Document:

Exhibit 10.8

                            Stock Purchase Agreement

      This Stock Purchase Agreement ("Agreement") is made as of December __ ,
2003, by Tel-instrument Electronics, Corp., a New Jersey corporation ("Buyer"),
Steve Holowacz, an individual resident in Stockholm, New Jersey, and James E.
Blockburger, an individual resident in Bloomingdale, New Jersey (and,
collectively, "Sellers").

      Sellers desire to sell, and Buyer desires to purchase, all of the issued
and outstanding shares (the "Shares") of capital stock of Innerspace Technology,
Inc., a New Jersey corporation ("Innerspace"), for the consideration and on the
terms set forth in this Agreement.

      NOW THEREFORE, the Parties intending to be legally bound, agree as
follows:

1.    DEFINITIONS

      1.1   "Applicable Contract" - any contract (a) under which Innerspace has
            or may acquire any rights, (b) under which Innerspace has or may
            become subject to any obligation or liability, or (c) by which
            Innerspace or any of the assets owned or used by it is or may become
            bound.

      1.2   "Breach" - a "Breach" of a representation, warranty, covenant,
            obligation, or other provision of this Agreement or any instrument
            delivered pursuant to this Agreement will be deemed to have occurred
            if there is or has been (a) any inaccuracy in or breach of, or any
            failure to perform or comply with, such representation, warranty,
            covenant, obligation, or other provisions, or (b) any claim (by any
            Person) or other occurrence or circumstance that is or was
            inconsistent with such representation, warranty, covenant,
            obligation or other provision, and the term "Breach" means any such
            inaccuracy, breach, failure, claim occurrence, or circumstance.

      1.3   "Contemplated Transactions" - all of the transactions contemplated
            by this Agreement, including:

                  (a)   the sale of the Shares by the Sellers to Buyer;

                  (b)   the execution, delivery, and performance of the
                        Promissory Note, the Employment Agreements and the
                        Noncompetition Agreement;

                  (c)   the performance by Buyer and Sellers of their respective
                        covenants and obligations under this Agreement; and

                  (d)   Buyer's acquisition and ownership of the Shares and
                        exercise of control over Innerspace.

      1.4   "Disclosure Letter" - the disclosure letter delivered by Sellers to
            Buyer concurrently with the execution of this Agreement.

      1.5   "Environmental, Health, and Safety Liabilities" - any cost, damages,
            expense, liability, obligation, or other responsibility arising from
            or under

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            Environmental Law or Occupational Safety and Health Law and
            consisting of or relating to:

                  (a)   any environmental, health, or safety matters or
                        conditions (including on-site or off-site contamination,
                        occupational safety and health, and regulation of
                        chemical substances or products);

                  (b)   fines, penalties, judgments, awards, settlements, legal
                        or administrative proceedings, damages, losses, claims,
                        demands and response, investigative, remedial, or
                        inspection costs and expenses arising under
                        Environmental Law or Occupational Safety and Health Law;

      1.6   "ERISA" - the Employment Retirement Income Security Act of 1974 or
            any successor law, and regulations and rules issued pursuant to that
            Act or any successor law.

      1.7   "Governmental Authorization" - any approval, consent, license,
            permit, waiver, or other authorization issued, granted, given, or
            otherwise made available by or under the authority of any
            Governmental Body or pursuant to any Legal Requirement.

      1.8   "Hazardous Materials" - any waste or other substance that is listed,
            defined, designated, or classified as, or otherwise determined to
            be, hazardous, radioactive, toxic or a pollutant or a contaminant
            under or pursuant to any Environmental Law, including any admixture
            or solution thereof, and specifically including petroleum and all
            derivatives thereof or synthetic substitutes therefor and asbestos
            or asbestos-containing materials.

      1.9   "Indemnified Persons" - as defined in Section 10.2.

      1.10  "Intellectual Property Assets" - as defined in Section 3.22.

      1.11  "Interim Balance Sheet" - as defined in Section 3.4.

      1.12  "IRC" - the Internal Revenue Code of 1986 or any successor law, and
            regulations issued by the IRS pursuant to the Internal Revenue Code
            or any successor law.

      1.13  "IRS" - the United States Internal Revenue Service or any successor
            agency, and, to the extent relevant, the United States Department of
            the Treasury.

      1.14  "Knowledge" - an individual will be deemed to have "Knowledge" of a
            particular fact or other matter if:

                  (a)   such individual is actually aware of such fact or other
                        matter; or

                  (b)   a prudent individual could be expected to discover or
                        otherwise become aware of such fact or other matter in
                        the course of conducting a reasonably comprehensive
                        investigation concerning the existence of such fact or
                        other matter.

                  A Person (other than an individual) will be deemed to have
                  "Knowledge" of a particular fact or other matter if any
                  individual who is serving, or who has at any time served, as a
                  director, officer, partner, executor, or trustee of such
                  Person (or in any similar capacity) has, or at any time had,
                  Knowledge of such fact or other matter.

      1.15  "Ordinary Course of Business" - an action take by a Person will be
            deemed to have been taken in the "Ordinary Course of Business" only
            if:

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                  (a)   such action is consistent with the past practices of
                        such Person and is taken in the ordinary course of the
                        normal day-to-day operations of such Person; and

                  (b)   such action is not required to be authorized by the
                        Board of Directors of such Person (or by any Person or
                        group of Persons exercising similar authority) and is
                        not required to be specifically authorized by the parent
                        company (if any) of such Person.

