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WWW.EXFILE.COM -- MATRITECH FORM 8-K -- EXHIBIT 4.3 -- 14850

    EXHIBIT
      4.3

    
 

    SECURITIES
      PURCHASE AGREEMENT

     

     

    This
      SECURITIES PURCHASE AGREEMENT (the “Agreement”),
      dated
      as of January 22, 2007, is made by and among Matritech, Inc., a corporation
      organized under the laws of the State of Delaware (the “Company”),
      and
      each of the purchasers (individually, a “Purchaser”
and
      collectively the “Purchasers”)
      set
      forth on the execution pages hereof (each, an “Execution
      Page”
and
      collectively the “Execution
      Pages”).

     

    

     

    BACKGROUND

     

    

     

    A.  The
      Company and each Purchaser are executing and delivering this Agreement in
      reliance upon the exemption from securities registration afforded by the
      provisions of Regulation D (“Regulation
      D”),
      as
      promulgated by the United States Securities and Exchange Commission (the
“SEC”)
      under
      the Securities Act of 1933, as amended (the “Securities
      Act”).

     

    B.  Upon
      the
      terms and conditions stated in this Agreement, the Company desires to issue
      and
      sell to the Purchasers, and each Purchaser desires to purchase (i) a secured
      convertible promissory note, in the form attached hereto as Exhibit
      A
      (collectively, including any note or notes issued upon transfer of the secured
      convertible promissory notes, the “Series
      B Notes”),
      in
      the principal face amount set forth on the Execution Pages hereof (for each
      Purchaser, the “Subscription
      Amount”),
      which
      Series B Notes shall initially be convertible into shares of the Company’s
      common stock, par value $0.01 per share (the “Common
      Stock”)
      at the
      conversion price set forth in the Series B Notes, and (ii) a warrant, in the
      form attached hereto as Exhibit
      B
      (including any warrant or warrants issued upon transfer of the warrant, the
      “Series
      B Warrants”),
      to
      acquire a number of shares of Common Stock equal to 60% of the number of shares
      of Common Stock such Purchaser would own if it converted its Series B Notes
      on
      the Closing Date (as defined below) in accordance with the terms of such Series
      B Notes plus an additional number of shares that may become issuable thereunder
      pursuant to Section 11(i) of such Series B Warrants. The shares of Common Stock
      issuable upon conversion of or otherwise pursuant to the Series B Notes,
      including shares of Common Stock issued as payment of interest under the Series
      B Notes and shares paid upon amortization of the Series B Notes, are referred
      to
      herein as the “Conversion
      Shares”
and
      the
      shares of Common Stock issuable upon exercise of or otherwise pursuant to the
      Series B Warrants are referred to herein as the “Warrant
      Shares.”
The
      Series B Notes, the Series B Warrants, the Conversion Shares and the Warrant
      Shares are collectively referenced herein as the “Securities”
and
      each of them may individually be referred to herein as a “Security.”

     

    C.  In
      connection with the Closing pursuant to this Agreement, the Company will execute
      and deliver an Amended and Restated Security Agreement which amends and restates
      the Security Agreement originally dated January 13, 2006, in the form attached
      hereto as Exhibit
      C
      (together with the License Agreement and any other document securing the Series
      B Notes, the “Security
      Documents”),
      in
      favor of the Collateral Agent (as defined herein) for the benefit of all

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    of
      the
      Purchasers and the purchasers of the 15% Secured Convertible Promissory Notes
      dated January 13, 2006 (the “Series
      A Notes”),
      pursuant to which the Company has agreed to grant a security interest in certain
      collateral described in the Security Documents in order to secure its
      obligations under the Series B Notes and the Series A Notes.

     

    D.  In
      connection with the Closing pursuant to this Agreement, the parties hereto
      will
      execute and deliver a Registration Rights Agreement, pursuant to which the
      Company has agreed to provide certain registration rights under the Securities
      Act and the rules and regulations promulgated thereunder, and applicable state
      securities laws, in the form attached hereto as Exhibit
      D
      (the
“Registration
      Rights Agreement”).
      In
      addition, in connection with the Closing pursuant to this Agreement, the
      Collateral Agent, for itself and the holders of the Series B Notes, will execute
      and deliver an Amended and Restated Contingent License Agreement, which amends
      and restates the Contingent License Agreement originally dated January 13,
      2006,
      pursuant to which the Company has agreed, under certain circumstances, to
      provide a license to certain intellectual property rights to the Collateral
      Agent for the benefit of the holders of the Series B Notes and the holders
      of
      the Series A Notes, in the form attached hereto as Exhibit
      E
      (the
“License
      Agreement”).
      This
      Agreement, the Series B Warrants, the License Agreement, the Security Documents
      and the Registration Rights Agreement are collectively referred to herein as
      the
“Transaction
      Documents.”

     

    NOW,
      THEREFORE, in consideration of the premises and mutual covenants contained
      herein and other good and valuable consideration, the receipt and sufficiency
      of
      which are hereby acknowledged, the Company and the Purchasers, intending to
      be
      legally bound, hereby agree as follows:

     

    

     

    1.  PURCHASE
      AND SALE OF SECURITIES.

     

    (a)  Purchase
      and Sale of Securities.
      Subject
      to the terms and conditions hereof, at the Closing (as defined in Section 1(b)
      below), the Company shall issue and sell to the Purchasers an aggregate
      principal face amount of Securities of up to $4,500,000 and each Purchaser,
      severally and not jointly, shall purchase from the Company, its respective
      Subscription Amount.

     

    (b)  The
      Closing.
      Subject
      to the satisfaction (or waiver) of the conditions set forth in Sections 6 and
      7
      below, the closing of the transactions contemplated hereby (the “Closing”)
      shall
      take place at the offices of Choate, Hall & Stewart LLP at Two International
      Place, Boston, MA 02110 at 10:00 a.m., Boston, Massachusetts time, on or before
      January 22, 2007 or such other time or place as the Company and the Purchasers
      may mutually agree (the “Closing
      Date”).

     

    

     

    2.  PURCHASER’S
      REPRESENTATIONS AND WARRANTIES.

     

    Each
      Purchaser severally, but not jointly, represents and warrants to the Company
      as
      follows:

     

    (a)  Purchase
      for Own Account, Etc.
      Such
      Purchaser is purchasing the Securities for such Purchaser’s own account for
      investment purposes only and not with a present view towards the public sale
      or
      distribution thereof, except pursuant to sales that are exempt from the

     

    
      
        
        

      

      
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    registration
      requirements of the Securities Act and/or sales registered under the Securities
      Act. Such Purchaser understands that such Purchaser must bear the economic
      risk
      of this investment indefinitely, unless the Securities are registered pursuant
      to the Securities Act and any applicable state securities or blue sky laws
      or an
      exemption from such registration is available, and that the Company has no
      present intention of registering the resale of any such Securities other than
      as
      contemplated by the Registration Rights Agreement. Notwithstanding anything
      in
      this Section 2(a) to the contrary, by making the representations herein, such
      Purchaser does not agree to hold the Securities for any minimum or other
      specific term and reserves the right to dispose of the Securities at any time
      in
      accordance with or pursuant to a registration statement or an exemption from
      the
      registration requirements under the Securities Act.

     

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

     

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

     

    (d)  Information.
      Such
      Purchaser and its counsel, if identified to the Company, have been furnished
      all
      materials relating to the business, finances and operations of the Company
      and
      materials relating to the offer and sale of the Securities which have been
      specifically requested by such Purchaser or its counsel. Neither such inquiries
      nor any other investigation conducted by such Purchaser or its counsel or any
      of
      its representatives shall modify, amend or affect such Purchaser’s right to rely
      on the Company’s representations and warranties contained in Section 3 below.
      Such Purchaser understands that such Purchaser’s investment in the Securities
      involves a high degree of risk.

     

    (e)  Governmental
      Review.
      Such
      Purchaser understands that no United States federal or state agency or any
      other
      government or governmental agency has passed upon or made any recommendation
      or
      endorsement of the Securities.

     

    (f)  Authorization;
      Enforcement.
      This
      Agreement and the Registration Rights Agreement have been duly and validly
      authorized, executed and delivered on behalf of such Purchaser and are valid
      and
      binding agreements of such Purchaser enforceable against such Purchaser in
      accordance with their respective terms, subject to applicable bankruptcy,
      insolvency, fraudulent conveyance, reorganization, moratorium and similar laws
      affecting creditors’ rights and remedies generally and general principles of
      equity.

     

    (g)  Residency.
      Such
      Purchaser is a resident of the jurisdiction set forth under such Purchaser’s
      name on the Execution Page hereto executed by such Purchaser.

     

    (h)  No
      Trading in Securities.
      Such
      Purchaser has not offered to sell, solicited offers to buy, disposed of, loaned,
      pledged or granted any right with respect to the Company’s 

     

    
      
        
        

      

      
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    Common
      Stock since the date it agreed to learn the confidential terms of the
      transactions contemplated by the Transaction Documents.

     

    (i)  Beneficial
      Ownership.
      Prior
      to the Closing, such Purchaser with the exception of (i) SDS Capital Group
      SPC,
      Ltd. (“SDS”),
      (ii)
      H&Q Life Science Investors, and (iii) ProMed Partners, L.P., ProMed Partners
      II, L.P., ProMed Offshore Fund, Ltd., ProMed Offshore Fund II, Ltd. and each
      of
      their respective affiliates is not a “beneficial owner” of more than 5% of the
      Common Stock (as defined for purposes of Rule 13d-3 of the Exchange Act). Prior
      to, and as a result of the purchase of the Series B Notes and the Series B
      Warrants, at the Closing, such Purchaser with the exception of ProMed Partners,
      L.P., ProMed Partners II, L.P., ProMed Offshore Fund, Ltd., ProMed Offshore
      Fund
      II, Ltd. and its affiliates is not, and will not be an “interested stockholder”
as defined in Section 203 of the Delaware General Corporation Law, as amended.
      

     

    Each
      Purchaser’s representations and warranties made in this Article 2 are made
      solely for the purpose of permitting the Company to make a determination that
      the offer and sale of the Securities pursuant to this Agreement comply with
      applicable U.S. federal and state securities laws and not for any other purpose.
      Accordingly, the Company may not rely on such representations and warranties
      for
      any other purpose. No Purchaser has made or hereby makes any other
      representations or warranties, express or implied, to the Company in connection
      with the transactions contemplated hereby.

     

    

     

    3.  REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY.

     

    Except
      as
      set forth on a Disclosure Schedule executed and delivered by the Company to
      each
      Purchaser (the “Disclosure
      Schedule”),
      the
      Company represents and warrants to each Purchaser as follows:

     

    (a)  Organization
      and Qualification.
      The
      Company and each of its direct and indirect subsidiaries (collectively, the
      “Subsidiaries”)
      is a
      corporation duly organized and existing in good standing under the laws of
      the
      jurisdiction in which it is incorporated or organized, and has the requisite
      corporate power to own its properties and to carry on its business as now being
      conducted. The Company and each of its Subsidiaries is duly qualified as a
      foreign corporation to do business and is in good standing in every jurisdiction
      in which the nature of the business conducted by it makes such qualification
      necessary and where the failure so to qualify or be in good standing would
      have
      a Material Adverse Effect. For purposes of this Agreement, “Material
      Adverse Effect”
means
      any effect which, individually or in the aggregate with all other effects,
      reasonably would be expected to be materially adverse to (i) the Securities;
      (ii) the ability of the Company to perform its obligations under this Agreement
      or the other Transaction Documents; or (iii) the business, operations,
      properties, prospects, condition (financial or otherwise) or results of
      operations of the Company and its Subsidiaries, taken as a whole.

     

    (b)  Authorization;
      Enforcement.
      (i) The
      Company has the requisite corporate power and authority to enter into and
      perform its obligations under this Agreement and the other Transaction
      Documents, to issue and sell the Series B Notes and Series B Warrants in
      accordance with the terms hereof, to issue the Conversion Shares upon conversion
      of the Series B Notes in accordance with the terms thereof and to issue the
      Warrant Shares upon exercise of 

     

    
      
        
        

      

      
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    the
      Series B Warrants in accordance with the terms thereof; (ii) the execution,
      delivery and performance of this Agreement and the other Transaction Documents
      by the Company and the consummation by it of the transactions contemplated
      hereby and thereby (including, without limitation, the issuance of the Series
      B
      Notes and Series B Warrants and the issuance and reservation for issuance of
      the
      Conversion Shares and Warrant Shares) have been duly authorized by the Company’s
      Board of Directors and, except for the approval of the Company’s stockholders
      referenced in Sections 4(g) and 7(h) hereof, no further consent or authorization
      of the Company, its Board of Directors, or any committee of the Board of
      Directors is required; and (iii) this Agreement constitutes, and, upon execution
      and delivery by the Company of the other Transaction Documents, such Transaction
      Documents will constitute, valid and binding obligations of the Company
      enforceable against the Company in accordance with their terms. 

     

    (c)  Capitalization.
      The
      capitalization of the Company as of the date hereof, including the authorized
      capital stock, the number of shares issued and outstanding, the number of shares
      issuable and reserved for issuance pursuant to the Company’s stock option plans,
      the number of shares issuable and reserved for issuance pursuant to securities
      (other than the Series B Notes and the Series B Warrants) exercisable or
      exchangeable for, or convertible into, any shares of capital stock and the
      number of shares to be reserved for issuance upon conversion of the Series
      B
      Notes and exercise of the Series B Warrants is set forth in Section
      3(c)
      of the
      Disclosure Schedule. All of such outstanding shares of capital stock have been,
      or upon issuance in accordance with the terms of any such exercisable,
      exchangeable or convertible securities will be, validly issued, fully paid
      and
      non-assessable. Except as set forth in Section
      3(c)
      of the
      Disclosure Schedule, no shares of capital stock of the Company (including the
      Conversion Shares and the Warrant Shares) are subject to preemptive rights
      or
      any other similar rights of the stockholders of the Company or any liens or
      encumbrances. Except for the Securities and as set forth in Section
      3(c)
      of the
      Disclosure Schedule, (i) there are no outstanding options, warrants, scrip,
      rights to subscribe to, calls or commitments of any character whatsoever
      relating to, or securities or rights convertible into or exercisable or
      exchangeable for, any shares of capital stock of the Company or any of its
      Subsidiaries, or contracts, commitments, understandings or arrangements by
      which
      the Company or any of its Subsidiaries is or may become bound to issue
      additional shares of capital stock of the Company or any of its Subsidiaries,
      nor are any such issuances, contracts, commitments, understandings or
      arrangements contemplated; (ii) there are no contracts, commitments,
      understandings or arrangements under which the Company or any of its
      Subsidiaries is obligated to register the sale of any of its or their securities
      under the Securities Act (except the Registration Rights Agreement); (iii)
      there
      are no outstanding securities or instruments of the Company or any of its
      Subsidiaries which contain any redemption or similar provisions, and there
      are
      no contracts, commitments, understandings or arrangements by which the Company
      or any of its Subsidiaries is or may become bound to redeem or otherwise acquire
      any security of the Company or any of its Subsidiaries; and (iv) the Company
      does not have any shareholder rights plan, “poison pill” or other anti-takeover
      plans or similar arrangements. Section
      3(c)
      of the
      Disclosure Schedule sets forth all of the securities or instruments issued
      by
      the Company or any of its Subsidiaries that contain anti-dilution or similar
      provisions, and, except as and to the extent set forth thereon, the sale and
      issuance of the Securities will not trigger any anti-dilution adjustments to
      any
      such securities or instruments. The Company has furnished to each Purchaser
      true
      and correct copies of the Company’s Amended and Restated Certificate of
      Incorporation as amended and as in effect on the date hereof (“Certificate
      of Incorporation”),
      the
      Company’s Amended and Restated Bylaws as in effect on the date hereof

     

    
      
        
        

      

      
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    (the
      “Bylaws”),
      and
      all other instruments and agreements governing securities convertible into
      or
      exercisable or exchangeable for capital stock of the Company, all of which
      instruments and agreements are set forth in Section
      3(c)
      of the
      Disclosure Schedule. For purposes of all provisions of this Agreement, any
      document publicly available on the SEC’s EDGAR system shall be considered to
      have been validly “furnished,” “delivered” or “provided” to a Purchaser or its
      counsel, as applicable. The Company or one of its Subsidiaries has the
      unrestricted right to vote, and (subject to limitations imposed by applicable
      law) to receive dividends and distributions on, all capital securities of its
      Subsidiaries as owned by the Company or any such Subsidiary. 

     

    (d)  Issuance
      of Securities.
      The
      Series B Notes and Series B Warrants are duly authorized and, upon issuance
      in
      accordance with the terms of this Agreement, (i) will be validly issued, fully
      paid and non-assessable and free from all taxes, liens, security interests,
      claims and encumbrances (other than those imposed by the Transaction Documents);
      (ii) will not be subject to preemptive rights, rights of first refusal or other
      similar rights of stockholders of the Company or any other person which have
      not
      been waived in connection herewith; and (iii) will not impose personal liability
      on the holder thereof. The Conversion Shares and Warrant Shares are duly
      authorized and reserved for issuance, and, upon conversion of the Series B
      Notes
      and exercise of the Series B Warrants in accordance with the terms thereof,
      (x)
      will be validly issued, fully paid and non-assessable, and free from all taxes,
      liens, claims and encumbrances (other than those imposed by the Transaction
      Documents), (y) will not be subject to preemptive rights, rights of first
      refusal or other similar rights of stockholders of the Company or any other
      person and (z) will not impose personal liability upon the holder
      thereof.

     

    (e)  No
      Conflicts; Consents.
      The
      execution, delivery and performance of this Agreement and the other Transaction
      Documents by the Company and the consummation by the Company of the transactions
      contemplated hereby and thereby (including, without limitation, the issuance
      of
      the Series B Notes and Series B Warrants and the issuance and reservation for
      issuance of the Conversion Shares and Warrant Shares) will not (i) result in
      a
      violation of the Certificate of Incorporation or Bylaws; (ii) conflict with,
      or
      constitute a default (or an event that with notice or lapse of time or both
      would become a default) under, or give to others any rights of termination,
      amendment (including, without limitation, the triggering of any anti-dilution
      provisions), acceleration or cancellation of, any agreement, indenture or
      instrument to which the Company or any of its Subsidiaries is a party; or (iii)
      result in a violation of any law, rule, regulation, order, judgment or decree
      (including United States federal and state securities laws, rules and
      regulations and rules and regulations of any self-regulatory organizations
      to
      which either the Company or its securities are subject) applicable to the
      Company or any of its Subsidiaries or by which any property or asset of the
      Company or any of its Subsidiaries is bound or affected (except, with respect
      to
      clauses (ii) and (iii), for such conflicts, defaults, terminations, amendments,
      accelerations, cancellations and violations that would not, individually or
      in
      the aggregate, have a Material Adverse Effect). Except (w) as may be required
      under the Securities Act in connection with the performance of the Company’s
      obligations under the Registration Rights Agreement, (x) for the filing of
      a
      Form D with the SEC, (y) as may be required for compliance with applicable
      state
      securities or “blue sky” laws, or (z) as otherwise set forth in Section
      3(e)
      of the
      Disclosure Schedule, the Company is not required to obtain any consent,
      approval, authorization or order of, or make any filing or registration with,
      any court or governmental agency or any regulatory or self-regulatory agency
      or
      other third party (including, 

     

    
      
        
        

      

      
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    without
      limitation, pursuant to any Material Contract (as defined in Section 3(g)
      below)) in order for it to execute, deliver or perform any of its obligations
      under this Agreement or any of the other Transaction Documents.

     

    (f)  Compliance.
      The
      Company is not in violation of its Certificate of Incorporation, Bylaws or
      other
      organizational documents and no Subsidiary is in violation of any of its
      organizational documents. Except as set forth in Section
      3(f)
      of the
      Disclosure Schedule, neither the Company nor any of its Subsidiaries is in
      default (and no event has occurred that with notice or lapse of time or both
      would put the Company or any of its Subsidiaries in default) under, nor, to
      the
      knowledge of the Company or any of its Subsidiaries, has there occurred any
      event giving others (with notice or lapse of time or both) any rights of
      termination, amendment, acceleration or cancellation of, any agreement,
      indenture or instrument to which the Company or any of its Subsidiaries is
      a
      party (including, without limitation, the Material Contracts), except for actual
      or possible violations, defaults or rights that would not, individually or
      in
      the aggregate, have a Material Adverse Effect. The businesses of the Company
      and
      its Subsidiaries are not being conducted, and shall not be conducted so long
      as
      any Purchaser owns any of the Securities, in violation of any law, ordinance
      or
      regulation of any governmental entity, except for possible violations the
      sanctions for which either individually or in the aggregate have not had and
      would not have a Material Adverse Effect. Neither the Company, nor any of its
      Subsidiaries has, nor, to the knowledge of the Company or any of its
      Subsidiaries, has any director, officer, agent, employee or other person acting
      on behalf of the Company or any Subsidiary, in the course of his actions for,
      or
      on behalf of, the Company or any Subsidiary, used any corporate funds for any
      unlawful contribution, gift, entertainment or other unlawful expenses relating
      to political activity, made any direct or indirect unlawful payment to any
      foreign or domestic government official or employee from corporate funds,
      violated or is in violation of any provision of the U.S. Foreign Corrupt
      Practices Act of 1977, or made any bribe, rebate, payoff, influence payment,
      kickback or other unlawful payment to any foreign or domestic government
      official or employee. The Company and its Subsidiaries possess all certificates,
      authorizations and permits issued by the appropriate federal, state, provincial
      or foreign regulatory authorities that are material to the conduct of its
      business, and neither the Company nor any of its Subsidiaries has received
      any
      notice of proceeding relating to the revocation or modification of any such
      certificate, authorization or permit. 

     

    (g)  SEC
      Documents, Financial Statements.
      Since
      December 31, 2001, the Company has timely filed (within applicable extension
      periods) all reports, schedules, forms, statements and other documents required
      to be filed by it with the SEC pursuant to the reporting requirements of the
      Securities Exchange Act of 1934, as amended (the “Exchange
      Act”)
      (all
      of the foregoing filed prior to the date hereof and all exhibits included
      therein and financial statements and schedules thereto and documents
      incorporated by reference therein, the “SEC
      Documents”).
      The
      Company has delivered to each Purchaser true and complete copies of the SEC
      Documents. As of their respective dates, the SEC Documents complied in all
      material respects with the requirements of the Exchange Act or the Securities
      Act, as the case may be, and the rules and regulations of the SEC promulgated
      thereunder applicable to the SEC Documents, and none of the SEC Documents,
      at
      the time they were filed with the SEC, 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. None of the statements
      made in any such SEC Documents is, or has

     

    
      
        
        

      

      
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     been,
      required to be amended or updated under applicable law (except for such
      statements as have been amended or updated in subsequent filings made prior
      to
      the date hereof). As of their respective dates, the financial statements of
      the
      Company included in the SEC Documents complied as to form in all material
      respects with applicable accounting requirements and the published rules and
      regulations of the SEC applicable with respect thereto. Such financial
      statements have been prepared in accordance with U.S. generally accepted
      accounting principles (“GAAP”),
      consistently applied, during the periods involved (except as may be otherwise
      indicated in such financial statements or the notes thereto or, in the case
      of
      unaudited interim statements, to the extent they may not include footnotes
      or
      may be condensed or summary statements) and fairly present in all material
      respects the consolidated financial position of the Company and its consolidated
      Subsidiaries as of the dates thereof and the consolidated results of their
      operations and cash flows for the periods then ended (subject, in the case
      of
      unaudited statements, to normal, immaterial year-end audit adjustments). Except
      as set forth in the financial statements of the Company included in the Select
      SEC Documents (as defined below), the Company has no liabilities, contingent
      or
      otherwise, other than (i) liabilities incurred in the ordinary course of
      business with non-affiliated third parties subsequent to the date of such
      financial statements and (ii) obligations under contracts and commitments
      incurred in the ordinary course of business with non-affiliated third parties
      and not required under GAAP to be reflected in such financial statements, which
      liabilities and obligations referred to in clauses (i) and (ii), individually
      or
      in the aggregate, are not material to the financial condition or operating
      results of the Company. To the extent required by the rules and regulations
      of
      the SEC applicable thereto, the Select SEC Documents contain a complete and
      accurate list of all material undischarged written or oral contracts,
      agreements, leases or other instruments to which the Company or any Subsidiary
      is a party or by which the Company or any Subsidiary is bound or to which any
      of
      the properties or assets of the Company or any Subsidiary is subject (each,
      a
“Material
      Contract”).
      Except as set forth in the Select SEC Documents, none of the Company, its
      Subsidiaries or, to the best knowledge of the Company, any of the other parties
      thereto is in breach or violation of any Material Contract, which breach or
      violation would have a Material Adverse Effect. For purposes of this Agreement,
      “Select
      SEC Documents”
means
      the Company’s (A) Proxy Statement for its Annual Meeting of Stockholders held in
      connection with the December 31, 2005 fiscal year, (B) Annual Report on Form
      10-K for the fiscal year ended December 31, 2005 (the “2005
      Annual Report”),
      (C)
      Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2006,
      June 30, 2006, and September 30, 2006, and (D) Current Reports on Form 8-K
      filed
      since December 31, 2005.

