner consistent with its fiduciary duties to the Trust. 

In the event the Managing Trustee is presented by the Advisor with a potential investment which might be made by the Managing Trustee, EFG or its Affiliates, including investment entities advised, managed, controlled or to be formed by the Managing Trustee, the Advisor and/or its Affiliates (collectively, the "Investment Entities"), the Managing Trustee will analyze the assets already purchased and investment objectives of each Investment Entity involved and will make the decision as to which Investment Entity will purchase the assets based upon such factors, among others, as (i) the amount of cash available in each Investment Entity for such acquisition and the length of time such funds have been available, (ii) the current and long-term liabilities of each Investment Entity, (iii) the effect of such acquisition on the diversification of each Investment Entity's equipment portfolio by type of equipment, (iv) the credit diversification (geographically and/or by industry) of each Investment Entity's equipment portfolio, (v) the estimated income tax consequences from such acquisition to the investors in each Investment Entity, (vi) the cash distribution objectives of each Investment Entity, (vii) the policy of each Investment Entity relating to leverage, and (viii) any specialized investment purpose of an Investment Entity (which may, in the discretion of the Advisor, entitle such entity to priority as to certain types of assets). If, after analyzing the foregoing and any other appropriate factors, the Managing Trustee determines that an acquisition would be equally suitable for more than one Investment Entity, then the Managing Trustee will purchase assets for the Investment Entities based on the length of time such funds have been available. In the event that the Trust and AFG Investment Trust C have a substantial portion of their uninvested Net Proceeds available at the same time for purchase of Assets, the Managing Trustee will allocate available Assets among them on a pro rata basis, determined by the cash balances in each in excess of funds designated for its Reserve Account and for distribution to its Participants. 

In the event of a conflict between two or more Investment Entities advised or managed or controlled (or in the process of being formed) by the Managing Trustee, EFG or its Affiliates, for the financing of the acquisition of Assets contemporaneously, the Managing Trustee and EFG will seek to cause the available financing to be obtained by the Investment Entity that has been seeking financing the longest. 

In the event of a conflict between two or more Investment Entities, advised, managed or controlled by the Managing Trustee, EFG or an Affiliate, to re-lease or sell similar assets contemporaneously, the first opportunity to re-lease or sell equipment will generally be allocated to the Investment Entity attempting to re-lease or sell equipment which has been subject to the lease which expired first, or, if the leases expire simultaneously, the lease which was first to take effect. However, the Managing Trustee and EFG, in their discretion, may make exceptions to this general policy where Assets are subject to remarketing commitments or where there are other circumstances which, in their judgment, make the application of such policy inequitable for a particular Entity. In addition, exceptions to this general policy will be made when a buyer or new lessee indicates a preference for a specific item or items of equipment. 

5.3  Other Transactions Involving the Trust, PLM, the Advisor and their Affiliates. 

(a)  Notwithstanding any provision of this Agreement, including Section 4.2(b)(iv), restricting the reinvestment by the Trust of its Cash from Sales and Refinancing in additional assets to the period continuing through December 31, 2002, PLM, its parent MILPI, and their Affiliates that they control, may continue to operate their ongoing businesses, continuing to make investments and reinvestments of their respective assets after December 31, 2002; 

(b)  In order to allow the Trust to operate PLM and its Affiliates as ongoing businesses, the Trust, PLM and their Affiliates, despite any conflicts that may arise under this Agreement, may enter into agreements, understandings and arrangements with Affiliates in the ordinary course of business on terms no less favorable than those that they would receive if such agreements, understandings and arrangements were being entered into with independent third parties including, but not limited to, agreements for the payment and reimbursement of expenses of ordinary business operations, rent for office space and equipment, management and administrative services and salaries and the payment of fees and commissions for advisory, acquisition, liquidation, negotiation, asset management or similar services. 

(c)  Except as specifically permitted by Sections 5.3(a) and 5.3(b) or other terms of this Agreement, the Managing Trustee shall be prohibited from entering into any agreements, contracts or arrangements on behalf of the Trust with the Advisor or any Affiliate (including the Managing Trustee itself). Such prohibition shall include, without limitation, that neither the Advisor nor any such Affiliate shall receive directly or indirectly a commission or fee in connection with the reinvestment of the proceeds of the sale or refinancing of any Equipment or in connection with any insurance obtained by the Trust except as provided in Section 5.1 and Section 5.3(b). In addition, in connection with any agreement entered into by the Trust with the Advisor or any Affiliate, no rebates or give-ups may be received by the Advisor or any such Affiliate, nor may the Advisor or any such Affiliate participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of this Agreement. 

The Advisor and its Affiliates shall not receive any fees or compensation other than as provided for in Sections 4.7, 5.1, 5.3(b), 7.4, 10.4(a) and 10.4(b). If the Advisor or an Affiliate purchases Interests, it shall be entitled to the same benefits to which each other Beneficiary is entitled, except as otherwise provided in Section 11.2(b). 

ARTICLE VI - TRUST BENEFICIARIES 

6.1  Absence of Control over Trust Business. 

The Trust Beneficiaries hereby consent to the exercise by the Managing Trustee of the power conferred on the Managing Trustee by this Agreement. No Trust Beneficiary (except one who is also the Managing Trustee and then only in its capacity as the Managing Trustee) shall participate in or have any control over the Trust's business or have any right or authority to act for or to bind the Trust. No Trust Beneficiary shall have the right to have the Trust dissolved and liquidated or have his Capital Contributions returned except as provided in this Agreement. 

6.2  Limited Liability. 

Except as set forth below, each Trust Beneficiary in his capacity as a Trust Beneficiary shall be entitled, pursuant to § 3803 (a) of the Business Trust Act, to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. Except (i) as may otherwise be required by law, (ii) to the extent that a Trust Beneficiary may be liable to the Trust for an amount equal to any Distributions made to him if, after such Distribution is made, the then fair market value of the remaining Assets of the Trust is not sufficient to pay its then outstanding liabilities and (iii) as set forth below with respect to Foreign Beneficiaries, the liability of each Trust Beneficiary in his capacity as a Trust Beneficiary shall be limited to the amount of his Capital Contribution as described in Sections 3.2 and 3.4 and no Trust Beneficiary shall, in his capacity as Trust Beneficiary, have any further obligations to the Trust or be required to contribute any additional capital or loan any funds to the Trust. 

Notwithstanding the foregoing, each Foreign Beneficiary shall indemnify the Trust and the Trustees for any costs or expenses incurred by the Trust or the Trustees in connection with the withholding requirements applicable to Foreign Beneficiaries under the Code, including, without limitation, Sections 1441, 1442 and 1446. 

Upon issuance of the Class B Interests as provided in this Agreement, the Class B Interests so issued shall be deemed to be validly issued, fully paid and non-assessable. 

6.3  Fiduciary Duty of Managing Trustee to Trust Beneficiaries. 

No Trust Beneficiary shall forgo by means of contract the fiduciary duty owed to the Trust Beneficiary by the Managing Trustee under the Business Trust Act or the common law of the State. 

ARTICLE VII - INVESTMENT OBJECTIVES AND POLICIES 

7.1  Investment Objectives and Policies. 

The Managing Trustee shall use its best efforts to cause the Trust to follow the investment objectives and policies set forth in the Class A Prospectus, as modified by the Prior Solicitation Statement and the Solicitation Statement. The Managing Trustee may not make substantial or material modifications in such investment objectives without Majority Consent. All funds held by the Trust which are not invested in Assets (including subscription payments upon their release to the Trust) may be invested by the Trust in Permitted Investments. The Trust shall not redeem or repurchase Interests except to the extent that such Interests are forfeited in order to (a) prevent the assets of the Trust from being deemed plan assets or (b) prevent Foreign Beneficiaries from remaining Trust Beneficiaries under certain circumstances provided herein or (c) as permitted by Section 9.6. The Managing Trustee shall use its best efforts and in particular shall only acquire Securities in such a manner to ensure that the Trust shall not be deemed an investment company, as such term is defined in the Investment Company Act of 1940. 

7.2  Assets and Lessees. 

The Trust shall acquire various types of Assets as provided in the Class A Prospectus, as modified by the Prior Solicitation Statement and the Solicitation Statement. 

7.3  Purchases, Sales and Leases of Assets from or to the Managing Trustee and its Affiliates. 

The Trust may not purchase Assets in which the Managing Trustee or any of its Affiliates (the "Interested Parties") has an interest except for (i) Assets acquired on an interim basis (generally not in excess of six months) by one of the Interested Parties for the purpose of facilitating the acquisition by the Trust of the Asset or obtaining financing for the Trust or (ii) in connection with a Joint Venture. The Trust may not purchase Assets from any program in which any of the Interested Parties has an interest; provided that such restriction shall not prohibit the Trust from being a participant in a Joint Venture and purchasing Assets from an Interested Party pursuant to a right of first refusal in connection therewith. The Trust may acquire any such Assets from the Interested Parties only if: (i) such acquisition is in the best interests of the Trust; (ii) such Asset is purchased by the Trust for a price no greater than the Asset Base Price; (iii) there is no difference in interest terms of the loans secured by such Asset at the time acquired by one of the Interested Parties and the time acquired by the Trust, unless any such difference is favorable to the Trust; and (iv) no other benefit arises out of such transaction to the Interested Parties apart from compensation otherwise permitted by this Agreement. Assets shall not be acquired from an Interested Party if such transaction would involve the payment of duplicative Asset Management Fees or other fees or would have the effect of circumventing any of the restrictions on and prohibitions of transactions involving conflicts of interest contained herein. The aggregate primary term rental payments received or accrued to the Interested Parties with respect to Assets prior to the time that the Trust purchases the Asset from the Interested Parties shall reduce the purchase price paid by the Trust for such Asset by such amounts unless such primary term rental payments are assigned to the Trust. 

If one of the Interested Parties purchases an Asset in its own name in order to facilitate the ultimate purchase by the Trust, the Trust may purchase such Asset and such Interested Party will be entitled to receive interest on the funds expended for such purchase on behalf of the Trust. Interest on such temporary purchases will be charged at a floating rate equal to the rate of interest charged by third party financing institutions on comparable loans for the same purpose (but not in excess of 2% per annum over the base rate from time to time announced by Fleet Bank of Massachusetts, N.A. Interest shall accrue and be payable at the above-determined rate from the date of the Managing Trustee's or Affiliate's acquisition of the Asset until such Asset is sold to the Trust. 

The Trust shall not lease Assets from or to the Interested Parties. The Trust shall not sell Assets to the Interested Parties, except as provided in this Section or pursuant to a right of first refusal in connection with a Joint Venture. 

7.4  Loans to or from the Managing Trustee and its Affiliates. 

No loans may be made by the Trust to the Managing Trustee or its Affiliates. The Managing Trustee or its Affiliates may loan funds on a short-term basis to the Trust but only with interest rates equal to the amounts that are charged (without reference to the Managing Trustee's or any Affiliate's financial abilities or guarantees) by unrelated banks on comparable loans for the same purpose (but not in excess of 2% per annum over the base rate from time to time announced by Fleet Bank of Massachusetts, N.A.). Interest on such loans will begin to accrue on the date the loan is funded. Neither the Managing Trustee nor any Affiliate shall provide permanent financing for the Trust, and all payments of principal and interest on any financing provided by the Managing Trustee or any of its Affiliates shall be due and payable within 12 months after the date of the loan. Neither the Managing Trustee nor any Affiliate may receive points or other financial charges or fees (excluding interest charges) in respect of any loans to the Trust, although the Managing Trustee's or an Affiliate's compensation (specifically, Acquisition Fees and Asset Management Fees) may be increased as an indirect result of such loans. 

Any borrowings from the Managing Trustee or its Affiliates incurred for organization and offering expenses will be non-interest-bearing and will be repaid out of offering proceeds (subject to the limitations of Section 10.4). The Trust shall not enter into any borrowing arrangement with the Managing Trustee or its Affiliates which calls for a prepayment charge or penalty to be paid to the Managing Trustee or its Affiliates. 

7.5  Joint Investments. 

The Trust shall not make investments in the limited partnership interests or other equity interests of any other program. The Trust may enter into a general partnership, joint venture, trust or other business arrangement (other than a corporation) (collectively, a "Joint Venture") with an Unaffiliated Person if all of the following conditions are satisfied. First, the Trust shall acquire a controlling interest in any such Joint Venture. For purposes hereof, the Trust shall be deemed to have a controlling interest in such Joint Venture if (i) the Trust holds or is contractually entitled to acquire an interest of not less than 50% in the capital and profits of the Joint Venture and the Joint Venture agreement or related documents grant to the Trust and its Affiliates the joint right to make basic management decisions concerning the leasing, financing, refinancing, sale or other disposition of the Assets or (ii) the Trust holds a less than 50% interest in the capital and profits of the Joint Venture, but the Joint Venture Agreement or related documents grant to the Trust and its Affiliates the exclusive right to make all basic management decisions concerning the leasing, financing, refinancing, sale or other disposition of the Asset. Second, no such Joint Venture shall be entered into by the Trust which involves the payment of duplicative equipment management or other fees or which would have the effect of circumventing any of the restrictions on and prohibitions against transactions involving conflicts of interest contained in this Agreement. Third, such Joint Venture must either own specific Assets or be in the process of acquiring specific Assets (i.e., a commitment for the purchase of the specific Asset has been executed, but the Joint Venture has not yet acquired title to or paid for the Asset). The Trust may enter into Joint Ventures which satisfy the preceding requirements with respect to any Asset at any time during the life of the Trust; provided, however, that Offering Proceeds received directly by the Trust from Beneficiaries are invested within 24 months after commencement of the Offering. Except for transactions that have been or may be approved by the Beneficiaries (including the Rancho Malibu and MILPI acquisitions approved by the Beneficiaries on March 14, 2003 pursuant to the Solicitation Statement), in no event may the Trust enter into a Joint Venture if by means of the Joint Venture the Trust will acquire Assets from a program in which the Managing Trustee or any of its Affiliates has an interest in contravention of the provisions of Section 7.3 of this Agreement. 

The Trust may enter into Joint Ventures with Affiliates of the Managing Trustee or EFG or programs sponsored by the Managing Trustee or its Affiliates (including Joint Ventures organized after the Closing) (collectively, "Affiliated Venturers") but only if, (i) no such Joint Venture shall be entered into by the Trust which involves the payment of duplicative equipment management or other fees or which would have the effect of circumventing any of the restrictions on and prohibitions of transactions involving conflicts of interest contained in this Agreement, (ii) the compensation to the Managing Trustee and its Affiliates with respect to such Joint Ventures shall be substantially identical to the compensation described in this Agreement, and (iii) in the event of a proposed sale of the Asset or interest therein initiated by another Joint Venture partner, the Trust has a right of first refusal, pro rata with the other remaining parties, to purchase the other party's or parties' interest. Further, no lender to a Joint Venturer may have a security or other interest in the Trust's interest in the Joint Venture except to the extent of funds loaned directly to or for the benefit of the Trust. The Trust may cease to be a party to a Joint Venture by sale of its interest to another Joint Venturer or to a third party purchaser. 

The Trust may also enter into a Joint Venture with one or more unaffiliated Persons and one or more Affiliated Venturers provided that (i) the Trust and its Affiliated Venturers acquire collectively a controlling interest (as such term is described above) in such Joint Venture, (ii) the conditions set forth in clauses (i) and (ii) in the paragraph immediately above are satisfied and (iii) the Joint Venture Agreement or related documents grant to the Trust and its Affiliated Venturers the joint right to make basic management decisions concerning the leasing, financing, refinancing, sale or other disposition of the Assets. 

Notwithstanding anything contained in this Section 7.5 to the contrary, the Trust may enter into Joint Ventures only (i) where such investments will further the investment objectives of the Trust, (ii) where such Joint Ventures do not involve the payment to the Managing Trustee, the Advisor or any Affiliate of the foregoing, equipment management or other fees that would not be permitted under this Agreement, (iii) where the Managing Trustee believes that it is in the best interest of the Trust to do so and (iv) where the Managing Trustee believes that the Trust’s participation is on terms and conditions which are fair to the Trust and the Beneficiaries, taking into account the participation of the Affiliated Venturers, and will allow the Trust to better obtain its investment objectives. 

7.6  Resales. 

No exclusive listing for the sale of Assets shall be granted to the Managing Trustee or any of its Affiliates. 

7.7  In-Kind Distributions. 

The Trust shall not make in-kind distributions to the Participants. 

7.8  Roll-Ups. 

The Trust shall not participate in any proposed Roll-Up if any of the following conditions are present: 

(i)  the proposed Roll-Up would result in the Beneficiaries having voting rights in the Roll-Up Entity which are less than those contained in this Agreement. If the Roll-Up Entity is a corporation, the voting rights of the Beneficiaries shall correspond to the voting rights provided for in this Agreement to the greatest extent possible; 

(ii)  the proposed Roll-Up includes provisions which would operate to materially impede or frustrate the accumulation of shares by any purchaser of the securities in the Roll-Up Entity (except to the minimum extent necessary to preserve the tax status of the Roll-Up Entity); 

(iii)  the proposed Roll-Up would limit the ability of a Beneficiary to exercise the voting rights of his securities of the Roll-Up Entity on the basis of the number of Interests held by the Beneficiary; 

(iv)  the Beneficiaries' rights of access to the records of the Roll-Up Entity will be less than those provided in this Agreement; 

(v)  any of the costs of the proposed Roll-Up would be borne by the Trust if the Roll-Up is not approved by the Beneficiaries; or 

(vi)  the Person sponsoring the Roll-Up fails to offer the Beneficiaries who vote on the proposal the choice of (a) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up; or (b) one of the following: (i) remaining as Beneficiaries in the Trust and preserving their interests therein on the same terms and conditions as existed previously; or (ii) receiving cash in an amount equal to the Beneficiaries' pro rata share of the appraised value of the net assets of the Trust. 

(b)  If the Trust may participate in a Roll-Up pursuant to this Section, an appraisal of all assets of the Trust shall be obtained from a competent, Independent Expert. The assets of the Trust shall be appraised on a consistent basis. The appraisal shall be based upon an evaluation of all relevant information and shall indicate the value of the Trust's assets as of a date no earlier than 30 days prior to the announcement of the proposed Roll-Up. The appraisal shall assume an orderly liquidation of the Trust's assets over a 12-month period. If the appraisal will be included in a Prospectus used to offer the securities of the Roll-Up Entity, the appraisal shall be filed with the Securities and Exchange Commission and the states as an exhibit to the registration statement for the offering. The terms of the engagement of the Independent Expert shall clearly state that the engagement is for the benefit of the Trust and the Beneficiaries. A summary of the independent appraisal, indicating all material assumptions underlying the appraisal, shall be included in a report to the Beneficiaries in connection with the proposed Roll-Up. 

7.9  Change in Investment Objective and Policies. 

The Managing Trustee shall be subject to the limitations provided in this Article VII in its administration of the Trust unless Majority Consent is obtained. 

ARTICLE VIII - DISTRIBUTIONS AND ALLOCATIONS 

8.1  Distribution of Distributable Cash. 

(a)  In General. Distributions prior to dissolution shall be made to the Participants within 45 days after completion of each month of each fiscal year. However, a Beneficiary may elect to have such Distributions made to him on a quarterly basis. Such election must accompany the Beneficiary's Subscription Agreement or be delivered to the Managing Trustee in writing on the anniversary of the Trust's Closing. Notwithstanding the foregoing, the Managing Trustee may, in its sole discretion, restrict or suspend Distributions if it believes such action to be in the best interests of the Trust. Commencing as of the Distribution Commencement Date, each Distribution shall be made (i) 90.75% to the Beneficiaries, (ii) 8.25% to the Special Beneficiary and (iii) 1% to the Managing Trustee. 

Distributions so to be made to the Class A Beneficiaries and the Class B Beneficiaries will be allocated as follows, on a quarterly non-cumulative basis (pro rated for fractional quarters): 

Prior to Class B Payout: 

first, 100% to the Class A Beneficiaries up to $0.41 per Class A Interest; 

second, 100% to the Class B Beneficiaries up to $0.164 per Class B Subordinated Interest, reduced by the Class B Distribution Reduction Factor; 

third, 100% to the Class A Beneficiaries up to an additional $0.215 per Class A Interest; and 

fourth, until Class B Payout has been attained, 80% to the Class B Beneficiaries and 20% to the Class A Beneficiaries. 

After Class B Payout: 

all further Distributions will be made to the Class A Beneficiaries and the Class B Beneficiaries in amounts so that each Class A Beneficiary receives with respect to each Class A Interest an amount equal to 450%, divided by the difference between 100% and the Class B Capital Reduction Factor, of the amount so distributed with respect to each Class B Interest. 

(b)  Liquidation Distributions. Upon dissolution and termination of the Trust, after payment of, or adequate provision for, the debts and obligations of the Trust, the remaining assets of the Trust (or the proceeds of sales or other dispositions in liquidation of Trust assets, as may be determined by the remaining or surviving Trustees) shall be distributed to the Participants in accordance with the positive balances in their Capital Accounts after taking into account all Capital Account adjustments for the Trust's taxable year, including adjustments to Capital Accounts pursuant to Section 8.2(a). In the event that the Managing Trustee has a deficit balance in its Capital Account following the liquidation of the Trust or its interest in the Trust as determined after taking into account all Capital Account adjustments for the Trust taxable year in which such liquidation occurs, the Managing Trustee shall pay to the Trust in cash an amount equal to the deficit balance in its Capital Account by the end of such taxable year (or, if later, within ninety (90) days after the date of such liquidation) which amount shall, upon liquidation of the Trust, be paid to recourse creditors of the Trust or distributed to the Trust Beneficiaries in accordance with their positive Capital Account balances. 