      1.16  "Person" - any individual, corporation (including any non-profit
            corporation), general or limited partnership, limited liability
            company, joint venture, estate, trust, association, labor union or
            other entity or Governmental Body.

      1.17  "Proceeding" - any action, arbitration, audit, hearing,
            investigation, litigation, or suit (whether civil, crinimal,
            administrative, investigative, or informal) commenced, brought,
            conducted, or heard by or before, or otherwise involving, any
            Governmental Body or arbitrator.

      1.18  "Related Person" - with respect to a particular individual:

                  (a)   each other member of such individual's family;

                  (b)   any Person that is directly or indirectly controlled by
                        such individual or one or more members of such
                        individual's family;

                  (c)   any person in which such individual or members of such
                        individual's family hold (individually or in the
                        aggregate) a material interest; and

                  (d)   any person with respect to which such individual or one
                        or more members of such individual's family serves as a
                        director, officer, partner, executor, or trustee (or in
                        a similar capacity).

                  With respect to a specific Person other than an individual:

                  (a)   any person that directly or indirectly controls, is
                        directly or indirectly controlled by, or is directly or
                        indirectly under common control with such specified
                        person;

                  (b)   any person that holds a material interest in such
                        specified person;

                  (c)   each person that serves as a director, officer, partner,
                        executor or trustee of such person (or similar
                        capacity);

                  (d)   any person in which specified person holds material
                        interest;

                  (e)   any person with respect to which such specified person
                        serves as a general partner or a trustee (or in a
                        similar capacity); and

                  (f)   any Related Person or any individual described in clause
                        (b) or (c).

      1.19  "Securities Act" - the Securities Act of 1933 or any successor law,
            and regulations and rules issued pursuant to the Act or any
            successor law.

      1.20  "Tax" - any tax (including any income tax, capital gains tax,
            value-added tax, sales tax, property tax, gift tax, or estate tax),
            levy, assessment, tariff, duty (including any customs duty),
            deficiency, or other fee, any related charge or amount (including
            any fine, penalty, interest, or addition to tax), imposed, assessed,
            or collected by or under the authority of any Governmental Body or
            payable pursuant to any tax-sharing agreement or any other Contract
            relating to the sharing or payment of any such tax, levy,
            assessment, tariff, duty, deficiency, or fee.

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      1.21  "Tax Return" - any return (including any information return),
            report, statement, schedule, notice, form, or other document or
            information filed with or submitted to, or required to be filed with
            or submitted to, any Governmental Body in connection with the
            determination, assessment, collection, or repayment of any Tax or in
            connection with the administration, implementation, or enforcement
            of or compliance with any Legal Requirement relating to any Tax.

      1.22  "Threatened" - a claim, Proceeding, dispute, action, or other matter
            will be deemed to have been "Threatened" if any demand or statement
            has been made (orally or in writing) or any notice has been given
            (orally or in writing), or if any other event has occurred or any
            other circumstances exist, that would lead a prudent Person to
            conclude that such a claim, Proceeding, dispute, action or other
            matter is likely to be asserted, commenced, taken, or otherwise
            pursued in the future.

2.    SALE AND TRANSFER OF SHARES; CLOSING

      2.1   SHARES

      Subject to the terms and conditions of this agreement, at the Closing,
hereinafter defined, Sellers will sell and transfer the Shares to Buyer, and
Buyer will purchase the Shares from Sellers.

      2.2   PURCHASE PRICE

        The purchase price (the "Purchase Price") for the Shares will be
$547,000 subject to adjustment as set forth below, and payable as follows:

      (a) at the Closing, the Buyer will pay the Sellers the sum of $460,000 in
cash; and

      (b) at the Closing, Buyer will issue to Sellers, a promissory note (the
"Promissory Note"), providing that on each of the three succeeding anniversaries
of the Closing Date, Buyer will pay Sellers jointly the aggregate amount of
$29,000 plus accrued simple interest at the rate of 8% per year from the Closing
Date. The Buyer will have the right to offset against the payments, under the
Promissory Notes, any amounts resulting from a breach by Sellers of any
covenant, representation or warranty contained in this Agreement.

      As further consideration, within 60 days of the Closing, Buyer will grant
options to purchase 25,000 of its shares of common stock, pursuant to Buyer's
Employees Stock Option Plan, to all employees of Innerspace, allocated as
directed by Sellers.

      2.3   CLOSING

      The purchase and sale (the "Closing") provided for in this agreement will
take place at the office of Buyer's counsel at 770 Lexington Avenue, New York,
NY 10021, at 10:00 a.m. (local time) on Thursday, December 18, 2003, or at such
other time and place as the parties may agree. Subject to the provisions of
Section 9, failure to consummate the purchase and sale provided for in this
Agreement on the date and time and at the

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place determined pursuant to this Section 2.3, will not result in the
termination of this Agreement and will not relieve any party of any obligation
under this Agreement.

      2.4   CLOSING OBLIGATIONS

      At the Closing:

      (a) Sellers will deliver to Buyer:

          (i) certificates representing the Shares, duly endorsed (or
accompanied by duly executed stock powers), with signatures guaranteed by a
commercial bank or by a member firm of the New York Stock Exchange, for transfer
to Buyer or its wholly subsidiary;

          (ii) Resignation Letters in the form of Exhibit 2.4(a)(ii) executed by
Sellers (collectively, "Sellers' Resignation Letters");

          (iii) employment agreements in the form of Exhibit 2.4(a)

          (iii), executed by Sellers (collectively, "Employment Agreements");

          (iv) non-competition agreements in the form of Exhibit 2.4(a)(iv),
executed by Sellers (collectively, the "Non-competition Agreements"); and

          (v) a certificate executed by Sellers representing and warranting to
Buyer that each of Sellers' representations and warranties in this Agreement was
accurate in all respects as of the date of this Agreement and is accurate in all
respects as of the Closing Date as if made on the Closing Date (giving full
effect to any supplements to the Disclosure Letter that were delivered by
Sellers to Buyer prior to the Closing Date in accordance with Section 5.5); and

          (vi) proof of payment of any amounts to, and release from Oxford
Capital Group, Inc.