     

    (h)  Internal
      Accounting Controls.
      The
      Company and each of its Subsidiaries maintains a system of internal accounting
      controls sufficient to provide reasonable assurance that (i) transactions are
      executed in accordance with management’s general or specific authorizations;
      (ii) transactions are recorded as necessary to permit preparation of financial
      statements in conformity with GAAP and to maintain asset accountability; (iii)
      access to assets is permitted only in accordance with management’s general or
      specific authorization; and (iv) the recorded accountability for assets is
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences. The Company has established disclosure
      controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15)
      for
      the Company and designed such disclosure controls and procedures to ensure
      that
      material information relating to the Company, including its Subsidiaries, is
      made known to the certifying officers by others within those entities,
      particularly during the period in which the Company’s 

     

    
      
        
        

      

      
        -8-

        
          

        

      

      
        
        

      

    

    Annual
      Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, is
      being prepared. The Company’s certifying officers have evaluated the
      effectiveness of the Company’s controls and procedures as of the end of the
      period covered by the 2005 Annual Report and the Company’s most recently filed
      Quarterly Report on Form 10-Q (each such date, an “Evaluation
      Date”).
      The
      Company presented in the 2005 Annual Report and its most recently filed
      Quarterly Report on Form 10-Q the conclusions of the certifying officers about
      the effectiveness of the disclosure controls and procedures based on their
      evaluations as of the respective Evaluation Date. Since the Evaluation Date
      for
      the 2005 Annual Report, there have been no significant changes in the Company’s
      internal controls (as such term is defined in Item 307(b) of Regulation S-K
      under the Exchange Act) or, to the Company’s knowledge, in other factors that
      could significantly affect the Company’s internal controls.

     

    (i)  Absence
      of Certain Changes.
      Except
      as set forth in the Select SEC Documents, since December 31, 2005, there has
      been no material adverse change and no material adverse development in the
      business, properties, operations, prospects, financial condition or results
      of
      operations of the Company and its Subsidiaries, taken as a whole. The Company
      has not taken any steps, and does not currently expect to take any steps, to
      seek protection pursuant to any bankruptcy or receivership law, nor does the
      Company or any of its Subsidiaries have any knowledge or reason to believe
      that
      its creditors intend to initiate involuntary bankruptcy proceedings with respect
      to the Company or any of its Subsidiaries. 

     

    (j)  Transactions
      With Affiliates.
      Except
      as set forth in the Select SEC Documents, or as set forth in Section
      3(j)
      of the
      Disclosure Schedule, none of the officers, directors, or employees of the
      Company or any of its Subsidiaries is presently a party to any transaction
      with
      the Company or any of its Subsidiaries (other than for ordinary course services
      solely in their capacity as officers, directors or employees), including any
      contract, agreement or other arrangement providing for the furnishing of
      services to or by, providing for rental of real or personal property to or
      from,
      or otherwise requiring payments to or from any such officer, director or
      employee or any corporation, partnership, trust or other entity in which any
      such officer, director, or employee has an ownership interest of five percent
      or
      more or is an officer, director, trustee or partner.

     

    (k)  Absence
      of Litigation.
      Except
      as disclosed in the Select SEC Documents, there is no action, suit, proceeding,
      inquiry or investigation before or by any court, public board, government
      agency, self-regulatory organization or body (including, without limitation,
      the
      SEC) pending or, to the knowledge of the Company or any of its Subsidiaries,
      threatened against or affecting the Company, any of its Subsidiaries, or any
      of
      their respective directors or officers in their capacities as such. There are
      no
      facts which, if known by a potential claimant or governmental authority, could
      give rise to a claim or proceeding which, if asserted or conducted with results
      unfavorable to the Company or any of its Subsidiaries, could reasonably be
      expected to have a Material Adverse Effect.

     

    (l)  Intellectual
      Property.
      Except
      for those matters described in the Company’s SEC Documents or as otherwise set
      forth in Section
      3(l)
      of the
      Disclosure Schedule and except for other matters which are not material to
      the
      Company’s business taken as a whole: 

     

    
      
        
        

      

      
        -9-

        
          

        

      

      
        
        

      

    

    
      	(i)  	
              No
                “Intellectual
                Property” (consisting
                of patents, trademarks, service marks, trade dress, trade names and
                corporate names, copyrights; and any registrations, applications
                and
                renewals for any of the foregoing) owned by the Company or its
                Subsidiaries which is necessary for the conduct of the Company’s and each
                of its Subsidiaries’ respective businesses as currently conducted or as
                currently proposed to be conducted is now involved in any cancellation,
                dispute or litigation, and, to the Company’s knowledge, no such action is
                threatened. 

            

    

     

    
      	(ii)  	
              No
                patent owned by the Company or its Subsidiaries is now involved in
                any
                interference, reissue, re-examination or opposition proceeding.
                

            

    

     

    
      	(iii)  	
              To
                the knowledge of the Company and its Subsidiaries, neither the Company
                nor
                any Subsidiary of the Company infringes or is in conflict with any
                right
                of any other person with respect to any third party Intellectual
                Property.

            

    

     

    
      	(iv)  	
              Neither
                the Company nor any of its Subsidiaries has received written notice
                of any
                pending conflict with or infringement upon such third party Intellectual
                Property. 

            

    

     

    
      	(v)  	
              Neither
                the Company nor any of its Subsidiaries has entered into any consent
                agreement, forbearance to sue or settlement agreement with respect
                to the
                validity of the Company’s or its Subsidiaries’ ownership of or right to
                use its Intellectual Property. 

            

    

     

    
      	(vi)  	
              The
                Company and its Subsidiaries have complied, in all material respects,
                with
                their respective contractual obligations relating to the protection
                of the
                Intellectual Property used pursuant to licenses.
                

            

    

     

    
      	(vii)  	
              To
                the Company’s knowledge, no person is infringing on or violating the
                Intellectual Property owned by the Company which is necessary for
                the
                conduct of Company’s and each of its Subsidiaries’ respective businesses
                as currently conducted or as currently proposed to be
                conducted.

            

    

     

    (m)  Title.
      The
      Company and its Subsidiaries have good and marketable title in fee simple to
      all
      real property and good and merchantable title to all personal property owned
      by
      them that is material to the business of the Company and its Subsidiaries,
      in
      each case free and clear of all liens, encumbrances and defects except such
      as
      do not materially affect the value of such property and do not materially
      interfere with the use made and proposed to be made of such property by the
      Company and its Subsidiaries. Any real property and facilities held under lease
      by the Company and its Subsidiaries are held by them under valid, subsisting
      and
      enforceable leases with such exceptions as are not material and do not
      materially interfere with the use made and proposed to be made of such property
      and buildings by the Company and its Subsidiaries.

     

    (n)  Tax
      Status.
      Except
      as set forth in the Select SEC Documents, the Company and each of its
      Subsidiaries has made or filed all foreign, U.S. federal, state, provincial
      and
      local income and all other tax returns, reports and declarations required by
      any
      jurisdiction to which it 

     

    
      
        
        

      

      
        -10-

        
          

        

      

      
        
        

      

    

    is
      subject (unless and only to the extent that the Company and each of its
      Subsidiaries has set aside on its books provisions reasonably adequate for
      the
      payment of all unpaid and unreported taxes) and has paid all taxes and other
      governmental assessments and charges that are material in amount, shown or
      determined to be due on such returns, reports and declarations, except those
      being contested in good faith and has set aside on its books provisions
      reasonably adequate for the payment of all taxes for periods subsequent to
      the
      periods to which such returns, reports or declarations apply. There are no
      unpaid taxes in any material amount claimed to be due by the taxing authority
      of
      any jurisdiction, and the officers of the Company know of no basis for any
      such
      claim. The Company has not executed a waiver with respect to any statute of
      limitations relating to the assessment or collection of any foreign, federal,
      state, provincial or local tax. None of the Company’s tax returns is presently
      being audited by any taxing authority.

     

    (o)  Key
      Employees.
      Each of
      the Company’s directors and officers and any Key Employee (as defined below) is
      currently serving the Company in the capacity disclosed in the Select SEC
      Documents. No Key Employee is, or is now expected to be, in violation of any
      material term of any employment contract, confidentiality, disclosure or
      proprietary information agreement, non-competition agreement, or any other
      contract or agreement or any restrictive covenant, and the continued employment
      of each Key Employee does not subject the Company or any of its Subsidiaries
      to
      any material liability with respect to any of the foregoing matters. No Key
      Employee has, to the knowledge of the Company and its Subsidiaries, any
      intention to terminate or limit his employment with, or services to, the Company
      or any of its Subsidiaries, nor is any such Key Employee subject to any
      constraints which would cause such employee to be unable to devote his full
      time
      and attention to such employment or services. For purposes of this Agreement,
      “Key
      Employee”
means
      the persons listed in Section
      3(o)
      of the
      Disclosure Schedule and any individual who assumes or performs any of the duties
      of a Key Employee.

     

    (p)  Employee
      Relations.
      Neither
      the Company nor any of its Subsidiaries is involved in any material union labor
      dispute nor, to the knowledge of the Company or any of its Subsidiaries, is
      any
      such dispute threatened. The Company and its Subsidiaries believe that their
      relations with their employees are good. No executive officer (as defined in
      Rule 501(f) of the Securities Act) has notified the Company that such officer
      intends to leave the Company or otherwise terminate such officer’s employment
      with the Company. The Company and its Subsidiaries are in compliance with all
      federal, state, local and foreign laws and regulations respecting employment
      and
      employment practices, terms and conditions of employment and wages and hours,
      except where failure to be in compliance would not, either individually or
      in
      the aggregate, result in a Material Adverse Effect.

     

    (q)   Insurance.
      The
      Company and each Subsidiary maintains in full force and effect insurance
      coverage that is customary for comparably situated companies for the business
      being conducted and properties owned or leased by the Company and each
      Subsidiary, and the Company reasonably believes such insurance coverage to
      be
      adequate against all liabilities, claims and risks against which it is customary
      for comparably situated companies to insure. To the Company’s knowledge, no
      default or event has occurred that could give rise to a default under any such
      policy.

     

    (r)  Environmental
      Matters.
      Neither
      the Company nor any Subsidiary is in violation of any statute, rule, regulation,
      decision or order of any governmental agency or body or any 

     

    
      
        
        

      

      
        -11-

        
          

        

      

      
        
        

      

    

    court,
      domestic or foreign, relating to the use, disposal or release of hazardous
      or
      toxic substances or relating to the protection or restoration of the environment
      or human exposure to hazardous or toxic substances (collectively, “Environmental
      Laws”);
      owns
      or, to the Company’s knowledge, operates any real property contaminated with any
      substance that is subject to any Environmental Laws; is liable for any off-site
      disposal or contamination pursuant to any Environmental Laws; or is subject
      to
      any claim relating to any Environmental Laws, which violation, contamination,
      liability or claim has had or could reasonably be expected to have a Material
      Adverse Effect, individually or in the aggregate; and there is no pending or,
      to
      the Company’s knowledge, threatened investigation that might lead to such a
      claim.

     

    (s)  Solvency.
      Based
      on the financial condition of the Company as of the Closing Date, and after
      giving effect to the net proceeds of the transactions contemplated by this
      Agreement, the Company’s fair saleable value of its assets exceeds the amount
      that is currently required to be paid on or in respect of the Company’s existing
      debts and other liabilities (including known contingent liabilities). The
      Company does not intend to incur debts beyond its ability to pay such debts
      as
      they mature (taking into account the timing and amounts of cash to be payable
      on
      or in respect of its debt).

     

    (t)  Listing.
      The
      Common Stock is currently listed for trading on the American Stock Exchange
      (“AMEX”).
      Except as set forth in Section
      3(t)
      of the
      Disclosure Schedule, the Company is not in violation of the listing requirements
      of AMEX and does not reasonably anticipate that the Common Stock will be
      delisted by AMEX for the foreseeable future, and has not received any notice
      other than as already publicly disclosed regarding the possible delisting of
      the
      Common Stock from AMEX. 

     

    (u)  Form
      S-3 Eligibility.
      The
      Company is eligible to register the resale of its Common Stock on a registration
      statement on Form S-3 under the Securities Act. Except as set forth in
Section
      3(u)
      of the
      Disclosure Schedule, there exist no facts or circumstances that would prohibit
      or delay the preparation and filing of a registration statement on Form S-3
      with
      respect to the Registrable Securities (as defined in the Registration Rights
      Agreement). The Company has no basis to believe that its past or present
      independent public auditors will withhold their consent to the inclusion, or
      incorporation by reference, of their audit opinion concerning the Company’s
      financial statements to be included in the Company’s Annual Report on Form 10-K
      for the fiscal year ended December 31, 2006 in the future Series B Registration
      Statement, which may be required to be filed pursuant to the Registration Rights
      Agreement.

     

    (v)  Anti-Takeover
      Provisions.
      The
      Company and its board of directors have taken all necessary action, if any,
      in
      order to render inapplicable any control share acquisition, business
      combination, poison pill (including any distribution under a rights agreement)
      or other similar anti-takeover provision under its Certificate of Incorporation
      or the laws of the state of its incorporation (including, without limitation,
      Section 203 of the Delaware General Corporation Law, as amended) which is or
      could become applicable to any Purchaser as a result of the transactions
      contemplated by this Agreement, including, without limitation, the Company’s
      issuance of the Securities and any and all Purchaser’s ownership of the
      Securities.

     

    (w)  Acknowledgment
      Regarding Each Purchaser’s Purchase of the Securities.
      Other
      than as set forth in Section
      3(w)
      of the
      Disclosure Schedule, the Company acknowledges and 

     

    
      
        
        

      

      
        -12-

        
          

        

      

      
        
        

      

    

    agrees
      that each Purchaser is acting solely in the capacity of arm’s length purchaser
      with respect to this Agreement and the other Transaction Documents and the
      transactions contemplated hereby and thereby, and that prior to the Closing
      no
      Purchaser is (i) an officer or director of the Company; (ii) an “affiliate” of
      the Company (as defined in Rule 144 under the Securities Act (including any
      successor rule, “Rule
      144”));
      or
      (iii) a “beneficial owner” of more than 5% of the Common Stock (as defined for
      purposes of Rule 13d-3 of the Exchange Act). 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 or the other
      Transaction Documents and the transactions contemplated hereby and thereby,
      and
      any advice given by a Purchaser or any of its representatives or agents in
      connection with this Agreement or the other Transaction Documents and the
      transactions contemplated hereby and thereby is merely incidental to such
      Purchaser’s purchase of the Securities. The Company further represents to each
      Purchaser that the Company’s decision to enter into this Agreement and the other
      Transaction Documents has been based solely on the independent evaluation by
      the
      Company and its representatives. 

     

    (x)  No
      General Solicitation or Integrated Offering.
      Neither
      the Company nor any distributor participating on the Company’s behalf in the
      transactions contemplated hereby (if any) nor any person acting for the Company,
      or any such distributor, has conducted any “general solicitation” (as such term
      is defined in Regulation D) with respect to any of the Securities being offered
      hereby. Neither the Company nor any of its affiliates, nor any person acting
      on
      its or their behalf, has directly or indirectly made any offers or sales of
      any
      security or solicited any offers to buy any security under circumstances that
      would require registration of the Securities being offered hereby under the
      Securities Act or cause this offering of Securities to be integrated with any
      prior offering of securities of the Company for purposes of the Securities
      Act,
      which result of such integration would require registration under the Securities
      Act, or any applicable stockholder approval provisions.

     

    (y)  No
      Brokers.
      Other
      than as set forth in Section
      3(y)
      of the
      Disclosure Schedule, the Company has taken no action that would give rise to
      any
      claim by any person for brokerage commissions, finder’s fees or similar payments
      by any Purchaser relating to this Agreement or the transactions contemplated
      hereby.

     

    (z)  Acknowledgment
      Regarding Securities.
      The
      number of Conversion Shares issuable upon conversion of the Series B Notes
      and
      the number of Warrant Shares issuable upon exercise of the Series B Warrants
      may
      increase in certain circumstances. The Company’s directors and executive
      officers have studied and fully understand the nature of the Securities being
      sold hereunder. The Company acknowledges that its obligation to issue Conversion
      Shares upon conversion of the Series B Notes in accordance with the terms
      thereof and the Warrant Shares upon the exercise of the Series B Warrants in
      accordance with the terms thereof is absolute and unconditional, regardless
      of
      the dilution that such issuance may have on the ownership interests of other
      stockholders and the availability of remedies provided for in any of the
      Transaction Documents relating to a failure or refusal to issue Conversion
      Shares or Warrant Shares. Taking the foregoing into account, the Company’s Board
      of Directors has determined in its good faith business judgment that the
      issuance of the Series B Notes and Series B Warrants hereunder and the
      consummation of the other transactions contemplated hereby are in the best
      interests of the Company and its stockholders.

     

    
      
        
        

      

      
        -13-

        
          

        

      

      
        
        

      

    

    (aa)  Disclosure.
      All
      information relating to or concerning the Company and/or any of its Subsidiaries
      set forth in this Agreement or provided to the Purchasers pursuant to Section
      2(d) hereof or otherwise in connection with the transactions contemplated hereby
      is true and correct in all material respects and the Company has not omitted
      to
      state any material fact necessary in order to make the statements made herein
      or
      therein, in light of the circumstances under which they were made, not
      misleading. No event or circumstance has occurred or exists with respect to
      the
      Company or its Subsidiaries or their respective businesses, properties,
      prospects, operations or financial conditions, which has not been publicly
      disclosed but, under applicable law, rule or regulation, would be required
      to be
      disclosed by the Company in a registration statement filed on the date hereof
      by
      the Company under the Securities Act with respect to a primary issuance of
      the
      Company’s securities.

     

     

    4.  COVENANTS.

     

    (a)  Best
      Efforts.
      The
      parties shall use their respective best efforts timely to satisfy each of the
      conditions described in Sections 6 and 7 of this Agreement.

     

    (b)  Form
      D; Blue Sky Laws.
      The
      Company shall file with the SEC a Form D with respect to the Securities as
      required under Regulation D. The Company shall, on or before the Closing Date,
      take such action as the Company shall reasonably determine is necessary to
      qualify the Securities for sale to each Purchaser pursuant to this Agreement
      under applicable securities or “blue sky” laws of the states of the United
      States or obtain exemption therefrom. The Company shall issue a press release
      (the “Press
      Release”)
      describing in reasonable detail the transactions contemplated hereby and such
      other matters as had previously been discussed by the Purchasers and the
      Company, as soon as practicable on or after the date hereof, but in no event
      later than 8:30 a.m., New York, New York time, on the first trading day
      following the date hereof. The Press Release shall be subject to prior review
      and comment from the Purchasers. In addition, no later than the second business
      day after the Closing Date, the Company shall file a Form 8-K with the SEC
      concerning this Agreement and the transactions contemplated hereby, which Form
      8-K shall attach this Agreement and its Exhibits as exhibits to such Form 8-K
      (the “8-K
      Filing”).
      Except as set forth in Section
      4(b)
      to the
      Disclosure Schedules, from and after the date of the Press Release, the Company
      hereby acknowledges that no Purchaser shall be in possession of any material
      nonpublic information received from the Company, any of its Subsidiaries or,
      to
      the best of the Company’s knowledge, any of its or their respective directors,
      officers, employees, affiliates, stockholders, agents or representatives, that
      is not disclosed in the Press Release. The Company shall not, and shall cause
      each of its Subsidiaries and its and each of their respective directors,
      officers, employees, affiliates, stockholders, agents or representatives not
      to,
      provide any Purchaser with any material nonpublic information regarding the
      Company or any of its Subsidiaries from and after the Press Release without
      the
      prior express written consent of such Purchaser; provided,
      however,
      that a
      Purchaser that exercises its rights under Section 4(n) hereof shall be
      deemed to have given such express written consent. In the event the covenant
      in
      the preceding sentence is breached for any reason, whether or not as a result
      of
      the fault or nonfeasance of the Company, the Company shall, as promptly as
      practicable and in no event later than the first trading day after becoming
      aware of such breach, disclose all such material nonpublic information to the
      public in accordance with Regulation FD 

     

    
      
        
        

      

      
        -14-

        
          

        

      

      
        
        

      

    

    promulgated
      under the Exchange Act. Subject to the foregoing, neither the Company nor any
      Purchaser shall issue any press releases or any other public statements with
      respect to the transactions contemplated hereby; provided,
      however,
      that
      the Company shall be entitled, without the prior approval of any Purchaser,
      to
      make any press release or other public disclosure with respect to such
      transactions as is required by applicable law and regulations (provided that
      (a)
      the Required Holders (as defined herein) shall be consulted by the Company
      in
      connection with any such press release or other public disclosure prior to
      its
      release and (b) in no event will any Purchaser be identified by name in any
      press release, including without limitation, the Press Release, or other public
      disclosure (other than in a future Series B Registration Statement on Form
      S-3
      with respect to the Registrable Securities) without the express prior approval
      of the Purchaser to be named). 

     

    (c)  Reporting
      Status.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Securities, the Company shall timely file all reports required to be
      filed with the SEC pursuant to the Exchange Act, and the Company shall not
      terminate its status as an issuer required to file reports under the Exchange
      Act even if the Exchange Act or the rules and regulations thereunder would
      permit such termination. In addition, except as set forth in Section
      4(c)
      of the
      Disclosure Schedule, the Company shall take all actions necessary to meet the
      “registrant eligibility” requirements set forth in the general instructions to
      Form S-3 or any successor form thereto, to continue to be eligible to register
      the resale of its Common Stock on a registration statement on Form S-3 under
      the
      Securities Act.

     

    (d)  Use
      of
      Proceeds.
      The
      Company shall use the proceeds from the sale and issuance of the Series B Notes
      and Series B Warrants as set forth on Section
      4(d)
      of the
      Disclosure Schedule. Except as set forth on Section
      4(d)
      of the
      Disclosure Schedule such proceeds shall not be used to (i) pay dividends; (ii)
      pay for any increase in executive compensation or make any loan or other
      material advance to any officer, employee, shareholder, director or other
      affiliate of the Company, without the express approval of the Board of Directors
      acting in accordance with past practice; (iii) purchase debt or equity
      securities of any entity (including redeeming the Company’s own securities, but
      expressly excluding the scheduled monthly redemptions of the Series B Notes
      and
      the Series A Notes), except for (A) evidences of indebtedness issued or fully
      guaranteed by the United States of America and having a maturity of not more
      than one year from the date of acquisition, (B) certificates of deposit, notes,
      acceptances and repurchase agreements having a maturity of not more than one
      year from the date of acquisition issued by a bank organized in the United
      States having capital, surplus and undivided profits of at least $500,000,000,
      (C) the highest-rated commercial paper having a maturity of not more than one
      year from the date of acquisition, and (D) “Money Market” fund shares, or money
      market accounts fully insured by the Federal Deposit Insurance Corporation
      and
      sponsored by banks and other financial institutions, provided that the
      investments consist principally of the types of investments described in clauses
      (A), (B), or (C) above; or (iv) make any investment not directly related to
      the
      current business of the Company.

     

    (e)  Financial
      Information.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Securities, the Company shall deliver the following reports to each
      such
      Purchaser: (i) within ten (10) days after the filing with the SEC, a copy of
      its
      Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q, its proxy
      statements and any 

     

    
      
        
        

      

      
        -15-

        
          

        

      

      
        
        

      

    

    Current
      Reports on Form 8-K, and (ii) within one day after release, copies of all press
      releases issued by the Company or any of its Subsidiaries.

     

    (f)  Reservation
      of Shares.
      The
      Company currently has authorized and reserved for the purpose of issuance a
      sufficient number of shares of Common Stock required to provide for the full
      conversion of the Series B Notes (at the current conversion price) and issuance
      of the Conversion Shares in connection therewith, the full exercise of the
      Series B Warrants (at the current exercise price) and the issuance of the
      Warrant Shares in connection therewith. The Company shall be obligated to
      authorize and reserve for issuance a sufficient number of shares of Common
      Stock
      to provide for the full conversion of the Series B Notes, the issuance of the
      Conversion Shares in connection therewith, the full exercise of the Series
      B
      Warrants and the issuance of the Warrant Shares in connection therewith
      (including those shares issued pursuant to Section 11(i) of the Warrant)
      (collectively, the “Issuance
      Obligations”).
      In
      the event such number of shares becomes insufficient to satisfy the Issuance
      Obligations, the Company shall take all necessary action to authorize and
      reserve such additional shares of Common Stock necessary to satisfy the Issuance
      Obligations.

     

    (g)  Listing;
      Stockholder Meeting.
      The
      Company shall not without stockholder approval issue more than 11,709,703 shares
      of Common Stock pursuant to the transactions contemplated hereby and in the
      other Transaction Documents. The Company shall (i) prepare and file an
      additional listing application with AMEX covering the Conversion Shares
      initially issuable upon conversion of the Series B Notes (without giving effect
      to any limitations on conversion contained in Article IX.A of the Series B
      Notes) and the Warrant Shares initially issuable upon exercise of the Series
      B
      Warrants (without giving effect to any limitations on exercise contained in
      Section 3(c) of the Series B Warrants); (ii) use its best efforts to cause
      such
      Conversion Shares and Warrant Shares to be approved for listing on AMEX as
      soon
      as possible thereafter; (iii) use its best efforts to maintain the listing
      of
      the Conversion Shares and Warrant Shares on AMEX, the NASDAQ Capital Market
      (the
“Capital
      Market”),
      the
      New York Stock Exchange (the “NYSE’),
      the
      NASDAQ Global Market (the “Global
      Market”)
      or the
      NASDAQ Global Select Market (the “Global
      Select Market”),
      whichever is at the time the principal trading exchange or market for the Common
      Stock. In addition, the Company shall, at a special meeting of stockholders,
      to
      be held no later than ninety (90) days after the Closing Date, offer proposals
      (the “Stockholder
      Proposals”)
      for
      stockholder approval (as required by the applicable rules and regulations of
      AMEX) with respect to the transactions contemplated by the Transaction
      Documents, including proposals approving (i) the issuance of shares upon
      conversion of the Series B Notes, as payment of interest on the Series B Notes,
      or upon the amortization of the Series B Notes, at a price below $0.63 (the
      “Conversion
      Floor Price”);
      (ii)
      the issuance of shares upon exercise of the Series B Warrants pursuant to the
      full ratchet antidilution provisions in the Series B Warrants at a price below
      $0.63 (the “Warrant
      Floor Price”);
      and
      (iii) if the Company determines it is necessary in order to be able to satisfy
      its obligations relative to the issuance of Conversion Shares and Warrant Shares
      under the Series B Notes and Series B Warrants, an amendment to the Company’s
      Certificate of Incorporation to increase the number of authorized shares of
      Common Stock, with the recommendation of the Company’s Board of Directors that
      such proposals be approved, and the Company shall use its best efforts to
      solicit proxies from its stockholders in connection therewith in favor of such
      proposals and all management-appointed proxyholders shall vote their proxies
      in
      favor of such proposals.