(c)  Notwithstanding the provisions of Sections 8.1(a) and 8.1(b), the Managing Trustee shall have the right to withhold funds from Distributions to be made to Beneficiaries who are Foreign Beneficiaries or deduct certain amounts from such Distributions under the circumstances set forth in Section 8.4(h). Any such withholdings or repayments or deductions shall be deemed to have been Distributions made to such Foreign Beneficiaries for all purposes of this Agreement. 

(d)  Promptly after the Class B Closing the Trust will make the Special Class A Distribution to the Class A Beneficiaries. Promptly after settlement of the Class Action Lawsuit, the Trust will make the Second Special Class A Distribution in the amount of $413,247 from the Class B Offering proceeds pro rata to the Class A Beneficiaries of record as of September 1, 1997, or their successors and assigns. 

(e)  The Trust will make Class B Capital Distributions not later than the expiration of the Initial Redemption Period provided that there are proceeds remaining from the Class B Offering after paying Class B Offering expenses, making the Special Class A Distribution and redeeming Class A Interests pursuant to the last paragraph of Section 9.6. In the event that a final settlement of the Class Action Lawsuit has been attained on or prior to July 17, 1999, then $929,806 of any remaining Class B Proceeds will be retained by the Trust and invested in additional Assets. 

8.2  Allocation of Profits and Losses. 

(a)  Profits from the normal operations of the Trust or from Sales or Refinancings or a Dissolution Event for each fiscal year or portion thereof will be allocated: 

First, to the extent that the Managing Trustee, the Special Beneficiary or any Class B Beneficiary has a positive balance in his Capital Account, to such Person(s) until such Capital Account balance(s) are decreased to zero, and if Losses are insufficient to reduce all such Capital Accounts to zero, then pro rata according to the positive balances in each Capital Account; and 

Second, any remaining Profit shall be allocated among the Managing Trustee, the Beneficiaries and the Special Beneficiary in such a manner that, as of the end of such fiscal year the Capital Account of each shall be equal (after taking into account the reduction in such Capital Account resulting from any Distributions made during the fiscal year) to the respective net amounts which would be distributed to each under this Agreement if the Trust were to (i) sell its remaining assets for an amount equal to their adjusted basis determined under Regulation Section 1.704-1(b)(2)(iv)(g) and (ii) distribute all such proceeds and any other Trust cash not previously distributed pursuant to Section 8.1(a). 

Notwithstanding the foregoing, no Profit shall be allocated under Section 8.2(a) Clause Second to the extent that an allocation of Profit has been made under Section 8.2(a) Clause First to offset a reduction in Capital Account(s) resulting from a Distribution made to the Managing Trustee or a Trust Beneficiary during such fiscal year. 

Losses from the normal operations of the Trust or from Sales or Refinancings or a Dissolution Event for each fiscal year or portion thereof will be allocated: 

First, to the extent that the Managing Trustee or any Class B Beneficiary has a positive balance in his Capital Account, to such Person(s) until such Capital Account balance(s) are decreased to zero, and if Losses are insufficient to reduce all such Capital Accounts to zero, then pro rata according to the positive balances in each Capital Account; and 

Second, to the extent that any Class A Beneficiary has a positive balance in his Capital Account, to such Class A Beneficiary(ies) until such Capital Account balance(s) are decreased to zero, and if Losses are insufficient to reduce all such Capital Accounts to zero, then pro rata according to the positive balances in each Capital Account; and 

Third, the remainder to the Managing Trustee. 

(b)  Notwithstanding Section 8.2(a), in no event shall there be allocated to the Managing Trustee less than 1% of the Profits or Losses of the Trust unless such allocation is mandated by Section 704(b) or Section 704(c) of the Code. In the event that the amount of Profits and Losses allocable to the Managing Trustee under Section 8.2(a) is less than 1% of the aggregate amount, then the amounts otherwise allocable first to the Special Beneficiary and then to the Beneficiaries shall be reduced in order to provide the Managing Trustee with its 1% share. 

(c)  All Profits, Losses and Distributions made or allocated to the Participants shall be credited or charged, as the case may be, to their respective Capital Accounts. 

(d)  The terms "Profits" and "Losses" used in this Agreement shall mean income and losses, and each item of income, gain, loss, deduction or credit entering into the computation thereof, as determined in accordance with the accounting methods followed by the Trust and consistent with Treasury Regulation Section 1.704-(1)(b)(2)(iv). Profits and losses for federal income tax purposes shall be determined in the same manner as Profits and Losses except as otherwise provided in Section 8.4(a). 

8.3  Recourse to Trust Assets Only. 

The Participants shall look solely to the assets of the Trust for the return of their respective Capital Contributions or any other Distributions with respect to their Interests. If the assets remaining after payment or discharge, or provision for payment or discharge, of Trust debts and liabilities are insufficient to return the Capital Contributions or to make any other Distribution to the Participants, no such person shall have any recourse against personal assets of any other Participant for that purpose, except to the limited extent set forth in Sections 4.6 and 8.1(b). 

8.4      Special Provisions. 

Notwithstanding anything contained in this Article VIII to the contrary: 

(a)  Income, gain, loss, and deduction with respect to Trust property which has a variation between its basis computed in accordance with Treasury Regulation Section 1.704(1)(b) and its basis computed for federal income tax purposes shall be shared among the Participants for federal income tax purposes so as to take account of such variation in a manner consistent with the principles of Section 704(c) of the Code and Treasury Regulation Section 1.704-3. 

(b)  (i)  All Distributions or allocations to the Class A Beneficiaries, other than those based on the Capital Account balances, shall be shared by the Class A Beneficiaries in the ratio of the aggregate number of Class A Interests held by each of them to the total number of Class A Interests held by all of them. 

(ii)  Except as otherwise provided pursuant to this Agreement, for each taxable year (i) Profits and Losses from normal operations and any special allocations of items thereof shall be allocated by determining the Profits and Losses from normal operations and any special allocations of items thereof attributable to each fiscal quarter on the basis of interim closings of the books of the Trust as of the close of business on the last day of each such fiscal quarter and by allocating the amount of such Profits and Losses from normal operations and special allocations of items thereof, among the Persons that are Beneficiaries as of the close of business on the last day of each month during such fiscal quarter in proportion to the aggregate number of Interests owned by each such Person as of the close of business on the last day of each such month, and (ii) Profits and Losses from Sales or Refinancings and any special allocations of items thereof allocable with respect to the Interests that have been transferred shall be allocated to the Persons that are Beneficiaries as of the close of business on the last day of the month that includes the date of the Sale or Refinancing to which such Profit or Loss from Sales or Refinancings is attributable, except that any such Profit from Sales or Refinancings that is recognized by the Trust upon the receipt of a deferred payment after the close of the month that includes the date of the Sale or Refinancing relating to such deferred payment shall be allocated to the Persons that are Beneficiaries as of the close of business on the last day of the month in which the Trust receives such deferred payment; provided, however, that notwithstanding anything to the contrary contained herein, the Managing Trustee may, after sixty days' prior notice to the Beneficiaries, allocate Profits and Losses from normal operations and from Sales or Refinancings and special allocations among the Beneficiaries during the taxable year in any other manner that the Managing Trustee, in its sole discretion, determines will satisfy Sections 704 and 706 of the Code and the taking of any such action by the Managing Trustee shall be deemed to effect an amendment to this Agreement and shall not require the Consent of any Beneficiary. 

(iii)  Distributable Cash from Operations distributable to the Beneficiaries with respect to each month shall be distributed among the Persons that are Beneficiaries as of the close of business on the last day of the month with respect to which such Distribution is made and Distributable Cash from Sales or Refinancings distributable to the Beneficiaries shall be distributed to the Persons that are Beneficiaries as of the close of business on the last day of the month that includes the date of the Sale or Refinancing to which any such Distributable Cash from Sales or Refinancings is attributable; provided, however, Distributable Cash from Sales or Refinancings that is attributable to deferred payments and interest thereon received by the Trust after the close of the month that includes the date of the Sale or Refinancing relating to any such deferred payment shall be distributed to the Persons that are Beneficiaries as of the close of business on the last day of the month that includes the date such Distributable Cash from Sales or Refinancings is paid to the Trust; and provided, further, that, notwithstanding anything contained herein to the contrary, the Managing Trustee may, after giving sixty days' prior notice to the Beneficiaries, adopt any other method for determining the distributions of Distributable Cash from Operations or Distributable Cash from Sales or Refinancings to which the Beneficiaries are entitled, that the Managing Trustee, in its sole discretion, determines is reasonable, and the taking of any such action by the Managing Trustee shall be deemed to effect an amendment to this Agreement and shall not require the Consent of any Beneficiary. 

(iv)  All Distributions or allocations to the Class B Beneficiaries, other than those based on the Capital Account balances, shall be shared by the Class B Beneficiaries in the ratio of the aggregate number of Class B Interests held by each of them to the total number of Class B Interests held by all of them. 

(c)  To the extent that interest on loans made by the Managing Trustee or its Affiliates is determined to be deductible by the Trust in excess of the amount of interest actually payable, such additional interest deduction shall be allocated solely to the Managing Trustee. 

(d)  If any Trust expenditure treated as a deduction on its federal income tax return is disallowed as a deduction and treated as a distribution to the Managing Trustee or the Special Beneficiary pursuant to Section 731(a) of the Code, there shall be a special allocation of gross income to the Managing Trustee or the Special Beneficiary equal to the amount of such distribution. 

(e)  If a Trust Beneficiary unexpectedly receives (1) an allocation of loss or deduction made (a) pursuant to Section 704(e)(2) of the Code to a donee of an interest in the Trust, (b) pursuant to Section 706(d) of the Code as the result of a change in any Trust Beneficiary's interest in the Trust, or (c) pursuant to Treasury Regulation Section 1.751-1(b)(2)(ii) as the result of a distribution by the Trust of unrealized receivables or inventory items or (2) a Distribution, and such allocation and/or Distribution would cause a deficit in a Trust Beneficiary's Capital Account, then such Trust Beneficiary shall be allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance as quickly as possible. For purposes of this Article, a Trust Beneficiary's Capital Account shall be treated as reduced by Qualified Income Offset Items. 

(f)  Except as otherwise provided herein, each Beneficiary shall be allocated Profits and Losses in accordance with this Section 8.4 from the first day of the calendar month in which he becomes a Beneficiary. 

(g)  The Trustees shall have the right, from time to time and at such times as they shall determine, to request each Beneficiary to certify to the Trust, in form acceptable to the Trustees, that such Beneficiary is not a nonresident alien individual or foreign partnership within the meaning of Section 1441 of the Code, a foreign corporation within the meaning of Section 1442 of the Code or a Person who is not a United States person within the meaning of Section 1446 of the Code. Any Beneficiary who fails to deliver this certification shall be treated for all purposes of this Agreement as a Foreign Beneficiary until such time as such Beneficiary delivers an acceptable certification to the Trust. 

(h)  The Trustees shall have the right, with respect to any Beneficiary who is determined to be a Foreign Beneficiary, to (i) pay over to the Service on behalf of such Foreign Beneficiary such amounts as they may determine may be required to comply with the Code, including without limitation Sections 1441, 1442 and 1446 and (ii) to deduct and maintain in a non-interest bearing escrow account for the benefit of such Foreign Beneficiary all or a portion of Distributions to be made to such Foreign Beneficiary to the extent that the Managing Trustee determines that such distributions may be needed by the Trust to comply at a later date with the Code, including without limitation Sections 1441, 1442 and 1446, or to repay principal, interest and other borrowing costs on any borrowings made by the Trust to comply with the requirements of the Code, including without limitation Sections 1441, 1442 or 1446. To the extent that the Managing Trustee determines that any amounts deducted from the Distributions of any Foreign Beneficiaries under clause (ii) above are not needed to enable the Trust to comply with the Code, including without limitation Sections 1441, 1442 and 1446, or (iii) to pay principal, interest or other borrowing costs on any borrowings made by the Trust in connection therewith, such amounts shall be paid over to the Foreign Beneficiaries with respect to whom the amounts were deducted. Any Foreign Beneficiary shall on demand reimburse the Trust for any amounts received by such Foreign Beneficiary as Distributions which are necessary to satisfy the Trust's obligations under the Code, including, without limitation, Sections 1441, 1442 and 1446. Each Foreign Beneficiary hereby grants to the Trust a first lien and security interest in and to the Interests of such Foreign Beneficiary and all proceeds thereof to secure the obligations of such Foreign Beneficiary under this Section 8.4(h) and the indemnification by each Foreign Beneficiary described in Section 6.2. 

(i)  To the extent that the Trust incurs any costs or expenses in connection with the withholding obligation described in Section 8.4(h), such costs or expenses shall be allocated solely to the Foreign Beneficiaries (and shall not enter into the computation of Profits and Losses allocated under Section 8.2) and shall reduce their Capital Accounts accordingly. 

(j)  If the Managing Trustee determines, after consultation with tax counsel, that the allocation of any item of Trust income, gain, loss, deduction or credit will not be recognized for federal income tax purposes, the Managing Trustee is authorized to amend this Agreement to cure such defect without the consent of Trust Beneficiaries. 

(k)  If any profit arises from the disposition of any Trust asset which shall be treated as ordinary income under the depreciation recapture provisions of the Code, then the full amount of such gain shall be allocated among the Managing Trustee and Trust Beneficiaries in the proportions that the Trust deductions from the depreciation giving rise to such recapture were actually allocated. In the event that subsequently enacted provisions of the Code result in other recapture income, no allocation of such recapture income shall be made to any Managing Trustee or Trust Beneficiary who has not received the benefit of those items giving rise to such other recapture income. 

(l)  With respect to assets distributed in kind to the Managing Trustee and Trust Beneficiaries in liquidation or otherwise, (i) any unrealized appreciation or unrealized depreciation in the values of such assets shall be deemed to be profits and losses realized by the Trust immediately prior to the liquidation or other distribution event; and (ii) such profits and losses shall be allocated to the Managing Trustee and Trust Beneficiaries in accordance with Section 8.2(a), and any property so distributed shall be treated as a distribution of an amount in cash equal to the excess of such fair market value over the outstanding principal balance of and accrued interest on any debt by which the property is encumbered. For the purposes of this Section 8.4(l), "unrealized appreciation" or "unrealized depreciation" shall mean the difference between the fair market value of such assets, taking into account the fair market value of the associated financing (but subject to Section 7701(g) of the Code) and the Trust’s adjusted basis for such assets as determined under Section 1.704-1(b). This Section 8.4(l) is merely intended to provide a rule for allocating unrealized gains and losses upon liquidation or other distribution event, and nothing contained in this Section 8.4(l) or elsewhere herein is intended to treat or cause such distributions to be treated as sales for value. The fair market value of such assets shall be determined by an appraiser to be selected by the Managing Trustee. 

(m)  If the Managing Trustee determines that it is in the best interests of the Trust and it is permitted under Treasury Regulation Section 1.704-1(b)(2)(iv)(f), the Managing Trustee may re-value the assets of the Trust to reflect their fair market value and adjust the Capital Accounts of the Managing Trustee and the Trust Beneficiaries to reflect the difference between such fair market value (referred to herein as the "Book Value") and the Trust’s tax basis in such assets (or, in the case of a prior revaluation, the Trust’s prior Book Value). The Managing Trustee is authorized to take whatever actions it deems necessary or appropriate to effect this revaluation of assets and the equitable adjustment of Capital Accounts on behalf of the Trust. In the event of a revaluation of Trust assets pursuant to this Section 8.4(m), subsequent allocations of gain, income, loss and deduction (including, without limitation, cost recovery and amortization deductions) with respect to such assets for the purpose of computing Profits or Losses shall be determined based on the Book Value of such assets and shall be computed consistent with Treasury Regulation Section 1.704-1(b)(2)(iv)(g). Allocations of gain, income, loss and deduction (including, without limitation, cost recovery and amortization deductions) with respect to such assets for the purpose of computing profits, losses and gains for tax purposes shall be allocated among the Managing Trustee and the Trust Beneficiaries in accordance with the principles of Section 704(c) of the Code and Treasury Regulation Section 1.704-3. 

(n)  Section 704 of the Code and the Regulations issued thereunder, including but not limited to the provisions of such regulations addressing minimum gain chargeback requirements and allocations of deductions attributable to nonrecourse debt and partner nonrecourse debt, are hereby incorporated by reference. 

ARTICLE IX - TRANSFER OF INTERESTS 

9.1  Withdrawal of a Beneficiary. 

Subject to compliance with this Agreement, a Beneficiary may withdraw from the Trust only by assigning or otherwise transferring his Beneficiary Interest specified in this Article IX. The withdrawal of Beneficiaries shall not dissolve or terminate the Trust. In the event of the withdrawal of a Beneficiary because of death, legal incompetence, dissolution or other termination, the estate, legal representative or successor of such withdrawn Beneficiary shall be deemed to be the assignee of such withdrawn Beneficiary's Interest and may become a Substitute Beneficiary upon compliance with the provisions of Section 9.3. 

9.2  Assignment. 

Subject to Section 4.2(a)(x) and Section 9.4, each Beneficiary may Assign all or a portion of his Beneficiary Interest (but not less than the Minimum Investment Amount) to another Person (the "Transferee") without the Consent of any Beneficiary, provided that the following conditions are met: (i) the Transferee delivers to the Managing Trustee a duly executed and completed assignment form in form satisfactory to the Managing Trustee (which is available upon request from the Managing Trustee) not less than 30 days in advance of such Assignment in which the Transferee agrees to be bound by the Agreement and which will contain various representations, including whether or not he is an Eligible Citizen; (ii) the Transferee satisfies the investor suitability standards applicable to the original Offering; (iii) the Assignment complies with all applicable laws and regulations, including, without limitation, such minimum investment and investor suitability requirements as may then be applicable under state or foreign securities laws; (iv) the Transferee executes a power of attorney which provides the Managing Trustee with authority to execute certain documents on his behalf; (v) the Transferee (or the Beneficiary) pays a transfer fee, not to exceed $100 per Assignment, to cover the expenses incurred in connection therewith; and (vi) the Managing Trustee consents to the Assignment (which consent may be withheld if the conditions to such Assignment are not met or if such Assignment would constitute a prohibited assignment described in paragraphs (a) through (g) of Section 9.4). A Transferee who desires to make a further Assignment of his Beneficiary Interest shall be subject to the provisions of this Section 9.2 to the same extent and in the same manner as the prior assignor. No Assignment shall be deemed to constitute an Assignment of a Beneficiary's entire Beneficiary Interest unless the provisions of Section 9.3 are satisfied in full. The rights of a Transferee who does not become a Substitute Beneficiary shall be limited to the receipt of his share of Profits, Losses and Distributions, as determined under Article VIII. Transferees shall be recognized as Assignees monthly, as of the first day of the calendar month in which the notice of assignment and other required documentation are received and accepted by the Managing Trustee; provided, however, that if an Assignee makes a subsequent Assignment of his Beneficiary Interest in the same calendar month, he shall not be recognized as an Assignee with respect to such Beneficiary Interest for any purpose. 

9.3  Substitution. 

No Person shall have the right to become a Substitute Beneficiary in place of his assignor unless all of the following conditions are met: 

(a)   the Beneficiary Interest was assigned in accordance with Sections 9.1 and 9.2; 

(b)  the Managing Trustee shall consent in writing to such substitution (which consent may be withheld for any reason in the sole discretion of the Managing Trustee); 

(c)  such Transferee executes an instrument reasonably satisfactory to the Managing Trustee accepting and adopting the terms and provisions of this Agreement; and 

(d)  in the case of Assignments other than by operation of law, the assignor states his intention in writing to have his Transferee become a Substitute Beneficiary. 

If all of the conditions of Sections 9.2 and 9.3 shall have been met, the Transferee shall become a Substitute Beneficiary within 30 days after the Managing Trustee consents to the admission of the Substitute Beneficiary (the "Recording Date"). The records of the Trust and this Agreement shall be amended to reflect any such substitution on or prior to the Recording Date; provided, however, that the records of the Trust and this Agreement shall be amended at least once each calendar quarter to reflect the admission of Substitute Beneficiaries. Failure or refusal of the Managing Trustee to admit a Transferee as a Substitute Beneficiary shall in no way affect the right of such Transferee to receive Distributions and allocations of Profits or Losses to which his predecessor in interest would have been entitled in accordance with Article VIII. 