      (b) Buyer will deliver to Sellers:

          (i) The following amounts by Bank cashier's or certified check payable
to the order of Holowacz or Blockburger, respectively, in the amount of $230,000
to Holawacz and $230,000 to Blockburger;

          (ii) The Promissory Note in the form of exhibit 2.4(b);

          (iii) a certificate executed by Buyer representing and warranting to
Sellers that each of Buyer's representations and warranties in this Agreement
was accurate in all respects as of the date of this Agreement and is accurate in
all respects as of the Closing Date as if made on the Closing Date; and

          (iv) the Employment Agreements, executed by Buyer.

      2.5   ADJUSTMENT AMOUNT

      (a) The Adjustment Amount (which may be a positive or negative number)
will be determined by (i) the difference between the stockholders' equity of
Innerspace as of the Closing Date determined in accordance with GAAP, minus (ii)
$400,000, and the Parties will discuss whether the adjustment amount warrants an
adjustment of the cash purchase price and if so, by how much.

      (b) Innerspace will pay, at or prior to the Closing, employee accrued
vacation time, and related taxes payable by the employer, to its employees, in
the amounts, set

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forth in part 3.20 of the Disclosure Letter, and the Purchase Price payable by
Buyer pursuant to Section 2.4(b)(i) shall be reduced by the amounts paid,
withheld or reserved by Innerspace, pursuant to this Part 3.20(c) of the
Disclosure Letter.

3.    REPRESENTATIONS AND WARRANTIES OF SELLERS

      Sellers represent and warrant to Buyer as follows:

      3.1   ORGANIZATION AND GOOD STANDING

            (a) Part 3.1 of the Disclosure Letter contains a complete and
accurate list of Innerspace's corporate name, jurisdiction of incorporation,
other jurisdictions in which it is authorized to do business, and its
capitalization (including the identity of each stockholder and the number of
shares held by each). Innerspace is a corporation duly organized, validly
existing, and in good standing under the law of its jurisdiction of
incorporation, with full corporate power and authority to conduct its business
as it is now being conducted, to own or use the properties and assets that it
purports to own or use, and to perform all its obligations under Applicable
Contracts. Innerspace is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each state or other jurisdiction in
which either the ownership or use of the properties owned or used by it, or the
nature of the activities conducted by it, requires such qualification.

            (b) Sellers have delivered to Buyer copies of the organizational
documents of Innerspace, as currently in effect.

      3.2   AUTHORITY; NO CONFLICT

            (c) This Agreement constitutes the legal, valid, and binding
obligation of Sellers, enforceable against Sellers in accordance with its terms.
Upon the execution and delivery by Sellers of the Employment Agreements, the
Sellers' Resignation Letter, and the Noncompetition Agreement (collectively, the
"Sellers' Closing Documents"), the Sellers' Closing Documents will constitute
the legal, valid, and binding obligations of Sellers, enforceable against
Sellers in accordance with their respective terms. Sellers have the absolute and
unrestricted right, power, authority, and capacity to execute and deliver this
Agreement and Sellers' Closing Documents and to perform their obligations under
this Agreement and the Sellers' Closing Documents.

            (d) Except as set forth in Part 3.2 of the Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation or
performance of any of the contemplated transactions will, directly or indirectly
(with or without notice or lapse of time):

                (i) contravene, conflict with, or result in a violation of (A)
any provision of the organizational documents of Innerspace, or (B) any
resolution adopted by the Board of Directors or the stockholders of Innerspace;

                (ii) contravene, conflict with, or result in a violation of, or
give any governmental body or other person the right to challenge any of the
contemplated transactions or to exercise any remedy or obtain any relief under,
any legal requirement

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or any order to which Innerspace or either Seller, or any of the assets owned or
used by Innerspace, may be subject;

                (iii) contravene, conflict with, or result in a violation of any
of the terms or requirements of, or give any governmental body the right to
revoke, withdraw, suspend, cancel, terminate, or modify, any governmental
authorization that is held by Innerspace or that otherwise relates to the
business of, or any of the assets owned or used by, Innerspace;

                (iv) contravene, conflict with, or result in a violation or
breach of any provision of, or give any person the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Applicable Contract; or

                (v) result in the imposition or creation of any encumbrance upon
or with respect to any of the assets owned or used by Innerspace.

Except as set forth in Part 3.2 of the Disclosure Letter, neither Sellers nor
Innerspace is or will be required to give any notice to or obtain any consent
from any person in connection with the execution and delivery of this Agreement
or the consummation or performance of any of the contemplated transactions.

                (e) Sellers are acquiring the Promissory Note for their own
account and not with a view to its distribution within the meaning of Section
2(11) of the Securities Act.