     

    
      
        
        

      

      
        -16-

        
          

        

      

      
        
        

      

    

    (h)  [
      ** ]
      Bonuses.
      [ ** ]
      The Company will not make any cash payments to senior level staff for bonuses
      earned at any time during the 2006 fiscal year except for (i) cash bonuses
      paid
      to sales staff based on achievement of pre-established goals and (ii) a maximum
      of $153,000 (not inclusive of any amounts paid pursuant to (i) above) will
      be
      paid to other senior level staff based on achievement of individual objectives.
      

     

    (i)  Corporate
      Existence.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Securities, the Company shall maintain its corporate existence, and
      in
      the event of a merger, consolidation or sale of all or substantially all of
      the
      Company’s assets, the Company shall ensure that the surviving or successor
      entity in such transaction (i) assumes the Company’s obligations under this
      Agreement and the other Transaction Documents and the agreements and instruments
      entered into in connection herewith and therewith regardless of whether or
      not
      the Company would have had a sufficient number of shares of Common Stock
      authorized and available for issuance in order to effect the conversion of
      all
      the Series B Notes and exercise in full of all Series B Warrants outstanding
      as
      of the date of such transaction and (ii) except in the event of a merger,
      consolidation of the Company into any other corporation, or the sale or
      conveyance of all or substantially all of the assets of the Company where the
      consideration consists solely of cash, the surviving or successor entity is
      a
      publicly traded corporation whose common stock is listed for trading on the
      Capital Market, the Global Market, the Global Select Market, the NYSE or
      AMEX.

     

    (j)  No
      Integrated Offerings.
      The
      Company shall not make any offers or sales of any security (other than the
      Securities) under circumstances that would require registration of the
      Securities being offered or sold hereunder under the Securities Act or cause
      this offering of the Securities to be integrated with any other offering of
      securities by the Company for purposes of any stockholder approval provision
      applicable to the Company or its securities.

     

    (k)  Legal
      Compliance.
      The
      Company shall conduct its business and the business of its Subsidiaries in
      compliance with all laws, ordinances or regulations of governmental entities
      applicable to such businesses, except where the failure to do so would not
      have
      a Material Adverse Effect.

     

    (l)  Redemptions,
      Dividends and Repayments of Indebtedness.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Series B Notes, the Company shall not, without first obtaining the
      written approval of the holders of a majority of the aggregate principal face
      amount of the Series B Notes then outstanding (which approval may be given
      or
      withheld by such holders in their sole and absolute discretion), repurchase,
      redeem or declare or pay any cash dividend or distribution on any shares of
      capital stock of the Company or repay or prepay any indebtedness of the Company
      other than as expressly required pursuant to the terms of such indebtedness
      as
      in effect on the date hereof.

     

    (m)  Information.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Securities, the Company shall furnish to each such Purchaser the
      information the Company must deliver to any holder or to any prospective
      transferee of Securities in order to permit the sale or other transfer of such
      Securities pursuant to Rule 144A of the SEC or any similar rule then in
      effect.

     

    
      
        
        

      

      
        -17-

        
          

        

      

      
        
        

      

    

    The
      Company shall keep at its principal executive office a true copy of this
      Agreement (as at the time in effect), and cause the same to be available for
      inspection at such office during normal business hours by any holder of
      Securities or any prospective transferee of Securities designated by a holder
      thereof.

     

    (n)  Inspection
      of Properties and Books.
      So long
      as any Purchasers (or any of their respective affiliates) beneficially own
      any
      of the Securities, each such Purchaser and its representatives and agents
      (collectively, the “Inspectors”)
      shall
      have the right, at such Purchaser’s expense, to visit and inspect any of the
      properties of the Company and of its Subsidiaries, to examine the books of
      account and records of the Company and of its Subsidiaries, to make or be
      provided with copies and extracts therefrom, to discuss the affairs, finances
      and accounts of the Company and of its Subsidiaries with, and to be advised
      as
      to the same by, its and their officers, employees and independent public
      accountants (and by this provision the Company authorizes such accountants
      to
      discuss such affairs, finances and accounts, whether or not a representative
      of
      the Company is present) all at such reasonable times and intervals and to such
      reasonable extent as the Purchasers may desire; provided,
      however,
      that
      each Inspector shall hold in confidence and shall not make any disclosure
      (except to such Purchaser) of any such information which the Company determines
      in good faith to be confidential, and of which determination the Inspectors
      are
      so notified, unless (i) the parties mutually determine on a reasonable basis
      that the disclosure of such information is necessary to avoid or correct a
      misstatement or omission in any Registration Statement filed pursuant to the
      Registration Rights Agreement, (ii) the release of such information is ordered
      pursuant to a subpoena or other order from a court or government body of
      competent jurisdiction, or (iii) such information has been made generally
      available to the public other than by disclosure in violation of this or any
      other agreement. Each Purchaser agrees that it shall, upon learning that
      disclosure of such information is sought in or by a court or governmental body
      of competent jurisdiction or through other means, give prompt notice to the
      Company and allow the Company, at its expense, to undertake appropriate action
      to prevent disclosure of, or to obtain a protective order for, the information
      deemed confidential. 

     

    (o)  Stockholders
      Rights Plan.
      No
      claim shall be made or enforced by the Company or any other person that any
      Purchaser is an “Acquiring Person” under any stockholders rights plan or similar
      plan or arrangement in effect or hereafter adopted by the Company, or that
      any
      Purchaser could be deemed to trigger the provisions of any such plan or
      arrangement, by virtue of receiving Securities under this Agreement or any
      other
      Transaction Documents or under any other agreement between the Company and
      the
      Purchasers.

     

    (p)  Pledge
      of Securities.
      The
      Company acknowledges and agrees that the Securities may be pledged by any
      Purchaser in connection with a bona fide margin agreement or other loan or
      financing arrangement that is secured by the Securities. The pledge of
      Securities shall not be deemed to be a transfer, sale or assignment of the
      Securities hereunder, and no Purchaser effecting a pledge of Securities shall
      be
      required to provide the Company with any notice thereof or otherwise make any
      delivery to the Company pursuant to this Agreement or any other Transaction
      Document. The Company shall execute and deliver such documentation as a pledgee
      of the Securities may reasonably request in connection with a pledge of the
      Securities to such pledgee by a Purchaser. 

     

    
      
        
        

      

      
        -18-

        
          

        

      

      
        
        

      

    

    (q)  Expenses.
      At the
      Closing, the Company shall pay to SDS reimbursement for the out-of-pocket
      expenses reasonably incurred by SDS, its affiliates and its advisors in
      connection with the negotiation, preparation, execution and delivery of this
      Agreement and the other Transaction Documents and the consummation of the
      transactions contemplated hereby and thereby, including, without limitation,
      SDS’s and its respective affiliates’ and advisors’ reasonable due diligence and
      attorneys’ fees and expenses (the “Expenses”);
      provided,
      however,
      that
      SDS shall be permitted, in its discretion, to deduct all of its Expenses from
      the Subscription Amount payable by SDS hereunder. 

     

    (r)  Participation
      Right.
      Subject
      to the terms and conditions specified in this Section 4(r), until the third
      anniversary of the date hereof (or such later date to which the maturity date
      of
      the Series B Notes is extended), Purchasers holding $250,000 or more of
      aggregate principal face amount of the Series B Notes (each, a “Qualifying
      Purchaser”)
      shall
      have a right to participate in any issuance by the Company of (a) equity or
      equity-linked securities, or (b) debt which is convertible into equity or in
      which there is an equity component (“Additional
      Securities”)
      on the
      same terms and conditions as offered by the Company to the other purchasers
      of
      such Additional Securities. Each time the Company proposes to offer any
      Additional Securities, the Company shall make an offering of such Additional
      Securities to each such Purchaser in accordance with the following provisions:
      

     

    (i)  At
      least
      ten (10) trading days prior to the closing of the sale of Additional
      Securities,
      the
      Company shall deliver to each Qualifying Purchaser a written notice of its
      intention to effect a Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Qualifying Purchaser if it wants to review the details
      of such financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of a Qualifying Purchaser, and only upon a request by such
      Qualifying Purchaser, for a Subsequent Financing Notice, the Company shall
      promptly, but no later than five (5) trading days after such request, deliver
      a
      Subsequent Financing Notice to such Qualifying Purchaser.
      The
      Subsequent Financing Notice shall describe in reasonable detail the proposed
      terms of such Subsequent Financing, the amount of proceeds intended to be raised
      thereunder, the person with whom such Subsequent Financing is proposed to be
      effected (provided that the name of such person(s) is available), and attached
      to which shall be a term sheet or similar document relating thereto. Each
      Qualifying Purchaser shall notify the Company by 6:30 p.m. (New York City time)
      on the fifth (5th)
      trading
      day after their receipt of the Subsequent Financing Notice of its willingness
      to
      provide the Subsequent Financing on the terms described in the Subsequent
      Financing Notice, subject to completion of mutually acceptable documentation.
      No
      Purchaser shall offer to sell, solicit offers to buy, dispose of, loan, pledge
      or grant any right with respect to the Company’s Common Stock (other than
      pursuant to this Section 4(r)) from the time the Company delivers the Subsequent
      Financing Notice until such time as the Purchaser is no longer in possession
      of
      material non-public information regarding the Company. 

     

    (ii)  Each
      Qualifying Purchaser agreeing to participate in the Subsequent Financing (the
      “Participating
      Purchasers”)
      shall
      have the right to purchase, at the price and on the terms specified in the
      Notice, up to that portion of such Additional Securities that has a total
      purchase price equal to fifty percent (50%) of the aggregate principal amount
      of
      Series B Notes then held by such Purchaser
      (the
“Series
      B Purchase Amount”) provided,
      that
      the
      Purchasers eligible to participate in the offering of the Additional Securities
      may only purchase in the 

     

    
      
        
        

      

      
        -19-

        
          

        

      

      
        
        

      

    

    aggregate
      up to 50% of the aggregate maximum dollar amount and/or other consideration
      being offered in such offering (the
      “Participating
      Purchaser Allotment”)
      (with
      any
      cutback required being allocated on a pro rata basis among the participating
      Purchasers based upon percentage of aggregate principal amount of all such
      participating Purchasers); provided
      further, that
      any
      Holder as defined in the Series B Notes who has participation and exchange
      rights under the transaction documents related to its purchase of the Company’s
      Series A Notes may not exercise its participation and exchange rights hereunder
      if it has exercised its rights under those Series A transaction documents and
      further
      provided that
      the
      limitations on the number of Additional Securities that a Participating
      Purchaser may acquire pursuant to this Section 4(r) shall include all Additional
      Securities that such Participating Purchaser may acquire pursuant to the
      exchange right set forth in Article X of the Series B Notes.
      Notwithstanding anything to the contrary contained herein, if the holders of
      the
      Series A Notes and the holders of the Series B Notes collectively have not
      elected to participate pursuant to their Series A Participation and Series
      B
      Participation (each as defined below) in a Subsequent Financing up to the full
      Participating Purchaser Allotment, the holders of the Series A Notes that
      exercised their participation rights or exchange rights under the Series A
      Notes
      (the “Series
      A Participation”)
      may
      elect to exercise their participation or exchange rights under the Series B
      Notes (the “Series
      B Participation”)
      for
      Additional Securities up to an amount equal to such Participating Purchaser’s
      Series B Purchase Amount, and likewise holders of the Series B Notes that
      elected their Series B Participation may elect their Series A Participation
      for
      Additional Securities up to an amount equal to 50% of such Participating
      Purchasers aggregate principal value of the Series A Notes then held by such
      Purchaser until the Participating Purchaser Allotment has been met (with any
      cutback required being allocated on a pro rata basis among the Participating
      Purchasers based upon percentage of aggregate principal amount outstanding
      on
      the Notes of all such participating Purchasers);
      provided however, that in no case may the Participating Purchasers collectively
      purchase Additional Securities pursuant to the Series A Participation and the
      Series B Participation in an amount greater than the Participating Purchaser
      Allotment.

     

    (iii)  If
      all
      Additional Securities which the eligible Purchasers are entitled to purchase
      pursuant to this Section 4(r) are not purchased as provided herein, the Company
      may, during the sixty (60) trading-day period following the expiration of the
      five (5) trading-day period provided in clause (i), offer the remaining
      unsubscribed portion of such Additional Securities to any person at a price
      not
      less than, and upon terms no more favorable to the offeree than, as specified
      in
      the Notice. If the Company does not consummate the sale of such Additional
      Securities within such period, the right provided hereunder shall be deemed
      to
      be revived and such Additional Securities shall not be offered or sold unless
      first reoffered to the Purchasers in accordance herewith. 

     

    (iv)  Notwithstanding
      the foregoing, the participation rights granted in this Section 4(r) shall
      not
      be applicable to: (A) the issuance of shares of Common Stock upon the exercise
      or conversion of the Company’s options, warrants, convertible notes or otherwise
      pursuant to the terms of convertible securities outstanding as of the date
      hereof and disclosed in Section
      3(c)
      of the
      Disclosure Schedule in accordance with the terms of such options, warrants
      or
      other securities as in effect on the date hereof; (B) the issuance of stock,
      stock options or other stock rights pursuant to any stock or option plan duly
      adopted by a majority of the non-employee members of the Board of Directors
      of
      the Company or a majority of the members of a committee of non-employee
      directors established for such purpose; (C) the issuance of securities pursuant
      to 

     

    
      
        
        

      

      
        -20-

        
          

        

      

      
        
        

      

    

    a
      bona
      fide underwritten public offering with gross proceeds of at least $25,000,000;
      (D) the issuance of the Series B Notes, the Series B Warrants, the Conversion
      Shares, the Warrant Shares and the Additional Warrant Shares (as defined in
      the
      Series B Warrants); (E) the issuance of securities in a bona fide business
      acquisition the primary purpose of which, as determined in good faith by a
      majority of the members of the Board of Directors of the Company, is not the
      raising of capital; (F) the issuance of capital stock or convertible securities
      in a joint venture, strategic partnership or licensing arrangement, the primary
      purpose of which, as determined in good faith by a majority of the members
      of
      the Board of Directors of the Company, is not the raising of capital; and (G)
      the issuance of shares of common stock by reason of a dividend, stock split
      or
      other distribution on shares of common stock (but only to the extent that such
      a
      dividend, split or distribution results in an adjustment in the conversion
      price
      of the Series B Notes and the exercise price and number of shares issuable
      under
      the Series B Warrants).

     

    (s)  Restriction
      on Sales.
      Until
      such time that the Company issues the Press Release, or otherwise publicly
      announces the transactions contemplated hereby, the Purchasers will not offer
      to
      sell, solicit offers to buy, dispose of, loan, pledge or grant any right with
      respect to the Company’s Common Stock.

     

    (t)  Listing
      of Additional Securities on AMEX.
      Immediately following stockholder approval of the Stockholder Proposals, if
      approved, the Company shall prepare and file with AMEX a listing application
      covering all additional Conversion Shares issuable and not included in the
      listing application referenced in Section 7(c) hereof, and, if necessary,
      all additional Warrant Shares and shares of Common Stock issuable in connection
      with the Warrants not included in the Company's AMEX listing application
      referred to in Section 7(c) hereof.

     

    (u)  Dilutive
      Issuances.
      Until
      such time as the Company has held a meeting of its stockholders at which the
      Stockholder Proposals have been voted upon, the Company shall not issue any
      shares of Common Stock, or any securities convertible into or exercisable or
      exchangeable for shares of Common Stock, at an effective price below the
      Conversion Floor Price, except for shares of Common Stock that would be excluded
      from the participation right in clauses (A), (B) or (D) of Section 4(r)(iv)
      above.

     

     

    5.  SECURITIES
      TRANSFER MATTERS.

     

    (a)  Conversion
      and Exercise.
      Upon
      conversion of the Series B Notes or exercise of the Series B Warrants by any
      person, (i) if the DTC Transfer Conditions (as defined below) are satisfied,
      the
      Company shall cause its transfer agent to electronically transmit all Conversion
      Shares and Warrant Shares by crediting the account of such person or its nominee
      with the Depository Trust Company (“DTC”)
      through its Deposit Withdrawal Agent Commission system; or (ii) if the DTC
      Transfer Conditions are not satisfied, the Company shall issue and deliver,
      or
      instruct its transfer agent to issue and deliver, certificates (subject to
      the
      legend and other applicable provisions hereof and the Series B Notes and Series
      B Warrants), registered in the name of such person or its nominee, physical
      certificates representing the 

     

    
      
        
        

      

      
        -21-

        
          

        

      

      
        
        

      

    

    Conversion
      Shares and Warrant Shares, as applicable. Even if the DTC Transfer Conditions
      are satisfied, any person effecting a conversion of Series B Notes or exercising
      Series B Warrants may instruct the Company to deliver to such person or its
      nominee physical certificates representing the Conversion Shares and Warrant
      Shares, as applicable, in lieu of delivering such shares by way of DTC Transfer.
      For purposes of this Agreement, “DTC
      Transfer Conditions”
means
      that (A) the Company’s transfer agent is participating in the DTC Fast Automated
      Securities Transfer program and (B) the certificates for the Conversion Shares
      or Warrant Shares required to be delivered do not bear a legend and the person
      effecting such conversion or exercise is not then required to return such
      certificate for the placement of a legend thereon.

     

    (b)  Transfer
      or Resale.
      Each
      Purchaser understands that (i) except as provided in the Registration Rights
      Agreement, the sale or resale of the Securities have not been and are not being
      registered under the Securities Act or any state securities laws, and the
      Securities may not be transferred unless (A) the transfer is made pursuant
      to
      and as set forth in an effective registration statement under the Securities
      Act
      covering the Securities; or (B) such Purchaser shall have delivered to the
      Company an opinion of counsel (which opinion shall be in form, substance and
      scope customary for opinions of counsel in comparable transactions) to the
      effect that the Securities to be sold or transferred may be sold or transferred
      pursuant to an exemption from such registration; or (C) sold under and in
      compliance with Rule 144; or (D) sold or transferred to an affiliate of such
      Purchaser that agrees to sell or otherwise transfer the Securities only in
      accordance with the provisions of this Section 5(b); and (ii) neither the
      Company nor any other person is under any obligation to register such Securities
      under the Securities Act or any state securities laws (other than pursuant
      to
      the terms of the Registration Rights Agreement). Notwithstanding the foregoing
      or anything else contained herein to the contrary, the Securities may be pledged
      as collateral in connection with a bona fide margin account or other lending
      arrangement, provided such pledge is consistent with applicable laws, rules
      and
      regulations.

     

    (c)  Legends.
      Each
      Purchaser understands that the Series B Notes and Series B Warrants and, until
      such time as the Conversion Shares and Warrant Shares have been registered
      under
      the Securities Act (including registration pursuant to Rule 416 thereunder)
      as
      contemplated by the Registration Rights Agreement or otherwise may be sold
      by
      such Purchaser under Rule 144, the certificates for the Conversion Shares and
      Warrant Shares may bear a restrictive legend in substantially the following
      form:

     

    The
      securities represented by this certificate have not been registered under the
      Securities Act of 1933, as amended, or the securities laws of any state of
      the
      United States or in any other jurisdiction. The securities represented hereby
      may not be offered, sold or transferred in the absence of an effective
      registration statement for the securities under applicable securities laws
      unless offered, sold or transferred pursuant to an available exemption from
      the
      registration requirements of those laws.

     

    For
      so
      long as the Conversion Shares and Warrant Shares (i) have been registered for
      resale under the Securities Act (including registration pursuant to Rule 416
      thereunder) as contemplated by the Registration Rights Agreement or (ii)
      otherwise may be sold by such Purchaser under Rule 144(k), the Company shall
      instruct the transfer agent that, in connection with the issuance of the
      Conversion Shares and Warrant Shares, certificates representing such Conversion
      Shares and Warrant Shares shall be issued without the restrictive legend above,
      

     

    
      
        
        

      

      
        -22-

        
          

        

      

      
        
        

      

    

    provided
      that, in the case of clause (i), the Company shall have received an undertaking
      from the holder that such Conversion Shares and Warrant Shares will be sold
      or
      transferred pursuant to the prospectus contained in such registration statement
      referred to in clause (i), including the prospectus delivery requirements if
      any, in accordance with the plan of distribution included in the registration
      statement. 

     

    The
      legend set forth above shall be removed and the Company shall issue a
      certificate without such legend to the holder of any Security upon which it
      is
      stamped, if, unless otherwise required by state securities laws, (i) the sale
      of
      such Security is registered under the Securities Act (including registration
      pursuant to Rule 416 thereunder); (ii) such holder provides the Company with
      an
      opinion of counsel, in form, substance and scope customary for opinions of
      counsel in comparable transactions, to the effect that a public sale or transfer
      of such Security may be made without registration under the Securities Act;
      or
      (iii) such holder provides the Company with reasonable assurances that such
      Security can be sold under Rule 144(k). In the event the above legend is removed
      from any Security and thereafter the effectiveness of a registration statement
      covering such Security is suspended or the Company determines that a supplement
      or amendment thereto is required by applicable securities laws, then upon
      reasonable advance written notice to such Purchaser the Company may require
      that
      the above legend be placed on any such Security that cannot then be sold
      pursuant to an effective registration statement or under Rule 144 and such
      Purchaser shall cooperate in the replacement of such legend. Such legend shall
      thereafter be removed when such Security may again be sold pursuant to an
      effective registration statement or under Rule 144(k). 

     

    (d)  Transfer
      Agent Instruction.
      Upon
      compliance by any Purchaser with the provisions of this Section 5 with respect
      to the transfer of any Securities, the Company shall permit the transfer of
      such
      Securities and, in the case of the transfer of Conversion Shares or Warrant
      Shares, promptly instruct its transfer agent to issue one or more certificates
      (or effect a DTC Transfer) in such name and in such denominations as specified
      by such Purchaser. The Company shall not give any instructions to its transfer
      agent with respect to the Securities, other than any permissible or required
      instructions provided in this Section 5, and the Securities shall otherwise
      be
      freely transferable on the books and records of the Company as and to the extent
      provided in this Agreement.

     

     

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

     

    The
      obligation of the Company hereunder to issue and sell the Series B Notes and
      Series B Warrants to each Purchaser hereunder is subject to the satisfaction,
      at
      or before the Closing Date, of each of the following conditions as to such
      Purchaser, provided that such conditions are for the Company’s sole benefit and
      may be waived by the Company at any time in its sole discretion:

     

    (a)  Execution
      of Transaction Documents.
      Each
      Purchaser shall have executed such Purchaser’s Execution Page to this Agreement
      and each other Transaction Document to which such Purchaser is a party and
      delivered the same to the Company.

     

    (b)  Payment
      of Purchase Price.
      Each
      Purchaser shall have delivered the full amount of such Purchaser’s Subscription
      Amount to the Company by wire transfer in accordance with 

     

    
      
        
        

      

      
        -23-

        
          

        

      

      
        
        

      

    

    the
      Company’s written wiring instructions (except for SDS to the extent that it may
      offset its expenses against the Subscription Amount pursuant to Section 4(q)
      hereof).

     

    (c)  Representations
      and Warranties True; Covenants Performed.
      The
      representations and warranties of each Purchaser shall be true and correct
      as of
      the date when made and as of the Closing Date as though made at that time
      (except for representations and warranties that speak as of a specific date,
      which representations and warranties shall be true and correct as of such date),
      and such Purchaser shall have performed, satisfied and complied with the
      covenants, agreements and conditions required by this Agreement to be performed,
      satisfied or complied with by such Purchaser at or prior to the Closing
      Date.

     

    (d)  No
      Legal Prohibition.
      No
      statute, rule, regulation, executive order, decree, ruling, injunction, action
      or proceeding shall have been enacted, entered, promulgated or endorsed by
      any
      court or governmental authority of competent jurisdiction or any self-regulatory
      organization having authority over the matters contemplated hereby which
      restricts or prohibits the consummation of any of the transactions contemplated
      by this Agreement.

     

     

    7.  CONDITIONS
      TO EACH PURCHASER’S OBLIGATION TO PURCHASE.

     

    The
      obligation of each Purchaser hereunder to purchase the Series B Notes and Series
      B Warrants for which it is subscribing from the Company hereunder is subject
      to
      the satisfaction, at or before the Closing Date, of each of the following
      conditions, provided that such conditions are for each Purchaser’s individual
      and sole benefit and may be waived by any Purchaser as to such Purchaser at
      any
      time in such Purchaser’s sole discretion:

     

    (a)  Execution
      of Transaction Documents.
      The
      Company shall have executed such Purchaser’s Execution Page to this Agreement
      and each Transaction Document to which the Company is a party and delivered
      executed originals of the same to such Purchaser. All other parties to the
      Transaction Documents (other than such Purchaser) shall have executed such
      Transaction Documents to which they are a party.

     

    (b)  Delivery
      of Securities.
      The
      Company shall have delivered to such Purchaser a duly executed Series B Note
      and
      Series B Warrant for the Subscription Amount being purchased by such Purchaser,
      registered in such Purchaser’s name.