9.4  Prohibited Assignment. 

No Trust Beneficiary Interests may be assigned or otherwise transferred under the following circumstances unless the Managing Trustee shall give its express written consent: 

(a)  to a minor or incompetent (unless a guardian, custodian, or conservator has been appointed to handle the affairs of such Person); 

(b)  to any Person not permitted to be a transferee under applicable law, including, in particular but without limitation, applicable federal, state or foreign securities laws, which generally provide that, except in the case of a transfer by gift, inheritance, intrafamily transfer or family dissolution, each transferee of a Beneficiary Interest must acquire no fewer than the Minimum Investment Amount and must satisfy investor suitability standards similar to those which were applicable to the original Offering, and that each transferor must transfer the number of Interests equal to the Minimum Investment Amount; 

(c)  to any assignee if such assignee would hold after such Assignment a fraction of an Interest; 

(d)  to any Person if, in the opinion of Trust Counsel, such transfer would result in the termination under the Code of the Trust's taxable year or of its status as an entity taxable as a partnership; 

(e)  to a Person who is a Foreign Beneficiary if, in the Managing Trustee's best judgment, such assignment or transfer would adversely affect the registration of any aircraft registered with the FAA or the documentation of any vessel documented under the laws of the United States; 

(f)  to any Person if such transfer would cause the assets of the Trust to be considered plan assets under ERISA and the regulations thereunder; or 

(g) to any Person, if such Assignment, would cause the Trust to be treated as a publicly traded partnership for purposes of Section 7704 of the Code. 

Any such attempted Assignment without the express written consent of the Managing Trustee shall be void and shall not bind the Trust. In the case of a proposed Assignment which is prohibited solely under clause (d) above, however, the Trust shall be obligated to permit such Assignment to become effective if and when, in the opinion of Trust Counsel, such Assignment would no longer have either of the adverse consequences under the Code which are specified in that clause. 

9.5  Change of Status of Beneficiary. 

In the event that (i) the Managing Trustee determines that a Beneficiary or a Person for whom a Beneficiary is acting as nominee who has previously represented to the Trust that he is an Eligible Citizen is no longer an Eligible Citizen or (ii) the Beneficiary fails to certify his citizenship to the Managing Trustee at the time that he acquires his Interests, the Managing Trustee may require that the status of the Beneficiary be changed to that of a Non-Eligible Beneficiary. In the event that the number of Non-Eligible Beneficiaries exceeds 80% of the maximum number of non-eligible Persons permitted to be Trust Beneficiaries pursuant to applicable laws or regulations governing the registration of any Asset owned by the Trust, the Managing Trustee may, in its sole discretion, expend Trust assets to redeem the Interests of Non-Eligible Beneficiaries. Any such Interests redeemed shall be redeemed by the Trust at a price equal to (i) 80% of the Non-Eligible Beneficiary's original Capital Contribution as reduced by any amounts returned to the Non-Eligible Beneficiary as uninvested Capital Contributions pursuant to Section 8.4, minus (ii) all Distributions made to the Non-Eligible Beneficiary. 

9.6  Right to Tender Interests for Redemption. 

A Beneficiary shall have the right to tender Class A Interests for redemption by the Trust subject to all of the following conditions: 

(a)  no Interests may be tendered within 24 months of Closing; 

(b)  Interests may be tendered by Beneficiaries for redemption by the Trust only on a date selected by the Managing Trustee, in its sole discretion, on which Interests tendered for redemption may be redeemed (the "Redemption Date"), which shall be declared not more than once in each calendar year of the Trust; 

(c)  the Beneficiary must tender all Interests owned if he tenders any Interests owned; 

(d)  at least 120 days' prior written notice of the Redemption Date shall be provided to the Beneficiaries; 

(e)  a redemption agreement fully executed by the Beneficiary on a form provided by the Trust and a redemption fee payable to the Trust, not to exceed $100, to cover the expenses incurred in connection therewith, must be received by the Trust at least 60 calendar days prior to the Redemption Date; 

(f)  not more than 10% of the total interests in Trust capital or Profits, when aggregated with all other Trust Beneficiary Interests sold or otherwise disposed of (other than the Permitted Transfers defined in clauses (i) through (vi) of Section 9.4(g)), may be redeemed pursuant to Section 9.5 and Section 9.6 or otherwise sold or disposed of in any taxable year of the Trust; 

(g)  the Trust must have sufficient cash, as determined in the sole discretion of the Managing Trustee, to redeem the Interests tendered; provided that the Trust may not redeem Interests in any fiscal quarter in which the Distribution paid in that quarter is less than 2.5% of Adjusted Investment; 

(h)  Interests tendered shall be redeemed in the order in which completed redemption agreements and redemption fees, are received by the Trust; 

(i)  the price at which Interests shall be redeemed by the Trust shall equal (i) 90% of a Beneficiary's original Capital Contribution as reduced by any amounts returned to the Beneficiary as uninvested Capital Contributions pursuant to Section 8.4, minus (ii) all Distributions made to the Beneficiary; and 

(j)  redemption of the Interests shall not be in violation of any applicable legal requirements, shall not cause the Trust to be deemed an investment company pursuant to the provisions of the Investment Company Act of 1940, shall not cause the Assets of the Trust to be considered plan assets under ERISA and the regulations thereunder, and shall not subject the Trust to taxation as an association taxable as a corporation. 

In addition to the foregoing, the Trust shall have the right to purchase and redeem Interests at such times, in such amounts, in such manner and at such prices as the Managing Trustee may determine from time to time in its sole discretion; provided, however, that any such purchase and redemption shall not be in violation of any applicable legal requirements, shall not result in the termination under the Code of the Trust or of its status as an entity taxable as a partnership, shall not result in the Trust being treated as a publicly traded partnership, shall not cause the Trust to be deemed an "investment company" pursuant to the provisions of the Investment Company Act of 1940 and shall not cause the Assets of the Trust to be considered "plan assets" under ERISA and the regulations thereunder. 

9.7  Status of an Assigning Beneficiary. 

Any Beneficiary who shall assign all of his Interests shall cease to be a Beneficiary and shall no longer have any of the rights or privileges of a Beneficiary, except that unless and until a Substitute Beneficiary is admitted in his place such assigning Beneficiary shall retain any statutory rights of an assignor of a Beneficiary Interest under the Business Trust Act. Any Beneficiary who shall have his Interests redeemed by the Trust shall cease to be a Beneficiary, and no Person shall have any of the rights or privileges of a Beneficiary with respect to the Interests which were redeemed. 

9.8  Withdrawal of Special Beneficiary; Substitution. 

Subject to compliance with this Agreement, the Special Beneficiary may withdraw from the Trust by assigning or otherwise transferring its Special Beneficiary Interest upon the express written consent of the Managing Trustee. Once the Special Beneficiary shall assign all of its Special Beneficiary Interest, the Special Beneficiary shall cease to be a Trust Beneficiary and shall no longer have any of the rights or privileges of a Trust Beneficiary, except that unless and until a Substitute Special Beneficiary is admitted in its place such assigning Special Beneficiary shall retain any statutory rights of an assignor of a Special Beneficiary Interest under the Business Trust Act. 

The Special Beneficiary hereby covenants and agrees, in the event of the Resignation or Removal of the Managing Trustee pursuant to Section 4.8 or 11.3, to transfer to a Substitute Managing Trustee selected as provided in Section 4.8 or Section 4.12 or to the Trust, such portion, if any, of its Special Beneficiary Interest as the Substitute Managing Trustee or the Trust shall elect to purchase. The Substitute Managing Trustee shall become a substitute Special Beneficiary. Any such transfer will be made in consideration of the payment by the Substitute Managing Trustee or the Trust to the Special Beneficiary or its legal representatives, of 86.5% of the fair market value of such Interest. The fair market value of the Special Beneficiary's Interest shall be as determined by the parties to the transfer, or otherwise in accordance with Section 11.3. The method of payment to the Special Beneficiary must be fair and must protect the solvency and liquidity of the Trust. In the event of the Resignation of the Managing Trustee, payment to the Special Beneficiary, if any, may be made by means of a non-interest-bearing unsecured promissory note with principal payable, if at all, from Distributions which the Special Beneficiary would have received but for its resignation. In the event of the Removal of the Managing Trustee, the Substitute Managing Trustee or the Trust shall make such payment to the Special Beneficiary by means of a promissory note bearing interest at a floating annual rate equal to the prime rate of interest announced by Fleet Bank of Massachusetts, N.A., maturing in not less than five years with equal installments of principal and interest payable each year. Any portion of such Special Beneficiary's Interest which is not required to be transferred as aforesaid may be retained by such Special Beneficiary or its estate or legal representatives as appropriate. The Special Beneficiary acknowledges and agrees that the payment of 86.5% of the fair market value of any portion of its Special Beneficiary Interest which has been transferred shall be full payment for such Special Beneficiary Interest. To the extent of such retained Special Beneficiary Interest, if any, such Special Beneficiary or its estate or legal representatives shall be treated as a Trust Beneficiary. 

Notwithstanding the foregoing, the resigned Special Beneficiary or its legal representatives shall be entitled to receive from the Trust (i) any positive balance in its Capital Account (as adjusted to the date of such resignation), provided, however, that in no event shall such amount exceed the fair market value of the Special Beneficiary's Interest, (ii) any amounts due and owing to it by the Trust less any amounts due and owing by it to the Trust. The right of the Special Beneficiary or its legal representatives to payment of said amounts shall be subject to any claim for damages which the Trust or any Trustee or any other Trust Beneficiary may have against such Special Beneficiary or its legal representatives if such resignation is in contravention of this Agreement. 

ARTICLE X - FISCAL MATTERS 

10.1  Title to Property and Bank Accounts. 

Except to the extent that trustees, nominees or other agents are used as specified in Section 4.2(b)(vii), the Assets shall be held in the name of the Trust. The funds of the Trust shall be deposited in the name of the Trust in such bank account or accounts as shall be designated by the Managing Trustee, and withdrawals therefrom shall be made upon the signature of the Managing Trustee or such Person or Persons as shall be designated in writing by the Managing Trustee. The funds of the Trust shall not be commingled with those of any other Person or entity except that the use of a zero balance or clearing account shall not constitute a commingling of Trust funds; and the funds of the Trust and funds of other entities sponsored by the Advisor or its Affiliates may be held in an account or accounts established and maintained for the purpose of making computerized disbursements and/or short-term investments provided the Trust's funds are protected from claims of such other entities and creditors of such other entities. 

10.2  Maintenance of, and Access to, Basic Trust Documents. 

The Managing Trustee shall maintain at the Trust's principal office the following documents: (i) an alphabetical list of the names, addresses, and business telephone numbers of the Trust Beneficiaries along with the number of Interests held by each of them (the "Trust Beneficiary List"); (ii) a copy of the Certificate of Trust and all amendments thereto; (iii) copies of the Trust's federal, state and local income tax returns and reports, if any, for the three most recent years; and (iv) copies of this Agreement as then in effect and of any financial statements of the Trust for the three most recent years. Such documents and all other Trust records are subject to inspection and copying by any Trust Beneficiary or his designated representatives at the reasonable request, and at the expense of such Trust Beneficiary during ordinary business hours. The Trust Beneficiary List shall be updated at least quarterly to reflect changes in the information contained therein. A copy of the Trust Beneficiary List shall be mailed to any Beneficiary requesting the Trust Beneficiary List within ten days of the request. The copy of the Trust Beneficiary List shall be printed in alphabetical order, on white paper, and in readily readable type (in no event smaller than 10-point type). A reasonable charge for copy work may be charged by the Trust. The purposes for which a Beneficiary may request a copy of the Trust Beneficiary List include, without limitation, matters relating to Beneficiaries' voting rights under this Agreement and the exercise of Beneficiaries' rights under federal proxy laws. If the Sponsor neglects or refuses to exhibit, produce or mail a copy of the Trust Beneficiary List as requested, the Sponsor shall be liable to any Beneficiary requesting the List for costs, including attorney's fees, incurred by that Beneficiary for compelling the production of the Trust Beneficiary List, and for actual damages suffered by any Beneficiary by reason of such refusal or neglect. It shall be a defense that the actual purpose and reason for the requests for inspection or for a copy of the Trust Beneficiary List is to secure such list of Beneficiaries or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a Beneficiary relative to the affairs of the Trust. The Sponsor may require the Beneficiary requesting the Trust Beneficiary List to represent that the list is not requested for a commercial purpose unrelated to the Beneficiary's interest in the Trust. The remedies provided hereunder to Beneficiaries requesting copies of the Trust Beneficiary List are in addition to, and shall not in any way limit, other remedies available to Beneficiaries under federal law, or the laws of any state. Except to the extent requested by any Trust Beneficiary, the Managing Trustee shall have no obligation to deliver or mail a copy of the Certificate of Trust or any amendment thereto to the Trust Beneficiaries. Each Trust Beneficiary shall also have the right to obtain from the Managing Trustee from time to time upon reasonable demand: (i) true and full information regarding the status of the business and financial condition of the Trust; (ii) promptly after becoming available, a copy of the Trust's federal, state and local income tax returns for each year; and (iii) such other information regarding the affairs of the Trust as may reasonably be produced by the Trust. 

10.3  Financial Books and Accounting. 

The Managing Trustee shall keep or cause to be kept complete and accurate financial books with respect to the Trust's business. Except to the extent otherwise required by the accounting methods adopted by the Trust for federal income tax purposes, such books shall be kept on an accrual basis. Profits and Losses shall be determined for each fiscal year in accordance with Article VIII. Except as otherwise provided herein, whenever a proportionate part of Profits or Losses is credited or charged to a Trust Beneficiary's Capital Account, every item of income, gain, loss or deduction entering into the computation of such Profits or Losses shall be considered either credited or charged, as the case may be, and every item of credit or tax preference related to such Profits or Losses and applicable to the period during which such Profits or Losses were realized shall be allocated to such Capital Account in the same proportion. 

10.4  Trust Expenses. 

No reimbursement shall be permitted to the Managing Trustee or any of its Affiliates for services for which the Managing Trustee or any such Affiliate is entitled to compensation by way of a separate fee. 

(a)  Organizational and Offering Expenses. The Trust shall reimburse the Managing Trustee and any Affiliate thereof for Organizational and Offering Expenses incurred by the Managing Trustee and its Affiliates with respect to the Class A Offering provided that in no event shall the amount of Organizational and Offering Expenses paid directly or indirectly by the four AFG Investment Trusts exceed 2.5% of Gross Class A Proceeds in all four AFG Investment Trusts. Such expenses shall be allocated among the six AFG Investment Trusts based on the number of Interests sold in each such Trust as compared to the total Interests sold in all four AFG Investment Trusts, without regard to the actual expenses incurred by each Trust. However, the Trust shall not pay Organizational and Offering Expenses in an amount in excess of 2.5% of the Gross Class A Proceeds. For purposes hereof, "Organizational and Offering Expenses" shall mean (i) those expenses (including the non-accountable expense allowance payable to the Dealer-Manager) incurred in connection with, and in preparing the Trust for, qualification under federal and state securities laws and subsequently offering and distributing the Interests to the public, except for sales commissions paid by the Trust in connection with the offering of Interests, (ii) expenses for salaries and direct expenses of officers, directors and members of the executive committee of any Affiliate of the Managing Trustee while engaged in registering and marketing the Interests, and (iii) any due diligence expenses attributable to the Offering. The Managing Trustee or its Affiliates will bear all Sales and Distribution Expenses in excess of nine and one-half percent (9.5%) of Gross Proceeds without recourse to or reimbursement from the Trust. 

(b)  Other Reimbursable Costs. Except for Organizational and Offering Expenses for the Class A Offering and with respect to organizational and offering expenses with respect to the Class B Offering provided for in Section 5.1(e) and Section 8.2(e), the Trust shall not reimburse the Managing Trustee or its Affiliates except for (i) the actual cost to the Managing Trustee or its Affiliates of goods and materials used for or by the Trust and obtained from Persons unaffiliated with the Managing Trustee and its Affiliates provided that such goods or materials are necessary to the prudent operation of the Trust and that the actual cost thereof includes only the price of goods and materials paid to independent third parties and direct costs incurred by the Managing Trustee or Affiliates in the transaction excluding general or administrative overhead and costs of personnel who are Controlling Persons of the Managing Trustee or its Affiliates and (ii) Acquisition Expenses, including but not limited to expenses related to the purchase, operation and financing of Assets. In no event, however, shall the Trust reimburse the Managing Trustee or its Affiliates for rent, depreciation, utilities, capital equipment and other administrative items. The Trust's annual report to the Beneficiaries will include a schedule itemizing costs reimbursed to the Managing Trustee and its Affiliates. 

(c)  Other Trust Expenses. Subject to the provisions of Sections 10.4(a) and (b), the Trust shall pay all expenses of the Trust (which expenses shall be billed directly to the Trust) which are necessary or appropriate for the prudent operation of the Trust and which may include but are not limited to: (i) all costs of personnel providing administrative services (excluding rent or depreciation, utilities, capital equipment, and other administrative items) employed full or part-time by the Trust and involved in the business of the Trust and allocated pro rata to their services performed on behalf of the Trust, and such personnel may include Persons who may also be officers or employees of the Managing Trustee or its Affiliates (other than Controlling Persons of the Managing Trustee or its Affiliates); (ii) all costs of borrowed money, taxes and assessments on Assets and other taxes applicable to the Trust; (iii) legal, audit, accounting, brokerage, and other fees; (iv) printing, engraving, and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration, and recording of documents evidencing ownership of an interest in the Trust or in connection with the business of the Trust; (v) fees and expenses paid to bankers, brokers, and services, consultants and other equipment management personnel, insurance brokers and other agents; (vi) expenses in connection with the disposition, replacement, alteration, repair, leasing, re-leasing, financing, and operation of Assets (including the costs and expenses of insurance premiums and of maintenance of such Assets); (vii) expenses of organizing, revising, amending, converting, modifying or terminating the Trust; (viii) expenses in connection with distributions made by the Trust to, and communications and bookkeeping and clerical work necessary in maintaining relations with, its Beneficiaries, including the costs of printing and mailing to such Persons evidences of ownership of Interests and reports of meetings of the Trust, and of preparation of proxy statements and solicitations of proxies in connection therewith; (ix) expenses in connection with preparing and mailing reports required to be furnished to Beneficiaries for investor tax reporting or other purposes, and reports which the Managing Trustee deems to be in the best interests of the Trust to furnish to the Beneficiaries; (x) any accounting, computer, statistical or bookkeeping costs necessary for the maintenance of the books and records of the Trust; and (xi) the cost of preparation and dissemination of informational material and documentation relating to potential sale, refinancing or other disposition of Assets. Reimbursement to the Managing Trustee or its Affiliates of the cost of services rendered to the Trust shall be limited to the lesser of the costs of those services or a rate equivalent to ninety percent (90%) of the rate which would be charged by an unaffiliated party to perform such services. As part of their annual audit of the Managing Trustee and its Affiliates, the Managing Trustee shall cause the Accountants to verify the allocation of costs of the Managing Trustee and its Affiliates to the Trust. The additional cost of the Accountants' verification of this reimbursement for services shall not be paid by the Trust unless the aggregate sum of the cost of the services and the cost of the Accountants' verification do not exceed ninety percent (90%) of the rate which would be charged by an unaffiliated party to perform the services performed by the Managing Trustee and its Affiliates. 

(d)  Other Limitations. Other than as specifically described above in this Section 10.4 and in Section 4.6 and Article V, the Trust shall not pay the Managing Trustee for any other items, including rent, travel expenses or salaries of the Managing Trustee or its Affiliates or Controlling Persons of the Managing Trustee or its Affiliates, generally considered to be the Managing Trustee's overhead and expenses . The Managing Trustee and its Affiliates will not be compensated for services provided to the Trust unless such parties or their predecessors were engaged in rendering those services as an ongoing business for Persons other than the Trust. The Managing Trustee shall not provide services to the Trust other than as provided in, or permitted by, this Agreement. 

10.5  Fiscal Year. 

Except as may otherwise be determined from time to time by the Managing Trustee, the Trust's fiscal year for federal income tax and financial reporting purposes shall end on December 31 of each year. 

10.6  Reports and Accounting Decisions. 

(a)  Reports to Beneficiaries. 

(i)  Quarterly Reports. Within 60 days after the end of each of the first three quarters of each fiscal year, the Managing Trustee shall send to each Person who was a Beneficiary on the last day of the quarter then ended (1) a condensed balance sheet, (2) statements of cash flows and operations including a description of any material events with respect to the Trust's revenues, assets, liabilities, expenses, contractual obligations or contingent liabilities, (3) a statement describing (A) any new agreement, contract or arrangement required to be reported by any section hereof and (B) the amount of all fees and other compensation and distributions paid by the Trust for such quarter to the Managing Trustee or any Affiliate of the Managing Trustee and a description of the services rendered or to be rendered by the Managing Trustee or such Affiliate for such fees and compensation (which requirement may not be circumvented by lump-sum payments to entities which disburse funds to others), (4) until the Capital Contributions derived from the Offering shall be fully invested except for reserves, a special report of Asset acquisitions including (A) a general description of Asset purchased, (B) a description of the Lease arrangements made with respect thereto and identification of the Lessee, (C) the actual purchase price, (D) the amount of cash expended from Capital Contributions to acquire such Asset, and (E) the amount of Capital Contributions which then remains unexpended, if any, stated in terms of both dollar amounts and percentage of the total amount of Capital Contributions, and (5) other pertinent material regarding the activities of the Trust during such fiscal quarter. Distribution to the Beneficiaries of the financial information contained in the Trust's quarterly report on Form 10-Q under the Securities Exchange Act of 1934 will satisfy the financial statement distribution requirements contained herein. No such statement or reports need be audited. 