      3.3   CAPITALIZATION

      The authorized equity securities of Innerspace consist of 1,250 shares of
common stock, par value $100 per share, of which 20 shares are issued and
outstanding and constitute the Shares. Sellers are and will be on the Closing
Date, the record and beneficial owners and holders of the Shares, free and clear
of all encumbrances. Holowacz owns 10 of the Shares and Blockburger owns 10 of
the Shares. No legend or other reference to any purported encumbrance appears
upon any certificate representing equity securities of Innerspace. All of the
outstanding equity securities of Innerspace have been duly authorized and
validly issued and are fully paid and nonassessable. There are no contracts
relating to the issuance, sale, or transfer of any equity securities or other
securities of Innerspace. None of the outstanding equity securities or other
securities of Innerspace was issued in violation of the Securities Act or any
other legal requirement. Innerspace does not have any contract to acquire
securities of, or an interest in any other business.

      3.4   FINANCIAL STATEMENTS

      Sellers have delivered to Buyer: (a) unaudited balance sheets of
Innerspace (including notes) as at June 30, 2002 and 2003 (the June 30, 2003
balance sheet is herein called the "Balance Sheet"), and the related unaudited
statements of income, changes in stockholder's equity and cash flow for each of
the fiscal years then ended, together with the report thereon of Chris DiCicco,
independent public accountant and (b) an unaudited balance sheet of Innerspace
(including notes) as at November 30, 2003 (the "Interim

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Balance Sheet") and the related unaudited statements of income, changes in
stockholders' equity, and cash flow for the 5 months then ended, together with
the report thereon of Chris DiCicco, independent Public Accountant. The Balance
Sheet and the Interim Balance Sheet, and related statements of income, changes
in Stockholders' equity and cash flow were not audited. However, nothing came to
the Sellers' attention that caused either of them to believe that the Balance
Sheet was not prepared in conformity with generally accepted accounting
principles, applied consistently or that it does not fairly present the
financial position of Innerspace at June 30, 2003, and the results of
operations, for the year then ended, in accordance with G.A.A.P. The Interim
Balance Sheet and the related statements of income, changes in stockholders'
equity and notes fairly present the financial condition and the results of
operation, changes in stockholders' equity, and cash flow of Innerspace as at
November 30, 2003 and for the 5 month period then ended in accordance with GAAP.
The financial statements referred to in this Section 3.4 reflect the consistent
application of such accounting principles throughout the periods involved. No
financial statements of any Person other than Innerspace are required by GAAP to
be included in the financial statements of Innerspace.

      3.5   BOOKS AND RECORDS

      Except as set forth in the Disclosure Letter, the books of account, minute
books, and other records of Innerspace, all of which have been made available to
Buyer, are complete and correct and have been maintained in accordance with
sound business practices, including the maintenance of an adequate system of
internal controls. The minute books of Innerspace contain accurate and complete
records of all meetings held of, and corporate action taken by, the
stockholders, the Board of Directors, and committees of the Board of Directors
of Innerspace, and no meeting of any such stockholders, Board of Directors, or
committee has been held for which minutes have not been prepared and are not
contained in such minute books. At the Closing, all of those books and records
will be in the possession of Innerspace.

      3.6   TITLE TO PROPERTIES; ENCUMBRANCES

      Part 3.6 of the Disclosure Letter contains a complete and accurate list of
all real property, leaseholds, or other interests therein owned by Innerspace.

      Sellers have delivered or made available to Buyer copies of the deeds and
other instruments (as recorded) by which Innerspace acquired such real property
and interests, and copies of all title insurance policies, opinions, abstracts,
and surveys in the possession of Sellers or Innerspace and relating to such
property or interests.

      Innerspace owns (with good and marketable title in the case of real
property, subject only to the matters permitted by the following sentence) all
the properties and assets (whether real, personal, or mixed and whether tangible
or intangible that it purports to own, located in the facilities owned or
operated by Innerspace or reflected as owned in its books and records, including
all of the properties and assets reflected in the Balance

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Sheet and the Interim Balance Sheet (except for assets held under capitalized
leases disclosed or not required to be disclosed in Part 3.6 of the Disclosure
Letter and personal property sold since the date of the Balance Sheet and the
Interim Balance Sheet, as the case may be, in the ordinary course of business),
and all of the properties and assets purchased or otherwise acquired by
Innerspace since the date of the Balance Sheet (except for personal property
acquired and sold since the date of the Balance Sheet in the ordinary course of
business and consistent with past practice). All material properties and assets
reflected in the Balance Sheet and the Interim Balance Sheet are free and clear
of all encumbrances and are not, in the case of real property, subject to any
rights of way, building use restrictions, exceptions, variances, reservations,
or limitations of any nature except, with respect to all such properties and
assets, any nature except, with respect to all such properties and assets, (a)
mortgage or security interests shown on the Balance Sheet or the Interim Balance
Sheet as securing specified liabilities or obligations, with respect to which no
default (or event that, with notice or lapse of time or both, would constitute a
default) exists, (b) mortgages or security interest incurred in connection with
the purchase of property or assets after the date of the Interim Balance Sheet
(such mortgages and security interests being limited to the property or assets
so acquired), with respect to which no default (or event that, with notice or
lapse of time or both, would constitute a default) exists, (c) liens for current
taxes not yet due, and (d) with respect to real property, (i) minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of Innerspace, and (ii) zoning laws and other
land use restrictions that do not impair the present or anticipated use of the
property subject thereto. All buildings, plants, and structures owned by
Innerspace lie wholly within the boundaries of the real property owned or leased
by Innerspace and do not encroach upon the property of, or otherwise conflict
with the property rights of, any other person.