     

    (c)  AMEX
      Listing.
      The
      Company shall: (i) prepare and file with AMEX a listing application covering
      the
      Conversion Shares initially issuable upon conversion of the Notes (without
      giving effect to any limitations on conversion contained in Article IX.A of
      the
      Series B Notes) and the Warrant Shares initially issuable upon exercise of
      the
      Series B Warrants (without giving effect to any limitations on exercise
      contained in Section 3(c) of the Series B Warrants), (ii) use its best efforts
      to take all steps necessary to cause such shares to be approved for listing
      on
      AMEX as soon as possible thereafter, (iii) notify the Purchasers upon such
      listing, and (iv) use its best efforts to maintain the listing of the Common
      Stock on AMEX, the Capital Market, the Global Market, the Global Select Market
      or the NYSE.

     

    (d)  Representations
      and Warranties True; Covenants Performed.
      The
      representations and warranties of the Company shall be true and correct as
      of
      the date when made and as of the 

     

    
      
        
        

      

      
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    Closing
      Date as though made at that time (except for representations and warranties
      that
      speak as of a specific date, which representations and warranties shall be
      true
      and correct as of such date) and the Company shall have performed, satisfied
      and
      complied with the covenants, agreements and conditions required by this
      Agreement to be performed, satisfied or complied with by the Company at or
      prior
      to the Closing Date. Such Purchaser shall have received a certificate, executed
      by the Chief Executive Officer of the Company after reasonable investigation,
      dated as of the Closing Date to the foregoing effect and as to such other
      matters as may reasonably be requested by such Purchaser.

     

    (e)  No
      Legal Prohibition.
      No
      statute, rule, regulation, executive order, decree, ruling, injunction, action
      or proceeding shall have been enacted, entered, promulgated or endorsed by
      any
      court or governmental authority of competent jurisdiction or any self-regulatory
      organization having authority over the matters contemplated hereby which
      restricts or prohibits the consummation of, any of the transactions contemplated
      by this Agreement.

     

    (f)  Legal
      Opinion.
      Such
      Purchaser shall have received an opinion of the Company’s counsel dated as of
      the Closing Date in substantially the form approved by the Purchasers prior
      to
      the Closing.

     

    (g)  No
      Material Adverse Change.
      There
      shall have been no material adverse changes and no material adverse developments
      in the business, properties, operations, prospects, condition (financial or
      otherwise) or results of operations of the Company and its Subsidiaries, taken
      as a whole, since the date hereof, and no information that is materially adverse
      to the Company and of which such Purchaser is not currently aware shall come
      to
      the attention of such Purchaser.

     

    (h)  Corporate
      Approvals.
      Such
      Purchaser shall have received (i) a copy of resolutions, duly adopted by the
      Board of Directors of the Company, which shall be in full force and effect
      at
      the time of the Closing, authorizing the execution, delivery and performance
      by
      the Company of this Agreement and the other Transaction Documents and the
      consummation by the Company of the transactions contemplated hereby and thereby
      and providing a determination as to whether any Purchasers are or will be an
      “interested stockholder” as defined in Section 203 of the Delaware General
      Corporation Law, as amended, as a result of the transactions contemplated
      hereby, certified as such by the Secretary or Assistant Secretary of the
      Company; (ii) consents of the holders of at least 75% of the outstanding face
      amount of the Company's Series A Preferred Stock for the incurrence of aggregate
      debt of up to $12,000,000 since March 4, 2005 and a copy of any amendment filed
      by the Company to its Certificate of Incorporation in connection therewith,
      certified as such by the Secretary or Assistant Secretary of the Company; (iii)
      consents of the holders of a majority of outstanding principal balance of the
      Series A Notes to the incurrence by the Company of additional debt, including
      the issuance of the Series B Notes, and to the pari
      passu
      position
      of the Series B Notes to the Series A Notes as to repayment and security; (iv)
      consents by holders of the Series A Notes who are entitled to exchange or
      participation rights under Article X of the Series A Notes or Section 4(q)
      of
      the Securities Purchase Agreement, dated January 13, 2006, by and among the
      Company and the purchasers party thereto (the “Series
      A Purchase Agreement”)
      to
      waive their rights thereto; (v) an amendment of the Series A Notes to remove
      volume trading limitations under the Stock Payment Conditions (as defined in
      Article XI.T of the Series A Notes) to allow interest and principal

     

    
      
        
        

      

      
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    payments
      on the Series A Notes to be payable in stock through December 13, 2007; and
      (vi)
      such other documents as it reasonably requests in connection with the
      Closing.

     

    (i)  Staff
      Reductions.
      The
      Company shall have reduced the Company’s overall headcount by the equivalent of
      five (5) full-time employees, with planned annual savings between $645,000
      and
      $655,000. The Company shall have offered severance payments to departing or
      released employees only as is consistent with contractual obligations and/or
      historical practice. 

     

     

    8.  COLLATERAL
      AGENCY PROVISIONS.

     

    (a)  Appointment
      of Collateral Agent.
      The
      Purchasers hereby appoint SDS to act as collateral agent (the “Collateral
      Agent”)
      and
      SDS agrees to act as Collateral Agent for the Purchasers, as contemplated herein
      and in the Security Documents. 

     

    (b)  Collateral
      Agent Authorized to Enter into Collateral Documents.
      Each of
      the Purchasers authorizes the Collateral Agent to enter into the Security
      Documents on its behalf.

     

    (c)  Amendment
      to Security Documents.
      The
      Purchasers holding a majority of the total outstanding principal balance of
      the
      Series B Notes (the “Required
      Holders”)
      shall
      have the right to direct the Collateral Agent, from time to time, to consent
      to
      any amendment, modification or supplement to or waiver of any provision of
      any
      Security Document and to release any Collateral (as defined in the Security
      Documents) from any lien or security interest held by the Collateral Agent;
      provided,
      however,
      that
      (i) no such direction shall require the Collateral Agent to consent to the
      modification of any provision or portion thereof which (in the sole judgment
      of
      the Collateral Agent) is intended to benefit the Collateral Agent; (ii) the
      Collateral Agent shall have the right to decline to follow any such direction
      if
      the Collateral Agent shall determine in good faith that the directed action
      is
      not permitted by the terms of any Security Document or may not lawfully be
      taken; and (iii) no such direction shall waive or modify any provision of any
      Security Document the waiver or modification of which expressly requires the
      consent of all of the Purchasers unless all Purchasers consent thereto. The
      Collateral Agent may rely on any such direction given to it by the Required
      Holders and shall be fully protected in relying thereon, and shall under no
      circumstances be liable, except in circumstances involving the Collateral
      Agent's gross negligence or willful misconduct as shall have been determined
      in
      a final nonappealable judgment of a court of competent jurisdiction, to any
      holder of the Series B Notes or any other person or entity for taking or
      refraining from taking action in accordance with any direction or otherwise
      in
      accordance with any of the Security Documents.

     

    (d)  Duties
      of Collateral Agent.
      

     

    (i)  Powers.
      The
      Collateral Agent shall have and may exercise such powers under the Security
      Documents as are specifically delegated to the Collateral Agent by the terms
      hereof and thereof, together with such powers as are reasonably incidental
      thereto. The Collateral Agent shall not have any implied duties or any
      obligations to take any action under the Security Documents except any action
      specifically provided by the Security Documents to be taken by the Collateral
      Agent.

     

    
      
        
        

      

      
        -26-

        
          

        

      

      
        
        

      

    

    (ii)  Reliance
      on Instructions of Required Holders.
      The
      Collateral Agent shall be required to act or to refrain from acting (and shall
      be fully protected in so acting or refraining from acting) upon the written
      instructions of the Required Holders, subject to Section 8(c) hereof, and such
      instructions shall be binding upon all the Purchasers; provided,
      however,
      that the
      Collateral Agent shall not be required to take any action which the Collateral
      Agent in good faith believes (A) could reasonably be expected to expose it
      to
      personal liability or (B) is contrary to this Agreement, the Security Documents
      and applicable law. Notwithstanding anything to the contrary contained herein,
      if the holders of the Series A Notes give the Collateral Agent any
      direction, as provided in Section 8 of the Series A Purchase
      Agreement, the Purchasers party hereto acknowledge and agree
      that (i) such direction shall be deemed to be an instruction
      from both the holders of the Series A Notes and the holders of the Series B
      Notes acting jointly; (ii) the holders of the Series B Notes shall not give
      a conflicting instruction to the Collateral Agent pursuant to the
      provisions of this Agreement; and (iii) if the Collateral Agent receives
      conflicting or inconsistent instructions from the holders of the Series A Notes
      and the holders of the Series B Notes, the Collateral Agent shall honor the
      instructions given by the holders of the Series A Notes and disregard the
      instructions given by the holders of the Series B Notes.

     

    (iii)  Action
      Without Instructions After Event of Default.
      Absent
      written instructions from the Required Holders at a time when an Event of
      Default shall have occurred and be continuing, the Collateral Agent may take,
      but shall have no obligation to take, any and all actions under the Security
      Documents or any of them or otherwise as it shall deem to be in the best
      interests of the Purchasers; provided,
      however,
      that in
      the absence of written instructions from the Required Holders, the Collateral
      Agent shall not exercise remedies available to it under any Security Document
      with respect to the Collateral or any part thereof (other than preserving,
      collecting and protecting the Collateral and the proceeds thereof).

     

    (iv)  Independent
      Right of Each Purchaser to Instruct Collateral Agent.
      The
      right of each Purchaser to instruct the Collateral Agent is the separate and
      individual property of such Purchaser and may be exercised as such Purchaser
      sees fit in its sole discretion and with no liability to any other such
      Purchaser for the exercise or non-exercise thereof. Without limiting the
      foregoing, the Required Holders shall not be liable under any circumstances
      to
      any other Purchaser for any action taken or omitted to be taken hereunder by
      the
      Collateral Agent upon written instructions from the Required
      Holders.

     

    (v)  Relationship
      Between Collateral Agent and Purchasers.
      The
      relationship between the Collateral Agent and the Purchasers is and shall be
      only to the extent explicitly provided for herein that of agent and principal
      and nothing herein contained shall be construed to constitute the Collateral
      Agent a trustee for any Purchaser or to impose on the Collateral Agent duties
      and obligations other than those expressly provided for herein. Without limiting
      the generality of the foregoing, neither the Collateral Agent nor any of its
      directors, officers, employees, partners or agents shall:

     

    (A)  be
      responsible to the other Purchasers for any recitals, representations or
      warranties contained in, or for the execution, validity, genuineness,
      perfection, effectiveness or enforceability of, the Security Documents (it
      being
      expressly understood that any determination of the foregoing is the
      responsibility of each Purchaser),

     

    
      
        
        

      

      
        -27-

        
          

        

      

      
        
        

      

    

    (B)  be
      responsible to the other Purchasers for the validity, genuineness, perfection,
      effectiveness, enforceability, existence, value or enforcement of any security
      interest in the Collateral (it being expressly understood that any determination
      of the foregoing is the responsibility of each Purchaser),

     

    (C)  be
      under
      any duty to inquire into or pass upon any of the foregoing matters, or to make
      any inquiry concerning the performance by any person or entity of its or their
      obligations under any Security Document (it being expressly understood that
      any
      determination of the foregoing is the responsibility of each
      Purchaser),

     

    (D)  be
      deemed
      to have knowledge of the occurrence of an Event of Default (as defined in the
      Series B Notes), or any event, condition or circumstance the occurrence of
      which
      would, with the giving of notice or the passage of time or both, constitute
      an
      Event of Default,

     

    (E)  be
      responsible or liable to the Purchasers for any shortage, discrepancy, damage,
      loss or destruction of any part of the Collateral wherever the same may be
      located regardless of the cause thereof unless the same shall happen solely
      through the gross negligence or willful misconduct of the Collateral Agent
      as
      shall have been determined in a final nonappealable judgment of a court of
      competent jurisdiction,

     

    (F)  have
      any
      liability to the Purchasers for any error or omission or action or failure
      to
      act of any kind made in the settlement, collection or payment in connection
      with
      any of the Security Documents or any of the Collateral or any instrument
      received in payment therefor or for any damage resulting therefrom other than
      as
      a sole result of its own gross negligence or willful misconduct as shall have
      been determined in a final nonappealable judgment of a court of competent
      jurisdiction, or

     

    (G)  in
      any
      event, be liable to the Purchasers as such for any action taken or omitted
      by
      it, absent its gross negligence or willful misconduct as shall have been
      determined in a final nonappealable judgment of a court of competent
      jurisdiction.

     

    (e)  Standard
      of Care.
      Each
      Purchaser agrees with all other Purchasers and the Collateral Agent that nothing
      contained in this Agreement shall be construed to give rise to, nor shall such
      Purchaser have, any claims whatsoever against the Collateral Agent on account
      of
      any act or omission to act in connection with the exercise of any right or
      remedy of the Collateral Agent with respect to the Security Documents or the
      Collateral in the absence of gross negligence or willful misconduct of the
      Collateral Agent as shall have been determined in a final nonappealable judgment
      of a court of competent jurisdiction.

     

    (f)  Collateral
      In Possession of Collateral Agent.
      The
      Collateral Agent shall be at liberty to place any of the Collateral, this
      Agreement, the Security Documents and any other instruments, documents or deeds
      delivered to it pursuant to or in connection with any of such documents in
      any
      safe deposit box, safe or receptacle selected by it or with any bank, any
      company whose business includes undertaking the safe custody of documents or
      any
      firm of lawyers of good repute and the Collateral Agent shall not be responsible
      for any loss thereby incurred unless such loss is solely the result of the
      Collateral Agent’s gross negligence or willful 

     

    
      
        
        

      

      
        -28-

        
          

        

      

      
        
        

      

    

    misconduct
      as shall have been determined in a final nonappealable judgment of a court
      of
      competent jurisdiction. The Collateral Agent’s books and records shall at all
      times show that the Collateral is held by the Collateral Agent subject to the
      pledge and lien of the Security Documents.

     

    (g)  Agents,
      Officers and Employees of Collateral Agent.
      The
      Collateral Agent may execute any of its duties under the Security Documents
      by
      or through its agents, officers or employees. Neither the Collateral Agent
      nor
      any of its agents, officers or employees shall be liable for any action taken
      or
      omitted to be taken by it or them in good faith, be responsible for the
      consequence of any oversight or error of judgment or answerable for any loss
      unless any of the foregoing shall happen through its or their gross negligence
      or willful misconduct as shall have been determined in a final nonappealable
      judgment of a court of competent jurisdiction.

     

    (h)  Appointment
      of Co-Agent.
      Whenever the Collateral Agent shall deem it necessary or prudent in order either
      to conform to any law of any jurisdiction in which all or any part of the
      Collateral shall be situated or to make any claim or bring any suit with respect
      to the Collateral or the Security Documents, or in the event that the Collateral
      Agent shall have been requested to do so by or on behalf of the Required
      Holders, the Collateral Agent shall execute and deliver a supplemental agreement
      and all other instruments and agreements necessary or proper to constitute
      a
      bank or trust company, or one or more other persons or entities approved by
      the
      Collateral Agent, either to act as co-agent or co-agents with respect to all
      or
      any part of the Collateral or with respect to the Security Documents, jointly
      with the Collateral Agent or any successor or successors, or to act as separate
      agent or agents of any such property, in any such case with such powers as
      may
      be provided in such supplemental agreement, and to vest in such bank, trust
      company or other persons or entities as such co-agent or separate agent, as
      the
      case may be, any property, title, right or power of the Collateral Agent deemed
      necessary or advisable by the Required Holders or the Collateral
      Agent.

     

    (i)  Reliance
      on Certain Documents.
      The
      Collateral Agent shall be entitled to rely on any communication, instrument
      or
      document believed by it to be genuine and correct and to have been signed or
      sent by the proper person or entity, and with respect to all legal matters
      shall
      be entitled to rely on the advice of legal advisors selected by it concerning
      all matters relating to the Security Documents and its duties hereunder and
      thereunder and otherwise shall rely on such experts as it deems necessary or
      desirable, and shall not be liable to any Purchaser or any other person or
      entity for the consequences of such reliance in the absence of gross negligence
      or willful misconduct as shall have been determined in a final nonappealable
      judgment of a court of competent jurisdiction.

     

    (j)  Collateral
      Agent May Have Separate Relationship with Parties.
      The
      Collateral Agent (or any affiliate of the Collateral Agent) may, notwithstanding
      the fact that it is the Collateral Agent, act as a lender to the Company and
      lend money to, and generally engage in any kind of business with such party
      in
      the same manner and to the same effect as though it were not the Collateral
      Agent; and such business shall not constitute a breach of any obligation of
      the
      Collateral Agent to the other Purchasers.

     

    (k)  Indemnification
      of Collateral Agent.
      Each of
      the Purchasers, ratably on the basis of the respective principal amounts of
      the
      Series B Notes outstanding at the time of the 

     

    
      
        
        

      

      
        -29-

        
          

        

      

      
        
        

      

    

    occurrence
      giving rise to the below liabilities, losses, etc., agrees to indemnify the
      Collateral Agent for any and all liabilities, losses, damages, penalties,
      actions, judgments, suits, costs, expenses or disbursements of any kind and
      nature whatsoever that may be imposed on, incurred by or asserted against the
      Collateral Agent in its capacity as the Collateral Agent, in any way relating
      to
      or arising out of the Security Documents or the transactions contemplated hereby
      or thereby or the enforcement of any of the terms hereof or thereof, provided
      that neither the Company nor any Purchaser shall be liable for any of the
      foregoing to the extent they arise from gross negligence or willful misconduct
      on the part of the Collateral Agent as shall have been determined in a final
      nonappealable judgment of a court of competent jurisdiction. This Section 8(k)
      shall survive the termination of this Agreement. Prior to taking any action
      hereunder as Collateral Agent, the Collateral Agent may require each Purchaser
      to deposit with it sufficient sums as it determines in good faith is necessary
      to protect the Collateral Agent for costs and expenses associated with taking
      such action, and the Collateral Agent shall have no liability hereunder for
      failure to take such action unless the Purchasers promptly deposit such
      sums.

     

    (l)  Resignation.
      The
      Collateral Agent at any time may resign, upon thirty (30) days’ prior written
      notice, by an instrument addressed and delivered to the Purchasers and the
      Company and may be removed at any time with or without cause upon thirty (30)
      days’ prior written notice, by an instrument in writing duly executed by duly
      authorized signatories of the Required Holders. The Required Holders shall
      also
      have the right to appoint a successor to the Collateral Agent upon any such
      resignation or removal, by instrument of substitution complying with the
      requirements of applicable law, or, in the absence of any such requirement,
      without any formality other than appointment and designation in writing, a
      copy
      of which instrument or writing shall be sent to each Purchaser. Upon the making
      of such appointment and delivery to such successor Collateral Agent of the
      Collateral then held by the retiring Collateral Agent, such successor Collateral
      Agent shall thereupon succeed to and become vested with all the rights, powers,
      privileges and duties conferred hereby and by the Security Documents upon the
      Collateral Agent named herein, and one or more such appointments and
      designations shall not exhaust the right to appoint and designate further
      successor Collateral Agents hereunder. The retiring Collateral Agent shall
      not
      be discharged from its duties and obligations hereunder until, and the retiring
      Collateral Agent shall be so discharged when, all the Collateral held by the
      retiring Collateral Agent has been delivered to the successor Collateral Agent
      and such successor Collateral Agent shall execute, acknowledge and deliver
      to
      each holder of the Series B Notes and to the Company an instrument accepting
      such appointment. If no successor shall be appointed and approved on or prior
      to
      the date of any such resignation, the resigning Collateral Agent may apply
      to
      any court of competent jurisdiction to appoint a successor to act until a
      successor shall have been appointed by the Required Holders as above
      provided.

     

     

    
      
        
        

      

      
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    (m)  Rights
      with Respect to Collateral.

     

    (i)  Each
      Purchaser agrees with all other Purchasers (A) that it shall not, and shall
      not
      attempt to, exercise any rights with respect to its security interest in the
      Collateral, whether pursuant to any other agreement or otherwise (other than
      pursuant to this Agreement), or take or institute any action against the
      Collateral Agent or any of the other Purchasers in respect of the Collateral
      or
      its rights hereunder (other than any such action arising from the breach of
      this
      Agreement) and (B) that such Purchaser has no other rights with respect to
      the
      Collateral other than as set forth in this Agreement and the Security
      Documents.

     

    (ii)  Each
      Purchaser agrees with all other Purchasers and the Collateral Agent that nothing
      contained in this Section 8 shall be construed to give rise to, nor shall such
      Purchaser have, any claims whatsoever against any other Purchaser or the
      Collateral Agent on account of any act or omission to act in connection with
      the
      exercise of any right or remedy of the Collateral Agent or any other Purchaser
      with respect to the Collateral in the absence of gross negligence or willful
      misconduct of such other Purchaser or Collateral Agent, as applicable, as shall
      have been determined in a final nonappealable judgment of a court of competent
      jurisdiction.

     

     

    9.  GOVERNING
      LAW; MISCELLANEOUS.

     

    (a)  Governing
      Law; Jurisdiction.
      This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of Delaware applicable to contracts made and to be performed in the State
      of Delaware. The Company and each Purchaser irrevocably consent to the exclusive
      jurisdiction of the United States federal courts and the state courts located
      in
      the County of New Castle, State of Delaware, in any suit or proceeding based
      on
      or arising under this Agreement or the transactions contemplated hereby and
      irrevocably agree that all claims between the parties in respect of such suit
      or
      proceeding may be determined in such courts. The Company and each Purchaser
      irrevocably waive the defense of an inconvenient forum to the maintenance of
      such suit or proceeding in such forum. The Company and each Purchaser further
      agree that service of process upon the Company or any Purchaser mailed by first
      class mail shall be deemed in every respect effective service of process upon
      the Company or such Purchaser, as the case may be, in any such suit or
      proceeding. Nothing herein shall affect the right of the Company or any
      Purchaser to serve process in any other manner permitted by law. The Company
      and
      each Purchaser agree that a final non-appealable judgment in any such suit
      or
      proceeding shall be conclusive and may be enforced in other jurisdictions by
      suit on such judgment or in any other lawful manner.

     

    (b)  Counterparts.
      This
      Agreement may be executed in two or more counterparts, all of which shall be
      considered one and the same agreement and shall become effective when
      counterparts have been signed by each party and delivered to the other party.
      This Agreement, once executed by a party, may be delivered to the other parties
      hereto by facsimile transmission of a copy of this Agreement bearing the
      signature of the party so delivering this Agreement. In the event any signature
      is delivered by facsimile transmission, the party using such means of delivery
      shall cause the manually executed execution page(s) hereof to be physically
      delivered to the other party within five (5) days of the execution hereof,
      provided that the failure to so deliver

     

    
      
        
        

      

      
        -31-

        
          

        

      

      
        
        

      

    

     any
      manually executed execution page shall not affect the validity or enforceability
      of this Agreement.

     

    (c)  Construction.
      Whenever the context requires, the gender of any word used in this Agreement
      includes the masculine, feminine or neuter, and the number of any word includes
      the singular or plural. Unless the context otherwise requires, all references
      to
      articles and sections refer to articles and sections of this Agreement, and
      all
      references to schedules are to schedules attached hereto, each of which is
      made
      a part hereof for all purposes. The descriptive headings of the several articles
      and sections of this Agreement are inserted for purposes of reference only,
      and
      shall not affect the meaning or construction of any of the provisions
      hereof.

     

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

     

    (e)  Entire
      Agreement; Amendments.
      This
      Agreement and the other Transaction Documents (including any schedules and
      exhibits hereto and thereto) contain the entire understanding of the Purchasers,
      the Company, their affiliates and persons acting on their behalf with respect
      to
      the matters covered herein and therein and, except as specifically set forth
      herein or therein, neither the Company nor the Purchasers make any
      representation, warranty, covenant or undertaking with respect to such matters.
      No provision of this Agreement may be waived other than by an instrument in
      writing signed by the party to be charged with enforcement, and no provision
      of
      this Agreement may be amended other than by an instrument in writing signed
      by
      the Company and the Required Holders. 

     

    (f)  Notices.
      Any
      notices required or permitted to be given under the terms of this Agreement
      shall be in writing and sent by certified or registered mail (return receipt
      requested) or delivered personally, by nationally recognized overnight carrier
      or by confirmed facsimile transmission, and shall be effective five (5) days
      after being placed in the mail, if mailed, or upon receipt or refusal of
      receipt, if delivered personally or by nationally recognized overnight carrier
      or confirmed facsimile transmission, in each case addressed to a party as
      provided herein. The initial addresses for such communications shall be as
      follows, and each party shall provide notice to the other parties of any change
      in such party’s address:

     

     

    (i)  If
      to the
      Company:

     

    Matritech,
      Inc.

    330
      Nevada Street

    Newton,
      Massachusetts 02460

    Telephone:
      (617) 928-0820

    Facsimile:
      (617) 928-0821

    Attention:
      Chief Executive Officer

    

     

    
      
        
        

      

      
        -32-

        
          

        

      

      
        
        

      

    

    with
      a
      copy simultaneously transmitted by like means (which transmittal shall not
      constitute notice hereunder) to:

     

     

    Choate,
      Hall & Stewart LLP

    Two
      International Place

    Boston,
      Massachusetts 02110

    Telephone:
      (617) 248-5000

    Facsimile:
      (617) 248-4000

    Attention:
      Barbara M. Johnson

    

     

    (ii)  If
      to any
      Purchaser, to the address set forth under such Purchaser’s name on the Execution
      Page hereto executed by such Purchaser.

     

    (g)  Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and assigns. Except as provided herein, the Company shall
      not
      assign this Agreement or any rights or obligations hereunder. Any Purchaser
      may
      assign or transfer the Securities pursuant to the terms of this Agreement and
      of
      such Securities, or assign such Purchaser’s rights hereunder to any other person
      or entity.

     

    (h)  Third
      Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      permitted successors and assigns, and is not for the benefit of, nor may any
      provision hereof be enforced by, any other person; provided,
      however,
      that
      Section 4(r) may be enforced by any Purchaser’s affiliates and its or their
      advisors to the extent the same is entitled to reimbursement of Expenses
      pursuant thereto.