 

(ii)  Annual Reports. Within 120 days after the end of each fiscal year, the Managing Trustee shall send to each Person who was a Beneficiary on the last day of the fiscal year then ended a report in narrative form summarizing the status of the Trust's investments and containing (1) a balance sheet as of the end of such fiscal year and statements of operations, Beneficiaries' equity and cash flows for such fiscal year, all of which shall be prepared in accordance with generally accepted accounting principles and accompanied by an auditor's report (containing an opinion of the Accountants), (2) a report (which need not be audited) summarizing the fees and other remuneration paid by the Trust for such fiscal year to the Managing Trustee or any Affiliate of the Managing Trustee or to the Delaware Trustee and a statement describing any new agreement, contract or arrangement required to be reported by any section hereof, and (3) a statement (which need not be audited) showing the Distributable Cash from Operations and Distributable Cash from Sales or Refinancings distributed per Interest to the Beneficiaries during such fiscal year. Such report shall separately identify (to the extent then applicable) Distributions from (a) Cash from Operations during the period, (b) Cash from Operations during a prior period which had been held in the Reserve Account, (c) Cash from Sales or Refinancings during the period, (d) Cash from Sales or Refinancings during a prior period which had been held in the Reserve Account, and (e) Reserve Account amounts from Gross Proceeds. Until the Capital Contributions of the Trust derived from the Offering shall be fully invested except for reserves, the annual report shall also contain a special report of Asset acquisitions containing the information specified above for quarterly reports. If any Asset acquired by the Trust individually represents at least 10% of the Trust's total Investment in Assets, the Managing Trustee shall include a status report as part of the annual report, which status report shall indicate: (1) the condition of the Asset, (2) how the Asset is being utilized as of the end of the year, (3) the remaining term of the Lease, (4) the projected use of the Asset for the next year, and (5) such other information relevant to the value or utilization of the Asset as the Managing Trustee deems appropriate. Distribution to the Beneficiaries of the financial information contained in the Trust's annual report on Form 10-K under the Securities Exchange Act of 1934 will satisfy the financial statement distribution requirements contained herein. 

The Managing Trustee shall cause the Accountants, as part of their annual audit of the Managing Trustee and its Affiliates, to issue to the Trust a special report prepared in accordance with the standards of the American Institute of Certified Public Accountants on the allocation of costs incurred by the Managing Trustee and its Affiliates and reimbursed to them by the Trust. In preparing this special report, the Accountants shall, at a minimum, review (1) the time records of individual employees, the costs of whose services were reimbursed by the Trust, and (2) the specific nature of the work performed by such employees. 

Each annual report will also include the fair market value of the Interests at the end of the preceding fiscal year. For each of the first two years after Closing, the Managing Trustee will value the Interests at the public offering price. Thereafter, the Managing Trustee will secure each year an independent appraisal of the fair market value of the Trust's assets as of the next annual valuation date and will prepare a per Interest valuation. The Managing Trustee will seek to provide such annual valuation to trustees and custodians of IRAs no later than January 15 of each year, based on valuation information as of the preceding October 31, updated for any material changes occurring between October 31 and December 31 of the preceding year. Qualified Plans will be furnished such annual valuation within 75 days after the close of the Trust's fiscal year. The Managing Trustee will revise the valuation procedures described above to conform to any relevant guidelines issued by the Department of Labor or the Service. 

(b)  Tax Returns and Tax Information. 

The Managing Trustee shall: 

(i)  prepare or cause the Accountants to prepare the tax returns (federal, state and local, if any) of the Trust for each fiscal year within 75 days after the end of each calendar year in which such fiscal year was completed; and 

(ii)  deliver to each Person who was a Beneficiary during a calendar year within 75 days after the end of such calendar year the information necessary to prepare his federal income tax return for the calendar year during which such fiscal year was completed, including information regarding unrelated business taxable income for the use of tax-exempt Beneficiaries. 

(c)  Accounting Decisions. All decisions as to accounting matters, except as specifically provided to the contrary herein, shall be made by the Managing Trustee in accordance with the accounting methods adopted by the Trust for federal income tax purposes or otherwise in accordance with generally accepted accounting principles and procedures applied in a consistent manner. The Managing Trustee may rely upon the advice of the Accountants as to whether such decisions are in accordance with the methods adopted by the Trust for federal income tax purposes or generally accepted accounting principles. 

(d)  Reports to Appropriate State Authorities. The Managing Trustee shall prepare and file with appropriate state authorities all reports required to be so filed by state securities or Blue Sky authorities. 

(e)  General. No cause of action shall accrue to any Beneficiary if the Managing Trustee shall have acted in good faith in attempting to satisfy the requirements of this Section 10.6, and the Managing Trustee's actions or inactions did not constitute negligence, misconduct or material breach of fiduciary duty so as to subject the Managing Trustee to liability under Section 4.6. 

10.7  Partnership Classification; Federal Tax Elections. 

(a)  Partnership Classification. The Trust is intended to be classified as a partnership under the Code and the regulations thereunder and in accordance with the tax laws of the State and other jurisdictions in a manner consistent with such objective. 

(b)  Federal Tax Elections. The Trust, in the sole discretion of the Managing Trustee, may make elections for federal tax purposes as follows: 

(i)  in case of transfer of all or part of the Interest of the Managing Trustee, the Special Beneficiary or any Beneficiary, the Trust, in the absolute discretion of the Managing Trustee, may elect pursuant to Section 754 of the Code (or corresponding provisions of future law) and pursuant to similar provisions of applicable state or local income tax laws, to adjust the basis of the assets of the Trust and in such event, any basis adjustment attributable to such election shall be allocated solely to the transferee; and 

(ii)  all other elections, including but not limited to the adoption of accelerated or straight-line depreciation cost recovery methods, required or permitted to be made by the Trust under the Code shall be made by the Managing Trustee in such manner as will, in the opinion of the Managing Trustee, be in the best interest of the Trust. (In reaching such opinion the Managing Trustee shall not be required to poll or survey the Beneficiaries.) The Trust shall, to the extent permitted by applicable law and regulations, elect to treat as an expense for federal income tax purposes all amounts incurred by it for state and local taxes, interest and other charges which may, in accordance with applicable law and regulations, be considered as expenses. 

ARTICLE XI - MEETINGS AND VOTING RIGHTS OF BENEFICIARIES 

11.1  Meetings. 

(a)  Meetings of the Beneficiaries for any purpose may be called by the Managing Trustee and shall be called by the Managing Trustee upon receipt of a request in writing signed by Beneficiaries owning 10% or more of the Interests in the aggregate held by all Beneficiaries as of the date of such written request. Notice of any such meeting shall be sent in accordance with the requirements of Section 11.1(b) within ten days after receipt of such request. Such request shall state the purpose of the proposed meeting and the matters proposed to be acted upon at the meeting. Such meeting shall be held at the principal office of the Trust or at such other place as may be designated by the Managing Trustee or, if called upon the request of Beneficiaries, as designated by such Beneficiaries. In addition, the Managing Trustee may submit, and upon request in writing signed by 10% or more in interest of the Beneficiaries, shall submit, any matter upon which the Beneficiaries are entitled to act to the Beneficiaries for a vote by written Consent without a meeting. 

(b)  The Managing Trustee shall provide, within 10 days of receipt of such request, written notice personally or by certified mail of such meeting to be held not less than 15 days nor more than 60 days after the distribution of such notice, to each Beneficiary at his record address, or at such other address which he may have furnished in writing to the Managing Trustee; provided, however, that any notice of any meeting at which a vote will be taken to (i) amend this Agreement, (ii) dissolve the Trust, (iii) remove any Managing Trustee and elect a new Managing Trustee, or (iv) approve or disapprove the sale of all or substantially all the assets of the Trust, or any notice of any meeting to be held pursuant to a written request signed by 10% or more in interest of the Beneficiaries, shall be given by certified mail. Such notice shall be in writing, and shall state the place, date, and hour of the meeting, and shall indicate that it is being issued at or by the direction of the Managing Trustee or Beneficiary calling the meeting. The notice shall state the purpose of the meeting. If a meeting is adjourned to another time or place, and if any announcement of the adjournment of time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting. The presence in person or by proxy of a Majority in Interest of the Beneficiaries shall constitute a quorum at all meetings of the Beneficiaries; provided, however, that if there be no such quorum, holders of a Majority in Interest of such Beneficiary Interests so present or so represented may adjourn the meeting from time to time without further notice, until a quorum shall have been obtained. No notice of the time, place or purpose of any meeting of Beneficiaries need be given to any Beneficiary who attends in person or is represented by proxy (except when a Beneficiary attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business on the ground that the meeting is not lawfully called or convened), or to any Beneficiary otherwise entitled to such notice who, in writing, has executed and filed with the records of the meeting, either before or after the time thereof, waiver of such notice. 

(c)  For the purpose of determining the Beneficiaries entitled to vote on any matter on which a vote is to be taken or to vote at any meeting of the Trust or any adjournment thereof pursuant to this Article XI, the Trustees or the Beneficiaries requesting such meeting may fix, in advance, a date as the record date (the "Record Date") for any such determination. Such date shall not be more than 50 days nor less than 20 days before any such meeting. 

(d)  Each Beneficiary may authorize any Person or Persons to act for him by proxy in all matters in which a Beneficiary is entitled to participate, whether by waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Beneficiary or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the Beneficiary executing it. 

(e)  At each meeting of Beneficiaries, the Beneficiaries present or represented by proxy may adopt such rules for the conduct of such meeting as they shall deem appropriate, provided that such rules shall not be inconsistent with the provisions of this Agreement. 

11.2  Voting Procedures; Voting Rights of Beneficiaries. 

(a)  A Majority in Interest of the Beneficiaries, without the concurrence of the Trustees, may (i) amend this Agreement, subject to the provisions of Article XII and to the conditions that such amendment (A) may not cause the Beneficiaries to lose the limited liability accorded them by the Business Trust Act and (B) may not, without the specific written consent of the Managing Trustee (which may not be unreasonably withheld), add to the duties or diminish the rights of the Managing Trustee or its Affiliates as set forth herein or reduce the compensation to which the Managing Trustee and its Affiliates are entitled for services to be provided hereunder, (ii) terminate the Trust, (iii) remove the Managing Trustee and elect a replacement therefor, (iv) approve or disapprove the sale of all or substantially all of the Assets of the Trust in a single sale or in multiple sales in the same 12-month period, except in the orderly liquidation and winding up of the business of the Trust upon its termination and dissolution. E ffective as of June 25, 1999, Class B Beneficiaries which are the Managing Trustee or any of its Affiliates shall be required to vote all their Class B Interests in accordance with the vote of the majority of Class A Interests voted (i.e., for this purpose Class A Interests which are not voted or which abstain will not be taken into account) with respect to all Interested Transactions. As used herein the term "Interested Transactions" means transactions where Beneficiary Consent under this Agreement is required concerning the compensation of the Managing Trustee or any of its Affiliates, the extension of the term of the Trust, or regarding any transaction between the Trust and the Managing Trustee or its Affiliates; provided, however, that the foregoing voting restrictions on the Class B Interests held by Class B Beneficiaries which are the Managing Trustee or any of its Affiliates shall not relate to any votes concerning the withdrawal or removal of the Managing Trustee, which votes are not subject to such voting restrictions on such Class B Interests. 

(b)  A Beneficiary shall be entitled to cast one vote for each Interest that he owns. Only the votes of Beneficiaries of record on the Record Date, whether at a meeting or otherwise, shall be counted. The Managing Trustee and its Affiliates shall be entitled to vote with respect to any Interests which they own, provided that they may only vote their Class B Interests with respect to all Interested Transactions in accordance with the provisions of Section 11.2(a), and provided further that the Managing Trustee and its Affiliates may not vote their Class A Interests with respect to the compensation or the withdrawal or removal of the Managing Trustee pursuant to this Agreement or regarding any transaction between the Trust and the Managing Trustee or its Affiliates. 

11.3  Valuation of Interests of the Managing Trustee. 

In the event of removal of the Managing Trustee pursuant to Section 11.2, its Interest shall be appraised by two independent appraisers, one selected by the removed Managing Trustee and one by the Beneficiaries. In the event that such two appraisers are unable to agree on the value of the removed Managing Trustee's Interest within 90 days, they shall within 20 days thereafter jointly appoint a third independent appraiser whose determination shall be final and binding; provided, however, that if the two appraisers are unable to agree within such 20 days on a third appraiser, the third appraiser shall be selected by the American Arbitration Association. If either the removed Managing Trustee or the Beneficiaries fails to appoint an appraiser, the value of the removed Managing Trustee's Interest shall be determined by arbitration in accordance with the then applicable rules of the American Arbitration Association. The costs of appraisal shall be borne equally between the Trust and the removed Managing Trustee. The Trust may elect to pay the removed Managing Trustee for the value of its Interest as so determined by delivery of a promissory note bearing interest at a floating annual rate equal to the prime rate of interest announced by Fleet Bank of Massachusetts, N.A., maturing in not less than five years with equal installments of interest and principal payable annually. 

ARTICLE XII - AMENDMENTS 

12.1  Certain Amendments Requiring Majority Consent. 

The Managing Trustee shall not amend this Agreement without Majority Consent in order to (i) Resign as Managing Trustee, (ii) appoint a new Managing Trustee, (iii) sell all or substantially all of the Assets of the Trust in a single sale or multiple sales in the same 12-month period, except in the ordinary liquidation and winding up of the Trust upon its termination and dissolution or (iv) permit the taking of any of the actions described in Section 7.8. The Managing Trustee may not amend this Agreement to change the voting rights of the Beneficiaries without Majority Consent, unless the Business Trust Act requires the change or such a change is necessary to preserve the status of the Trust as an entity taxable as a partnership for federal tax purposes or to conform to any operative legal precedent providing that trust beneficiaries will be entitled to limited liability for the purposes of the Business Trust Act. A written consent may not be withdrawn or voided once it is filed with the Managing Trustee. 

12.2  Other Amendments. 

In addition to any amendments otherwise authorized herein, this Agreement may be amended from time to time by the Managing Trustee without the Consent of any Trust Beneficiary: (i) to add to the representations, duties or obligations of the Managing Trustee or surrender any right or power granted to the Managing Trustee herein, for the benefit of the Trust Beneficiaries; (ii) to correct any mistake, omission or inconsistency or cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions for the benefit of the Trust Beneficiaries with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement; (iii) to preserve the status of the Trust as an entity taxable as a partnership for federal income tax purposes, including amendments to prevent the Trust from being treated as a publicly traded partnership; (iv) to delete or add any provision of this Agreement required to be so deleted or added by the staff of the Securities and Exchange Commission or other federal agency, the National Association of Securities Dealers, Inc., or by a state Blue Sky commission or other state agency or any judicial authority or similar such official, (v) to permit the Interests to fall within any exemption from the definition of plan assets contained in Section 2510.3-101 of Title 29 of the Code of Federal Regulations; (vi) to effect an amendment to this Agreement as (a) contemplated under Section 4.2(a)(x), Section 4.2(a)(xii) or 8.4(b), or (b) necessary in order to effect the provisions of Section 9.5; (vii) to make any other amendments which do not adversely affect the rights of the Trust Beneficiaries; and (viii) to authorize the Trust to issue an additional class of Interests (or other securities), with any designations, preferences and relative, participating, optional and other special rights, including special voting rights, as shall be fixed by the Managing Trustee. 

ARTICLE XIII - POWER OF ATTORNEY 

13.1  Appointment. 

Each of the Beneficiaries (through acceptance of their Interests) agrees to be bound by this Agreement and hereby makes, constitutes and appoints the Managing Trustee, the president and each vice president of the Managing Trustee, and each Person who shall thereafter become an additional or Substitute Managing Trustee during the term of the Trust and any continuation of the Trust pursuant to Section 4.12 and Article XI, with full power of substitution, the true and lawful attorney-in-fact of, to act in the name, place and stead of such Beneficiary, with the power from time to time to execute, acknowledge, make, verify, swear to, certify, deliver, record, file and/or publish: 

(a)  this Agreement under the laws of the State or any other jurisdiction, any subsequent amendment to this Agreement, the Certificate of Trust and any amendments thereto or restatement thereof; 

(b)  any other document required to reflect any action of the Managing Trustee or Beneficiaries duly taken in the manner provided for in this Agreement, whether or not the Beneficiary voted in favor of or otherwise Consented to such action; 

(c)  any other application, certificate, affidavit, instrument and document as may be required or appropriate in connection with documentation and registration of Assets with the FAA and any other governmental authority having jurisdiction; 

 

(d)  any other instrument, certificate or document which may be required by any regulatory agency, laws of the United States, any state or any other jurisdiction in which the Trust is doing or intends to do business or which the Managing Trustee deems advisable to file or record, provided such instrument, certificate or document is not inconsistent with the terms of this Agreement as then in effect; 

(e)  any certificate of dissolution or cancellation of the Certificate of Trust that may be necessary upon the termination of the Trust; 

(f)  any instrument or papers required to continue or terminate the business of the Trust pursuant to Sections 4.12 and 1.6; 

(g)  any amendment to this Agreement permitted hereunder; and 

(h)  any and all instruments which the Managing Trustee deems appropriate to reflect a change or modification of the Trust in accordance with the terms of this Agreement. 

13.2  Amendments to Agreement. 

The terms of this Agreement permit certain amendments of this Agreement to be effected and certain other actions to be taken or omitted by, or with respect to, the Trust, in each case with the approval of less than all the Beneficiaries if a specified percentage of the Beneficiaries shall have voted in favor of, or otherwise Consented to, such action. This power of attorney shall permit the Managing Trustee and the Trust to act on behalf of the Beneficiary, in accordance with the terms of this Agreement, whether or not the Beneficiary shall have Consented to such action, in order to effect the orderly administration of the Trust's affairs. 

13.3  Power Coupled with an Interest. 

The foregoing grant of authority: 

(a)  is a special power of attorney coupled with an interest in favor of such attorneys-in-fact and as such shall be irrevocable and shall survive the death, incapacity, insolvency, dissolution or termination of each Beneficiary; 

(b)  may be exercised for each Beneficiary by a signature of any one of such attorneys-in-fact or by listing the names of all of the Beneficiaries, including such Beneficiary, and executing any instrument with a single signature of any one of such attorneys-in-fact acting as attorney-in-fact for all of them; and 

(c)  shall survive the Assignment by any Beneficiary of the whole or any portion of his Beneficiary Interest, as applicable, except that, where the assignee of the whole thereof has furnished a power of attorney and has been approved by the Managing Trustee for admission to the Trust as a Substitute Beneficiary this power of attorney shall survive such Assignment with respect to the assignor for the sole purpose of enabling such attorneys-in-fact to execute, acknowledge and file any instrument necessary to effect such substitution and shall thereafter terminate with respect to any Beneficiary who assigns all of his Beneficiary Interest. 

13.4  Power of Attorney by Substitute Beneficiaries. 

A similar power of attorney shall be one of the instruments which the Managing Trustee shall require an assignee of a Beneficiary to execute as a condition to the admission of such assignee as a Substitute Beneficiary. 

ARTICLE XIV - GENERAL PROVISIONS 

14.1  Notices, Approvals and Consents. 

All notices, approvals, Consents or other communications hereunder shall be in writing and signed by the party giving the same, and shall be deemed to have been given when the same are (a) deposited in the United States mail and sent by first class mail (or certified if so required under Section 11.1(b)), postage prepaid, or (b) delivered in hand. In each case, said mailing or delivering shall be made to the parties at the addresses set forth below or at such other addresses as such parties may designate by notice to the Trust: 

(a)  If to the Trust or the Managing Trustee, at the principal office of the Trust; 

(b)  If to the Delaware Trustee at its principal office in the State as set forth in the records of the Trust and in Schedule A; 

(c)  If to any other Trustee at its principal office as set forth in the records of the Trust; 

(d)  If to the Special Beneficiary, at its principal office as set forth in the records of the Trust; and 

(e)  If to a Beneficiary, at the address set forth in the records of the Trust (as provided to the Trust by such Beneficiary), or to such other address as may be designated by notice from such Beneficiary given in the manner hereby specified. 

14.2  Further Assurances. 

The Trustees and Trust Beneficiaries will execute, acknowledge and deliver such further instruments and do such further acts and things as may be required to carry out the intent and purpose of this Agreement. 

14.3  Captions. 

Captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit, extend or describe the scope of this Agreement or the intent of any of the provisions thereof. 

14.4  Binding Effect. 

Except to the extent required under the Business Trust Act, as provided in Section 4.1(d) with respect to the Managing Trustee, and for fees, rights to reimbursement, and other compensation provided as such, none of the provisions of this Agreement shall be for the benefit of or be enforceable by any creditor of the Trust. 

14.5  Separability. 

If one or more of the provisions of this Agreement or any application thereof shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and any other application thereof shall not in any way be affected or impaired thereby, and such remaining provisions shall be interpreted consistently with the omission of such invalid, illegal or unenforceable provisions. 

14.6  Integration. 

This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in connection therewith which conflict with the express terms of this Agreement. No covenant, representation or condition not expressed in this Agreement shall affect or be effective to interpret, change or restrict the express provisions of this Agreement. 

14.7  Applicable Law. 

This Agreement shall be construed and enforced in accordance with and governed by the laws of the State. 

14.8  Counterparts. 

This Agreement may be signed by each party hereto upon a separate copy, and all counterparts so executed shall constitute one agreement binding on all parties hereto, notwithstanding that all parties are not signatory to the original or same counterpart. 

14.9  Creditors. 

No creditor who makes a non-recourse loan to the Trust shall have or acquire at any time, as a result of making such loan, any direct or indirect interest in the profits, capital or property of the Trust other than as a secured creditor. 