      3.7   CONDITION AND SUFFICIENCY OF ASSETS

      The building, plant, structures, and equipment of Innerspace are
structurally sound, are in good operating condition and repair, and are adequate
for the uses to which they are being put, and none of such buildings, plants,
structures, or equipment is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs that are not material in nature or
costs. The building, plant, structures, and equipment are sufficient for the
continued conduct of Innerspace's business after the Closing in substantially
the same manner as conducted prior to the Closing.

      3.8   ACCOUNTS RECEIVABLE

      All accounts receivable of Innerspace that are reflected on the Balance
Sheet or the Interim Balance Sheet or on the accounting records of Innerspace as
of the Closing Date (collectively, the "Accounts Receivable") represent or will
represent valid obligations arising from sales actually made or services
actually performed in the ordinary course of business. Unless paid prior to the
Closing Date, the Accounts Receivable are or will be as of the Closing Date
current and collectible net of the respective reserves shown on the Balance
Sheet or the Interim Balance Sheet or on the

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accounting records as of the Closing Date (which reserves are adequate and
calculated consistent with past practice and, in the case of the reserve on the
Closing Date, will not represent a greater percentage of the Accounts Receivable
as of the Closing Date than the reserve reflected in the Interim Balance Sheet
represented of the Accounts Receivable reflected therein and will not represent
a material adverse change in the composition of such Accounts Receivable in
terms of aging). Subject to such reserves, each of the Accounts Receivable
either has been or will be collected in full, without any set-off within ninety
days after the day on which it first becomes due and payable. There is no
contest, claim, or right of set-off, other than returns in the ordinary course
of business, under any contract with any obligor of an Accounts Receivable
relating to the amount or validity of such Accounts Receivable. Part 3.8 of the
Disclosure Letter contains a complete and accurate list of all Accounts
Receivable as of the date of the Interim Balance Sheet, which list sets forth
the aging of such Accounts Receivable.

      3.9   INVENTORY

      All inventory, whether or not reflected in the Balance Sheet or the
Interim Balance Sheet, consists of a quality and quantity usable and salable in
the ordinary course of business, except for obsolete items and items of
below-standard quality, all of which have been written off or written down to
net realizable value in the Balance Sheet or the Interim Balance Sheet or on the
accounting records of Innerspace as of the Closing Date, as the case may be. All
inventories not written off have been priced at the lower of cost or market on a
first in - first out basis. The quantities of each item of inventory (whether
raw materials, work-in-process, or finished goods) are not excessive, but are
reasonable in the present circumstances of Innerspace.

      3.10  NO UNDISCLOSED LIABILITIES

      Except as set forth in Part 3.10 of the Disclosure Letter, Innerspace has
no liabilities or obligations of any nature (whether known or unknown and
whether absolute, accrued, contingent, or otherwise) except for liabilities or
obligations reflected or reserved against in the Balance Sheet or the Interim
Balance Sheet and current liabilities incurred in the ordinary course of
business since the respective dates thereof.

      3.11  TAXES

      (a) Innerspace has filed or caused to be filed (on a timely basis since
1998) all tax returns that are or were required to be filed by it pursuant to
applicable Legal Requirements. Sellers have delivered to Buyer copies of, and
Part 3.11 of the Disclosure Letter contains a complete and accurate list of, all
such tax returns, filed since October 31, 1998. Innerspace has paid, or made
provision for the payment of, all taxes that have or may have become due
pursuant to those tax returns or otherwise, or pursuant to any assessment
received by Sellers, except such taxes, if any, as are listed in Part 3.11 of
the Disclosure Letter and are being contested in good faith and as to which
adequate reserves (determined in accordance with GAAP) have been provided in the
Balance Sheet and the Interim Balance Sheet.

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      (b) Innerspace's federal and state income tax returns have been audited by
the IRS or relevant state tax authorities or are closed by the applicable
statute of limitations for all taxable years through June 30, 1998. Part 3.11 of
the Disclosure Letter contains a complete and accurate list of all audits of all
such tax returns, including a reasonably detailed description of the nature and
outcome of each audit, since 1998. All deficiencies proposed as a result of such
audits have been paid, reserved against, settled, or, as described in Part 3.11
of the Disclosure Letter, are being contested in good faith by appropriate
proceedings. Part 3.11 of the Disclosure Letter describes all adjustments to the
United States federal income tax returns filed by Innerspace for all taxable
years since October 31, 1998, and the resulting deficiencies proposed by the
IRS. Except as described in Part 3.11 of the Disclosure Letter, neither Sellers
nor Innerspace has given or been requested to give waivers or extensions (or is
or would be subject to a waiver or extension given by any other person) of any
statute of limitations relating to the payment of taxes of Innerspace or for
which Innerspace would be liable.

      (c) The charges, accruals, and reserves with respect to taxes on the books
of Innerspace are adequate (determined in accordance with GAAP) and are at least
equal to Innerspace's liability for taxes. There exists no proposed tax
assessment against Innerspace except as disclosed in the Balance Sheet or in
Part 3.11 of the Disclosure Letter. All taxes that Innerspace is or was required
by legal requirements to withhold or collect have been duly withheld or
collected and, to the extent required, have been paid to the proper Governmental
Body or other Person.

      (d) All tax returns filed are true, correct, and complete. Innerspace has
not been within the five-year period preceding the Closing Date, an "S"
corporation.

      3.12  NO MATERIAL ADVERSE CHANGE

      Since the date of the Interim Balance Sheet, there has not been any
material adverse change in the business, operations, properties, prospects,
assets or condition of Innerspace and no event has occurred or circumstance
exists that may result in material adverse change.