     

    (i)  Survival.
      The
      representations and warranties of the Company and the agreements and covenants
      set forth in Sections 3, 4, 5, 8 and 9 hereof shall survive the Closing
      notwithstanding any due diligence investigation conducted by or on behalf of
      any
      Purchaser. Moreover, none of the representations and warranties made by the
      Company herein shall act as a waiver of any rights or remedies any Purchaser
      may
      have under applicable U.S. federal or state securities laws.

     

    (j)  Publicity.
      The
      Company and each Purchaser shall have the right to approve before issuance
      any
      press releases or SEC filings, or any other public statements with respect
      to
      the transactions contemplated hereby; provided,
      however,
      that
      the Company shall be entitled, without the prior approval of the Purchasers,
      to
      make any press release, SEC filings or, to the extent applicable, AMEX filings
      with respect to such transactions as is required by applicable law and
      regulations (although the Purchasers shall be consulted by the Company in
      connection with any such press release prior to its release, and the Purchasers
      shall be provided with a copy thereof and must provide specific consent to
      the
      use of a Purchaser’s name in connection therewith).

     

    (k)  Further
      Assurances.
      Each
      party shall do and perform, or cause to be done and performed, all such further
      acts and things, and shall execute and deliver all such other agreements,
      certificates, instruments and documents, as the other party may reasonably
      request 

     

    
      
        
        

      

      
        -33-

        
          

        

      

      
        
        

      

    

    in
      order
      to carry out the intent and accomplish the purposes of this Agreement and the
      consummation of the transactions contemplated hereby.

     

    (l)  Indemnification.
      In
      consideration of each Purchaser’s execution and delivery of this Agreement and
      the other Transaction Documents and purchase of the Securities hereunder, and
      in
      addition to all of the Company’s other obligations under this Agreement and the
      other Transaction Documents, from and after the Closing, the Company shall
      defend, protect, indemnify and hold harmless each Purchaser and each other
      holder of the Securities and all of their stockholders, partners, members,
      officers, directors, employees and direct or indirect investors and any of
      the
      foregoing persons’ agents or other representatives (including, without
      limitation, those retained in connection with the transactions contemplated
      by
      this Agreement, collectively, the “Indemnitees”)
      from
      and against any and all actions, causes of action, suits, claims, losses, costs,
      penalties, fees, liabilities and damages, and expenses in connection therewith
      (irrespective of whether any such Indemnitee is a party to the action for which
      indemnification hereunder is sought), and including reasonable attorneys’ fees
      and disbursements (the “Indemnified
      Liabilities”),
      incurred by any Indemnitee as a result of, or arising out of, or relating to
      (i)
      any misrepresentation or breach of any representation or warranty made by the
      Company in this Agreement, any other Transaction Document or any other
      certificate, instrument or document contemplated hereby or thereby; (ii) any
      breach of any covenant, agreement or obligation of the Company contained in
      this
      Agreement, any other Transaction Document or any other certificate, instrument
      or document contemplated hereby or thereby; or (iii) any cause of action, suit,
      claim, order, proceeding or process brought or made against such Indemnitee
      by a
      third party (including for these purposes a derivative action brought on behalf
      of the Company) and arising out of or resulting from (A) the execution,
      delivery, performance or enforcement of this Agreement, any other Transaction
      Document or any other certificate, instrument or document contemplated hereby
      or
      thereby, (B) any disclosure made by such Purchaser pursuant to Section 4(b)
      or
      4(n) hereof, or (C) the status of such Purchaser or holder of the Securities
      as
      an investor in the Company; provided,
      however,
      that
      with respect to clause (iii) above, excluding any Indemnified Liabilities (a)
      resulting from the Indemnitee’s or the Purchaser’s own acts of fraud or willful
      misconduct and (b) resulting from any cause of action, suit, claim, order,
      proceeding or process brought or asserted against any Indemnified Party by
      any
      investor in or partner, shareholder, member, employee or agent of said
      Indemnified Party. To the extent that the foregoing undertaking by the Company
      may be unenforceable for any reason, the Company shall make the maximum
      contribution to the payment and satisfaction of each of the Indemnified
      Liabilities which is permissible under applicable law. Except as otherwise
      set
      forth herein, the mechanics and procedures with respect to the rights and
      obligations under this Section 9(l) shall be the same as those set forth in
      Section 6(c) of the Registration Rights Agreement.

     

    (m)  Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to any Purchaser hereunder
      or pursuant to any of the other Transaction Documents or any Purchaser enforces
      or exercises its rights hereunder or 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

     

    
      
        
        

      

      
        -34-

        
          

        

      

      
        
        

      

    

     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. 

     

    (n)  Joint
      Participation in Drafting.
      Each
      party to this Agreement has participated in the negotiation and drafting of
      this
      Agreement and the other Transaction Documents. As such, the language used herein
      and therein shall be deemed to be the language chosen by the parties hereto
      to
      express their mutual intent, and no rule of strict construction will be applied
      against any party to this Agreement.

     

    (o)  Remedies.
      No
      provision of this Agreement or any other Transaction Document providing for
      any
      remedy to a Purchaser shall limit any other remedy which would otherwise be
      available to such Purchaser at law, in equity or otherwise. Nothing in this
      Agreement or any other Transaction Document shall limit any rights any Purchaser
      may have under any applicable federal or state securities laws with respect
      to
      the investment contemplated hereby. The Company acknowledges that a breach
      by it
      of its obligations hereunder will cause irreparable harm to the Purchasers
      by
      vitiating the intent and purpose of the transactions contemplated hereby.
      Accordingly, the Company acknowledges that the remedy at law for a breach of
      its
      obligations hereunder (including, but not limited to, its obligations pursuant
      to Section 5 hereof) will be inadequate and agrees, in the event of a breach
      or
      threatened breach by the Company of the provisions of this Agreement (including,
      but not limited to, its obligations pursuant to Section 5 hereof), that each
      Purchaser shall be entitled, in addition to all other available remedies, to
      an
      injunction restraining any breach and requiring immediate issuance and transfer
      of the Securities, without the necessity of showing economic loss and without
      any bond or other security being required.

     

    (p)  Knowledge.
      As used
      in this Agreement, the term “knowledge” of any person or entity shall mean and
      include such person’s or entity’s or, with respect to the Company, the Company’s
      executive officers’ actual knowledge and that knowledge which a reasonably
      prudent business person could have obtained in the management of his or her
      business affairs after making due inquiry and exercising due diligence which
      a
      prudent business person should have made or exercised, as applicable, with
      respect thereto.

     

    (q)  Exculpation
      Among Purchasers; No “Group”.
      Each
      Purchaser acknowledges that it has independently evaluated the merits of the
      transactions contemplated by this Agreement and the other Transaction Documents,
      that it has independently determined to enter into the transactions contemplated
      hereby and thereby, that it is not relying on any advice from or evaluation
      by
      any other Purchaser, and that it is not acting in concert with any other
      Purchaser in making its purchase of securities hereunder or in monitoring its
      investment in the Company. The Purchasers and, to its knowledge, the Company
      agree that the Purchasers have not taken any actions that would deem such
      Purchasers to be members of a “group” for purposes of Section 13(d) of the
      Exchange Act, and the Purchasers have not agreed to act together for the purpose
      of acquiring, holding, voting or disposing of equity securities of the Company.
      Each Purchaser further acknowledges that SDS has retained Drinker Biddle &
Reath LLP (“DB&R”)
      to act
      as its counsel in connection with the transactions contemplated by this
      Agreement and the other Transaction Documents and that DB&R has not acted as
      counsel for any of the other Purchasers 

     

    
      
        
        

      

      
        -35-

        
          

        

      

      
        
        

      

    

    in
      connection therewith and none of the other Purchasers have the status of a
      client of DB&R for conflict of interest or other purposes as a result
      thereof. 

     

    [REMAINDER
      OF PAGE LEFT BLANK INTENTIONALLY]

     

    

     

    
      
        
        

      

      
        -36-

        
          

        

      

      
        
        

      

    

    IN
      WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
      Securities Purchase Agreement to be duly executed as of the date first above
      written.

     

    

     

    MATRITECH,
      INC.

     

    

     

    

     

    By:
      ___________________________________       

     

    Name: Stephen
      D. Chubb

    Title: Chief
      Executive Officer

     

    

     

    PURCHASER:

     

    

     

     

    ___________________________

    (Print
      or
      Type Name of Purchaser)

     

    

     

    

     

    By:
      ___________________________________       

    Name: 

    Title:

    

    RESIDENCE:
      ____________________________     

    

    ADDRESS:
      _____________________________
  

    Telephone:
          

    Facsimile:
          

    Attention:
          

     

    SUBSCRIPTION
      AMOUNT:

    

    Aggregate
      Face Amount of Note: $___________WWW.EXFILE.COM -- MATRITECH FORM 8-K -- EXHIBIT 4.4 -- 14850

    EXHIBIT
      4.4

     

    THIS
      NOTE AND THE SECURITIES INTO WHICH THIS NOTE IS CONVERTIBLE HAVE NOT BEEN
      REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES
      LAWS
      OF ANY STATE OF THE UNITED STATES OR IN ANY OTHER JURISDICTION. THE SECURITIES
      REPRESENTED HEREBY MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN THE ABSENCE OF
      AN
      EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE SECURITIES
      LAWS UNLESS OFFERED, SOLD OR TRANSFERRED PURSUANT TO AN AVAILABLE EXEMPTION
      FROM
      THE REGISTRATION REQUIREMENTS OF THOSE LAWS.

     

    SERIES
      B 15% SECURED CONVERTIBLE PROMISSORY NOTE

     

    
      	
              Issuance
                Date: January 22, 2007

            	
              Principal:
                $_________

            

    

     

    FOR
      VALUE RECEIVED,
      MATRITECH, INC., a corporation organized under the laws of Delaware (the
“Borrower”),
      hereby promises to pay to the order of ____________________, or its registered
      assigns (individually, the “Holder,”
and,
      collectively with the holders of the Other Series B Notes (as defined below),
      the “Holders”),
      the
      amount set out above as the Principal (as reduced pursuant to the terms hereof
      pursuant to redemption, conversion or otherwise, the “Principal”)
      when
      due, whether upon the Scheduled Maturity Date, on any Monthly Installment Date
      with respect to the Principal Installment Amount due on such Monthly Installment
      Date (each, as defined herein), acceleration, conversion, redemption or
      otherwise (in each case in accordance with the terms hereof) and to pay interest
      (“Interest”)
      on any
      outstanding Principal at the rate of fifteen percent (15.0%) per annum (except
      as otherwise provided herein) (the “Interest
      Rate”),
      from
      the date set out above as the Issuance Date (the “Issuance
      Date”)
      until
      the same becomes due and payable, whether upon the Scheduled Maturity Date,
      on
      any Quarterly Installment Date with respect to the Interest Installment Amount
      due on such Quarterly Installment Date (each, as defined herein), acceleration,
      conversion, redemption or otherwise (in each case, in accordance with the terms
      hereof).

    

    The
      term
“Note”
and
      all
      references thereto, as used throughout this instrument, shall mean this
      instrument as originally executed, or if later amended or supplemented, then
      as
      so amended or supplemented. This Note is being issued by the Borrower along
      with
      similar secured convertible promissory notes designated as Series B 15% Secured
      Convertible Promissory Notes (the “Other
      Series B Notes”
and,
      together with this Note, the “Series
      B Notes”)
      pursuant to that certain Securities Purchase Agreement, dated as of
      January 22, 2007, between the Borrower and the signatories thereto (the
“Securities
      Purchase Agreement”).
      The
      obligations under the Series B Notes are secured as provided in an Amended
      and
      Restated Security Agreement (the “Security
      Agreement”),
      dated
      as of the date hereof, by the Borrower in favor of the Collateral Agent (as
      defined in the Securities Purchase Agreement) for the benefit of the Holders
      of
      the Series B Notes and the holders of the 15% Secured Convertible Promissory
      Notes dated

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    January 13,
      2006 (the “Series
      A Notes”).
      The
      Series B Notes, the Securities Purchase Agreement, the Security Agreement,
      the
      Warrants issued pursuant to the Securities Purchase Agreement (the “Series
      B Warrants”),
      the
      Amended and Restated Contingent License Agreement (the “Contingent
      License Agreement”),
      dated
      as of the date hereof, between the Borrower and the Collateral Agent (as defined
      in the Securities Purchase Agreement) for the benefit of the Holders of the
      Series B Notes and the holders of the Series A Notes, and the Registration
      Rights Agreement, dated as of the date hereof, between the Borrower and the
      signatories thereto (the “Registration
      Rights Agreement”),
      are
      collectively referred to herein as the “Transaction
      Documents.”
All
      capitalized terms used but not otherwise defined herein shall have the
      respective meanings assigned to such terms in the Securities Purchase
      Agreement.

    

    ARTICLE
      I

     

    PAYMENT
      OF PRINCIPAL AND INTEREST

     

    A.  Payment
      of Principal.
      On each
      Monthly Installment Date, commencing on July 13, 2007, the Borrower shall
      pay to the Holder an amount equal to the Principal Installment Amount due on
      such Monthly Installment Date in cash or, provided there has been no Stock
      Payment Conditions Failure, in shares of Common Stock (or any combination of
      the
      foregoing), in accordance with the provisions of Article III. On the
      Scheduled Maturity Date, the Holder shall surrender the Note to the Borrower
      and
      the Borrower shall pay to the Holder, an amount in cash, representing all
      outstanding Principal and the accrued and unpaid Interest thereon.

     

    B.  Payment
      of Interest.
      Interest shall accrue at the Interest Rate on the unpaid principal balance
      hereof from the Issuance Date until the same is paid, whether at maturity,
      or
      upon prepayment, repayment, conversion or otherwise. Interest shall be
      calculated based on a 365 day year and shall be payable quarterly in arrears
      on
      each Quarterly Installment Date, commencing on June 13, 2007, except that
      the first payment shall be in respect of interest accrued from the Issuance
      Date
      to June 13, 2007, and on the Scheduled Maturity Date (each an “Interest
      Payment Date”).
      On
      each Quarterly Installment Date, the Borrower shall pay to the Holder an amount
      equal to the Interest Installment Amount due on such Quarterly Installment
      Date
      in cash or, provided there has been no Stock Payment Conditions Failure, in
      shares of Common Stock (or any combination of the foregoing), in accordance
      with
      the provisions of Article III. On the Scheduled Maturity Date, the Holder
      shall surrender the Note to the Borrower and the Borrower shall pay to the
      Holder, an amount in cash, representing all outstanding Principal and the
      accrued and unpaid Interest thereon. Upon the occurrence and during the
      continuance of an Event of Default, the Interest Rate shall be increased to
      twenty-four percent (24.0%) (the “Default
      Rate”).
      In
      the event that such Event of Default is subsequently cured, the adjustment
      referred to in the preceding sentence shall cease to be effective as of the
      date
      of such cure; provided that the Interest as calculated at such increased rate
      during the continuance of such Event of Default shall continue to apply to
      the
      extent relating to the days after the occurrence of such Event of Default
      through and including the date of cure of such Event of Default. Interest on
      overdue interest shall accrue at the same rate compounded
      quarterly.

     

    C.  Prepayment.
      The
      Borrower may at any time and from time to time upon thirty (30) calendar days’
prior written notice to the Holder prepay the outstanding principal
      amount

     

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    of
      the
      Series B Notes in cash in whole or in part, without premium or penalty, except
      as provided in the next sentence. Any such prepayment shall be accompanied
      by
      payment in cash of a premium equal to twenty-five percent (25.0%) of the
      principal amount of such prepayment plus all accrued and unpaid interest
      thereon. A Change of Control, as defined herein, shall automatically trigger
      prepayment in full of the Series B Notes and the payment of the required
      prepayment premium, without the need for any prior notice by Borrower pursuant
      to this Article I.C. The Borrower shall not prepay the outstanding Series B
      Notes except contemporaneously with prepayment of the outstanding Series A
      Notes
      and if any such prepayment is made, the Borrower shall prepay the outstanding
      Series A Notes and Series B Notes of each Holder and each holder of a Series
      A
      Note pro
      rata,
      based
      on the total amounts due on the Series A Notes and Series B Notes at the time
      of
      prepayment, and any such prepayment among all outstanding Series A Notes and
      Series B Notes shall be in a minimum amount equal to $500,000 and in incremental
      amounts equal to $100,000 in excess of such minimum amount. If Borrower, after
      giving notice of prepayment, fails to effect the prepayment in accordance with
      the terms of the notice (or within three (3) trading days after the date for
      prepayment), then Holder shall be entitled to exercise all remedies of Holder
      and the Borrower shall thereafter be prohibited from making any prepayment
      of
      the Note under this Article I.C.

     

    D.  Manner
      of Payments.
      All
      cash payments of principal and interest shall be made in, and all references
      herein to monetary denominations shall refer to, lawful money of the United
      States of America. All cash payments shall be made at such address as the Holder
      shall have given or shall hereafter give to the Borrower by written notice
      made
      in accordance with the provisions of this Note. All payments of this Note in
      shares of Common Stock shall be made in accordance with the provisions of
      Article III. If any payment to be made hereunder shall be due on a day
      other than a business day, such payment shall be made on the next succeeding
      business day and such extension of time shall be included in computing interest
      in connection with such payment.

     

    ARTICLE
      II

     

    CONVERSION

     

    A.  Conversion
      at the Option of the Holder.
      Subject
      to the limitations on conversions contained in Article IX, the Holder may,
      at any time and from time to time (including without limitation after receipt
      of
      notice of prepayment from Borrower under Article I.C hereof), convert (an
“Optional
      Conversion”)
      all or
      any portion of the unpaid principal amount hereof and, to the extent requested
      in writing by the Holder, any accrued interest thereon into such number of
      fully
      paid and non-assessable shares of Common Stock as is equal to the quotient
      obtained by dividing (x) the amount of principal and interest, if any,
      being so converted by (y) the Conversion Price then in effect (the
“Optional
      Conversion Shares”);
      provided that the Conversion Price may not be below $0.63 until after the
      Borrower’s stockholders have approved the stockholder proposal referred to in
      clause (i) of the last sentence of Section 4(g) of the Securities Purchase
      Agreement.

     

    B.  Mechanics
      of Conversion.
      In
      order to effect an Optional Conversion, the Holder shall: (x) fax (or
      otherwise deliver) a copy of the fully executed Notice of Optional Conversion
      to
      the Borrower (Attention: Secretary) and (y) surrender or cause to be
      surrendered this Note, duly endorsed, along with a copy of the Notice of
      Optional Conversion as soon as practicable 

     

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    thereafter
      to the Borrower. Upon receipt by the Borrower of a facsimile copy of a Notice
      of
      Optional Conversion and the original Note, duly endorsed (or if this Note has
      been lost, stolen or destroyed the documentation required by Article XII.B
      hereof) from the Holder, the Borrower shall promptly send, via facsimile, a
      confirmation to the Holder stating that the Notice of Optional Conversion has
      been received, the date upon which the Borrower expects to deliver the Common
      Stock issuable upon such conversion and the name and telephone number of a
      contact person at the Borrower regarding the conversion.

     

    (i)  Delivery
      of Common Stock Upon Conversion.
      Upon the
      surrender of this Note (or if this Note has been lost, stolen or destroyed
      the
      documentation required by Article XII.B hereof) accompanied by a Notice of
      Optional Conversion, the Borrower (itself, or through its transfer agent) shall,
      no later than the third (3rd)business
      day following such surrender (the “Delivery
      Period”),
      issue
      and deliver (i.e., deposit with a nationally recognized overnight courier
      service postage prepaid) to the Holder or its nominee stock certificates
      evidencing (x) that number of shares of Common Stock issuable upon
      conversion of that portion of this Note being converted and (y) a new Note
      representing the principal balance of this Note not being converted, if any.
      Notwithstanding the foregoing, if the Borrower’s transfer agent is participating
      in the Depository Trust Company (“DTC”)
      Fast
      Automated Securities Transfer program, and so long as the certificates therefor
      do not bear a legend (pursuant to the terms of the Securities Purchase
      Agreement) and the holder thereof is not then required to return such
      certificate for the placement of a legend thereon (pursuant to the terms of
      the
      Securities Purchase Agreement), the Borrower shall cause its transfer agent
      to
      promptly electronically transmit the Common Stock issuable upon conversion
      to
      the Holder by crediting the account of the Holder or its nominee with DTC
      through its Deposit Withdrawal Agent Commission system (“DTC
      Transfer”).
      If
      the aforementioned conditions to a DTC Transfer are not satisfied, the Borrower
      shall deliver as provided above to the Holder physical certificates representing
      the Common Stock issuable upon conversion. Further, the Holder may instruct
      the
      Borrower to deliver to the Holder physical certificates representing the Common
      Stock issuable upon conversion in lieu of delivering such shares by way of
      DTC
      Transfer.

     

    (ii)  Taxes.
      The
      Borrower shall pay any and all taxes that may be imposed upon it with respect
      to
      the issuance and delivery of the shares of Common Stock upon the conversion
      of
      this Note.

     

    (iii)  No
      Fractional Shares.
      If any
      conversion of this Note would result in the issuance of a fractional share
      of
      Common Stock (aggregating the entire amount of principal and interest being
      converted pursuant to a given Notice of Optional Conversion), such fractional
      share shall be payable in cash based upon the Closing Sales Price of the Common
      Stock at such time, and the number of shares of Common Stock issuable upon
      conversion of this Note shall be the next lower whole number of shares. If
      the
      Borrower elects not to, or is unable to, make such a cash payment, the Holder
      shall be entitled to receive, in lieu of the final fraction of a share, one
      whole share of Common Stock.

     

    (iv)  Conversion
      Disputes.
      In the
      case of any dispute with respect to a conversion, the Borrower shall promptly
      issue such number of shares of Common Stock as are not disputed in accordance
      with subparagraph (i) above. If such dispute involves the calculation of the
      Conversion Price, and such dispute is not promptly resolved by discussion
      between the 

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    Majority
      Holders and the Borrower, the Borrower shall submit the disputed calculations
      to
      an independent outside accountant (which accountant shall be subject to the
      reasonable approval of the Majority Holders via facsimile within three (3)
      business days of receipt of the Notice of Optional Conversion. The accountant,
      at the Borrower’s sole expense, shall promptly audit the calculations and notify
      the Borrower and the Holders of the results no later than three (3) business
      days from the date it receives the disputed calculations. The accountant’s
      calculation shall be deemed conclusive, absent manifest error. The Borrower
      shall then issue the appropriate number of shares of Common Stock in accordance
      with subparagraph (i) above.

     

    (v)  Payment
      of Accrued Amounts.
      Upon
      conversion of any unpaid principal amount of this Note, if the Holder has not
      elected to convert all of the accrued interest thereon, then all accrued but
      unconverted interest on such amount through and including the Conversion Date
      shall be paid on the Conversion Date in cash by the Borrower.

     

    C.  Optional
      Conversion Make-Whole.
      If, in
      connection with any Optional Conversion, the Borrower is unable to issue at
      the
      applicable Conversion Price all the applicable Optional Conversion Shares that
      the Borrower is required to issue, then (A) the Borrower shall deliver to
      the Holder the maximum number of Optional Conversion Shares available on the
      applicable Conversion Date in accordance with Article II and (B) the
      Borrower shall pay to the Holder in cash, on the applicable Conversion Date,
      an
      amount equal to the product of (1) the number of Optional Conversion Shares
      that the Borrower is prohibited from issuing on the applicable Conversion Date
      and (2) the greater of (x) the applicable Conversion Price and
      (y) the Closing Sales Price on the trading day immediately preceding the
      applicable Conversion Date (the “Optional
      Conversion Make-Whole”).

     

    ARTICLE
      III

     

    INSTALLMENT
      CONVERSION OR REDEMPTION

     

    A.  General.
      Subject
      to and in accordance with the terms of this Article III, on each applicable
      Installment Date, the Borrower shall pay to the Holder the Installment Amount
      as
      of such Installment Date by the combination of any of the following:
      (i) (A) provided that there has been no Stock Payment Conditions
      Failure and (B) provided that prior to the receipt of stockholder approval
      referred to in clause (i) of the last sentence of Section 4(g) of the Securities
      Purchase Agreement, the 10-day VWAP is not less than the then effective
      Conversion Price (unless waived by the Holder on its behalf), by requiring
      the
      conversion of all or any portion of the applicable Installment Amount into
      shares of Common Stock in accordance with the provisions of this
      Article III (a “Borrower
      Conversion”),
      and/or (ii) redeeming for cash all or any portion of the applicable
      Installment Amount in accordance with the provisions of this Article III (a
“Borrower
      Redemption”);
      provided that all of the outstanding applicable Installment Amount as of each
      such Installment Date must be converted or redeemed by the Borrower on the
      applicable Installment Date, subject to the provisions of this Article III.
      Unless the Borrower Installment Notice (as defined below) indicates otherwise
      or
      if there is a Stock Payment Conditions Failure, the entire Installment Amount
      to
      be paid on such Installment Date shall be paid through a Borrower Conversion;
      provided that in no event may a Borrower Conversion be made at a Conversion
      Price below $0.63 until after the Borrower’s stockholders have approved the
      stockholder proposal referred to in clause (i) of the last sentence of

     

    
      
         

      

      
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    Section 4(g)
      of the Securities Purchase Agreement. Notwithstanding anything to the contrary
      herein, a Holder may elect to defer the receipt of any shares of Common Stock
      pursuant to a Borrower Conversion with written notice delivered to the Borrower
      until the earlier of (i) the Scheduled Maturity Date or (ii) the date
      a Registration Statement (as defined in the Registration Rights Agreement)
      is
      declared effective by the SEC. On or prior to the date which is the twentieth
      (20th) trading day prior to each Installment Date (each, an “Installment
      Notice Due Date”),
      the
      Borrower shall deliver written notice (each, a “Borrower
      Installment Notice”),
      to
      the Holder which Borrower Installment Notice shall state (i) the portion,
      if any, of the applicable Installment Amount to be converted pursuant to a
      Borrower Conversion (the “Borrower
      Conversion Amount”),
      (ii) the portion, if any, of the applicable Installment Amount which the
      Borrower elects to redeem pursuant to a Borrower Redemption (the “Borrower
      Redemption Amount”),
      (iii) whether the Holder elects a deferral of receipt of the shares of
      Common Stock pursuant to the Borrower Conversion and (iv) unless the
      Borrower has elected to pay the applicable Installment Amount entirely through
      a
      Borrower Redemption, the Borrower Installment Notice shall certify that the
      Stock Payment Conditions have been satisfied as of the date of the Borrower
      Installment Notice. Each Borrower Installment Notice whether actually given
      or
      deemed given shall be irrevocable, except as otherwise provided herein. The
      Borrower may give a Borrower Installment Notice that is effective with respect
      to all subsequent Installment Dates, unless and until modified by a subsequent
      Borrower Installment Notice given in accordance with this Article III.A,
      provided however, that such standing notice shall not become an irrevocable
      Borrower Installment Notice with respect to any Installment Amount until twenty
      (20) trading days prior to the applicable Installment Date. Except as expressly
      provided in this Article III.A, the Borrower shall redeem and convert the
      applicable Installment Amount of this Note pursuant to this Article III and
      the corresponding Installment Amounts of the Other Series B Notes pursuant
      to
      the corresponding provisions of the Other Series B Notes in the same ratio
      of
      the Installment Amount being redeemed and converted hereunder. The Borrower
      Redemption Amount (whether set forth in the Borrower Installment Notice or
      by
      operation of this Article III) shall be redeemed in accordance with Article
      III.B and the Borrower Conversion Amount shall be converted in accordance with
      Article III.C.