14.10  Interpretation. 

Unless the context in which words are used in this Agreement otherwise indicates that such is the intent, words in the singular shall include the plural and in the masculine shall include the feminine and neuter and vice versa. 

14.11  Arbitration; Venue. 

This Agreement does not impose mandatory arbitration or venue in connection with the settlement of disputes involving any Beneficiary; provided, however, that this provision shall not affect or supersede any other agreement which does provide for mandatory arbitration or venue, including any agreement between any Beneficiary and any Soliciting Dealer. 

 

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Third Amended and Restated Declaration of Trust as of July 28, 2003. 

	
MANAGING TRUSTEE 
	
BENEFICIARIES 

	

	

	
 
	
 

	
AFG ASIT CORPORATION 
	
Each Person named as a Beneficiary on Schedule A attached hereto 

 

By: AFG ASIT Corporation as Attorney-in-Fact for each such Person 

 

 

	
By: ___________________________________ 

Authorized Officer 
	
By: ____________________________________ 

Authorized Officer 

	
 
	
 

	
DELAWARE TRUSTEE 
	
 

	

	
	
 
	
 

	
WILMINGTON TRUST COMPANY 

 

 
	
 

	
By: ___________________________________ 

Authorized Officer 
	
 

	
 
	
 

	
SPECIAL BENEFICIARY 
	
 

	

	
	
 
	
 

	
EQUIS II CORPORATION (successor in interest to Equis Financial Group) 

 

 

By: ____________________________________ 

Authorized Officer 
	
 

 

SCHEDULE A 

NAMES, BUSINESS ADDRESSES AND CAPITAL CONTRIBUTIONS OF TRUSTEES AND BENEFICIARIES 

I.  Managing Trustee 

AFG ASIT Corporation   $1,000 

200 Nyala Farms 

Westport, CT 06880 

II.  Delaware Trustee 

Wilmington Trust Company                                                             N/A 

Rodney Square North 

Wilmington, DE 19890 

III.  Special Beneficiary 

Equis II Corporation                                                                       $1,000 

200 Nyala Farms 

Westport, CT 06880 

Class A and Class B 

IV.  Class A and B Beneficiaries 

(attached hereto    

as Exhibit A)<PAGE>

                                                                     EXHIBIT 4.3

                          SECURITIES PURCHASE AGREEMENT

         This Securities Purchase Agreement (this "Agreement") is dated as of
March 16, 2004, among Escalon Medical Corp., a Pennsylvania corporation (the
"Company"), and each purchaser identified on the signature pages hereto (each,
including its successors and assigns, a "Purchaser" and collectively the
"Purchasers"); and

         WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act (as defined below),
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 shares of Common Stock and Warrants on the Closing
Date.

         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 agrees
as follows:

                                    ARTICLE I
                                   DEFINITIONS

         1.1.     Definitions. In addition to the terms defined elsewhere in
this Agreement, for all purposes of this Agreement, the following terms have the
meanings indicated in this Section 1.1:

                  "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. 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.

                  "Closing" means the closing of the purchase and sale of the
         Common Stock 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 Shares have been satisfied or
         waived.

                  "Commission" means the United States Securities and Exchange
         Commission.

                  "Common Stock" means the common stock of the Company, $0.001
         par value per share.

                  "Effective Date" means the date that the Registration
         Statement is first declared effective by the Commission.

<PAGE>

                  "Exchange Act" means the Securities Exchange Act of 1934, as
         amended.

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

                  "Material Adverse Effect" shall have the meaning ascribed to
         such term in Section 3.1(b).

                   "Per Share Purchase Price" equals $13.00 per share, subject
         to adjustment for stock splits, stock dividends, stock combinations and
         other similar transactions of the Common Stock that occur after the
         date of this Agreement but prior to the Closing Date.

                  "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.

                  "Principal Market" initially means the NASDAQ Small-Cap Market
         and shall also include the New York Stock Exchange, the Nasdaq National
         Market or the American Stock Exchange, whichever is at the time the
         principal trading exchange or market for the Common Stock, based upon
         share volume.

                   "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.

                  "Registration Rights Agreement" means the Registration Rights
         Agreement, dated as of the date of this Agreement, among the Company
         and each Purchaser, in the form of Exhibit A hereto.

                  "Registration Statement" means a registration statement
         meeting the requirements set forth in the Registration Rights Agreement
         and covering the resale by the Purchasers of the Shares and the Warrant
         Shares.

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

                  "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(g).

                  "Securities Act" means the Securities Act of 1933, as amended.

                                        2
<PAGE>

                  "Shares" means the shares of Common Stock issued or issuable
         to each Purchaser pursuant to this Agreement.

                  "Subscription Amount" means, as to each Purchaser, the amounts
         set forth below such Purchaser's signature block on the signature page
         hereto, in United States dollars and in immediately available funds.

                  "Subsidiary" shall mean the subsidiaries of the Company, if
         any, referenced in Section 3.1(a).

                  "Trading Day" means a day on which the Common Stock is traded
         on a Principal Market.

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

                  "Warrants" means the warrants issued to each Purchaser to
         purchase shares of Common Stock, in the form of Exhibit B hereto.

                  "Warrant Shares" means the shares of Common Stock issueable
         upon exercise of the Warrants.

                                   ARTICLE II
                                PURCHASE AND SALE

         2.1.     Closing. On the Closing Date, each Purchaser shall purchase
from the Company, severally and not jointly with the other Purchasers, and the
Company shall issue and sell to each Purchaser, the following: (a) the number of
Shares equal to such Purchaser's Subscription Amount divided by the Per Share
Purchase Price and (b) Warrants to purchase shares of the Companies Common Stock
equal to fifteen percent (15%) of the Shares purchased by Purchaser at Closing
(adjusted for any stock splits, stock dividends, stock combinations and other
similar transactions) exercisable at a per share purchase price of $15.60. The
aggregate amount of Shares sold hereunder shall be up to 800,000 plus such
additional amounts of shares to be issued pursuant to the Warrants and in
Section 2.3 of this Agreement. Upon satisfaction of the conditions set forth in
Section 2.2, the Closing shall occur at the offices of the Company or such other
location as the parties shall mutually agree.

         2.2.     Closing Conditions; 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;

                                       3
<PAGE>

                           (ii)     a copy of the irrevocable instructions to
the Company's transfer agent instructing the transfer agent to deliver, on an
expedited basis, a certificate evidencing the number of Shares equal to such
Purchaser's Subscription Amount divided by the Per Share Purchase Price,
registered in the name of such Purchaser; and

                           (iii)    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 wire
transfer to the account as specified in writing by the Company; and

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

                  (c)      The obligations of the parties are subject to the
following additional conditions:

                           (i)      All representations and warranties of the
other party contained herein shall remain true and correct as of the Closing
Date and all covenants of the other party shall have been performed if due prior
to such date.

                           (ii)     From the date hereof to the Closing Date,
trading in the Common Stock shall not have been suspended by the Commission
(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 Financial Markets 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 Principal 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 Shares at the Closing.

                           (iii)    There shall not then be in effect any legal
or other order enjoining or restraining the transactions contemplated by this
Agreement.

                           (iv)     There shall not be in effect any law, rule
or regulation prohibiting or restricting such sale or requiring any consent or
approval of any person to issue the Shares which consent or approval shall not
have been obtained (except as may otherwise be provided in this Agreement).

                                       4
<PAGE>

         2.3.     Additional Shares. In the event that the Company does not file
a Registration Statement by the Filing Date (as defined in the Registration
Rights Agreement) or a Registration Statement is not effective by the
Effectiveness Date (as defined in the Registration Rights Agreement), then for
each 30 day period (not to exceed 180 days) in which the Registration Statement
is not filed or not effective, the Company shall issue to each Purchaser,
without any further consideration to be paid by the Purchaser, additional shares
of Common Stock equal to one percent (1%) of the Shares (adjusted for any stock
splits, stock dividends, stock combinations and other similar transactions)
issued on the Closing Date.

                                   ARTICLE III
                         REPRESENTATIONS AND WARRANTIES

         3.1.     Representations and Warranties of the Company. Except as set
forth in the SEC Reports, the Company hereby makes the representations and
warranties set forth below to each Purchaser:

                  (a)      Subsidiaries. All of the direct and indirect
subsidiaries of the Company are referenced in the SEC Reports. 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 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.

                  (b)      Organization and Qualification. Each of the Company
and the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted. Neither the Company nor any Subsidiary is in violation
or default of any of the provisions of its respective certificate or articles of
incorporation, bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly qualified to conduct business and is in
good standing as a foreign corporation or other entity in each jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good
standing, as the case may be, could not have or reasonably be expected to result
in (i) a material adverse effect on the legality, validity or enforceability of
any Transaction Document, (ii) a material adverse effect on the results of
operations, assets, business, prospects or financial condition 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 thereunder. The execution and delivery of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly authorized by all necessary
action on

                                       5
<PAGE>

the part of the Company and no further action is required by the Company 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, will
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with its terms except (i) as limited by 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, the issuance and sale of the Shares
and the consummation by the Company of the other transactions contemplated
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 4.4 of this
Agreement, (ii) the filing with the Commission of the Registration Statement,
(iii) application(s) to each applicable Principal Market for the listing of the
Shares and the Warrant Shares for trading thereon in the time and manner
required thereby, and (iv) the filing of Form D with the Commission and such
filings as are required to be made under applicable state securities laws
(collectively, the "Required Approvals").

                  (f)      Issuance of the Shares. The Shares are, and on each
date on which the Warrants are exercised the Warrant Shares shall be duly
authorized and, when issued and paid for in accordance with the 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 Company has reserved
from its duly authorized capital stock the maximum number of shares of Common
Stock issuable pursuant to

                                       6
<PAGE>

this Agreement. The issuance and sale of the Shares, Warrants or Warrant Shares
contemplated hereby will not give rise to any preemptive rights or rights of
first refusal on behalf of any Person.

                  (g)      SEC Reports; Financial Statements. The Company has
filed all reports required to be filed by it under the Securities Act and the
Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two
years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials, including the
exhibits thereto, 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 and the rules and
regulations of the Commission promulgated thereunder, 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 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.

                  (h)      Material Changes. Since the date of the latest
audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, there has been no event, occurrence
or development that has had or that could reasonably be expected to result in a
Material Adverse Effect.

                  (i)      Sarbanes-Oxley; Internal Accounting Controls. The
Company is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 and the rules promulgated there under which are applicable to it as of
the Closing Date.

                  (j)      Certain Fees. Except for The Keystone Equities Group,
L.P. ("Placement Agent"), 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 this Agreement.

                  (k)      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
Shares or the Warrants by the Company to the Purchasers as contemplated hereby.
The issuance and sale of the Shares and the Warrants hereunder does not
contravene the rules and regulations of the Principal Market.

                                       7
<PAGE>

                  (l)      Investment Company. The Company is not, and is not an
Affiliate of, and immediately after receipt of payment for the Shares, will not
be or be an Affiliate of, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.

                  (m)      Registration Rights. Except as contemplated in the
Transaction Documents, no Person has any right to cause the Company to effect
the registration under the Securities Act of any securities of the Company.

                  (n)      Listing and Maintenance Requirements. The Company's
Common Stock is registered pursuant to Section 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 Principal
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 Principal Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in compliance
in all material respects with all such listing and maintenance requirements.

                  (o)      Application of Takeover Protections. The Company and
its Board of Directors have taken all necessary action, if any, in order to
render inapplicable to the issuance of the Shares and the Warrant Shares 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 Certificate 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.

                  (p)      Disclosure. The Company confirms that, neither the
Company 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, non-public information. The Company understands and
confirms that the Purchasers will rely on the foregoing representations and
covenants in effecting transactions in securities of the Company. 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.

                  (q)      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 Shares to be integrated with prior offerings by the Company
for purposes of the Securities Act or any applicable shareholder approval
provisions, including,

                                       8
<PAGE>

without limitation, under the rules and regulations of any exchange or automated
quotation system on which any of the securities of the Company are listed or
designated.

                  (r)      Form S-3 Eligibility. The Company is eligible to
register the resale of its Common Stock by the Purchasers on Form S-3
promulgated under the Securities Act and the Company hereby covenants and agrees
to use its best efforts to maintain its eligibility to use Form S-3 until the
Registration Statement covering the resale of the Shares and the Warrant Shares
shall have been filed with, and declared effective by, the Commission.

                  (s)      General Solicitation. Neither the Company nor any
person acting on behalf of the Company has offered or sold any of the Shares or
Warrants by any form of general solicitation or general advertising. The Company
has offered the Shares and the Warrants for sale only to the Purchasers and
certain other "accredited investors" within the meaning of Rule 501 under the
Securities Act.

                  (t)      Acknowledgment Regarding Purchasers' Purchase of
Shares. 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 hereby. 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 this
Agreement and the transactions contemplated hereby and any advice given by any
Purchaser or any of their respective representatives or agents in connection
with this Agreement and the transactions contemplated hereby is merely
incidental to the Purchasers' purchase of the Shares and Warrants. The Company
further represents to each Purchaser that the Company's decision to enter into
this Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.

         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 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 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.

                                       9
<PAGE>

                  (b)      No Conflicts. The execution, delivery and performance
of the Transaction Documents by such Purchaser, the issuance and sale of the
Shares to such Purchaser and the consummation by such Purchaser of the other
transactions contemplated thereby do not and will not (i) conflict with or
violate any provision of such Purchaser's certificate or articles of
incorporation, bylaws or other organizational or charter documents, or (ii)
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 such Purchaser is subject
(including federal and state securities laws and regulations), or by which any
property or asset of such Purchaser is bound or affected.

                  (c)      Investment Intent. Such Purchaser understands that
the Shares, Warrants and Warrant Shares are "restricted securities" and have not
been registered under the Securities Act or any applicable state securities law
and is acquiring such securities as principal for its own account for investment
purposes only and not with a view to or for distributing or reselling such
securities or any part thereof, has no present intention of distributing any of
such securities and has no arrangement or understanding with any other persons
regarding the distribution of such securities (this representation and warranty
not limiting such Purchaser's right to sell such securities pursuant to the
Registration Statement or otherwise in compliance with applicable federal and
state securities laws). Such Purchaser is acquiring such securities hereunder in
the ordinary course of its business. Such Purchaser does not have any agreement
or understanding, directly or indirectly, with any Person to distribute any of
such securities.

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

                  (e)      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 Shares,
Warrants and Warrant Shares, and has so evaluated the merits and risks of such
investment. Such Purchaser is able to bear the economic risk of an investment in
securities and, at the present time, is able to afford a complete loss of such
investment.

                  (f)      General Solicitation. Such Purchaser is not
purchasing the Shares, Warrants and Warrant Shares as a result of any
advertisement, article, notice or other communication regarding such 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.

                  (g)      Ownership of Company Stock. The purchaser by each
Purchaser of the Shares, Warrants and Warrant Shares is issueable to it at the
Closing will not result in such Purchaser (individually or together with other
Persons with whom such Purchaser has identified,

                                       10
<PAGE>

or will have identified, itself as part of a "group" in a public filing made
with the Commission involving the Company's securities) acquiring, or obtaining
the right to acquire, in excess of 9.999% of the Common Stock or the voting
power of the Company on a post transaction basis that assumes that the Closing
shall have occurred.

         The Company acknowledges and agrees that each Purchaser does not make
or has not made any representations or warranties with respect to the
transactions contemplated hereby other than those specifically set forth in this
Section 3.2.

                                   ARTICLE IV
                         OTHER AGREEMENTS OF THE PARTIES

         4.1.     Transfer Restrictions.

                  (a)      The Shares, Warrants and Warrant Shares may only be
disposed of in compliance with state and federal securities laws. In connection
with any transfer of such 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 and shall be reasonably satisfactory to
the Company, to the effect that such transfer does not require registration of
such transferred Shares, Warrants or Warrant Shares 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(b), of a legend on any of the Shares or Warrant
Shares in the following form:

         THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND
         EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN
         RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
         OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT
         BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
         STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
         EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
         REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE
         STATE SECURITIES LAWS 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. THESE SECURITIES MAY BE PLEDGED IN
         CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
         BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN
         "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a) UNDER THE SECURITIES
         ACT.

                                       11
<PAGE>

         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 Shares,
Warrants or Warrant Shares 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 such securities to the pledgees or secured
parties. Such a pledge or transfer would not be subject to approval of the
Company and no legal opinion of legal counsel of the pledgee, secured party or
pledgor shall be required in connection therewith. Further, no notice shall be
required of such pledge. At the appropriate Purchaser's expense, the Company
will execute and deliver such reasonable documentation as a pledgee or secured
party of Shares, Warrants or Warrant Shares may reasonably request in connection
with a pledge or transfer of such securities, including, if the Shares or
Warrant Shares 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 Shares or Warrant Shares
shall not contain any legend (including the legend set forth in Section 4.1(b)),
(i) while a registration statement (including the Registration Statement)
covering the resale of such securities is effective under the Securities Act, or
(ii) following any sale of such Shares or Warrant Shares pursuant to Rule 144,
or (iii) if such Shares or Warrant 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. 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 of a certificate representing Shares and
Warrant Shares, as the case may be, issued with a restrictive legend (such date,
the "Legend Removal Date"), deliver or cause to be delivered to such Purchaser a
certificate representing such Shares and Warrant 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.

                  (d)      Each Purchaser, severally and not jointly with the
other Purchasers, agrees that the removal of the restrictive legend from
certificates representing Shares and Warrant Shares as set forth in this Section
4.1 is predicated upon the Company's reliance that the Purchaser will sell any
Shares or Warrant Shares pursuant to either the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an
exemption therefrom.

                  (e)      Until the date that each Purchaser holds less than
20% of the Shares and Warrant Shares purchased hereunder by such Purchaser, 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 interest of the Shares and Warrant Shares.

                                       12
<PAGE>

         4.2.     Furnishing of Information. As long as any Purchaser owns
Shares, 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 Shares, 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 Shares under Rule 144. The Company
further covenants that it will take such further action as any holder of Shares
may reasonably request, all to the extent required from time to time to enable
such Person to sell such Shares without registration under the Securities Act
within the limitation of the exemptions provided by Rule 144.

         4.3.     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 Shares in a manner that would require the registration
under the Securities Act of the sale of the Shares to the Purchasers or that
would be integrated with the offer or sale of the Shares for purposes of the
rules and regulations of any Principal Market such that it would require
shareholder approval prior to the closing of such other transaction unless
shareholder approval is obtained before the closing of such subsequent
transaction.

         4.4.     Securities Laws Disclosure; Publicity. The Company shall, by
8:30 a.m. Eastern time on the Trading Day following the date hereof, issue a
press release or file a Current Report on Form 8-K, in each case reasonably
acceptable to the Placement Agent disclosing the material terms of the
transactions contemplated hereby. The Company and the Placement Agent shall
consult with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of the Placement Agent, with respect
to any press release of the Company, which consent shall not unreasonably be
withheld, 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 Principal Market, without the prior written consent of such Purchaser, except
(i) as required by federal securities law in connection with the registration
statement contemplated by the Registration Rights Agreement and reports filed by
the Company under the Exchange Act and (ii) to the extent such disclosure is
required by law or Principal Market regulations, in which case the Company shall
provide the Purchasers with prior notice of such disclosure permitted under
subclause (i) or (ii).

         4.5.     Non-Public Information. The Company covenants and agrees that
neither it nor any other Person acting on its behalf will provide any Purchaser
or its agents or counsel with any information that the Company believes
constitutes material non-public information, unless prior thereto such Purchaser
shall have executed a written agreement regarding the confidentiality and

                                       13
<PAGE>

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.

         4.6.     Reimbursement. If any Purchaser or Placement Agent becomes
involved in any capacity in any Proceeding by or against any Person who is a
stockholder of the Company (except as a result of sales, pledges, margin sales
and similar transactions by such Purchaser to or with any current stockholder),
solely as a result of such Purchaser's acquisition of the Shares under this
Agreement, the Company will reimburse such Purchaser and the Placement Agent for
its reasonable legal and other expenses (including the cost of any investigation
preparation and travel in connection therewith) incurred in connection
therewith, as such expenses are incurred. The reimbursement obligations of the
Company under this paragraph shall be in addition to any liability which the
Company may otherwise have, shall extend upon the same terms and conditions to
any Affiliates of the Purchasers or the Placement Agent who are actually named
in such action, proceeding or investigation, and partners, directors, agents,
employees and controlling persons (if any), as the case may be, of the
Purchasers, the Placement Agent and any of their Affiliates, and shall be
binding upon and inure to the benefit of any successors, assigns, heirs and
personal representatives of the Company, the Purchasers, the Placement Agent and
any of their Affiliates and any such Person. The Company also agrees that the
Purchasers, the Placement Agent and their Affiliates, partners, directors,
agents, employees or controlling persons shall have no liability to the Company
or any Person asserting claims on behalf of or in right of the Company solely as
a result of the Purchasers acquiring the Shares under this Agreement.
Notwithstanding the foregoing, the Company shall have no obligation to the
Placement Agent hereunder to the extent that the liability incurred by it has
been determined by a court of competent jurisdiction to be the result of gross
negligence, willful misconduct or intentional violation of any state or federal
securities laws.