      3.13  EMPLOYEE BENEFITS

      (a) Part 3.13 of the Disclosure Letter contains a complete and accurate
list of all of Innerspace's pension, profit sharing, deferred compensation or
other employee benefit plans ("Company Employee Plans").

      (b) Part 3.13 of the Disclosure Letter sets forth a calculation of the
liability of Innerspace for post-retirement benefits made in accordance with
Financial Accounting Statement 106 of the Financial Accounting Standards Board,
regardless of whether Innerspace is required by Statement 106 to disclose such
information.

      (c) Part 3.13 of the Disclosure Letter sets forth the financial costs of
all obligations owed under any Company Employee Plans that is not subject to the
disclosure and reporting requirements of ERISA.

      (d) Sellers have delivered to Buyer, all documents relating to all Company
Employee Plans; all notifications to employees of their rights under ERISA; all
notices that were given by Innerspace of any Company Employee Plans to the IRS,
or any

                                       11
<PAGE>

participant or beneficiary, pursuant to statute, within the four years preceding
the date of this Agreement, including notices that are expressly mentioned
elsewhere in this Section 3.13; all notices that were given by the IRS, or the
Department of Labor to Innerspace, within the four years preceding the date of
this Agreement.

      (e) Except as set forth in Part 3.13 of the Disclosure Letter:

          (i) Innerspace has performed all of its obligations under all Company
Employee Plans and has made appropriate entries in its financial records, and
statements for all obligations and liabilities under such Plans.

          (ii) No statement, either written or oral, has been made by Innerspace
to any Person with regard to any Plan that was not in accordance with the Plan
and that could have an adverse economic consequences to Innerspace or to Buyer.

          (iii) Innerspace, with respect to all Company Plans, and each Company
Plan is in full compliance with ERISA, the IRC, and other applicable laws
including the provisions of such laws expressly mentioned in this Section 3.13,
and with any applicable collective bargaining agreement.

               (A) No Seller or Innerspace has any liability to the IRS with
respect to any Plan, including any liability imposed by Chapter 43 of the IRC.

               (B) All filings required by ERISA and the IRC as to each Plan
have been timely failed, and all notices and disclosures to participants
required by either ERISA or the IRC have been timely provided.

               (C) All contributions and payments made or accrued with respect
to all Company Plans, are deductible under IRC ss. 162 or ss. 404. No amount, or
any asset of Company Plan, is subject to tax as unrelated business taxable
income.

      (f) Each Company Employee Plan can be terminated within thirty days,
without payment of any additional contribution or amount and without the vesting
or acceleration of any benefits promised by such Plan.

      (g) No event has occurred or circumstance exists that could result in a
material increase in premium costs of a Company Employee Plan.

      (h) No accumulated funding deficiency, whether or not waived, exists with
respect to any Company Employee Plan; no event has occurred or circumstance
exists that may result in an accumulated funding deficiency as of the last day
of the current plan year of any such Plan.

      (i) Innerspace has never established, maintained, or contributed to or
otherwise participated in, or had an obligation to maintain, contribute, or
otherwise participate in, any Multi-Employer Plan.

      (j) Innerspace has not withdrawn from any Multi-Employer Plan with respect
to which there is any outstanding liability as of the date of this Agreement. No
event has occurred or circumstance exists that presents a risk of the occurrence
of any withdrawal from, or the participation, termination, reorganization or
insolvency of, any Multi-Employer Plan that could result in any liability of
ether Innerspace or Buyer to a Multi-Employer Plan.

      (k) Except to the extent required under ERISA and IRC, Innerspace does not
provide health or welfare benefits for any retired or former employee or is
obligated to provide health or welfare benefits to any active employee following
such employee's retirement or other termination of service.

                                       12
<PAGE>

      (l) Innerspace has the right to modify and terminate benefits to retirees
(other than pensions) with respect to both retired and active employees.

      (m) No payment that is owed or may become due to any director, officer,
employee, or agent of Innerspace will be non-deductible to Innerspace or subject
to tax under IRC ss.280G or ss. 4999; nor will Innerspace be required to "gross
up" or otherwise compensate any such person because of the imposition of any
excise tax on a payment to such person.

      (n) The consummation of the contemplated transactions will not result in
the payment, vesting, or acceleration of any benefits.

      3.14  COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS

      (a) Except as set forth in Part 3.14 of the Disclosure Letter:

            (i) No event has occurred or circumstance exists that (with or
without notice or lapse of time) (A) may constitute or result in a violation, or
failure by Innerspace to comply with any legal requirement, or (B) may give rise
to any obligation on the part of Innerspace to undertake, or to bear all or any
portion of the cost of, any remedial action of any nature; and

            (ii) Innerspace has not received, at any time since January 1, 2000,
any notice or other communication (whether oral or written) from any
governmental body or any other person regarding (A) any actual, alleged,
possible, or potential violation of or failure to comply with any term or
requirement of any governmental authorization, or (B) any actual, proposed,
possible, or potential revocation, withdrawal, suspension, cancellation,
termination of, or modification to any governmental authorization; and

            (iii) All applications required to have been filed for the renewal
of the governmental authorizations listed or required to be listed in Part 3.14
of the Disclosure Letter have been duly filed on a timely basis with the
appropriate governmental bodies, and all other filings required to have been
made with respect to such governmental authorization have been duly made on a
timely basis with the appropriate governmental bodies.

            The governmental authorizations listed in Part 3.14 of the
Disclosure Letter collectively constitute all of the governmental authorizations
necessary to permit Innerspace to lawfully conduct and operate its business and
to permit it to own and use its assets in the manner in which it currently
operates its business and owns and uses such assets.