     

    B.  Mechanics
      of Borrower Redemption.
      If the
      Borrower elects, or is deemed to have elected, a Borrower Redemption in
      accordance with Article III.A, then the Borrower Redemption Amount, if any,
      which is to be paid to the Holder on the applicable Installment Date shall
      be
      redeemed by the Borrower on such Installment Date upon payment by the Borrower
      to the Holder on such Installment Date, by wire transfer of immediately
      available funds, an amount in cash (the “Borrower
      Installment Redemption Price”)
      equal
      to 100% of the Borrower Redemption Amount. If the Borrower fails to redeem
      the
      Borrower Redemption Amount on the applicable Installment Date by payment of
      the
      Borrower Installment Redemption Price on such date, then at the option of the
      Holder designated in writing to the Borrower (any such designation, a
“Conversion
      Notice”
for
      purposes of this Note), the Holder may require the Borrower to convert all
      or
      any part of the Borrower Redemption Amount at the Effective Conversion Price.
      Conversions required by this Article III.B shall be made in accordance with
      the
      provisions of Article II.B. Notwithstanding anything to the contrary in this
      Article III.B, but subject to Article IX, until the Borrower Installment
      Redemption Price (together with any interest thereon) is paid in full, the
      Borrower Redemption Amount (together with any interest thereon) may be
      converted, in whole or in part, by the Holder into shares of Common Stock
      pursuant to Article II. In the event the Holder elects to convert all or
      any 

     

    
      
         

      

      
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    portion
      of the Borrower Redemption Amount prior to the applicable Installment Date
      as
      set forth in the immediately preceding sentence, the Borrower Redemption Amount
      so converted shall be deducted from the Installment Amounts relating to the
      Installment Dates as set forth in the applicable Conversion Notice.

     

    C.  Mechanics
      of Borrower Conversion.

     

    (i)  If
      the
      Borrower pays any part of an Installment Amount pursuant to a Borrower
      Conversion in accordance with Article III.A, then on the Installment Date the
      Borrower shall issue and deliver (i.e., deposit with a nationally recognized
      overnight courier service postage prepaid) to the Holder or its nominee stock
      certificates evidencing a number of shares of Common Stock equal to the quotient
      of (x) the Borrower Conversion Amount divided by (y) the Effective
      Conversion Price (the “Installment
      Conversion Shares”),
      with
      cash in lieu of fractional shares (if any) payable to the Holder in accordance
      with Article II.B(iii). Notwithstanding the foregoing, if the Borrower’s
      transfer agent is participating in the DTC Fast Automated Securities Transfer
      program, and so long as the certificates therefor do not bear a legend (pursuant
      to the terms of the Securities Purchase Agreement) and the holder thereof is
      not
      then required to return such certificate for the placement of a legend thereon
      (pursuant to the terms of the Securities Purchase Agreement), the Borrower
      shall
      deliver such shares by way of DTC Transfer. If the aforementioned conditions
      to
      a DTC Transfer are not satisfied, the Borrower shall deliver as provided above
      to the Holder physical certificates representing the Common Stock issuable
      upon
      conversion. Further, the Holder may instruct the Borrower to deliver to the
      Holder physical certificates representing the Common Stock issuable upon
      conversion in lieu of delivering such shares by way of DTC
      Transfer.

     

    (ii)  If
      there
      is a Stock Payment Conditions Failure with respect to any Borrower Conversion,
      which failure occurs after the Borrower Installment Notice with respect to
      such
      Borrower Conversion has become irrevocable, then the Borrower upon written
      notice to the Holder not less than five (5) trading days prior to the applicable
      Conversion Date shall be entitled to satisfy the payment of the relevant
      Installment Amount by wire transfer of immediately available funds, in an amount
      in cash equal to one hundred percent (100%) of the unconverted Borrower
      Conversion Amount on such Installment Date (plus accrued and unpaid interest
      thereon). If there is a Stock Payment Conditions Failure with respect to any
      Borrower Conversion and the Borrower does not timely notify the Holder of its
      election to make cash payment in accordance with the preceding sentence, then
      at
      the option of the Holder designated in writing to the Borrower, the Holder
      may
      require the Borrower to satisfy the payment of the relevant Installment Amount
      in one of the following ways or any combination thereof: (x) the Borrower shall
      redeem all or any part designated by the Holder of the unconverted Borrower
      Conversion Amount (such designated amount is referred to as the “First
      Redemption Amount”)
      on such
      Installment Date, by paying to the Holder on such Installment Date (or such
      later date not more than two (2) trading days after the Holder delivers its
      election under this clause (ii)), by wire transfer of immediately available
      funds, an amount in cash equal to one hundred percent (100%) of such First
      Redemption Amount (plus accrued and unpaid interest thereon), (y) the
      Borrower Conversion shall be null and void with respect to all or any part
      designated by the Holder of the unconverted Borrower Conversion Amount (other
      than any amount redeemed under clause (x) of this Article III.C(ii)) and the
      Holder shall be entitled to all the rights of a Holder with respect to such
      amount of the Borrower Conversion Amount, or 

     

    
      
         

      

      
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    (z) the
      Borrower shall deliver the Installment Conversion Shares on the next scheduled
      Installment Date or any other mutually agreed upon date if the Holder so elects
      pursuant to clauses (ii) or (iii) of Article XI.T; for the avoidance of doubt,
      the Borrower’s failure to issue shares of Common Stock on an Installment Date
      with respect to any Borrower Conversion Amount due to a Stock Payment Conditions
      Failure shall not be deemed an Event of Default hereunder so long as the
      Borrower otherwise promptly complies with the Holder’s written designation with
      respect to such Borrower Conversion Amount. If the Borrower fails to redeem
      any
      First Redemption Amount on or before the applicable Installment Date, by payment
      of such amount on the applicable Installment Date, then the Holder shall have
      the rights set forth in Article VI as if the Borrower failed to pay the
      applicable Borrower Redemption Amount and all other rights under this Note.
      Notwithstanding anything to the contrary in this Article III.C, but subject
      to
      Article IX, until the Borrower delivers shares of Common Stock representing
      the Borrower Conversion Amount to the Holder, the Borrower Conversion Amount
      may
      be converted by the Holder into shares of Common Stock pursuant to
      Article II. In the event the Holder elects to convert the Borrower
      Conversion Amount prior to the applicable Installment Date as set forth in
      the
      immediately preceding sentence, the Borrower Conversion Amount so converted
      shall be deducted from the Installment Amounts relating to the Installment
      Dates
      as set forth in the applicable Conversion Notice.

     

    D.  Borrower
      Conversion Make-Whole.
      If, in
      connection with any Borrower Conversion, the Borrower is unable to issue at
      the
      applicable Effective Conversion Price all the shares of Common Stock that the
      Borrower would have been required to issue, then the Borrower shall pay to
      the
      Holder in cash, on the applicable Installment Date, an amount equal to the
      product of (1) the number of Installment Conversion Shares that the
      Borrower is prohibited from issuing on the applicable Installment Date and
      (2) the greater of (x) the applicable Effective Conversion Price and
      (y) the Closing Sales Price on the trading day immediately preceding the
      applicable Installment Date (the “Borrower
      Conversion Make-Whole”).

     

    E.  Increase
      in Interest Applicable to Installment Amounts.
      In the
      event that (i) the Borrower shall have held a stockholder meeting and the
      stockholders shall have failed to approve the Stockholder Proposal providing
      for
      the issuance of any shares in payment of the Notes at a price below the
      Conversion Floor Price, as defined in the Securities Purchase Agreement, and
      (ii) the Borrower makes a Borrower Redemption in payment of any Installment
      Amounts at a time when the Effective Conversion Price shall be below the
      Conversion Price then in effect; then the Borrower shall, at the time it makes
      its next quarterly interest payment in accordance with Article I.B, pay interest
      on each installment paid by the Borrower as a Borrower Redemption under
      circumstances (i) and (ii) at the rate of seventeen percent (17%) rather than
      fifteen percent (15%).

     

    ARTICLE
      IV

     

    RESERVATION
      OF SHARES OF COMMON STOCK

     

    A.  Reserved
      Amount.
      On or
      prior to the Issuance Date, and at all times thereafter until the date of
      stockholder approval of the Stockholder Proposals, the Borrower shall reserve
      such number of shares of its authorized but unissued shares of Common Stock
      for
      issuance of Optional Conversion Shares and Installment Conversion Shares
      pursuant to Articles II and III, 

     

    
      
         

      

      
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    respectively,
      of the Series B Notes as is sufficient to provide for the full conversion of
      all
      of the Series B Notes outstanding at the then current Conversion Price thereof
      (without giving effect to the limitations contained in Article IX). On the
      date of stockholder approval of the Stockholder Proposals and at all times
      thereafter, the Borrower shall reserve such number of shares of its authorized
      but unissued shares of Common Stock for issuance of Optional Conversion Shares
      and Installment Conversion Shares pursuant to Articles II and III,
      respectively, of the Series B Notes as is sufficient to provide for the issuance
      of all such Optional Conversion Shares and Installment Conversion Shares
      (without giving effect to the limitations contained in Article IX). The
      amount of shares of the Borrower’s authorized but unissued shares of Common
      Stock reserved pursuant to this Article IV.A shall be referred to herein as
      the
“Reserved
      Amount.”
The
      Reserved Amount shall be allocated among the Holders as provided in Article
      XII.C.

     

    B.  Increases
      to Reserved Amount.
      If the
      Reserved Amount for any three (3) consecutive trading days (the last of such
      three (3) trading days being the “Authorization
      Trigger Date”)
      shall
      be less than one hundred percent (100%) of the number of shares of Common Stock
      issuable upon full conversion of all then outstanding Series B Notes (without
      giving effect to the limitations contained in Article IX), the Borrower shall
      immediately notify the Holders of such occurrence and shall take immediate
      action (including, if necessary, seeking stockholder approval to authorize
      the
      issuance of additional shares of Common Stock) to increase the Reserved Amount
      to one hundred percent (100%) of the number of shares of Common Stock then
      issuable upon full conversion of all then outstanding Series B Notes at the
      then
      current Conversion Price (without giving effect to the limitations contained
      in
      Article IX). In the event the Borrower fails to so increase the Reserved
      Amount within ninety (90) days after an Authorization Trigger Date, the Holder
      shall thereafter have the option, exercisable in whole or in part at any time
      and from time to time, by delivery of a Default Notice to the Borrower, to
      require the Borrower to prepay in cash, for an amount equal to the Default
      Amount (as defined in Article VI.B), that portion of the unpaid principal amount
      hereof and accrued interest thereon such that, after giving effect to such
      prepayment, the then unissued portion of the Holder’s Reserved Amount is at
      least equal to one hundred percent (100%) of the total number of shares of
      Common Stock issuable upon conversion of this Note by the Holder. If the
      Borrower fails to prepay any portion of this Note as required hereby within
      five
      (5) business days after its receipt of such Default Notice, then the Holder
      shall be entitled to the remedies provided in Article VI.C.

     

    ARTICLE
      V

     

    FAILURE
      TO SATISFY CONVERSIONS

     

    A.  Conversion
      Defaults.
      If,
      (i) the Holder at any time submits a Notice of Optional Conversion and the
      Borrower fails for any reason (other than because such issuance would exceed
      the
      Holder’s allocated portion of the Reserved Amount, for which failures the
      Holders shall have the remedies set forth in Article IV) to deliver, on or
      prior to the fifth (5th)
      business day following the expiration of the Delivery Period for such
      conversion, such number of shares of Common Stock to which the Holder is
      entitled upon such conversion, or (ii) the Borrower provides written notice
      to the Holders (or makes a public announcement via press release) at any time
      of
      its intention not to issue shares of Common Stock upon exercise by the Holders
      of their conversion rights in accordance with the terms of the Series B Notes
      (other than because such 

     

    
      
         

      

      
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    issuance
      would exceed a Holder’s allocated portion of the Reserved Amount), (each of (i)
      and (ii) being a “Conversion
      Default”),
      then
      the Holder may elect, at any time and from time to time prior to the Default
      Cure Date for such Conversion Default, by delivery of a Default Notice to the
      Borrower, to have all or any portion of the unpaid principal amount hereof
      and
      accrued interest thereto prepaid by the Borrower in cash, for an amount equal
      to
      the Default Amount (as defined in Article VI.B). If the Borrower fails to prepay
      any portion of this Note as required hereby within five (5) business days after
      its receipt of such Default Notice, then the Holder shall be entitled to the
      remedies provided in Article VI.C.

     

    B.  Buy-In
      Cure.
      Unless
      the Borrower has notified the Holder in writing (or made a written announcement
      via press release) prior to the delivery by the Holder of a Notice of Optional
      Conversion that the Borrower is unable to honor conversions, if
      (i) (a) the Borrower fails to promptly deliver during the Delivery
      Period shares of Common Stock to the Holder upon a conversion of all or any
      portion of this Note or (b) there shall occur a Legend Removal Failure (as
      defined in Article VI.A(iv) below) and (ii) thereafter, the Holder
      purchases (in an open market transaction or otherwise) shares of Common Stock
      to
      make delivery in satisfaction of a sale by the Holder of the unlegended shares
      of Common Stock (the “Sold
      Shares”)
      which
      the Holder anticipated receiving upon such conversion (a “Buy-In”),
      the
      Borrower shall pay the Holder, in addition to any other remedies available
      to
      the Holder, the amount by which (x) the Holder’s total purchase price
      (including brokerage commissions, if any) for the unlegended shares of Common
      Stock so purchased exceeds (y) the net proceeds received by the Holder from
      the sale of the Sold Shares. For example, if the Holder purchases unlegended
      shares of Common Stock having a total purchase price of $11,000 to cover a
      Buy-In with respect to shares of Common Stock it sold for $10,000, the Borrower
      will be required to pay the Holder $1,000. The Holder shall provide the Borrower
      written notification and supporting documentation indicating any amounts payable
      to the Holder pursuant to this Article V.B.

     

    ARTICLE
      VI

     

    EVENTS
      OF DEFAULT

     

    A.  Events
      of Default.
      In the
      event (each of the events described in clauses (i)-(ix) below after expiration
      of the applicable cure period (if any) being an “Event
      of Default”):

     

    (i)  the
      Borrower fails to pay any amount of Principal (including, without limitation,
      the Borrower’s failure to pay any redemption or make-whole payments), Interest
      or other amounts owing under this Note or any other Transaction Document, within
      three (3) business days after the applicable due date, whether on any applicable
      Installment Date, at maturity, upon acceleration or otherwise;

     

    (ii)  the
      Common Stock (including any of the shares of Common Stock issuable upon
      conversion of this Note) is suspended from trading on any of, or is not listed
      (and authorized) for trading on at least one of, the New York Stock Exchange,
      the American Stock Exchange, the Nasdaq Global Market, Nasdaq Global Select
      Market, or the Nasdaq Capital Market for an aggregate of ten (10) or more
      trading days in any twelve (12) month period;

     

    
      
         

      

      
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    (iii)  (a)
      the
      registration statement, if required to be filed by the Borrower pursuant to
      Section 2(a) of the Registration Rights Agreement, has not been declared
      effective by the one hundred eightieth (180th)
      day
      following the Demand Date (as defined in Section 2(a) of the Registration Rights
      Agreement), or in the case of any Additional Registration Statement (as defined
      in Section 3(b) of the Registration Rights Agreement), has not been
      declared effective by the sixtieth (60th)
      day
      after the event giving rise to the obligation to file the Additional
      Registration Statement, (b) any such registration statement (including any
      such Additional Registration Statement), after being declared effective, cannot
      be utilized by the Holders for the resale of all of their Registrable Securities
      (as defined in the Registration Rights Agreement) covered thereby for an
      aggregate of more than sixty (60) days, or (c) any Additional Registration
      Statement is not filed on or before the later of fifteen (15) trading days
      or
      three (3) trading days after receipt of all information from the holders of
      Registrable Securities required to be included in such Additional Registration
      Statement; provided,
      however
      that it
      shall not be deemed an Event of Default if the Borrower is unable to have a
      registration statement or an Additional Registration Statement declared
      effective solely because the SEC will not declare either the registration
      statement or Additional Registration Statement effective due to interpretations
      of Rule 415;

     

    (iv)  the
      Borrower fails to remove any restrictive legend on any certificate or any shares
      of Common Stock issued to the Holder upon conversion of this Note as and when
      required by the terms hereof and of the Securities Purchase Agreement or the
      Registration Rights Agreement (a “Legend
      Removal Failure”),
      and
      any such failure continues uncured for five (5) business days after the Borrower
      has been notified thereof in writing by the Holder;

     

    (v)  the
      Borrower provides written notice (or otherwise indicates) to the Holder, or
      states by way of public announcement distributed via a press release, at any
      time, of its intention not to issue, or otherwise refuses to issue, shares
      of
      Common Stock to the Holder upon conversion in accordance with the terms of
      this
      Note (other than because such issuance would exceed the Holder’s allocated
      portion of the Reserved Amount, for which failures the Holder shall have the
      remedies set forth in Article IV);

     

    (vi)  the
      Borrower or any subsidiary of the Borrower shall make an assignment for the
      benefit of creditors, or apply for or consent to the appointment of a receiver
      or trustee for it or for a substantial part of its property or business, or
      such
      a receiver or trustee shall otherwise be appointed;

     

    (vii)  bankruptcy,
      insolvency, reorganization or liquidation proceedings or other proceedings
      for
      the relief of debtors shall be instituted by or against the Borrower or any
      subsidiary of the Borrower and if instituted against the Borrower or any
      subsidiary of the Borrower by a third party, shall not be dismissed within
      sixty
      (60) days of their initiation;

     

    (viii)  the
      Borrower shall:

     

    (a)  sell,
      convey, transfer or dispose of all or substantially all of its assets (the
      presentation of any such transaction for stockholder approval being conclusive
      evidence that such transaction involves the sale of all or substantially all
      of
      the assets of the Borrower);

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    (b)  merge
      or
      consolidate with or into any person or entity, which results in either
      (i) the holders of the voting securities of the Borrower immediately prior
      to such transaction holding or having the right to direct the voting of fifty
      percent (50%) or less of the total outstanding voting securities of the Borrower
      or such other surviving or acquiring person or entity immediately following
      such
      transaction or (ii) the members of the board of directors or other
      governing body of the Borrower comprising fifty percent (50%) or less of the
      members of the board of directors or other governing body of the Borrower or
      such other surviving or acquiring person or entity immediately following such
      transaction (each of (i), (ii) and subclause (a) above being a “Change
      of Control”);

     

    (c)  either
      (i) fail to pay, when due, or within any applicable grace period, any
      payment with respect to any indebtedness of the Borrower in excess of $250,000
      due to any third party, other than payments contested by the Borrower in good
      faith, or otherwise be in breach or violation of any agreement for monies owed
      or owing in an amount in excess of $250,000 which breach or violation permits
      the other party thereto to declare a default or otherwise accelerate amounts
      due
      thereunder, or (ii) suffer to exist (A) any Event of Default under and
      as defined in the Series A Notes or (B) any other default or event of
      default under any agreement (including, without limitation, the Series A Notes)
      binding the Borrower which default or event of default would or is likely to
      have a material adverse effect on the business, operations, properties,
      prospects or financial condition of the Borrower;

     

    (d)  have
      thirty-five percent (35%) or more of the voting power of its capital stock
      owned
      beneficially by one person, entity or “group” (as such term is used under
      Section 13(d) of the Securities Exchange Act of 1934, as amended);
      or

     

    (ix)  except
      with respect to matters covered by subparagraph (i) - (viii) above, as to which
      such applicable subparagraphs shall apply, the Borrower otherwise shall breach
      any material term hereunder or under the other Transaction Documents, including,
      without limitation, the representations and warranties contained herein or
      therein (i.e., in the event of a material breach as of the date such
      representation and warranty was made) and/or the covenants contained herein
      or
      therein, and if such breach is curable, shall fail to cure such breach within
      ten (10) business days after the Borrower has been notified thereof in writing
      by the Holder;

     

    then,
      upon the occurrence of any such Event of Default, at the option of the Holder,
      exercisable in whole or in part at any time and from time to time by delivery
      of
      a written notice to such effect (a “Default
      Notice”)
      to the
      Borrower while such Event of Default continues, the Borrower shall prepay,
      in
      satisfaction of its obligation to pay the outstanding principal amount of this
      Note and accrued and unpaid interest thereon, an amount equal to the Default
      Amount (as defined in Article VI.B below); provided,
      however,
      that
      (a) in the case of an Event of Default described in clauses (vi) and (vii)
      of this Article VI.A, the Borrower’s prepayment obligation hereunder shall be
      automatic and shall not require the delivery of a Default Notice by the Holder,
      and (b) in the case of an Event of Default resulting from a Legend Removal
      Failure, the Borrower’s prepayment obligation hereunder shall only apply to that
      portion of the Note affected by such Legend Removal Failure. Such Default
      Amount, together with all other ancillary amounts payable hereunder, shall
      immediately become due and payable, all without demand, presentment or notice,
      all of which are hereby expressly waived, together with all costs, including,
      without limitation, legal fees and expenses of collection, and the Holder shall
      be entitled to exercise all

     

    
      
         

      

      
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    other
      rights and remedies available at law or in equity. For the avoidance of doubt,
      the occurrence of any event described in clauses (i), (ii), (iii), (vi), (vii)
      and (viii) above shall immediately constitute an Event of Default and there
      shall be no cure period. Upon the Borrower’s receipt of any Default Notice under
      the Series B Notes, the Borrower shall immediately (and in any event within
      one
      business day following such receipt) deliver a written notice (a “Default
      Announcement”)
      to all
      Holders stating the date upon which the Borrower received such Default Notice
      and the amount of the Series B Notes covered thereby. Following the delivery
      of
      a Default Announcement hereunder, at any time and from time to time, the Holder
      may request (either orally or in writing) information from the Borrower with
      respect to the instant default (including, but not limited to, the aggregate
      principal amount outstanding of Series B Notes covered by Default Notices
      received by the Borrower) and the Borrower shall furnish (either orally or
      in
      writing) as soon as practicable such requested information to the
      Holder.

    

    B.  Definition
      of Default Amount.
      The
“Default
      Amount”
with
      respect to this Note means an amount equal to the greater of:

     

    (i) 
V   x M

     
      CP

    

    and    
      (ii)             
      V
      x R

    

    where:

    

    “V”
means
      the aggregate principal amount outstanding of the Series B Notes required to
      be
      prepaid plus all accrued and unpaid interest thereon through the date of payment
      of the Default Amount hereunder;

    

    “CP”
means
      the lesser of the Conversion Price and the Effective Conversion Price in effect
      on the date on which the Borrower receives the Default Notice;

    

    “M”
means
      (i) with respect to all Events of Default other than Events of Default
      described in subparagraph (a) or (b) of Article VI.A(viii) hereof, the highest
      Closing Sales Price of the Borrower’s Common Stock during the period beginning
      on the date on which the Borrower receives the Default Notice and ending on
      the
      date immediately preceding the date of payment of the Default Amount hereunder,
      and (ii) with respect to an Event of Default described in subparagraph (a)
      or (b) of Article VI.A(viii) hereof, the greater of (a) the amount
      determined pursuant to clause (i) of this definition or (b) the fair market
      value, as of the date on which the Borrower receives the Default Notice, of
      the
      consideration payable to the holder of a share of Common Stock pursuant to
      the
      transaction which triggers the Event of Default. For purposes of this
      definition, “fair market value” shall be determined by the mutual agreement of
      the Borrower and the Majority Holders, or if such agreement cannot be reached
      within five (5) business days prior to the date of the Event of Default, by
      an
      investment banking firm selected by the Borrower and reasonably acceptable
      to
      the Majority Holders with the costs of such appraisal to be borne by the
      Borrower; and

    

    
      
         

      

      
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    “R”
means
      one hundred and twenty percent (120%).