         4.7.     Indemnification. Subject to the provisions of this Section
4.7, the Company will indemnify and hold the Purchasers, the Placement Agent and
their directors, officers, shareholders, partners, employees and agents (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 representation, 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. 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

                                       14
<PAGE>

the expense of such Purchaser Party except to the extent that (i) the employment
thereof has been specifically authorized by the Company in writing, (ii) the
Company has failed after a reasonable period of time to assume such defense and
to employ counsel or (iii) in such action there is, in the reasonable opinion of
such separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party. The Company
will not be liable to any Purchaser Party under this Agreement (i) for any
settlement by an 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 the Purchasers in this Agreement or
in the other Transaction Documents. Notwithstanding the foregoing, the Company
shall have no obligation to the Placement Agent hereunder to the extent that the
liability incurred by it has been determined by a court of competent
jurisdiction to be the result of gross negligence, willful misconduct or
intentional violation of any state or federal securities laws.

         4.8.     Reservation of Common Stock. As of the date hereof, the
Company has reserved and the Company shall continue to reserve and keep
available at all times, free of preemptive rights, a sufficient number of shares
of Common Stock for the purpose of enabling the Company to issue the Shares
pursuant to this Agreement.

         4.9.     Listing of Common Stock. The Company hereby agrees to use best
efforts to maintain the listing of the Common Stock on a Principal Market, and
as soon as reasonably practicable following the Closing (but not later than the
earlier of the Effective Date and the first anniversary of the Closing Date) to
list all of the Shares on such Principal Market. The Company further agrees, if
the Company applies to have the Common Stock traded on any other Principal
Market, it will include in such application all of the Shares, and will take
such other action as is necessary to cause all of the Shares to be listed on
such other Principal Market as promptly as possible. The Company will take all
action reasonably necessary to continue the listing and trading of its Common
Stock on a Principal Market and will comply in all respects with the Company's
reporting, filing and other obligations under the bylaws or rules of the
Principal Market.

         4.10.    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. 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 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 Shares or otherwise.

         4.11.    Delivery of Shares After Closing. The Company shall deliver,
or cause to be delivered, the respective Shares purchased by each Purchaser to
such Purchaser within 5 Trading Days of the Closing Date.

                                       15
<PAGE>

                                    ARTICLE V
                                  MISCELLANEOUS

         5.1.     Fees and Expenses. Except as otherwise set forth in this
Agreement, 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 stamp and other taxes
and duties levied in connection with the sale of the Shares.

         5.2.     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.

         5.3.     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 6:30
p.m. (Eastern 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 6:30 p.m. (Eastern time) on any Trading Day,
(c) the second Trading Day following the date of mailing, if sent by U.S.
nationally recognized overnight courier service, or (d) upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as set forth on the signature pages attached
hereto.

         5.4.     Amendments; Waivers. No provision of this Agreement may be
waived or amended except in a written instrument signed, in the case of an
amendment, by the Company and each Purchaser or, in the case of a waiver, by the
party against whom enforcement of any such waiver is sought. No waiver of any
default with respect to any provision, condition or requirement of this
Agreement shall be deemed to be a continuing waiver in the future or a waiver of
any subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.

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

         5.6.     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. Any Purchaser may
assign any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Shares and Warrant Shares, provided such
transferee agrees in writing to be bound, with respect to the transferred Shares
and Warrant

                                       16
<PAGE>

Shares, by the provisions hereof that apply to the "Purchasers", and provided
that such transferee represents and warrants that it is an "accredited investor"
or "qualified institutional buyer" as defined in Section 3.2(d).

         5.7.     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 Sections 4.6 and 4.7.

         5.8.     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 Commonwealth of Pennsylvania, without regard to the principles of conflicts
of law thereof. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of Philadelphia
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 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 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 attorneys' fees and
other costs and expenses incurred with the investigation, preparation and
prosecution of such action or proceeding.

         5.9.     Survival. The representations and warranties herein shall
survive the Closing and delivery of the Shares.

         5.10.    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, 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 signature page
were an original thereof.

         5.11.    Severability. If any provision of this Agreement is held to be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties

                                       17
<PAGE>

will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

         5.12.    Rescission and Withdrawal Right. Notwithstanding anything to
the contrary contained in (and without limiting any similar provisions of) the
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.

         5.13.    Replacement of Shares. If any certificate or instrument
evidencing any Shares is mutilated, lost, stolen or destroyed, the Company shall
issue or cause to be issued in exchange and substitution for and upon
cancellation thereof, 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 and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument
under such circumstances shall also pay any reasonable third-party costs
associated with the issuance of such replacement Shares.

         5.14.    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 described in the foregoing sentence and hereby agrees to waive in
any action for specific performance of any such obligation the defense that a
remedy at law would be adequate.

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

         5.16.    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 of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
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

                                       18
<PAGE>

Document. 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. 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.

                            (Signature Page Follows)

                                       19
<PAGE>

                  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.

ESCALON MEDICAL CORP.                                   Address for Notice:

By:___/s/ Richard J. DePiano_______                     575 East Swedesford Road
   Name: Richard J. DePiano                             Suite 100
   Title: Chairman & CEO                                Wayne, PA 19087

With a copy to (which shall not constitute notice):     Duane Morris, LLP
Kathleen M. Shay, Esquire                               One Liberty Place
                                                        Philadelphia, PA 19103-
                                                        7396

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOR PURCHASERS FOLLOW]

                                       20
<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: BayStar Capital II, L.P.
Signature of Authorized Signatory of Investing Entity: /s/ Steve Derby
Name of Authorized Signatory: Steve Derby
Title of Authorized Signatory: Managing Member
Email Address of Authorized Entity: steve@sdscapital.com

Address for Notice of Investing Entity:

c/o BayStar Capital Management, LLC
53 Forest Avenue, Suite 203
Old Greenwich, CT 06870

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $325,000.00
Shares: 25,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       21

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: SDS Capital Group SPC, Ltd.
Signature of Authorized Signatory of Investing Entity: /s/ Steve Derby
Name of Authorized Signatory: Steve Derby
Title of Authorized Signatory: Managing Member
Email Address of Authorized Entity: steve@sdscapital.com

Address for Notice of Investing Entity:

c/o SDS Management, LLC
53 Forest Avenue, 2nd Floor
Old Greenwich, CT 06870

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $1,300,000.00
Shares: 100,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       22

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Colonial Fund LLC
Signature of Authorized Signatory of Investing Entity: /s/ Cary G. Brody
Name of Authorized Signatory: Cary G. Brody
Title of Authorized Signatory: President
Email Address of Authorized Entity: cbrody@colonialfund.com

Address for Notice of Investing Entity:

Colonial Fund CCL
1270 Avenue of the Americas, Suite 1233
New York, NY 10020
Attention: Cary Brody

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $3,055,000.00
Shares: 235,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       23

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: W. Anthony Hitschler
Signature of Authorized Signatory of Investing Entity: /s/ W. Anthony Hitschler
Name of Authorized Signatory: W. Anthony Hitschler
Title of Authorized Signatory:
Email Address of Authorized Entity: THITSCHLER@AOL.COM

Address for Notice of Investing Entity:

W. Anthony Hitschler
211 Radnor Chester Road
Villanova, PA 19085

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $1,300,000.00
Shares: 100,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       24

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Transvest LTD
Signature of Authorized Signatory of Investing Entity: /s/ Jeffrey Bonner
Name of Authorized Signatory:  Jeffrey Bonner
Title of Authorized Signatory: General Partner
Email Address of Authorized Entity: jbonner@transvestltd.com

Address for Notice of Investing Entity:

Transvest LTD
Claredon House
2 Church St.
P.O. Box HM1022
Hamilton HMDX Bermuda

Address for Delivery of Shares for Investing Entity (if not same as above):

Transvest LTD (I/C Highlander)
7 Hanover Square, 8th Floor
New York, NY 10004

Subscription Amount: $650,000
Shares: 50,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       25

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Frorer Partners, L.P.
Signature of Authorized Signatory of Investing Entity: /s/ Peter Frorer
Name of Authorized Signatory: Peter Frorer
Title of Authorized Signatory: General Partner
Email Address of Authorized Entity: Peterfrorer@verizon.net

Address for Notice of Investing Entity:

Frorer Partners, L.P.
15 North Balch Street
Hanover, NH 03755

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $520,000.00
Shares: 40,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       26

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Polar Capital LP
Signature of Authorized Signatory of Investing Entity: /s/ D. S. Callan
Name of Authorized Signatory:  David S. Callan
Title of Authorized Signatory: President
Email Address of Authorized Entity:

Address for Notice of Investing Entity:

Polar Capital LP
417 Callowhill Street, Rear
Philadelphia, PA 19123
Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $130,000.00
Shares: 10,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       27

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: The Citizen's Alliance for Better Neighborhoods
Signature of Authorized Signatory of Investing Entity: /s/ Ruth Arnao
Name of Authorized Signatory: Ruth Arnao
Title of Authorized Signatory: Executive Director
Email Address of Authorized Entity:

Address for Notice of Investing Entity:

The Keystone Equities Group
P.O. Box 1155
Oaks, PA 19456

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $325,000.00
Shares: 25,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       28

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: SF Capital Partners Ltd.
Signature of Authorized Signatory of Investing Entity: /s/ Brian H. Davidson
Name of Authorized Signatory: Brian H. Davidson
Title of Authorized Signatory: Authorized Signatory
Email Address of Authorized Entity: bdavidson@sfcapital.com

Address for Notice of Investing Entity:

SF Capital Partners Ltd.
3600 South Lake Drive
St. Francis, WI 53235

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $1,625,000.00
Shares: 125,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       29

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Castle Creek Technology Partners LLC
Signature of Authorized Signatory of Investing Entity: /s/ Thomas A. Frei
Name of Authorized Signatory: Thomas A. Frei
Title of Authorized Signatory: Managing Director of the Investment Manager
Email Address of Authorized Entity:

Address for Notice of Investing Entity:

Castle Creek Technology Partners LLC
111 W. Jackson Blvd., Suite 2020
Chicago, IL 60604

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $845,000.00
Shares: 65,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       30

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: Treeline Investment Partners, L.P.
                          By: Treeline Management LLC
Signature of Authorized Signatory of Investing Entity: /s/ Joseph Gil
Name of Authorized Signatory: Joseph Gil
Title of Authorized Signatory: Managing Member
Email Address of Authorized Entity: JGIL@TREELINECAPITAL.COM

Address for Notice of Investing Entity:

Treeline Investment Partners, L.P.
112 Baypoint Drive
San Rafael, CA 94901

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $65,000.00
Shares: 5,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       31

<PAGE>

[PURCHASER SIGNATURE PAGES TO ESMC 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 Investing Entity: MFN LLC
Signature of Authorized Signatory of Investing Entity: /s/ Louis Ottimo
Name of Authorized Signatory: Louis Ottimo
Title of Authorized Signatory: Member
Email Address of Authorized Entity:LOTTIMO@EKNSTOCK.COM

Address for Notice of Investing Entity:

MFN LLC
600 Old Country Road, Ste 210
Garden City, NY 11530

Address for Delivery of Shares for Investing Entity (if not same as above):

Subscription Amount: $260,000.00
Shares: 20,000
Per Share Purchase Price: $13.00

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

[SIGNATURE PAGES CONTINUE]

                                       32
<PAGE>

                   EXHIBIT A TO SECURITIES PURCHASE AGREEMENT

                          REGISTRATION RIGHTS AGREEMENT

                  This Registration Rights Agreement (this "Agreement") is made
and entered into as of March ___, 2004, by and among Escalon Medical Corp., a
Pennsylvania corporation (the "Company"), and the purchasers signatory hereto
(each such purchaser, a "Purchaser" and collectively, the "Purchasers").

                  This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof among the Company and the Purchasers (the
"Purchase Agreement")

                  The Company and the Purchasers hereby agree as follows:

         1.       Definitions. Capitalized terms used and not otherwise defined
herein that are defined in the Purchase Agreement shall have the meanings given
such terms in the Purchase Agreement. As used in this Agreement, the following
terms shall have the following meanings:

                  "Advice" shall have the meaning set forth in Section 6(d).

                  "Effectiveness Date" means, with respect to the Registration
         Statement required to be filed hereunder, the earlier of (a) the 75th
         calendar day following the date of the Purchase Agreement, unless the
         Commission conducts a full review of the Registration Statement, in
         which case the 120th calendar day shall apply to this clause (a) rather
         than the 75th calendar day, and (b) the fifth Trading Day following the
         date on which the Company is notified by the Commission that the
         Registration Statement will not be reviewed or is no longer subject to
         further review and comments.

                  "Effectiveness Period" shall have the meaning set forth in
         Section 2.

                  "Filing Date" means, with respect to the Registration
         Statement required to be filed hereunder, the 30th calendar day
         following the date of the Purchase Agreement.

                  "Holder" or "Holders" means the holder or holders, as the case
         may be, from time to time of Registrable Securities.

                  "Indemnified Party" shall have the meaning set forth in
         Section 5(c).

                  "Indemnifying Party" shall have the meaning set forth in
         Section 5(c).

                  "Losses" shall have the meaning set forth in Section 5(a).

                  "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.

                                      -1-

<PAGE>

                  "Prospectus" means the prospectus included in the Registration
         Statement (including, without limitation, a prospectus that includes
         any information previously omitted from a prospectus filed as part of
         an effective registration statement in reliance upon Rule 430A
         promulgated under the Securities Act), as amended or supplemented by
         any prospectus supplement, with respect to the terms of the offering of
         any portion of the Registrable Securities covered by the Registration
         Statement, and all other amendments and supplements to the Prospectus,
         including post-effective amendments, and all material incorporated by
         reference or deemed to be incorporated by reference in such Prospectus.

                  "Registrable Securities" means all of the Shares, together
         with any shares of Common Stock issued or issuable upon any stock
         split, dividend or other distribution, recapitalization or similar
         event with respect to the foregoing, and the Warrant Shares.

                  "Registration Statement" means the registration statements
         required to be filed hereunder, including (in each case) the
         Prospectus, amendments and supplements to the registration statement or
         Prospectus, including pre- and post-effective amendments, all exhibits
         thereto, and all material incorporated by reference or deemed to be
         incorporated by reference in the registration statement.

                  "Rule 415" means Rule 415 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 purpose and effect as such
         Rule.

                  "Rule 424" means Rule 424 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 purpose and effect as such
         Rule.

         2.       Registration. On or prior to the Filing Date, the Company
shall prepare and file with the Commission the Registration Statement covering
the resale of all of the Registrable Securities for an offering to be made on a
continuous basis pursuant to Rule 415. The Registration Statement required
hereunder shall be on Form S-3 (except if the Company is not then eligible to
register for resale the Registrable Securities on Form S-3, in which case the
Registration shall be on another appropriate form permitting registration of the
Registrable Securities for resale by such Holders in accordance herewith and the
methods of distribution elected by the Holders herein). The Registration
Statement required hereunder shall contain (except if otherwise directed by the
Holders) substantially the "Plan of Distribution" attached hereto as Annex A.
Subject to the terms of this Agreement, the Company shall use best efforts to
cause the Registration Statement to be declared effective under the Securities
Act as promptly as possible after the filing thereof, but in any event not later
than the Effectiveness Date, and shall use best efforts to keep the Registration
Statement continuously effective under the Securities Act until the date when
all Registrable Securities covered by the Registration Statement have been sold
or may be sold without registration under the Securities Act pursuant to Rule
144(k) as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Company's transfer agent
and the affected Holders (the "Effectiveness Period"). None of the Company's
security holders (other than the Holders of

                                      -2-
<PAGE>

Registrable Securities) shall have the right to include any of the Company's
securities in the Registration Statement to be filed pursuant to this Section 2.

         3.       Registration Procedures

                  In connection with the Company's registration obligations
hereunder, the Company shall:

                  (a)      Furnish to the Holders copies of all such documents
         filed (including documents incorporated or deemed incorporated by
         reference to the extent requested by such Holder), not more than five
         Trading Days after the filing of the Registration Statement or any
         related Prospectus or any amendment or supplement thereto.

                  (b)      (i) Prepare and file with the Commission such
         amendments, including post-effective amendments, to the Registration
         Statement and the Prospectus used in connection therewith as may be
         necessary to keep the Registration Statement continuously effective as
         to the applicable Registrable Securities for the Effectiveness Period;
         (ii) cause the related Prospectus to be amended or supplemented by any
         required Prospectus supplement, and as so supplemented or amended to be
         filed pursuant to Rule 424; (iii) respond as promptly as reasonably
         possible to any comments received from the Commission with respect to
         the Registration Statement or any amendment thereto; and (iv) comply in
         all material respects with the provisions of the Securities Act and the
         Exchange Act with respect to the disposition of all Registrable
         Securities covered by the Registration Statement during the
         Effectiveness Period in accordance with the intended methods of
         disposition by the Holders thereof set forth in the Registration
         Statement as so amended or in such Prospectus as so supplemented.

                  (c)      Notify the Holders of Registrable Securities to be
         sold as promptly as reasonably possible and (if requested by any such
         Holder) confirm such notice in writing promptly following the day
         (i)(A) when the Registration Statement and Prospectus or any Prospectus
         supplement or post-effective amendment to the Registration Statement is
         filed; (B) when the Commission notifies the Company whether there will
         be a "review" of the Registration Statement and whenever the Commission
         comments in writing on the Registration Statement; and (C) with respect
         to the Registration Statement or any post-effective amendment, when the
         same has become effective; (ii) of any request by the Commission or any
         other Federal or state governmental authority during the Effectiveness
         Period for amendments or supplements to the Registration Statement or
         Prospectus or for additional information; (iii) of the issuance by the
         Commission or any other Federal or state governmental authority of any
         stop order suspending the effectiveness of the Registration Statement
         covering any or all of the Registrable Securities or the initiation of
         any Proceedings for that purpose; (iv) of the receipt by the Company of
         any notification with respect to the suspension of the qualification or
         exemption from qualification of any of the Registrable Securities for
         sale in any jurisdiction, or the initiation or threatening of any
         Proceeding for such purpose; and (v) of the occurrence of any event or
         passage of time that makes the financial statements included in the
         Registration Statement ineligible for inclusion therein or any
         statement made in the Registration Statement or Prospectus or any
         document incorporated or

                                      -3-
<PAGE>

         deemed to be incorporated therein by reference untrue in any material
         respect or that requires any revisions to the Registration Statement,
         Prospectus or other documents so that, in the case of the Registration
         Statement, Prospectus or other documents, as the case may be, it will
         not contain any untrue statement of a material fact or omit to state
         any material fact required to be stated therein or necessary to make
         the statements therein, in light of the circumstances under which they
         were made, not misleading.

                  (d)      Use reasonable efforts to avoid the issuance of, or,
         if issued, obtain the withdrawal of (i) any order suspending the
         effectiveness of the Registration Statement, or (ii) any suspension of
         the qualification (or exemption from qualification) of any of the
         Registrable Securities for sale in any jurisdiction, at the earliest
         practicable moment.

                  (e)      Furnish to each Holder, without charge, at least one
         conformed copy of the Registration Statement and each amendment
         thereto, including financial statements and schedules, all documents
         incorporated or deemed to be incorporated therein by reference to the
         extent requested by such Person, and all exhibits to the extent
         requested by such Person (including those previously furnished or
         incorporated by reference) promptly after the filing of such documents
         with the Commission.

                  (f)      Promptly deliver to each Holder, without charge, as
         many copies of the Prospectus or Prospectuses (including each form of
         prospectus) and each amendment or supplement thereto as such Holder may
         reasonably request in connection with resales by the Holder of
         Registrable Securities. Subject to the terms of this Agreement, the
         Company hereby consents to the use of such Prospectus and each
         amendment or supplement thereto by each of the selling Holders in
         connection with the offering and sale of the Registrable Securities
         covered by such Prospectus and any amendment or supplement thereto,
         except after the giving of any notice pursuant to Section 3(c)(ii),
         (iii), (iv) and (v).

                  (g)      Prior to any resale of Registrable Securities by a
         Holder, use its reasonable efforts to register or qualify or cooperate
         with the selling Holders in connection with the registration or
         qualification (or exemption from the registration or qualification) of
         such Registrable Securities for the resale by the Holder under the
         securities or Blue Sky laws of such jurisdictions within the United
         States as any Holder reasonably requests in writing, to keep the
         registration or qualification (or exemption therefrom) effective during
         the Effectiveness Period and to do any and all other acts or things
         reasonably necessary to enable the disposition in such jurisdictions of
         the Registrable Securities covered by the Registration Statement;
         provided, that the Company shall not be required to qualify generally
         to do business in any jurisdiction where it is not then so qualified,
         subject the Company to any material tax in any such jurisdiction where
         it is not then so subject or file a general consent to service of
         process in any such jurisdiction.

                  (h)      If requested by the Holders, cooperate with the
         Holders to facilitate the timely preparation and delivery of
         certificates representing Registrable Securities to be delivered to a
         transferee pursuant to the Registration Statement, which certificates
         shall be free, to the extent permitted by the Purchase Agreement, of
         all restrictive legends, and

                                      -4-
<PAGE>

         to enable such Registrable Securities to be in such denominations and
         registered in such names as any such Holders may request.