      3.15 LEGAL PROCEEDINGS; ORDERS

      (a) Except as set forth in Part 3.15 of the Disclosed Letter, there is no
pending Proceeding:

            (i) that has been commenced by or against Innerspace or that
otherwise relates to or may affect its business, or any of the assets owned or
used by, it; or

            (ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the contemplated
transactions.

                                       13
<PAGE>

To the knowledge of Sellers and Innerspace, (1) no such proceeding has been
threatened, and (2) no event has occurred or circumstance exists that may give
rise to or serve as a basis for the commencement of any such proceeding. Sellers
have delivered to Buyer copies of all pleadings, correspondence, and other
documents relating to each proceeding listed in Part 3.15 of the Disclosure
Letter. The proceedings listed in Part 3.15 of the Disclosure Letter will not
have a material adverse effect on the business, operations, assets, condition,
or prospects of Innerspace.

      (b) Except as set forth in Part 3.15 of the Disclosed Letter:

            (i) there is no Order to which Innerspace, or any of the assets
owned or used by it, is subject;

            (ii) neither Seller is subject to any Order that relates to the
business of, or any of the assets owned or used by, Innerspace; and

            (iii) No officer, director, agent, or employee of Innerspace is
subject to any Order that prohibits such officer, director, agent, or employee
from engaging in or continuing any conduct, activity, or practice relating to
the business of Innerspace.

      3.16  ABSENCE OF CERTAIN CHANGES AND EVENTS

      Except as set forth in Part 3.16 of the Disclosure Letter, since the date
of the Interim Balance Sheet, Innerspace has conducted its businesses only in
the ordinary course of business and there has not been any:

      (a) change in its authorized or issued capital stock; grant of any stock
option or right to purchase shares of its capital stock; issuance of any
security convertible into such capital stock; grant of any registration rights;
purchase, redemption, retirement, or other acquisition by Innerspace of any
shares of any such capital stock; or declaration or payment of any dividend or
other distribution or payment in respect of shares of capital stock;

      (b) amendment to the Organization Documents;

      (c) payment or increase of bonuses, salaries, or other compensation to any
stockholder, director, officer, or (except in the ordinary course of business)
employee or entry into any employment, severance, or similar contract with any
director, officer, or employee;

      (d) adoption of, or increase in the payments to or benefits under, any
Company Employee Plan for or with any employees;

      (e) damage to or destruction or loss of any of its assets or property,
whether or not covered by insurance, materially and adversely affecting the
properties, assets, business, financial condition, or prospects of Innerspace;

      (f) entry into, termination of, or receipt of notice of termination of (i)
any license, distributorship, dealer, sales representative, joint venture,
credit, or similar agreement, or (ii) any contract or transaction involving a
total remaining commitment by or to Innerspace of at least $10,000;

      (g) sale (other than sales of inventory in the ordinary course of
business), lease, or other disposition of any asset or property or mortgage,
pledge, or imposition of any lien or other encumbrance on any material asset or
property, including the sale, lease, or other disposition of any of the
Intellectual Property Assets;

                                       14
<PAGE>

      (h) cancellation or waiver of any claims or rights with a value in excess
of $10,000;

      (i) material change in the accounting methods; or

      (j) agreement, whether oral or written with, or by Innerspace to do any of
the foregoing.

      3.17  CONTRACTS; NO DEFAULTS

      (a) Part 3.17 of the Disclosure Letter contains a complete and accurate
list, and Sellers have delivered to Buyer true and complete copies of:

            (i) each contract that involves performance of services or delivery
of goods or materials of an amount or value in excess of $10,000.

            (ii) each contract that involves performance of services or delivery
of goods or materials to Innerspace of an amount or value in excess of $10,000.

            (iii) each contract that was not entered into in the ordinary course
of business and that involves expenditures or receipts in excess of $10,000.

            (iv) each lease, rental or occupancy agreement, license, installment
and conditional sale agreement, and other contract affecting the ownership of,
leasing of, title to, use of, or any leasehold or other interest in, any real or
personal property (except personal property leases and installment and
conditional sales agreements having a value per item or aggregate payments of
less than $10,000 and with terms of less than one year);

            (v) each licensing agreement or other contract with respect to
patents, trademarks, copyrights, or other intellectual property, including
agreements with current or former employees, consultants, or contractors
regarding the appropriation or the non-disclosure of any of the Intellectual
Property Assets;

            (vi) each collective bargaining agreement and other contract to or
with any labor union or other employee representative of a group of employees;

            (vii) each joint venture, partnership, and other contract (however
named) involving a sharing of profits, losses, costs, or liabilities with any
other person;

            (viii) each contract containing covenants that purport to restrict
the business activity of, or limit the freedom of Innerspace to engage in any
line of business or to compete with any person;

            (ix) each contract providing for payments to or by any person based
on sales, purchases, or profits, other than direct payments for goods;

            (x) each power of attorney that is currently effective and
outstanding;

            (xi) each contract entered into that contains or provides for an
express undertaking to be responsible for consequential damages;

            (xii) each contract for capital expenditures in excess of $5,000;

            (xiii) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by Innerspace other
than in the ordinary course of business; and

            (xiv) each amendment, supplement, and modification (whether oral or
written) in respect of any of the foregoing.

                                       15
<PAGE>

Part 3.17 of the Disclosure Letter sets forth reasonably complete details
concerning such contracts, including the parties to the contracts and the amount
of the remaining commitment under the contracts.