    

    C.  Failure
      to Pay Default Amounts.
      If the
      Borrower fails to pay the Holder the Default Amount with respect to any Note
      within five (5) business days after its receipt of a Default Notice (the
“Prepayment
      Date”),
      then
      the Holder shall be entitled to interest on the Default Amount at a per annum
      rate equal to the lower of twenty-four percent (24.0%) and the highest interest
      rate permitted by applicable law from the date on which the Borrower receives
      the Default Notice until the date of payment of the Default Amount hereunder.
      In
      the event the Borrower is not able to prepay all of the outstanding Series
      A
      Notes and Series B Notes required to be prepaid on the Prepayment Date
      (including for such purpose all Series A Notes and Series B Notes subject to
      Default Notices delivered prior to the Prepayment Date), the Borrower shall
      prepay the outstanding Series A Notes and Series B Notes to each holder of
      the
      Series A Notes and each Holder of the Series B Notes pro
      rata,
      based
      on the total amounts due on the Series A Notes and Series B Notes at the time
      of
      prepayment and required to be prepaid on the Prepayment Date relative to the
      total amounts due under the Series A Notes and Series B Notes on the Prepayment
      Date.

     

    ARTICLE
      VII

     

    ADJUSTMENTS
      TO THE CONVERSION PRICE

     

    The
      Conversion Price shall be subject to adjustment from time to time as
      follows:

    

    A.  Dilutive
      Issuances.
      If the
      Borrower shall issue or sell, or is, in accordance with subsections B(i) through
      (viii) below, deemed to have issued or sold (each, a “Dilutive
      Issuance”),
      any
      additional shares of Common Stock, other than Excluded Stock (the “New
      Issuance Shares”),
      without consideration or for a consideration per share less than the Conversion
      Price in effect immediately prior to the time of such issue or sale (the lowest
      price at which such shares of Common Stock are issued or deemed to be issued
      hereunder is hereinafter referred to as the “New
      Issuance Price”),
      then
      and in each such case (a “Trigger
      Issuance”)
      the
      then-existing Conversion Price, shall be reduced, as of the close of business
      on
      the effective date of the Trigger Issuance, to a price determined in accordance
      with the immediately succeeding paragraphs.

     

    Prior
      to
      stockholder approval of the Stockholder Proposals, the Conversion Price shall
      be
      reduced to the higher of (i) the New Issuance Price or (ii) $0.63
      (appropriately adjusted for any stock split, reverse stock split, stock dividend
      or other reclassification or combination of the Common Stock occurring after
      the
      date hereof) (the “Full-Ratchet
      Floor Price”).

    

    From
      and
      after the date of stockholder approval of the Stockholder Proposals, if any,
      the
      Conversion Price shall be reduced to the New Issuance Price. In the event that
      in the time period prior to such stockholder approval a Dilutive Issuance is
      made and the Conversion Price is adjusted to the Full-Ratchet Floor Price
      instead of the New Issuance Price, then immediately following such stockholder
      approval, the Conversion Price shall be adjusted to such New Issuance Price
      if
      such New Issuance Price is lower than the then current Conversion
      Price.

    

    
      
         

      

      
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    For
      purposes of this subsection A, “Excluded
      Stock”
means
      (1) shares of Common Stock issued pursuant to the terms thereof upon the
      exercise or conversion of the Borrower’s options, warrants or convertible
      securities outstanding as of the Closing Date in accordance with the terms
      of
      such options, warrants or other securities as in effect on the Closing Date
      and
      provided that such securities have not been amended since the Closing Date
      to
      increase the number of shares of Common Stock issuable thereunder or to lower
      the exercise or conversion price thereof; (2) stock, stock options or other
      stock rights issued pursuant to any stock or option plan duly adopted by a
      majority of the non-employee members of the Board of Directors of the Borrower
      or a majority of the members of a committee of non-employee directors
      established for such purpose; (3) the shares of Common Stock issuable
      pursuant to the (i) the Series B Notes and the Series A Notes or
      (ii) the Series B Warrants and the warrants issued by the Company on
      January 13, 2006 in connection with the issuance of the Series A Notes;
      (4) securities issued in a bona fide business acquisition, the primary
      purpose of which, as determined in good faith by a majority of the members
      of
      the Board of Directors of the Borrower, is not the raising of capital;
      (5) capital stock or convertible securities issued in a joint venture,
      strategic partnership or licensing arrangement, the primary purpose of which,
      as
      determined in good faith by a majority of the members of the Board of Directors
      of the Borrower, is not the raising of capital; and (6) shares of Common
      Stock issued or issuable by reason of a dividend, stock split or other
      distribution on shares of Common Stock (but only to the extent that such a
      dividend, split or distribution results in an adjustment in the Conversion
      Price
      pursuant to the other provisions herein).

    

    B.  Effect
      on Conversion Price of Certain Events.
      For
      purposes of subsection A above, the following subsections B(i) to (viii) shall
      also be applicable:

     

    (i)  Issuance
      of Rights or Options.
      In case
      at any time the Borrower shall in any manner grant (directly and not by
      assumption in a merger or otherwise) any warrants or other rights to subscribe
      for or to purchase, or any options for the purchase of, Common Stock or any
      stock or security convertible into or exchangeable for Common Stock (such
      warrants, rights or options being called “Options”
and
      such convertible or exchangeable stock or securities being called “Convertible
      Securities”)
      whether or not such Options or the right to convert or exchange any such
      Convertible Securities are immediately exercisable, and the price per share
      for
      which Common Stock is issuable upon the exercise of such Options or upon the
      conversion or exchange of such Convertible Securities (determined by dividing
      (i) the sum (which sum shall constitute the applicable consideration) of
      (x) the total amount, if any, received or receivable by the Borrower as
      consideration for the granting of such Options, plus (y) the aggregate
      amount of additional consideration payable to the Borrower upon the exercise
      of
      all such Options, plus (z), in the case of such Options which relate to
      Convertible Securities, the aggregate amount of additional consideration, if
      any, payable upon the issue or sale of such Convertible Securities and upon
      the
      conversion or exchange thereof, by (ii) the total maximum number of shares
      of Common Stock issuable upon the exercise of such Options or upon the
      conversion or exchange of all such Convertible Securities issuable upon the
      exercise of such Options) shall be less than the Conversion Price in effect
      immediately prior to the time of the granting of such Options, then the total
      number of shares of Common Stock issuable upon the exercise of such Options
      or
      upon conversion or exchange of the total amount of such Convertible Securities
      issuable upon the exercise of such Options shall be deemed to have been issued
      for such price per share as of the date of granting of such Options or the
      issuance of such Convertible Securities and thereafter

     

    
      
         

      

      
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    shall
      be
      deemed to be outstanding for purposes of adjusting the Conversion Price. Except
      as otherwise provided in subsection B(iii) of this Article VII, no
      adjustment of the Conversion Price shall be made upon the actual issue of such
      Common Stock or of such Convertible Securities upon exercise of such Options
      or
      upon the actual issue of such Common Stock upon conversion or exchange of such
      Convertible Securities.

    

    (ii)  Issuance
      of Convertible Securities.
      In case
      the Borrower shall in any manner issue (directly and not by assumption in a
      merger or otherwise) or sell any Convertible Securities, whether or not the
      rights to exchange or convert any such Convertible Securities are immediately
      exercisable, and the price per share for which Common Stock is issuable upon
      such conversion or exchange (determined by dividing (i) the sum (which sum
      shall constitute the applicable consideration) of (x) the total amount
      received or receivable by the Borrower as consideration for the issue or sale
      of
      such Convertible Securities, plus (y) the aggregate amount of additional
      consideration, if any, payable to the Borrower upon the conversion or exchange
      thereof, by (ii) the total number of shares of Common Stock issuable upon
      the conversion or exchange of all such Convertible Securities) shall be less
      than the Conversion Price in effect immediately prior to the time of such issue
      or sale, then the total maximum number of shares of Common Stock issuable upon
      conversion or exchange of all such Convertible Securities shall be deemed to
      have been issued for such price per share as of the date of the issue or sale
      of
      such Convertible Securities and thereafter shall be deemed to be outstanding
      for
      purposes of adjusting the Conversion Price, provided that (a) except as
      otherwise provided in subsection B(iii) of this Article VII, no adjustment
      of the Conversion Price shall be made upon the actual issuance of such Common
      Stock upon conversion or exchange of such Convertible Securities and (b) no
      further adjustment of the Conversion Price shall be made by reason of the issue
      or sale of Convertible Securities upon exercise of any Options to purchase
      any
      such Convertible Securities for which adjustments of the Conversion Price have
      been made pursuant to the other provisions of Article VII.

    

    (iii)  Change
      in Option Price or Conversion Rate.
      Upon
      the happening of any of the following events, namely, if the purchase price
      provided for in any Option referred to in subsection B(i) hereof, the additional
      consideration, if any, payable upon the conversion or exchange of any
      Convertible Securities referred to in subsections B(i) or B(ii), or the rate
      at
      which Convertible Securities referred to in subsections B(i) or B(ii) are
      convertible into or exchangeable for Common Stock shall change at any time
      (including, but not limited to, changes under or by reason of provisions
      designed to protect against dilution), the Conversion Price in effect at the
      time of such event shall forthwith be readjusted to the Conversion Price which
      would have been in effect at such time had such Options or Convertible
      Securities still outstanding provided for such changed purchase price,
      additional consideration or conversion rate, as the case may be, at the time
      initially granted, issued or sold. On the termination of any Option for which
      any adjustment was made pursuant to subsections A and B hereof or any right
      to
      convert or exchange Convertible Securities for which any adjustment was made
      pursuant to this subsection B (including without limitation upon the redemption
      or purchase for consideration of such Convertible Securities by the Borrower),
      the Conversion Price then in effect hereunder shall forthwith be changed to
      the
      Conversion Price which would have been in effect at the time of such termination
      had such Option or Convertible Securities, to the extent outstanding immediately
      prior to such termination, never been issued.

    

    
      
         

      

      
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    (iv)  Stock
      Dividends.
      In case
      the Borrower shall declare a dividend or make any other distribution upon any
      stock of the Borrower (other than the Common Stock) payable in Common Stock,
      Options or Convertible Securities, then any Common Stock, Options or Convertible
      Securities, as the case may be, issuable in payment of such dividend or
      distribution shall be deemed to have been issued or sold without
      consideration.

    

    (v)  Consideration
      for Stock.
      In case
      any shares of Common Stock, Options or Convertible Securities shall be issued
      or
      sold for cash, the consideration received therefor shall be deemed to be the
      amount received by the Borrower therefor. In case any shares of Common Stock,
      Options or Convertible Securities shall be issued or sold for a consideration
      other than cash, the amount of the consideration other than cash received by
      the
      Borrower shall be deemed to be the fair value of such consideration as
      determined in good faith by the Board of Directors of the Borrower using
      standard commercial valuation methods appropriate for valuing such assets;
      provided,
      however,
      that if
      the Majority Holders do not agree to such fair value calculation within three
      (3) business days after receipt thereof from the Borrower, then such fair value
      shall be determined in good faith by an investment banker or other appropriate
      expert of national reputation selected by the Borrower and reasonably acceptable
      to the Majority Holders, with the costs of such appraisal to be borne fifty
      percent (50%) by the Borrower and fifty percent (50%) by the Holders (ratably
      on
      the basis of the respective principal amounts of the Series B Notes then
      outstanding). In case any Options shall be issued in connection with the issue
      and sale of other securities of the Borrower, together comprising one integral
      transaction in which no specific consideration is allocated to such Options
      by
      the parties thereto, such Options shall be deemed to have been issued for
      nominal consideration. If Common Stock, Options or Convertible Securities shall
      be issued or sold by the Borrower and, in connection therewith, other Options
      or
      Convertible Securities (the “Additional
      Rights”)
      are
      issued without any specific consideration allocated to such Additional Rights,
      then the consideration received or deemed to be received by the Borrower for
      such Additional Rights shall be deemed to be nominal.

    

    (vi)  Record
      Date.
      In case
      the Borrower shall take a record of the holders of its Common Stock for the
      purpose of entitling them (i) to receive a dividend or other distribution
      payable in Common Stock, Options or Convertible Securities or (ii) to
      subscribe for or purchase Common Stock, Options or Convertible Securities,
      then
      such record date shall be deemed to be the date of the issue or sale of the
      shares of Common Stock deemed to have been issued or sold upon the declaration
      of such dividend or the making of such other distribution or the date of the
      granting of such right of subscription or purchase, as the case may
      be.

    

    (vii)  Treasury
      Shares.
      The
      number of shares of Common Stock outstanding at any given time shall not include
      shares owned or held by or for the account of the Borrower or any of its
      wholly-owned subsidiaries, and the disposition of any such shares (other than
      the cancellation or retirement thereof) shall be considered an issue or sale
      of
      Common Stock for the purpose of this Article VII.

    

    C.  Stock
      Splits and Dividends.
      If the
      Borrower shall, at any time or from time to time while Series B Notes are
      outstanding, pay a dividend or make a distribution on its Common Stock in shares
      of Common Stock, subdivide its outstanding shares of Common Stock into a

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    greater
      number of shares or combine its outstanding shares of Common Stock into a
      smaller number of shares or issue by reclassification of its outstanding shares
      of Common Stock any shares of its capital stock (including any such
      reclassification in connection with a consolidation or merger in which the
      Borrower is the continuing corporation), then the Conversion Price in effect
      immediately prior to the date upon which such change shall become effective
      shall be adjusted by the Borrower so that the Holder shall be entitled to
      receive the number of shares of Common Stock or other capital stock which such
      Holder would have received immediately following such event had this Note been
      exercised immediately prior to such event. Such adjustments shall be made
      successively whenever any event listed above shall occur.

    

    D.  Reorganization
      or Reclassification.
      If any
      capital reorganization or reclassification of the capital stock of the Borrower
      shall be effected in such a way (including, without limitation, by way of
      consolidation or merger) that holders of Common Stock but not Holders of the
      Series B Notes shall be entitled to receive stock, securities or assets with
      respect to or in exchange for Common Stock then, as a condition of such
      reorganization or reclassification, lawful and adequate provision shall be
      made
      whereby the Holder shall thereafter have the right to receive, upon the basis
      and upon the terms and conditions specified herein and in lieu of the shares
      of
      Common Stock of the Borrower immediately theretofore receivable upon the
      exercise of this Note, such shares of stock, securities or assets as may be
      issued or payable with respect to or in exchange for a number of outstanding
      shares of Common Stock equal to the number of shares of such stock immediately
      theretofore so receivable had such reorganization or reclassification not taken
      place and in any such case appropriate provision shall be made with respect
      to
      the rights and interests of such Holder to the end that the provisions hereof
      (including without limitation provisions for adjustments of the Conversion
      Price) shall thereafter be applicable, as nearly as may be, in relation to
      any
      shares of stock, securities or assets thereafter deliverable upon the exercise
      of such rights (including an immediate adjustment, by reason of such
      reorganization or reclassification, of the Conversion Price to the value for
      the
      Common Stock reflected by the terms of such reorganization or reclassification
      if the value so reflected is less than the Conversion Price in effect
      immediately prior to such reorganization or reclassification). In the event
      of a
      merger or consolidation of the Borrower as a result of which a greater or lesser
      number of shares of common stock of the surviving corporation are issuable
      to
      holders of the Common Stock of the Borrower outstanding immediately prior to
      such merger or consolidation, the Conversion Price in effect immediately prior
      to such merger or consolidation shall be adjusted in the same manner as though
      there were a subdivision or combination of the outstanding shares of Common
      Stock of the Borrower.

    

    E.  Distributions.
      In case
      the Borrower shall fix a payment date for the making of a distribution to all
      holders of Common Stock (including any such distribution made in connection
      with
      a consolidation or merger in which the Borrower is the continuing corporation)
      of evidences of indebtedness or assets (other than cash dividends or cash
      distributions payable out of consolidated earnings or earned surplus or
      dividends or distributions referred to in subsection C of this
      Article VII), or subscription rights or warrants, the Conversion Price to
      be in effect after such payment date shall be determined by multiplying the
      Conversion Price in effect immediately prior to such payment date by a fraction,
      the numerator of which shall be the total number of shares of Common Stock
      outstanding multiplied by the Closing Sales Price (as defined below) per share
      of Common Stock immediately prior to such payment date, less the
      fair

     

    
      
         

      

      
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    market
      value (as determined by the Borrower’s Board of Directors in good faith) of said
      assets or evidences of indebtedness so distributed, or of such subscription
      rights or warrants, and the denominator of which shall be the total number
      of
      shares of Common Stock outstanding multiplied by such Closing Sales Price per
      share of Common Stock immediately prior to such payment date. Such adjustment
      shall be made successively whenever such a payment date is fixed.

    

    F.  Effective
      Date of Adjustment.
      An
      adjustment to the Conversion Price shall become effective immediately after
      the
      payment date in the case of each dividend or distribution and immediately after
      the effective date of each other event which requires an
      adjustment.

    

    G.  Subsequent
      Adjustments.
      In the
      event that, as a result of an adjustment made pursuant to this Article VII,
      the Holder shall become entitled to receive any shares of capital stock of
      the
      Borrower other than shares of Common Stock, the number of such other shares
      so
      receivable upon the conversion of this Note shall be subject thereafter to
      adjustment from time to time in a manner and on terms as nearly equivalent
      as
      practicable to the provisions contained herein.

    

    H.  Voluntary
      Adjustment by the Borrower.
      The
      Borrower may at any time during the term of this Note reduce the then current
      Conversion Price to any amount and for any period of time deemed appropriate
      by
      the Board of Directors of the Borrower provided that such reduction shall apply
      to all of the Series B Notes.

    

    I.  Other
      Action Affecting Conversion Price.
      If, at
      any time after the Issuance Date, the Borrower takes any action affecting the
      Common Stock that would be covered by Article VII.A through E, but for the
      manner in which such action is taken or structured, which would in any way
      diminish the value of the Series B Notes, then the Conversion Price shall be
      adjusted in such manner as the Board of Directors of the Borrower shall in
      good
      faith determine to be equitable under the circumstances.

     

    J.  Notice
      of Adjustments.
      Upon
      the occurrence of each adjustment or readjustment of the Conversion Price
      pursuant to this Article VII amounting to a more than one percent (1%)
      change in such Conversion Price, or any change in the number or type of stock,
      securities and/or other property issuable upon conversion of the Series B Notes,
      the Borrower, at its expense, shall promptly compute such adjustment or
      readjustment or change and prepare and furnish to the Holder a certificate
      setting forth such adjustment or readjustment or change and showing in detail
      the facts upon which such adjustment or readjustment or change is based. The
      Borrower shall, upon the written request at any time of the Holder, furnish
      to
      the Holder a like certificate setting forth (i) such adjustment or
      readjustment or change, (ii) the Conversion Price at the time in effect and
      (iii) the number of shares of Common Stock and the amount, if any, of other
      securities or property which at the time would be received upon conversion
      of
      the Series B Notes.

     

    
      
         

      

      
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    ARTICLE
      VIII

     

    RANK;
      SECURITY; CONSENT RIGHTS; NOTICE OF CERTAIN ACTIONS

     

    A.  Rank.
      The
      Series B Notes shall rank pari
      passu
      as to
      repayment with the Series A Notes and both such sets of notes shall rank senior
      as to repayment to any other indebtedness outstanding as of the Issuance Date
      other than (i) equipment purchase and lease financing provided by General
      Electric Capital Corporation to the Borrower, with an outstanding principal
      amount of not more than $6,000 and (ii) a bank loan provided by Sparkasse
      Freiburg to the Borrower’s German subsidiary, Matritech GmbH, with an
      outstanding principal amount of not more than $20,000.

     

    B.  Security.
      This
      Note is one of the “Notes”
      referred to in the Security Agreement. Reference is hereby made to such
      agreement for a description of the properties and assets in which a security
      interest has been granted, the nature and extent of the security and the rights
      of the Holder in respect thereof.

     

    C.  Consent
      Rights.
      So long
      as any Series B Notes are outstanding, the Borrower shall not take any of the
      following corporate actions (whether by merger, consolidation or otherwise)
      without first obtaining the approval (by vote or written consent) of the
      Majority Holders:

     

    (i)  alter
      or
      change the rights, preferences or privileges of the Series B Notes;

     

    (ii)  issue
      any
      additional Series B Notes;

     

    (iii)  redeem,
      repurchase or otherwise acquire, or declare or pay any cash dividend or
      distribution on, any securities of the Borrower, except pursuant to any equity
      compensation plan approved by the Borrower’s Board of Directors or as expressly
      required by the terms of the Series A Notes or Series B Notes;

     

    (iv)  [Reserved];

     

    (v)  issue
      any
      debt securities or incur any indebtedness (except (a) any such indebtedness
      incurred to finance receivables in an amount at any time not to exceed eighty
      percent (80%) of the outstanding receivables owed to the Borrower at such time
      and (b) equipment purchase and lease financing in an amount at any time not
      to exceed $200,000), or redeem, repurchase, prepay or otherwise acquire any
      outstanding debt securities or indebtedness of the Borrower, except as expressly
      required by the terms of such securities or indebtedness;

     

    (vi)  enter
      into any agreement, commitment, understanding or other arrangement to take
      any
      of the foregoing actions; or

     

    (vii)  cause
      or
      authorize any subsidiary of the Borrower to engage in any of the foregoing
      actions.

     

    
      
         

      

      
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    Notwithstanding
      the foregoing, no
      change
      pursuant to this Article VIII shall be effective to the extent that, by its
      terms, it applies to less than all of the Holders of the Series B Notes then
      outstanding.

    

    D.  Notice
      Rights.
      In
      addition to the foregoing consent rights, the Borrower shall provide the Holder
      with prior notification of any meeting of the stockholders (at the same time
      and
      with copies of proxy materials and other information sent to stockholders).
      If
      the Borrower takes a record of its stockholders for the purpose of determining
      stockholders entitled to (i) receive payment of any dividend or other
      distribution, any right to subscribe for, purchase or otherwise acquire
      (including by way of merger, consolidation or recapitalization) any share of
      any
      class or any other securities or property, or to receive any other right, or
      (ii) to vote in connection with any proposed sale, lease or conveyance of
      all or substantially all of the assets of the Borrower, or any proposed merger,
      consolidation, liquidation, dissolution or winding up of the Borrower, the
      Borrower shall mail a notice to the Holder, at least fifteen (15) days prior
      to
      the record date specified therein (or forty-five (45) days prior to the
      consummation of the transaction or event, whichever is earlier, but in no event
      earlier than public announcement of such proposed transaction), of the date
      on
      which any such record is to be taken for the purpose of such vote, dividend,
      distribution, right or other event, and a brief statement regarding the amount
      and character of such vote, dividend, distribution, right or other event to
      the
      extent known at such time.

     

    ARTICLE
      IX

     

    LIMITATIONS
      ON CERTAIN CONVERSIONS, REDEMPTIONS AND TRANSFERS

     

    The
      conversion of the Series B Notes pursuant to Article II, the issuance of
      Installment Conversion Shares as repayment of the Series B Notes pursuant to
      Article III and transfers of Series B Notes shall be subject to the
      following limitation:

    

    A.  Restriction
      on Conversion, Redemption or Transfer.
      In no
      event shall the Borrower issue
      Common
      Stock to the Holder in connection with the repayment of this Note pursuant
      to
      Article III.C, and in no event shall the Holder have the right to effect an
      Optional Conversion of this Note into shares of Common Stock or to dispose
      of
      this Note to the extent that such repayment, conversion or right to effect
      such
      conversion or disposition would result in the Holder and its affiliates together
      beneficially owning more than 9.99% of the outstanding shares of Common Stock.
      For purposes of this Article IX, beneficial ownership shall be determined
      in accordance with Section 13(d) of the Securities Exchange Act of 1934, as
      amended, and Regulation 13D-G thereunder. Any Holder (other than SDS Capital
      Group SPC, Ltd. or its affiliates) may waive, for itself only, the restriction
      in this Article IX upon sixty-one (61) days prior written notice to the
      Borrower. Other than as expressly set forth in this Article IX with respect
      to Holder waivers, the restriction contained in this Article IX may not be
      altered, amended, deleted or changed in any manner whatsoever unless the holders
      of a majority of the outstanding shares of Common Stock and the Holder shall
      approve, in writing, such alteration, amendment, deletion or
      change.

     

    
      
         

      

      
        21

        
          

        

      

      
         

      

    

    ARTICLE
      X

     

    EXCHANGE
      RIGHT IN FUTURE FINANCINGS

     

    Subject
      to the terms and conditions specified in this Article X and Section 4(r) of
      the Securities Purchase Agreement, until December 13, 2007 (or such later
      date to which the maturity date of this Note is extended), if and when the
      Borrower completes an offering of (i) equity or equity-linked securities,
      or (ii) debt that is convertible into equity or in which there is an equity
      component (“Additional
      Securities”),
      the
      Borrower shall offer a number of such Additional Securities to the Holder in
      accordance with the following provisions:

    

    A.  At
      least
      ten (10) trading days prior to the closing of the offering of Additional
      Securities, the Borrower shall deliver to the Holder then holding $250,000
      or
      more of aggregate principal face amount of the Series B Notes (a “Qualified
      Holder”)
      a
      written notice of its intention to effect such offering (“Pre-Notice”),
      which
      Pre-Notice shall ask the Qualified Holder if it wants to review the details
      of
      such financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of a Qualified Holder, and only upon a request by a Qualified
      Holder, for a Subsequent Financing Notice, the Borrower shall promptly, but
      no
      later than five (5) trading days after such request, deliver a Subsequent
      Financing Notice to the Qualified Holder. The Subsequent Financing Notice shall
      describe in reasonable detail the proposed terms of such Subsequent Financing,
      the amount of proceeds intended to be raised thereunder, the person(s) with
      whom
      such Subsequent Financing is proposed to be effected (provided that the name
      of
      such person(s) is available), and attached to which shall be a term sheet or
      similar document relating thereto.