                  (i)      Upon the occurrence of any event contemplated by
         Section 3(c)(v), as promptly and in any event within 30 days of such
         event, prepare a supplement or amendment, including a post-effective
         amendment, to the Registration Statement or a supplement to the related
         Prospectus or any document incorporated or deemed to be incorporated
         therein by reference, and file any other required document so that, as
         thereafter delivered, neither the Registration Statement nor such
         Prospectus will contain an untrue statement of a material fact or omit
         to state a material fact required to be stated therein or necessary to
         make the statements therein, in light of the circumstances under which
         they were made, not misleading. If the Company notifies the Holders in
         accordance with clauses (ii) through (v) of Section 3(c) above to
         suspend the use of any Prospectus until the requisite changes to such
         Prospectus have been made, then the Holders shall suspend use of such
         Prospectus. The Company will use reasonable efforts to ensure that the
         use of the Prospectus may be resumed as promptly as is practicable.

                  (j)      Comply with all applicable rules and regulations of
         the Commission.

                  (k)      The Company may require each selling Holder to
         furnish to the Company a certified statement as to the number of shares
         of Common Stock beneficially owned by such Holder and, if required by
         the Commission, the person thereof that has voting and dispositive
         control over the Shares.

         4.       Registration Expenses. All fees and expenses incident to the
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement. The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the Principal Market on which the Common Stock is then
listed for trading, and (B) in compliance with applicable state securities or
Blue Sky laws), (ii) printing expenses (including, without limitation, expenses
of printing certificates for Registrable Securities and of printing prospectuses
if the printing of prospectuses is reasonably requested by the holders of a
majority of the Registrable Securities included in the Registration Statement),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company and the Holders, (v) Securities Act liability insurance,
if the Company so desires such insurance, and (vi) fees and expenses of all
other Persons retained by the Company in connection with the consummation of the
transactions contemplated by this Agreement. In addition, the Company shall be
responsible for all of its internal expenses incurred in connection with the
consummation of the transactions contemplated by this Agreement (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expense of any annual audit and the
fees and expenses incurred in connection with the listing of the Registrable
Securities on any securities exchange as required hereunder. In no event shall
the Company be responsible for any broker or similar commissions or, except to
the extent provided for in the Transaction Documents, any legal fees or other
costs of the Holders.

                                      -5-
<PAGE>

         5.       Indemnification

                  (a)      Indemnification by the Company. The Company shall,
         notwithstanding any termination of this Agreement, indemnify and hold
         harmless each Holder, the officers, directors, agents and employees of
         each of them, each Person who controls any such Holder (within the
         meaning of Section 15 of the Securities Act or Section 20 of the
         Exchange Act) and the officers, directors, agents and employees of each
         such controlling Person, to the fullest extent permitted by applicable
         law, from and against any and all losses, claims, damages, liabilities,
         costs (including, without limitation, reasonable attorneys' fees) and
         expenses (collectively, "Losses"), as incurred, arising out of or
         relating to any untrue or alleged untrue statement of a material fact
         contained in the Registration Statement, any Prospectus or any form of
         prospectus or in any amendment or supplement thereto or in any
         preliminary prospectus, or arising out of or relating to any omission
         or alleged omission of a material fact required to be stated therein or
         necessary to make the statements therein (in the case of any Prospectus
         or form of prospectus or supplement thereto, in light of the
         circumstances under which they were made) not misleading, except to the
         extent, but only to the extent, that (i) such untrue statements or
         omissions are based solely upon information regarding such Holder
         furnished in writing to the Company by such Holder expressly for use
         therein, or to the extent that such information relates to such Holder
         or such Holder's proposed method of distribution of Registrable
         Securities and was reviewed and expressly approved in writing by such
         Holder expressly for use in the Registration Statement, such Prospectus
         or such form of Prospectus or in any amendment or supplement thereto
         (it being understood that the Holder has approved Annex A hereto for
         this purpose) or (ii) in the case of an occurrence of an event of the
         type specified in Section 3(c)(ii)-(v), the use by such Holder of an
         outdated or defective Prospectus after the Company has notified such
         Holder in writing that the Prospectus is outdated or defective and
         prior to the receipt by such Holder of the Advice contemplated in
         Section 6(d). The Company shall notify the Holders promptly of the
         institution, threat or assertion of any Proceeding of which the Company
         is aware in connection with the transactions contemplated by this
         Agreement.

                  (b)      Indemnification by Holders. Each Holder shall,
         severally and not jointly, indemnify and hold harmless the Company, its
         directors, officers, agents and employees, each Person who controls the
         Company (within the meaning of Section 15 of the Securities Act and
         Section 20 of the Exchange Act), and the directors, officers, agents or
         employees of such controlling Persons, to the fullest extent permitted
         by applicable law, from and against all Losses, as incurred, to the
         extent arising out of or based solely upon: (x) such Holder's failure
         to comply with the prospectus delivery requirements of the Securities
         Act or (y) any untrue or alleged untrue statement of a material fact
         contained in any Registration Statement, any Prospectus, or any form of
         prospectus, or in any amendment or supplement thereto or in any
         preliminary prospectus, or arising out of or relating to any omission
         or alleged omission of a material fact required to be stated therein or
         necessary to make the statements therein not misleading (i) to the
         extent, but only to the extent, that such untrue statement or omission
         is contained in any information so furnished in writing by such Holder
         to the Company specifically for inclusion in the Registration Statement
         or such Prospectus or (ii) to the extent that (1) such untrue
         statements or omissions are based solely upon information regarding
         such Holder

                                      -6-
<PAGE>

         furnished in writing to the Company by such Holder expressly for use
         therein, or to the extent that such information relates to such Holder
         or such Holder's proposed method of distribution of Registrable
         Securities and was reviewed and expressly approved in writing by such
         Holder expressly for use in the Registration Statement (it being
         understood that the Holder has approved Annex A hereto for this
         purpose), such Prospectus or such form of Prospectus or in any
         amendment or supplement thereto or (2) in the case of an occurrence of
         an event of the type specified in Section 3(c)(ii)-(v), the use by such
         Holder of an outdated or defective Prospectus after the Company has
         notified such Holder in writing that the Prospectus is outdated or
         defective and prior to the receipt by such Holder of the Advice
         contemplated in Section 6(d). In no event shall the liability of any
         selling Holder hereunder be greater in amount than the dollar amount of
         the net proceeds received by such Holder upon the sale of the
         Registrable Securities giving rise to such indemnification obligation.

                  (c)      Conduct of Indemnification Proceedings. If any
         Proceeding shall be brought or asserted against any Person entitled to
         indemnity hereunder (an "Indemnified Party"), such Indemnified Party
         shall promptly notify the Person from whom indemnity is sought (the
         "Indemnifying Party") in writing, and the Indemnifying Party shall have
         the right to assume the defense thereof, including the employment of
         counsel reasonably satisfactory to the Indemnified Party and the
         payment of all fees and expenses incurred in connection with defense
         thereof; provided, that the failure of any Indemnified Party to give
         such notice shall not relieve the Indemnifying Party of its obligations
         or liabilities pursuant to this Agreement, except (and only) to the
         extent that it shall be finally determined by a court of competent
         jurisdiction (which determination is not subject to appeal or further
         review) that such failure shall have prejudiced the Indemnifying Party.

                  An Indemnified Party shall have the right to employ separate
         counsel in any such Proceeding and to participate in the defense
         thereof, but the fees and expenses of such counsel shall be at the
         expense of such Indemnified Party or Parties unless: (1) the
         Indemnifying Party has agreed in writing to pay such fees and expenses;
         (2) the Indemnifying Party shall have failed promptly to assume the
         defense of such Proceeding and to employ counsel reasonably
         satisfactory to such Indemnified Party in any such Proceeding; or (3)
         the named parties to any such Proceeding (including any impleaded
         parties) include both such Indemnified Party and the Indemnifying
         Party, and such Indemnified Party shall reasonably believe, based upon
         the opinion of counsel, that a material conflict of interest is likely
         to exist if the same counsel were to represent such Indemnified Party
         and the Indemnifying Party (in which case, if such Indemnified Party
         notifies the Indemnifying Party in writing that it elects to employ
         separate counsel at the expense of the Indemnifying Party, the
         Indemnifying Party shall not have the right to assume the defense
         thereof and the reasonable fees and expenses of one separate counsel
         shall be at the expense of the Indemnifying Party). The Indemnifying
         Party shall not be liable for any settlement of any such Proceeding
         effected without its written consent, which consent shall not be
         unreasonably withheld. No Indemnifying Party shall, without the prior
         written consent of the Indemnified Party, effect any settlement of any
         pending Proceeding in respect of which any Indemnified Party is a
         party, unless such settlement includes an unconditional release of such
         Indemnified Party from all liability on claims that are the subject
         matter of such Proceeding.

                                      -7-
<PAGE>

                  Subject to the terms of this Agreement, all reasonable fees
         and expenses of the Indemnified Party (including reasonable fees and
         expenses to the extent incurred in connection with investigating or
         preparing to defend such Proceeding in a manner not inconsistent with
         this Section) shall be paid to the Indemnified Party, as incurred,
         within ten Trading Days of written notice thereof to the Indemnifying
         Party; provided, that the Indemnified Party shall promptly reimburse
         the Indemnifying Party for that portion of such fees and expenses
         applicable to such actions for which such Indemnified Party is not
         entitled to indemnification hereunder.

                  (d)      Contribution. If a claim for indemnification under
         Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason
         of public policy or otherwise), then each Indemnifying Party, in lieu
         of indemnifying such Indemnified Party, shall contribute to the amount
         paid or payable by such Indemnified Party as a result of such Losses,
         in such proportion as is appropriate to reflect the relative fault of
         the Indemnifying Party and Indemnified Party in connection with the
         actions, statements or omissions that resulted in such Losses as well
         as any other relevant equitable considerations. The relative fault of
         such Indemnifying Party and Indemnified Party shall be determined by
         reference to, among other things, whether any action in question,
         including any untrue or alleged untrue statement of a material fact or
         omission or alleged omission of a material fact, has been taken or made
         by, or relates to information supplied by, such Indemnifying Party or
         Indemnified Party, and the parties' relative intent, knowledge, access
         to information and opportunity to correct or prevent such action,
         statement or omission. The amount paid or payable by a party as a
         result of any Losses shall be deemed to include, subject to the
         limitations set forth in this Agreement, any reasonable attorneys' or
         other reasonable fees or expenses incurred by such party in connection
         with any Proceeding to the extent such party would have been
         indemnified for such fees or expenses if the indemnification provided
         for in this Section was available to such party in accordance with its
         terms.

                  The parties hereto agree that it would not be just and
         equitable if contribution pursuant to this Section 5(d) were determined
         by pro rata allocation or by any other method of allocation that does
         not take into account the equitable considerations referred to in the
         immediately preceding paragraph. Notwithstanding the provisions of this
         Section 5(d), no Holder shall be required to contribute, in the
         aggregate, any amount in excess of the amount by which the proceeds
         actually received by such Holder from the sale of the Registrable
         Securities subject to the Proceeding exceeds the amount of any damages
         that such Holder has otherwise been required to pay by reason of such
         untrue or alleged untrue statement or omission or alleged omission,
         except in the case of fraud by such Holder.

                  The indemnity and contribution agreements contained in this
         Section are in addition to any liability that the Indemnifying Parties
         may have to the Indemnified Parties.

         6.       Miscellaneous

                  (a)      Remedies. In the event of a breach by the Company or
         by a Holder, of any of its respective obligations under this Agreement,
         each Holder or the Company, as

                                      -8-
<PAGE>

         the case may be, in addition to being entitled to exercise all rights
         granted by law and under this Agreement, including recovery of damages,
         will be entitled to specific performance of its rights under this
         Agreement. The Company and each Holder agree that monetary damages
         would not provide adequate compensation for any losses incurred by
         reason of a breach by it of any of the provisions of this Agreement and
         hereby further agrees that, in the event of any action for specific
         performance in respect of such breach, it shall waive the defense that
         a remedy at law would be adequate.

                  (b)      No Piggyback on Registrations. Except as set forth on
         Schedule 6(b) attached hereto and any securities issued to investors in
         private placement transactions effected by the Company after the date
         of the Purchase Agreement and prior to the actual filing date of the
         Registration Statement, neither the Company nor any of its security
         holders (other than the Holders in such capacity pursuant hereto) may
         include securities of the Company in a Registration Statement other
         than the Registrable Securities. No Person has any right to cause the
         Company to effect the registration under the Securities Act of any
         securities of the Company. The Company shall not file any other
         registration statement until after the Effective Date.

                  (c)      Compliance. Each Holder covenants and agrees that it
         will comply with the prospectus delivery requirements of the Securities
         Act as applicable to it in connection with sales of Registrable
         Securities pursuant to the Registration Statement.

                  (d)      Discontinued Disposition. Each Holder agrees by its
         acquisition of such Registrable Securities that, upon receipt of a
         notice from the Company of the occurrence of any event of the kind
         described in Section 3(c), such Holder will forthwith discontinue
         disposition of such Registrable Securities under the Registration
         Statement until such Holder's receipt of the copies of the supplemented
         Prospectus and/or amended Registration Statement or until it is advised
         in writing (the "Advice") by the Company that the use of the applicable
         Prospectus may be resumed, and, in either case, has received copies of
         any additional or supplemental filings that are incorporated or deemed
         to be incorporated by reference in such Prospectus or Registration
         Statement. The Company will use commercially reasonable efforts to
         ensure that the use of the Prospectus may be resumed as promptly as it
         practicable.

                  (e)      Piggy-Back Registrations. If at any time during the
         Effectiveness Period there is not an effective Registration Statement
         covering all of the Registrable Securities and the Company shall
         determine to prepare and file with the Commission a registration
         statement relating to an offering for its own account or the account of
         others under the Securities Act of any of its equity securities, other
         than on Form S-4 or Form S-8 (each as promulgated under the Securities
         Act) or their then equivalents relating to equity securities to be
         issued solely in connection with any acquisition of any entity or
         business or equity securities issuable in connection with the stock
         option or other employee benefit plans, then the Company shall send to
         each Holder a written notice of such determination and, if within
         fifteen days after the date of such notice, any such Holder shall so
         request in writing, the Company shall include in such registration
         statement all or any part of such Registrable Securities such Holder
         requests to be registered, subject to customary underwriter cutbacks
         applicable to all holders of registration rights.

                                      -9-
<PAGE>

                  (f)      Amendments and Waivers. The provisions of this
         Agreement, including the provisions of this sentence, may not be
         amended, modified or supplemented, and waivers or consents to
         departures from the provisions hereof may not be given, unless the same
         shall be in writing and signed by the Company and each Holder of the
         then outstanding Registrable Securities; provided, however, that any
         Holder may waive or consent to departures from the provisions of this
         Agreement as long as such waiver or consent does not adversely affect
         or impair the rights of the other Holders under this Agreement.

                  (g)      Notices. Any and all notices or other communications
         or deliveries required or permitted to be provided hereunder shall be
         made in accordance with the provisions of the Purchase Agreement.

                  (h)      Successors and Assigns. This Agreement shall inure to
         the benefit of and be binding upon the successors and permitted assigns
         of each of the parties and shall inure to the benefit of each Holder.
         Each Holder may assign their respective rights hereunder in the manner
         and to the Persons as permitted under the Purchase Agreement.

                  (i)      Execution and Counterparts. This Agreement may be
         executed in any number of counterparts, each of which when so executed
         shall be deemed to be an original and, all of which taken together
         shall constitute one and the same Agreement. In the event that any
         signature is delivered by facsimile transmission, such signature shall
         create a valid binding obligation of the party executing (or on whose
         behalf such signature is executed) the same with the same force and
         effect as if such facsimile signature were the original thereof.

                  (j)      Governing Law. All questions concerning the
         construction, validity, enforcement and interpretation of this
         Agreement shall be determined with the provisions of the Purchase
         Agreement.

                  (k)      Cumulative Remedies. The remedies provided herein are
         cumulative and not exclusive of any remedies provided by law.

                  (l)      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.

                  (m)      Headings. The headings in this Agreement are for
         convenience of reference only and shall not limit or otherwise affect
         the meaning hereof.

                                      -10-
<PAGE>

                  (n)      Independent Nature of Purchasers' Obligations and
         Rights. The obligations of each Holder hereunder are several and not
         joint with the obligations of any other Holder hereunder, and no Holder
         shall be responsible in any way for the performance of the obligations
         of any other Holder hereunder. Nothing contained herein or in any other
         agreement or document delivered at any closing, and no action taken by
         any Holder pursuant hereto or thereto, shall be deemed to constitute
         the Holders as a partnership, an association, a joint venture or any
         other kind of entity, or create a presumption that the Holders are in
         any way acting in concert with respect to such obligations or the
         transactions contemplated by this Agreement. Each Holder shall be
         entitled to protect and enforce its rights, including without
         limitation the rights arising out of this Agreement, and it shall not
         be necessary for any other Holder to be joined as an additional party
         in any proceeding for such purpose.

                            *************************

                                      -11-
<PAGE>

                  IN WITNESS WHEREOF, the parties have executed this
Registration Rights Agreement as of the date first written above.

                                ESCALON MEDICAL CORP.

                                By:__________________________________________
                                   Name:
                                   Title:

                       [SIGNATURE PAGE OF HOLDERS FOLLOWS]

<PAGE>

                    [PURCHASER'S SIGNATURE PAGE TO ESMC RRA]

Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________

                           [SIGNATURE PAGES CONTINUE]

                                      -13-
<PAGE>

                    [PURCHASER'S SIGNATURE PAGE TO ESMC RRA]

Name of Investing Entity: __________________________
Signature of Authorized Signatory of Investing entity: _________________________
Name of Authorized Signatory: _________________________
Title of Authorized Signatory: __________________________

                           [SIGNATURE PAGES CONTINUE]

                                      -14-
<PAGE>

                                     ANNEX A

                              Plan of Distribution

         The Selling Stockholders (the "Selling Stockholders") of the common
stock ("Common Stock") of Escalon Medical Corp. (the "Company") and any of their
pledgees, assignees and successors-in-interest may, from time to time, sell any
or all of their shares of Common Stock on any stock exchange, market or trading
facility on which the shares are traded or in private transactions. These sales
may be at fixed or negotiated prices. The Selling Stockholders may use any one
or more of the following methods when selling shares:

                  -        ordinary brokerage transactions and transactions in
                           which the broker-dealer solicits purchasers;

                  -        block trades in which the broker-dealer will attempt
                           to sell the shares as agent but may position and
                           resell a portion of the block as principal to
                           facilitate the transaction;

                  -        purchases by a broker-dealer as principal and resale
                           by the broker-dealer for its account;

                  -        an exchange distribution in accordance with the rules
                           of the applicable exchange;

                  -        privately negotiated transactions;

                  -        settlement of short sales entered into after the date
                           of this prospectus;

                  -        broker-dealers may agree with the Selling
                           Stockholders to sell a specified number of such
                           shares at a stipulated price per share;

                  -        a combination of any such methods of sale;

                  -        through the writing or settlement of options or other
                           hedging transactions, whether through an options
                           exchange or otherwise; or

                  -        any other method permitted pursuant to applicable
                           law.

         The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), if available, rather
than under this prospectus.

         Broker-dealers engaged by the Selling Stockholders may arrange for
other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Stockholders (or, if any broker-dealer
acts as agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. Each Selling Stockholder does not expect these commissions and
discounts relating to its sales of shares to exceed what is customary in the
types of transactions involved.

                                      -15-
<PAGE>

         In connection with the sale of our common stock or interests therein,
the Selling Stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The Selling
Stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).

         The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Each Selling Stockholder has
informed the Company that it does not have any agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock.

         The Company is required to pay certain fees and expenses incurred by
the Company incident to the registration of the shares. The Company has agreed
to indemnify the Selling Stockholders against certain losses, claims, damages
and liabilities, including liabilities under the Securities Act.

         Because Selling Stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities covered
by this prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this prospectus.
Each Selling Stockholder has advised us that they have not entered into any
agreements, understandings or arrangements with any underwriter or broker-dealer
regarding the sale of the resale shares. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
Selling Stockholders.

         We agreed to keep this prospectus effective until the earlier of (i)
the date on which the shares may be resold by the Selling Stockholders without
registration and without regard to any volume limitations by reason of Rule
144(e) under the Securities Act or any other rule of similar effect or (ii) all
of the shares have been sold pursuant to the prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale shares will be
sold only through registered or licensed brokers or dealers if required under
applicable state securities laws. In addition, in certain states, the resale
shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

         Under applicable rules and regulations under the Exchange Act, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to our common stock for a period
of two business days prior to the commencement

                                      -16-
<PAGE>

of the distribution. In addition, the Selling Stockholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases and
sales of shares of our common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale.

                                      -17-

<PAGE>

                              Schedule 6(b)

                                  None

Schedule to the RRA

<PAGE>

                   EXHIBIT B TO SECURITIES PURCHASE AGREEMENT

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE 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, NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH
THIS SECURITY IS EXERCISABLE MAY 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
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR
OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

                          COMMON STOCK PURCHASE WARRANT

                To Purchase __________ Shares of Common Stock of

                              ESCALON MEDICAL CORP.