     

    B.  By
      written notification received by the Borrower by 6:30 p.m. (New York City time)
      on the fifth (5th)
      trading
      day after its receipt of the Subsequent Financing Notice, the Qualified Holder
      may elect to purchase or obtain, at the price and on the terms specified in
      the
      Notice, up to that portion of such Additional Securities that has a total
      purchase price equal to fifty percent (50%) of the aggregate principal amount
      of
      this Note, subject to mutually acceptable documentation; provided,
      however,
      that the Borrower shall accept the surrender of the principal balance of this
      Note being exchanged as payment in full for such Additional Securities;
provided
      further, that
      any
      Holder who has participation and exchange rights under the transaction documents
      related to its purchase of the Borrower’s Series A Notes may not exercise its
      participation and exchange rights hereunder if it has exercised its rights
      under
      those Series A transaction documents unless otherwise provided in clause (ii)
      of
      Section 4(r) of the Securities Purchase Agreement; and provided
      further, that
      the
      Qualified Holders of the Series B Notes shall, if the offering is oversubscribed
      by such collective Qualified Holders, be limited to purchasing a pro
      rata
      portion
      of the offering based on the amount such Holder’s respective election bears to
      the aggregate of all such elections by the Qualified Holders of the Series
      B
      Notes. Upon the surrender of this Note (or if this Note has been lost, stolen
      or
      destroyed the documentation required by Article XII.B hereof) as provided in
      this Article X.B and the closing of the subsequent financing transaction, the
      Borrower (itself, or through its transfer agent) shall, no later than the third
      business day following such closing, issue and deliver (i.e., deposit with
      a
      nationally recognized overnight courier service postage prepaid) to the Holder
      or its nominee (x) certificates or other instruments evidencing the
      Additional Securities purchased by the Holder and (y) a new Note
      representing the principal balance of this Note not being exchanged.

     

    
      
         

      

      
        22

        
          

        

      

      
         

      

    

    For
      the
      avoidance of doubt, the exchange right set forth in this Article X shall
      not entitle the Holder to acquire more Additional Securities than the Holder
      would otherwise be entitled to acquire pursuant to Section 4(r) of the
      Securities Purchase Agreement; provided
      that in
      no event shall this provision limit the amount of Additional Securities that
      can
      be purchased by a Holder to less than fifty percent (50%) of the principal
      face
      amount of this Note.

     

    C.  Notwithstanding
      the foregoing, the rights set forth in this Article X shall not be
      applicable to the issuance of Excluded Stock.

     

    ARTICLE
      XI

     

    CERTAIN
      DEFINITIONS

     

    For
      purposes of this Note, in addition to the other terms defined herein, the
      following terms shall have the following meanings:

    

    A.  “AMEX”
means
      the American Stock Exchange.

     

    B.  “business
      day” means
      any
      day, other than a Saturday or Sunday or a day on which banking institutions
      in
      the State of New York are authorized or obligated by law, regulation or
      executive order to close.

     

    C.  “Closing
      Date”
shall
      have the meaning set forth in the Securities Purchase Agreement, which date
      is
      the date the Borrower initially issued Series B Notes pursuant to the terms
      of
      the Securities Purchase Agreement.

     

    D.  “Closing
      Sales Price”
means,
      for any security as of any date, the last sales price of such security on the
      principal trading market where such security is listed or traded as reported
      by
      Bloomberg Financial Markets (or a comparable reporting service of national
      reputation selected by the Borrower and reasonably acceptable to the Majority
      Holders if Bloomberg Financial Markets is not then reporting closing bid prices
      of such security) (in any case, “Bloomberg”),
      or if
      the foregoing does not apply, the last reported sales price of such security
      on
      a national exchange or in the over-the-counter market on the electronic bulletin
      board for such security as reported by Bloomberg, or, if no such price is
      reported for such security by Bloomberg, the average of the bid prices of all
      market makers for such security as reported in the “pink sheets” by Pink Sheets
      LLC (formerly the National Quotation Bureau, Inc.), in each case for such date
      or, if such date was not a trading day for such security, on the next preceding
      date which was a trading day. If the Closing Sales Price cannot be calculated
      for such security as of either of such dates on any of the foregoing bases,
      the
      Closing Sales Price of such security on such date shall be the fair market
      value
      as reasonably determined by an investment banking firm selected by the Borrower
      and reasonably acceptable to the Majority Holders, with costs of such appraisal
      to be borne by the Borrower.

     

    E.  “Common
      Stock”
means
      the common stock of the Borrower, par value $0.01 per share.

     

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

    F.  “Conversion
      Date”
means,
      for any Optional Conversion (as defined in Article II.A), the date on which
      the last of the following has been delivered to the Borrower: (i) the
      completed form attached hereto (the “Notice
      of Optional Conversion”),
      and
      (ii) this Note, duly endorsed (the original hard copy, unless if this Note
      has been lost, stolen or destroyed the Holder shall deliver original hard copies
      of the documentation required by Article XII.B hereof).

     

    G.  “Conversion
      Price”
means
      $0.63, and shall be subject to adjustment as provided herein.

     

    H.  “Default
      Cure Date”
means,
      as applicable, (i) with respect to a Conversion Default described in clause
      (i) of Article V.A, the date the Borrower effects the conversion of the full
      amount of this Note being converted, (ii) with respect to a Conversion
      Default described in clause (ii) of Article V.A, the date the Borrower issues
      freely tradable shares of Common Stock in satisfaction of the conversion of
      the
      full amount of this Note being converted in accordance with Article II, or
      (iii) with respect to either type of a Conversion Default, the date on
      which the Borrower prepays this Note pursuant to Article V.A.

     

    I.  “Effective
      Conversion Price”
means,
      as of any date of determination, that price which shall be the lower of
      (i) the then current Conversion Price and (ii) the price computed as
      eighty-five percent (85%) of the Weighted Average Price of the shares of Common
      Stock for the ten (10) consecutive trading day period ending on the second
      trading day immediately prior to the applicable Installment Date (such price
      referred to in this clause (ii) being referred to as the “10-Day
      VWAP”);
      provided that the Effective Conversion Price may not be below $0.63 until after
      the Borrower’s stockholders have approved the stockholder proposal referred to
      in clause (i) of the last sentence of Section 4(g) of the Securities Purchase
      Agreement.

     

    J.  “Installment
      Amount”
means,
      as to any Installment Date, an amount equal to the sum of (i) the amount of
      the Principal Installment Amount with respect to such Installment Date and
      (ii) if such Installment Date is a Quarterly Installment Date, the amount
      of the Interest Installment Amount with respect to such Installment
      Date.

     

    K.  “Installment
      Date”
means,
      as applicable, a Monthly Installment Date and/or a Quarterly Installment
      Date.

     

    L.  “Interest
      Installment Amount”
means,
      as to any Quarterly Installment Date, an amount equal to the accrued and unpaid
      interest on the outstanding Principal through such Quarterly Installment
      Date.

     

    M.  “Majority
      Holders”
means
      the Holders of a majority of the aggregate principal amount and accrued interest
      represented by the then outstanding Series B Notes.

     

    N.  “Monthly
      Installment Date”
means,
      initially, July 13, 2007 and, thereafter, the 13th day of each calendar
      month prior to the Scheduled Maturity Date.

     

    O.  “NASDAQ”
means
      whichever, if any, of the Nasdaq Global Market, the Nasdaq Global Select Market
      or the Nasdaq Capital Market on which the shares of Common Stock are
      traded.

     

    
      
         

      

      
        24

        
          

        

      

      
         

      

    

    P.  “Principal
      Installment Amount”
means,
      as to any Monthly Installment Date, an amount equal to
      $[__________].1

     

    Q.  “Quarterly
      Installment Date”
means,
      initially, June 13, 2007 and, thereafter, the 13th day of each of September
      and December 2007.

     

    R.  “Scheduled
      Maturity Date”
means
      December 13, 2007.

     

    S.  “Stockholder
      Approval”
means
      stockholder approval of the transactions and consents contemplated by
      Section 7(h) of the Securities Purchase Agreement.

     

    T.  “Stock
      Payment Conditions”
      means
      that each of the following conditions is satisfied: (i) any applicable
      shares of Common Stock to be issued in connection with the event requiring
      determination may be issued in full without violating Article IX.A hereof;
      (ii) the number of Installment Conversion Shares to be paid in the
      aggregate to all holders and Holders of the Series A Notes and the Series B
      Notes in respect of any Installment Amount shall not exceed twenty percent
      (20%)
      of the trading volume (as reported by Bloomberg) of the Common Stock for the
      period of twenty (20) consecutive trading days ending on the trading day
      immediately prior to such payment without the prior written consent within
      five
      (5) days of such payment of the Holder to receive its portion of the Installment
      amount in stock (it being acknowledged and agreed that if the Holder does not
      so
      consent to receiving such payment in Installment Conversion Shares, that payment
      may be deferred by the Holder, at its option, until the next scheduled
      Installment Date or any other mutually agreed upon date), provided, however,
      that the amount of deferred shares shall not be included in the calculation
      of
      the number of Installment Conversion Shares to be paid in respect of the
      subsequent Installment Amount for the purposes of this clause (ii);
      (iii) if the Common Stock is selling at a price below $0.40 per share, no
      payment of Installment Conversion Shares may be made to the Holder pursuant
      to
      Article VIII.C without the Holder’s prior written consent within five (5) days
      of such payment (it being acknowledged and agreed that if the Holder does not
      so
      consent to receiving such payment in Installment Conversion Shares, that payment
      may be deferred by the Holder, at its option, until the next scheduled
      Installment Date or any other mutually agreed upon date), provided, however
      that
      the amount of deferred shares shall not be included in the calculation of the
      number of Installment Conversion Shares to be paid in respect of the subsequent
      Installment Amount for the purposes of clause (ii) above; (iv) the Borrower
      has not issued any notice relating to the redemption of any warrant(s) during
      the thirty (30) day period ending on and including the applicable date of
      determination; and (v) any issuances of Installment Conversion Shares will
      not result in the Holder’s aggregate ownership interest of the Common Stock to
      rise above 9.99% unless waived by such Holder under Article IX.

     

    U.  “Stock
      Payment Conditions Failure”
      means
      that during any period commencing with the delivery of the Borrower Installment
      Notice through the applicable Installment Date, the Stock Payment Conditions
      have not been satisfied (or waived in writing by the Majority
      Holders).

    ______________________

    
      1  Insert
        an
        amount equal to 1/6th
        of the
        original principal amount of this Note.

       

    

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    V.  “trading
      day”
means
      any day on which the principal United States securities exchange or trading
      market where the Common Stock is then listed or traded, is open for
      trading.

     

    W.  “Weighted
      Average Price”
means,
      for any security for any period of trading days, the dollar volume-weighted
      average price for such security on AMEX during the period beginning at 9:30:01
      a.m., New York Time (or such other time as AMEX publicly announces is the
      official open of trading) on the applicable day at the commencement of the
      period, and ending at 4:00:00 p.m., New York Time (or such other time as AMEX
      publicly announces is the official close of trading) on the applicable day
      at
      the end of the period, as reported by Bloomberg through its “Volume at Price”
functions, or, if the foregoing does not apply, the dollar volume-weighted
      average price of such security on NASDAQ or another principal market for such
      security during the period beginning at 9:30:01 a.m., New York Time (or such
      other time as such principal market publicly announces is the official open
      of
      trading) on the applicable day at the commencement of the period, and ending
      at
      4:00:00 p.m., New York Time (or such other time as such principal market
      publicly announces is the official close of trading) on the applicable day
      at
      the end of the period, as reported by Bloomberg, or, if the foregoing does
      not
      apply, the dollar volume-weighted average price of such security in the
      over-the-counter market on the electronic bulletin board for such security
      during the period beginning at 9:30:01 a.m., New York Time (or such other time
      as such principal market publicly announces is the official open of trading)
      on
      the applicable day at the commencement of the period, and ending at 4:00:00
      p.m., New York Time (or such other time as such market publicly announces is
      the
      official close of trading) on the applicable day at the end of the period,
      as
      reported by Bloomberg, if no dollar volume-weighted average price is reported
      for such security by Bloomberg for such hours, the average of the highest
      closing bid price and the lowest closing ask price of any of the market makers
      for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
      the National Quotation Bureau, Inc.). If the Weighted Average Price cannot
      be
      calculated for a security for a period of days on any of the foregoing bases,
      the Weighted Average Price of such security for such period shall be the fair
      market value as mutually determined by the Borrower and the Majority Holders.
      If
      the Borrower and the Majority Holders are unable to agree upon the fair market
      value of such security, then such dispute shall be resolved pursuant to Article
      II.B(iv). All such determinations shall be appropriately adjusted for any share
      dividend, share split, share combination or other similar transaction during
      the
      applicable calculation period.

     

    ARTICLE
      XII

     

    MISCELLANEOUS

     

    A.  Failure
      or Indulgency Not Waiver.
      No
      failure or delay on the part of any Holder in the exercise of any power, right
      or privilege hereunder shall operate as a waiver thereof, nor shall any single
      or partial exercise of any such power, right or privilege preclude other or
      further exercise thereof or of any other right, power or privilege.

     

    B.  Lost
      or Stolen Notes.
      Upon
      receipt by the Borrower of (i) evidence of the loss, theft, destruction or
      mutilation of this Note and (ii) (y) in the case of loss, theft or
      destruction, of indemnity (without any bond or other security) reasonably
      satisfactory to the Borrower, or (z) in

     

    
      
         

      

      
        26

        
          

        

      

      
         

      

    

    the
      case
      of mutilation, this Note (surrendered for cancellation), the Borrower shall
      execute and deliver a new Series B Note of like tenor and date. However, the
      Borrower shall not be obligated to reissue such lost, stolen, destroyed or
      mutilated Note if the Holder contemporaneously requests the Borrower to convert
      such Note.

     

    C.  Allocation
      of Reserved Amount.
      The
      initial Reserved Amount shall be allocated pro
      rata
      among
      the Holders of the Series B Notes based on the principal amount of Series B
      Notes issued to each Holder. Each increase to the Reserved Amount shall be
      allocated pro
      rata
      among
      the Holders of the Series B Notes based on the principal amount of Series B
      Notes held by each Holder at the time of the increase in the Reserved Amount.
      In
      the event a Holder shall sell or otherwise transfer any of such Holder’s Series
      B Notes, each transferee shall be allocated a pro
      rata portion
      of such transferor’s Reserved Amount. Any portion of the Reserved Amount which
      remains allocated to any person or entity which does not hold any Series B
      Notes
      shall be allocated to the remaining Holders of the Series B Notes, pro
      rata
      based on
      the principal balance of Series B Notes then held by such Holders.

     

    D.  Quarterly
      Statements of Available Shares.
      For
      each calendar quarter beginning with respect to the second quarter of 2007
      and
      thereafter for so long as any Series B Notes are outstanding, the Borrower
      shall
      deliver (or cause its transfer agent to deliver) to the Holder a written report
      notifying the Holder of any occurrence that prohibits the Borrower from issuing
      Common Stock upon any conversion. The report shall also specify (i) the
      total principal amount of Series B Notes outstanding as of the end of the
      previous quarter, (ii) the total number of shares of Common Stock issued
      upon all conversions of Series B Notes prior to the end of the previous quarter,
      (iii) the total number of shares of Common Stock which are reserved for
      issuance upon conversion of the Series B Notes as of the end of the previous
      quarter and (iv) the total number of shares of Common Stock which may
      thereafter be issued by the Borrower upon conversion of the Series B Notes
      before the Borrower would exceed the Reserved Amount. The Borrower (or its
      transfer agent) shall use its best efforts to deliver the report for each
      quarter to the Holder prior to the tenth day of the calendar month following
      the
      quarter to which such report relates. In addition, the Borrower (or its transfer
      agent) shall provide, as promptly as practicable following delivery to the
      Borrower of a written request by the Holder, any of the information enumerated
      in clauses (i) - (iv) of this Paragraph D as of the date of such
      request.

     

    E.  Status
      as Stockholder.
      Upon
      the Conversion Date for any conversion under this Note, (i) the shares
      covered thereby (other than the shares, if any, which cannot be issued because
      their issuance would exceed the Holder’s allocated portion of the Reserved
      Amount) shall be deemed converted into shares of Common Stock and (ii) the
      Holder’s rights as a Holder of such converted Note shall cease and terminate,
      excepting only the right to receive certificates for such shares of Common
      Stock
      and to any remedies provided herein or otherwise available at law or in equity
      to the Holder because of a failure by the Borrower to comply with the terms
      of
      this Note. Notwithstanding the foregoing, if the Holder has not received
      certificates for all shares of Common Stock prior to the sixth (6th)
      business day after the expiration of the Delivery Period with respect to a
      conversion of this Note for any reason, then (unless the Holder otherwise elects
      to retain its status as a holder of Common Stock by so notifying the Borrower
      within five (5) business days after the expiration of such six (6) business
      day
      period after expiration of the Delivery Period) the Holder shall regain the
      rights of a Holder of this Note and the Borrower shall, as soon as practicable,
      return such unconverted Note to the Holder. In all 

     

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

    cases,
      the Holder shall retain all of its rights and remedies for the Borrower’s
      failure to convert this Note.

     

    F.  Remedies
      Cumulative.
      The
      remedies provided in this Note shall be cumulative and in addition to all other
      remedies available under this Note, at law or in equity (including a decree
      of
      specific performance and/or other injunctive relief), and nothing herein shall
      limit the Holder’s right to pursue actual damages for any failure by the
      Borrower to comply with the terms of this Note. The Borrower acknowledges that
      a
      breach by it of its obligations hereunder will cause irreparable harm to the
      Holder and that the remedy at law for any such breach may be inadequate. The
      Borrower therefore agrees, in the event of any such breach or threatened breach,
      that the Holder shall be entitled, in addition to all other available remedies,
      to seek an injunction restraining any breach, without the necessity of showing
      economic loss and without any bond or other security being
      required.

     

    G.  Waiver.
      Notwithstanding any provision in this Note to the contrary, any provision
      contained herein and any right of the Holder granted hereunder may be waived
      as
      to all Series B Notes (and the Holders thereof) upon the written consent of
      the
      Majority Holders, unless a higher percentage is required by applicable law,
      in
      which case the written consent of the Holders of not less than such higher
      percentage of Series B Notes shall be required.

     

    H.  Notices.
      Any
      notices required or permitted to be given under the terms hereof shall be sent
      by certified or registered mail (return receipt requested) or delivered
      personally, by responsible overnight carrier or by confirmed facsimile, and
      shall be effective five (5) days after being placed in the mail, if mailed,
      or
      upon receipt or refusal of receipt, if delivered personally or by responsible
      overnight carrier or confirmed facsimile, in each case addressed to a party.
      The
      addresses for such communications are:

     

    (i)        if
      to the
      Borrower, to:

     

    Matritech,
      Inc.

    330
      Nevada Street

    Newton,
      MA 02460

    Telephone:
      (617) 928-0820

    Facsimile:
      (617) 928-0821

    Attention:
      Chief Executive Officer

    

    (ii)  if
      to the
      Holder, to the address set forth under the Holder’s name on the execution page
      to the Securities Purchase Agreement, or such other address as may be designated
      in writing hereafter, in the same manner, by such person.

     

    I.  Amendment
      Provision.
      This
      Note and any provision hereof may be amended only by an instrument in writing
      signed by the Borrower and the Majority Holders; provided, however, that no
      such
      amendment, as applied to any of the Series B Notes held by any particular Holder
      of Series B Notes, shall, without the written consent of that particular Holder,
      (i) reduce the Interest Rate, extend the time for payment of Interest or
      change the manner or rate of accrual of Interest on the Series B Notes,
      (ii) reduce the amount of Principal, or extend the Scheduled Maturity Date,
      of the Series B Notes, (iii) make any change that impairs or
      adversely

     

    
      
         

      

      
        28

        
          

        

      

      
         

      

    

    affects
      the conversion rights of the Series B Notes, (iv) impair the right of any
      Holder to receive payment of Principal or Interest or other payments due under
      the Series B Notes, if any, on or after the due dates therefor; or
      (v) modify any of the provisions of, or impair the right of any Holder
      under, this Article XII.I.

     

    J.  Assignability.
      This
      Note shall be binding upon the Borrower and its successors and assigns and
      shall
      inure to the benefit of the Holder and its successors and assigns.
      Notwithstanding anything to the contrary contained in this Note or the
      Transaction Documents, this Note may be pledged and all rights of the Holder
      under this Note may be assigned to any affiliate or to any other person or
      entity without the consent of the Borrower.

     

    K.  Cost
      of Collection.
      If an
      Event of Default occurs hereunder, the Borrower shall pay the Holder hereof
      costs of collection, including reasonable attorneys’ fees.

     

    L.  Governing
      Law; Jurisdiction.
      This
      Note shall be governed by and construed in accordance with the laws of the
      State
      of Delaware applicable to contracts made and to be performed in the State of
      Delaware. The Borrower and the Holder irrevocably consent to the exclusive
      jurisdiction of the United States federal courts and the state courts located
      in
      the County of New Castle, State of Delaware, in any suit or proceeding based
      on
      or arising under this Note and irrevocably agree that all claims between the
      parties in respect of such suit or proceeding may be determined in such courts.
      The Borrower and the Holder irrevocably waive the defense of an inconvenient
      forum to the maintenance of such suit or proceeding in such forum. The Borrower
      and the Holder further agree that service of process upon the Borrower or the
      Holder, as applicable, mailed by first class mail shall be deemed in every
      respect effective service of process upon such party in any such suit or
      proceeding. Nothing herein shall affect the right of the Borrower or the Holder
      to serve process in any other manner permitted by law. The Borrower and the
      Holder agree that a final non-appealable judgment in any such suit or proceeding
      shall be conclusive and may be enforced in other jurisdictions by suit on such
      judgment or in any other lawful manner.

     

    M.  Denominations.
      At the
      request of the Holder, upon surrender of this Note, the Borrower shall promptly
      issue new Series B Notes in the aggregate outstanding principal amount hereof,
      in the form hereof, in such denominations of at least $25,000 as the Holder
      shall request.

     

    N.  Certain
      Waivers.
      The
      Borrower and each endorser hereby waive presentment, notice of nonpayment or
      dishonor, protest, notice of protest and all other notices in connection with
      the delivery, acceptance, performance, default or enforcement of payment of
      this
      Note, and hereby waive all notice or right of approval of any extensions,
      renewals, modifications or forbearances which may be allowed.

     

    O.  Severability.
      If any
      provision of this Note shall be invalid or unenforceable in any jurisdiction,
      such invalidity or unenforceability shall not affect the validity or
      enforceability of the remainder of this Note or the validity or enforceability
      of this Note in any other jurisdiction.

     

    
      
         

      

      
        29

        
          

        

      

      
         

      

    

    P.  Maximum
      Interest Rate.
      If the
      effective interest rate on this Note would otherwise violate any applicable
      usury law, then the interest rate shall be reduced to the maximum permissible
      rate and any payment received by the Holder in excess of the maximum permissible
      rate shall be treated as a prepayment of the principal of this
      Note.

     

     

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        30

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF,
      the
      Borrower has caused this Note to be executed by its duly authorized officer
      as
      of the date first written above.

    

    

    MATRITECH,
      INC.

    

    

    By:                                                              

    Name: Stephen
      D. Chubb

    Title: Chief
      Executive Officer

    

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    

 

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    Exhibit A

    NOTICE
      OF OPTIONAL CONVERSION

    

    To:         
      Matritech,
      Inc.

    330
      Nevada Street

    Newton,
      MA 02460

    Facsimile:

    Attention:

    

    The
      undersigned hereby irrevocably elects to convert $____________ of the
      outstanding principal balance of, and accrued interest on, the Note (the
“Conversion”),
      into
      shares of common stock (“Common
      Stock”)
      of
      Matritech, Inc. (the “Borrower”)
      according to the conditions of the Series B 15% Secured Convertible Promissory
      Note dated January 22, 2007 (the “Note”),
      as of
      the date written below. If securities are to be issued in the name of a person
      other than the undersigned, the undersigned will pay all transfer taxes payable
      with respect thereto. No fee will be charged to the holder of the Note for
      any
      conversion, except for transfer taxes, if any. A copy of the Note is attached
      hereto (or evidence of loss, theft or destruction thereof).

    

    Except
      as
      may be provided below, the Borrower shall electronically transmit the Common
      Stock issuable pursuant to this Notice of Optional Conversion to the account
      of
      the undersigned or its nominee (which is ________________) with DTC through
      its
      Deposit Withdrawal Agent Commission System (“DTC
      Transfer”).

    

    In
      the
      event of partial exercise, please reissue an appropriate Note(s) for the
      principal balance which shall not have been converted.

    

    The
      undersigned acknowledges and agrees that all offers and sales by the undersigned
      of the securities issuable to the undersigned upon conversion of the Note have
      been or will be made only pursuant to an effective registration of the transfer
      of the Common Stock under the Securities Act of 1933, as amended (the
“Act”),
      or
      pursuant to an exemption from registration under the Act.

    

    Check
      Box
      if Applicable:

    

    
      	
              o

            	
              In
                lieu of receiving the shares of Common Stock issuable pursuant to
                this
                Notice of Optional Conversion by way of DTC Transfer, the undersigned
                hereby requests that the Borrower issue and deliver to the undersigned
                or
                its nominee (if applicable) physical certificates representing such
                shares
                of Common Stock.

            

    

    

    Date
      of
      Conversion: ____________________

    Applicable
      Conversion Price: _____________

    Number
      of
      Shares of

    Common
      Stock to be Issued:  _____________

    Signature: 
      ___________________________

    Name:
       ______________________________

    Address:
      ____________________________

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00116-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00116-of-00352.parquet"}]]