                  THIS COMMON STOCK PURCHASE WARRANT (the "Warrant") CERTIFIES
that, for value received, _____________ (the "Holder"), is entitled, upon the
terms and subject to the limitations on exercise and the conditions hereinafter
set forth, at any time on or after the day beginning 181 days after the date of
the Purchase Agreement (the "Initial Exercise Date") and on or prior to the
fifth anniversary of the Initial Exercise Date (the "Termination Date") but not
thereafter, to subscribe for and purchase from Escalon Medical Corp., a
Pennsylvania corporation (the "Company"), up to ____________ shares (the
"Warrant Shares") of Common Stock, par value $0.001 per share, of the Company
(the "Common Stock"). The purchase price of one share of Common Stock (the
"Exercise Price") under this Warrant shall be $15.60, subject to adjustment
hereunder. The Exercise Price and the number of Warrant Shares for which the
Warrant is exercisable shall be subject to adjustment as provided herein.
CAPITALIZED TERMS USED AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS
SET FORTH IN THAT CERTAIN SECURITIES PURCHASE AGREEMENT (THE "PURCHASE
AGREEMENT"), DATED MARCH ____, 2004 AMONG THE COMPANY AND THE PURCHASERS
SIGNATORY THERETO.

                                       1
<PAGE>

                  1.       Title to Warrant.

                                    (a) Prior to the Termination Date and
subject to compliance with applicable laws and Section 7 of this Warrant, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
office or agency of the Company by the Holder in person or by duly authorized
attorney, upon surrender of this Warrant together with the Assignment Form
annexed hereto properly endorsed. The transferee shall sign an investment letter
in form and substance reasonably satisfactory to the Company. Notwithstanding
the foregoing, the Company shall not be obligated to register or issue any New
Warrant in an amount less than 5% of the total number of shares of Common Stock
into which this Warrant is exercisable.

                                    (b) Notwithstanding anything to the
contrary, Holder shall not transfer or assign any portion of this Warrant if
such transfer or assignment would violate federal or state securities laws.
Until the Warrant Shares have been registered under the Securities Act and
registered and qualified under the securities laws of any state in question, the
Company shall cause each certificate evidencing any Warrant Shares to bear the
following legend:

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE
HAVE 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, NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH
THIS SECURITY IS EXERCISABLE MAY 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
REASONABLY ACCEPTABLE TO THE COMPANY TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR
OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS
DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT.

                                       2
<PAGE>

                  2. Authorization of Shares. The Company covenants that all
Warrant Shares which may be issued upon the exercise of the purchase rights
represented by this Warrant will, upon exercise of the purchase rights
represented by this Warrant, be duly authorized, validly issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the issue
thereof (other than taxes in respect of any transfer occurring contemporaneously
with such issue).

                  3. Exercise of Warrant.

                           (a) Exercise of the purchase rights represented by
         this Warrant may be made at any time or times on or after the Initial
         Exercise Date and on or before the Termination Date by delivery to the
         Company of a duly executed facsimile copy of the Notice of Exercise
         Form annexed hereto (or such other office or agency of the Company as
         it may designate by notice in writing to the registered Holder at the
         address of such Holder appearing on the books of the Company);
         provided, however, within 5 Trading Days of the date said Notice of
         Exercise is delivered to the Company, the Holder shall have surrendered
         this Warrant to the Company and the Company shall have received payment
         of the aggregate Exercise Price of the shares thereby purchased by wire
         transfer or cashier's check drawn on a United States bank. Certificates
         for shares purchased hereunder shall be delivered to the Holder within
         5 Trading Days from the delivery to the Company of the Notice of
         Exercise Form, surrender of this Warrant and payment of the aggregate
         Exercise Price as set forth above ("Warrant Share Delivery Date"). This
         Warrant shall be deemed to have been exercised on the later of the date
         the Notice of Exercise is delivered to the Company by facsimile copy or
         the date the Exercise Price is received by the Company. The Warrant
         Shares shall be deemed to have been issued, and Holder or any other
         person so designated to be named therein shall be deemed to have become
         a holder of record of such shares for all purposes, as of the date the
         Warrant has been exercised by payment to the Company of the Exercise
         Price and all taxes required to be paid by the Holder, if any, pursuant
         to Section 5 prior to the issuance of such shares, have been paid.
         Nothing herein shall limit a Holder's right to pursue any remedies
         available to it hereunder, at law or in equity including, without
         limitation, a decree of specific performance and/or injunctive relief
         with respect to the Company's failure to timely deliver certificates
         representing shares of Common Stock upon exercise of the Warrant as
         required pursuant to the terms hereof.

                           (b) If this Warrant shall have been exercised in
         part, the Company shall, at the time of delivery of the certificate or
         certificates representing Warrant Shares, deliver to Holder a new
         Warrant evidencing the rights of Holder to purchase the unpurchased
         Warrant Shares called for by this Warrant, which new Warrant shall in
         all other respects be identical with this Warrant.

                           (c) The Holder shall not have the right to exercise
         any portion of this Warrant, pursuant to Section 3(a) or otherwise, to
         the extent that after giving effect to such issuance after exercise,
         the Holder (together with the Holder's affiliates), as set forth on the
         applicable Notice of Exercise, would beneficially own in excess of
         9.99% of the number of shares of the Common Stock outstanding
         immediately after giving effect to such issuance. For purposes of the
         foregoing sentence, the number of shares of Common

                                       3
<PAGE>

         Stock beneficially owned by the Holder and its affiliates shall include
         the number of shares of Common Stock issuable upon exercise of this
         Warrant with respect to which the determination of such sentence is
         being made, but shall exclude the number of shares of Common Stock
         which would be issuable upon (A) exercise of the remaining,
         nonexercised portion of this Warrant beneficially owned by the Holder
         or any of its affiliates and (B) exercise or conversion of the
         unexercised or nonconverted portion of any other securities of the
         Company (including, without limitation, any other Warrants) subject to
         a limitation on conversion or exercise analogous to the limitation
         contained herein beneficially owned by the Holder or any of its
         affiliates. Except as set forth in the preceding sentence, for purposes
         of this Section 3(c), beneficial ownership shall be calculated in
         accordance with Section 13(d) of the Exchange Act, it being
         acknowledged by Holder that the Company is not representing to Holder
         that such calculation is in compliance with Section 13(d) of the
         Exchange Act and Holder is solely responsible for any schedules
         required to be filed in accordance therewith. To the extent that the
         limitation contained in this Section 3(c) applies, the determination of
         whether this Warrant is exercisable (in relation to other securities
         owned by the Holder) and of which a portion of this Warrant is
         exercisable shall be in the sole discretion of such Holder, and the
         submission of a Notice of Exercise shall be deemed to be such Holder's
         determination of whether this Warrant is exercisable (in relation to
         other securities owned by such Holder) and of which portion of this
         Warrant is exercisable, in each case subject to such aggregate
         percentage limitation, and the Company shall have no obligation to
         verify or confirm the accuracy of such determination. For purposes of
         this Section 3(c), in determining the number of outstanding shares of
         Common Stock, the Holder may rely on the number of outstanding shares
         of Common Stock as reflected in (x) the Company's most recent Form 10-Q
         or Form 10-K, as the case may be, (y) a more recent public announcement
         by the Company or (z) any other notice by the Company or the Company's
         Transfer Agent setting forth the number of shares of Common Stock
         outstanding. In any case, the number of outstanding shares of Common
         Stock shall be determined after giving effect to the conversion or
         exercise of securities of the Company, including this Warrant, by the
         Holder or its affiliates since the date as of which such number of
         outstanding shares of Common Stock was reported.

                           (d) If at any time after one year from the date of
         issuance of this Warrant there is no effective Registration Statement
         registering the resale of the Warrant Shares by the Holder at such
         time, this Warrant may also be exercised at such time by means of a
         "cashless exercise" in which the Holder shall be entitled to receive a
         certificate for the number of Warrant Shares equal to the quotient
         obtained by dividing [(A-B) (X)] by (A), where:

                  (A)  =  the closing price of the Company's Common Stock on
                          the Trading Day immediately preceding the date of such
                          election;

                  (B)  =  the Exercise Price of this Warrant, as adjusted; and

                  (X)  =  the number of Warrant Shares issuable upon exercise
                          of this Warrant in accordance with the terms of this
                          Warrant by means of a cash exercise rather than a
                          cashless exercise.

                                       4
<PAGE>

                           (e) If this Warrant is exercised in whole or in part
         prior to the filing date of a Registration Statement as contemplated by
         the Registration Rights Agreement between the Company, the Holder and
         certain other investors, dated as of the date hereof (the "Registration
         Rights Agreement"), any and all Warrant Shares that result from such
         exercise shall be deemed to be "Registrable Securities" as that term is
         defined in the Registration Rights Agreement.

                  4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant. As to any fraction of a share which Holder would otherwise be entitled
to purchase upon such exercise, the Company shall pay a cash adjustment in
respect of such final fraction in an amount equal to such fraction multiplied by
the Exercise Price.

                  5. Charges, Taxes and Expenses. Issuance of certificates for
Warrant Shares shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be paid by the Company, and
such certificates shall be issued in the name of the Holder or in such name or
names as may be directed by the Holder; provided, however, that in the event
certificates for Warrant Shares are to be issued in a name other than the name
of the Holder, this Warrant when surrendered for exercise shall be accompanied
by the Assignment Form attached hereto duly executed by the Holder; and the
Company may require, as a condition thereto, the payment of a sum sufficient to
reimburse it for any transfer tax incidental thereto.

                  6. Closing of Books. The Company will not close its
stockholder books or records in any manner which prevents the timely exercise of
this Warrant, pursuant to the terms hereof.

                  7. Transfer, Division and Combination.

                           (a) Subject to compliance with any applicable
         securities laws and the conditions set forth in Sections 1 and 7(e)
         hereof and to the provisions of Section 4.1 of the Purchase Agreement,
         this Warrant and all rights hereunder are transferable, in whole or in
         part, upon surrender of this Warrant at the principal office of the
         Company, together with a written assignment of this Warrant
         substantially in the form attached hereto duly executed by the Holder
         or its agent or attorney and funds sufficient to pay any transfer taxes
         payable upon the making of such transfer. Upon such surrender and, if
         required, such payment, the Company shall execute and deliver a new
         Warrant or Warrants in the name of the assignee or assignees and in the
         denomination or denominations specified in such instrument of
         assignment, and shall issue to the assignor a new Warrant evidencing
         the portion of this Warrant not so assigned, and this Warrant shall
         promptly be cancelled. A Warrant, if properly assigned, may be
         exercised by a new holder for the purchase of Warrant Shares without
         having a new Warrant issued.

                           (b) This Warrant may be divided or combined with
         other Warrants upon presentation hereof at the aforesaid office of the
         Company, together with a written notice specifying the names and
         denominations in which new Warrants are to be issued, signed

                                       5
<PAGE>

         by the Holder or its agent or attorney. Subject to compliance with
         Section 7(a), as to any transfer which may be involved in such division
         or combination, the Company shall execute and deliver a new Warrant or
         Warrants in exchange for the Warrant or Warrants to be divided or
         combined in accordance with such notice.

                           (c) The Company shall prepare, issue and deliver at
         its own expense (other than transfer taxes) the new Warrant or Warrants
         under this Section 7.

                           (d) The Company agrees to maintain, at its aforesaid
         office, books for the registration and the registration of transfer of
         the Warrants.

                           (e) If, at the time of the surrender of this Warrant
         in connection with any transfer of this Warrant, the transfer of this
         Warrant shall not be registered pursuant to an effective registration
         statement under the Securities Act and under applicable state
         securities or blue sky laws, the Company may require, as a condition of
         allowing such transfer (i) that the Holder or transferee of this
         Warrant, as the case may be, furnish to the Company a written opinion
         of counsel (which opinion shall be in form, substance and scope
         customary for opinions of counsel in comparable transactions) to the
         effect that such transfer may be made without registration under the
         Securities Act and under applicable state securities or blue sky laws,
         (ii) that the holder or transferee execute and deliver to the Company
         an investment letter in form and substance acceptable to the Company
         and (iii) that the transferee be an "accredited investor" as defined in
         Rule 501(a)(1), (a)(2), (a)(3), (a)(7), or (a)(8) promulgated under the
         Securities Act or a qualified institutional buyer as defined in Rule
         144A(a) under the Securities Act.

                  8. No Rights as Shareholder until Exercise. This Warrant does
not entitle the Holder to any voting rights or other rights as a shareholder of
the Company prior to the exercise hereof. Upon the surrender of this Warrant and
the payment of the aggregate Exercise Price (or by means of a cashless
exercise), the Warrant Shares so purchased shall be and be deemed to be issued
to such Holder as the record owner of such shares as of the close of business on
the later of the date of such surrender or payment.

                  9. Loss, Theft, Destruction or Mutilation of Warrant. The
Company covenants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this Warrant
or any stock certificate relating to the Warrant Shares, and in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it
(which, in the case of the Warrant, shall not include the posting of any bond),
and upon surrender and cancellation of such Warrant or stock certificate, if
mutilated, the Company will make and deliver a new Warrant or stock certificate
of like tenor and dated as of such cancellation, in lieu of such Warrant or
stock certificate.

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

                                       6
<PAGE>

                  11. Adjustments of Exercise Price and Number of Warrant
Shares; Stock Splits, etc. The number and kind of securities purchasable upon
the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of any of the following. In case
the Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock, or (iv) issue any shares of its
capital stock in a reclassification of the Common Stock, then the number of
Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the Holder shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which it
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the Holder shall thereafter be entitled to purchase the number of
Warrant Shares or other securities resulting from such adjustment at an Exercise
Price per Warrant Share or other security obtained by multiplying the Exercise
Price in effect immediately prior to such adjustment by the number of Warrant
Shares purchasable pursuant hereto immediately prior to such adjustment and
dividing by the number of Warrant Shares or other securities of the Company that
are purchasable pursuant hereto immediately after such adjustment. An adjustment
made pursuant to this paragraph shall become effective immediately after the
effective date of such event retroactive to the record date, if any, for such
event.

                  12. Reorganization, Reclassification, Merger, Consolidation or
Disposition of Assets. In case the Company shall reorganize its capital,
reclassify its capital stock, consolidate or merge with or into another
corporation (where the Company is not the surviving corporation or where there
is a change in or distribution with respect to the Common Stock of the Company),
or sell, transfer or otherwise dispose of all or substantially all of its
property, assets or business to another corporation and, pursuant to the terms
of such reorganization, reclassification, merger, consolidation or disposition
of assets, shares of common stock of the successor or acquiring corporation, or
any cash, shares of stock or other securities or property of any nature
whatsoever (including warrants or other subscription or purchase rights) in
addition to or in lieu of common stock of the successor or acquiring corporation
("Other Property"), are to be received by or distributed to the holders of
Common Stock of the Company, then the Holder shall have the right thereafter to
receive, upon exercise of this Warrant, the number of shares of Common Stock of
the successor or acquiring corporation or of the Company, if it is the surviving
corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a Holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined in good faith by resolution of the Board of
Directors of the Company) in order to provide for adjustments of Warrant Shares
for which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 12. For purposes of
this Section 12, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class

                                       7
<PAGE>

which is not preferred as to dividends or assets over any other class of stock
of such corporation and which is not subject to redemption and shall also
include any evidences of indebtedness, shares of stock or other securities which
are convertible into or exchangeable for any such stock, either immediately or
upon the arrival of a specified date or the happening of a specified event and
any warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 12 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.

                  13. Notice of Adjustment. Whenever the number of Warrant
Shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as herein provided,
the Company shall give notice thereof to the Holder, which notice shall state
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares (and
other securities or property) after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made.

                  14. Notice of Corporate Action. If at any time:

                           (a) the Company shall take a record of the holders of
         its Common Stock for the purpose of entitling them to receive a
         dividend or other distribution, or any right to subscribe for or
         purchase any evidences of its indebtedness, any shares of stock of any
         class or any other securities or property, or to receive any other
         right, or

                           (b) there shall be any capital reorganization of the
         Company, any reclassification or recapitalization of the capital stock
         of the Company or any consolidation or merger of the Company with, or
         any sale, transfer or other disposition of all or substantially all the
         property, assets or business of the Company to, another corporation or,

                           (c) there shall be a voluntary or involuntary
         dissolution, liquidation or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at
least 10 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 10
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their Warrant Shares for securities or other property
deliverable upon such disposition, dissolution, liquidation or winding up. Each
such written notice shall be sufficiently given if addressed to

                                       8
<PAGE>

Holder at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(d).

                  15. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the Principal Market
upon which the Common Stock may be listed.

                  Except and to the extent as waived or consented to by the
Holder, the Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
as set forth in this Warrant against impairment. Without limiting the generality
of the foregoing, the Company will (a) not increase the par value of any Warrant
Shares above the amount payable therefor upon such exercise immediately prior to
such increase in par value, (b) take all such action as may be necessary or
appropriate in order that the Company may validly and legally issue fully paid
and nonassessable Warrant Shares upon the exercise of this Warrant, and (c) use
commercially reasonable efforts to obtain all such authorizations, exemptions or
consents from any public regulatory body having jurisdiction thereof as may be
necessary to enable the Company to perform its obligations under this Warrant.

                  Before taking any action which would result in an adjustment
in the number of Warrant Shares for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.

                  16. Miscellaneous.

                           (a) Jurisdiction. All questions concerning the
         construction, validity, enforcement and interpretation of this Warrant
         shall be determined in accordance with the provisions of the Purchase
         Agreement.

                           (b) Restrictions. The Holder acknowledges that the
         Warrant Shares acquired upon the exercise of this Warrant, if not
         registered, will have restrictions upon resale imposed by state and
         federal securities laws.

                           (c) Nonwaiver and Expenses. No course of dealing or
         any delay or failure to exercise any right hereunder on the part of
         Holder shall operate as a waiver of such right or otherwise prejudice
         Holder's rights, powers or remedies, notwithstanding all

                                       9
<PAGE>

rights hereunder terminate on the Termination Date. If the Company willfully and
knowingly fails to comply with any provision of this Warrant, which results in
any material damages to the Holder, the Company shall pay to Holder such amounts
as shall be sufficient to cover any costs and expenses including, but not
limited to, reasonable attorneys' fees, including those of appellate
proceedings, incurred by Holder in collecting any amounts due pursuant hereto or
in otherwise enforcing any of its rights, powers or remedies hereunder.

                           (d) Notices. Any notice, request or other document
required or permitted to be given or delivered to the Holder by the Company
shall be delivered in accordance with the notice provisions of the Purchase
Agreement.

                           (e) Limitation of Liability. No provision hereof, in
the absence of any affirmative action by Holder to exercise this Warrant or
purchase Warrant Shares, and no enumeration herein of the rights or privileges
of Holder, shall give rise to any liability of Holder for the purchase price of
any Common Stock or as a stockholder of the Company, whether such liability is
asserted by the Company or by creditors of the Company.

                           (f) Remedies. Holder, in addition to being entitled
to exercise all rights granted by law, including recovery of damages, will be
entitled to specific performance of its rights under this Warrant. The Company
agrees that monetary damages would not be adequate compensation for any loss
incurred by reason of a breach by it of the provisions of this Warrant and
hereby agrees to waive the defense in any action for specific performance that a
remedy at law would be adequate.

                           (g) Successors and Assigns. Subject to applicable
securities laws, this Warrant and the rights and obligations evidenced hereby
shall inure to the benefit of and be binding upon the successors of the Company
and the successors and permitted assigns of Holder. The provisions of this
Warrant are intended to be for the benefit of all Holders from time to time of
this Warrant and shall be enforceable by any such Holder or holder of Warrant
Shares.

                           (h) Amendment. This Warrant may be modified or
amended or the provisions hereof waived with the written consent of the Company
and the Holder.

                           (i) Severability. Wherever possible, each provision
of this Warrant shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Warrant shall be prohibited
by or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provisions or the remaining provisions of this Warrant.

                           (j) Headings. The headings used in this Warrant are
for the convenience of reference only and shall not, for any purpose, be deemed
a part of this Warrant.

                              ********************

                                       10
<PAGE>

                  IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.

Dated:  March _____, 2004

                                ESCALON MEDICAL CORP.

                                By:__________________________________________
                                   Name:
                                   Title:

                                       11
<PAGE>

                               NOTICE OF EXERCISE

To:      Escalon Medical Corp.

                  (1) The undersigned hereby elects to purchase ________ Warrant
Shares of the Company pursuant to the terms of the attached Warrant No. ________
(only if exercised in full), and tenders herewith payment of the exercise price
in full, together with all applicable transfer taxes, if any.

                  (2) Payment shall take the form of (check applicable box):

                           [ ] in lawful money of the United States; or

                           [ ] the cancellation of such number of Warrant Shares
                           as is necessary, in accordance with the formula set
                           forth in subsection 3(d), to exercise this Warrant
                           with respect to the maximum number of Warrant Shares
                           purchasable pursuant to the cashless exercise
                           procedure set forth in subsection 3(d).

                  (3) Please issue a certificate or certificates representing
said Warrant Shares in the name of the undersigned or in such other name as is
specified below:

                           _______________________________

The Warrant Shares shall be delivered to the following:

                           _______________________________

                           _______________________________

                           _______________________________

                  (4) Accredited Investor. The undersigned is an "accredited
investor" as defined in Regulation D under the Securities Act of 1933, as
amended.

                                                 [PURCHASER]

                                                 By: ___________________________
                                                 Name:
                                                 Title:

                                                 Dated: ________________________

<PAGE>

                                 ASSIGNMENT FORM

                    (To assign the foregoing warrant, execute
                   this form and supply required information.
                 Do not use this form to exercise the warrant.)

         FOR VALUE RECEIVED, the foregoing Warrant No. _______ and all rights
evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

                                             Dated: ______________, _______

                    Holder's Signature: _____________________________

                    Holder's Address:   _____________________________

                                        _____________________________

Signature Guaranteed:  ___________________________________________

NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.

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