      (b) Except as set forth in Part 3.17 of the Disclosure Letter:

            (i) neither Seller (and no related person of either Seller) has or
may acquire any rights under, and neither Seller has or may become subject to
any obligation or liability under, any contract that relates to the business of,
or any of the assets owned or used by, Innerspace; and

            (ii) No officer, director, agent, employee, consultant, or
contractor of Innerspace is bound by any contract that purports to limit the
ability of such officer, director, agent, employee, consultant, or contractor to
(A) engage in or continue any conduct, activity, or practice relating to the
business of Innerspace, or (B) assign to Innerspace or to any other person any
rights to any invention, improvement, or discovery.

      (c) Except as set forth in Part 3.17 of the Disclosure Letter:

            (i) Innerspace is, and at all times since January 1, 2000 has been,
in full compliance with all applicable terms and requirements of each contract
under which it has or had any obligation or liability or by which it or any of
the assets owned or used by it is or was bound;

            (ii) each other person that has or had any obligation or liability
under any contract under which an Innerspace has or had any rights is, and at
all times since January 1, 2000 has been, in full compliance with all applicable
terms and requirements of such contract.

            (iii) no event has occurred or circumstance exists that (with or
without notice or lapse of time) may contravene, conflict with, or result in a
violation or breach of, or give any person, the right to declare a default or
exercise any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any applicable contract; and

            (iv) Innerspace has not given or received from any other person at
any time since January 1, 2000, any notice or other communication (whether oral
or written) regarding any actual, alleged, possible, or potential violation or
breach, of, or default under, any contract.

      (d) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to
Innerspace under current or completed contracts with any person, and, to the
knowledge of Sellers, no such person has made written demand for such
renegotiations.

      (e) The contracts relating to the sale, design, manufacture, or provision
of products or services by Innerspace have been entered into in the ordinary
course of business and have been entered into without the commission of any act
alone or in concert with any other person, or any consideration has been paid or
promised, that is or would be in violation of any legal requirement.

      3.18  INSURANCE

      (a) Sellers have delivered to Buyer:

                                       16
<PAGE>

            (i) true and complete copies of all policies of insurance to which
Innerspace is a party or under which it, or any director, is or has been covered
at any time within the 3 years preceding the date of this Agreement;

            (ii) true and complete copies of all pending applications for
policies or insurance; and

            (iii) any statement by Innerspace's accountants with regard to the
adequacy of Innerspace's coverage or of the reserves for claims.

      (b) Part 3.18 of the Disclosure Letter describes:

            (i) any self-insurance arrangement, including any reserves
established thereunder;

            (ii) all obligations to third parties with respect to insurance
(including such obligations under leases and service agreements) and identified
the policy under which such coverage is provided.

      (c) Part 3.18 of the Disclosure Letter sets forth, by year, for the
current policy year and each of the 2 preceding policy years:

            (i) a summary of the loss experience under each policy;

            (ii) a statement describing each claim under an insurance policy for
an amount in excess of $10,000, which sets forth:

                  (A) the name of the claimant;

                  (B) a description of the policy by insurer, type of insurance,
and period of coverage, and

                  (C) the amount and a brief description of the claim; and

            (iii) a statement describing the loss experience for all claims that
were self-insured, including the number and aggregate cost of such claims.

      (d) Except as set forth on Part 3.18 of the Disclosure Letter:

            (i) all policies covering Innerspace, or any director or officer;

                  (A) are valid, outstanding, and enforceable;

                  (B) are issued by an insurer that is financially sound and
reputable;

                  (C) taken together, provide adequate insurance coverage for
the assets and the operations of Innerspace;

                  (D) are sufficient for compliance with all legal requirements
and contracts to which Innerspace is a party or by which it is bound;

                  (E) will continue in full force and effect following the
consummation of the contemplated transactions; and

                  (F) do not provide for any retrospective premium adjustment or
other experience-based liability.

            (ii) Innerspace has not received (A) any refusal of coverage or any
notice that a defense will be afforded with reservation of rights, or (B) any
notice of cancellation or any other indication that any insurance policy is no
longer in full force or effect or will not be renewed or that the issuer of any
policy is not willing or able to perform its obligations thereunder.

                                       17
<PAGE>

            (iii) Innerspace has paid all premiums due, and has otherwise
performed all obligations, under each policy which provides coverage to
Innerspace or a director thereof.

            (iv) Innerspace has given notice to the insurer of all claims that
may be insured thereby.

      3.19  ENVIRONMENTAL MATTERS

      Except as set forth in part 3.19 of the Disclosure Letter:

      (a) Innerspace is, and at all times has been, in full compliance with, and
has not been and is not in violation of or liable under, any environmental law.
No Seller has any basis to expect or has received actual or threatened order,
notice, or other communication from (i) any governmental body or private citizen
acting in the public interest, or (ii) the current or prior owner or operator of
any facilities, of any actual or potential violation or failure to comply with
any environmental law, or of any actual or threatened obligation to undertake or
bear the cost of any of the facilities or any other properties or assets
(whether real, personal or mixed) in which Sellers or Innerspace has had an
interest, or with respect to any property or facility at or which hazardous
materials were generated, manufactured, refined, transferred, imported, used, or
processed by Sellers, or by Innerspace, or any other person for whose conduct
they are or may be held responsible, or from which hazardous materials have been
transported, treated, stored, handled, transferred, disposed, recycled or
received.

      (b) There are no pending or, to the knowledge of Sellers, threatened
claims, encumbrances, or other restrictions of any nature, resulting from any
environmental, health and safety liabilities or arising under or pursuant to any
environmental law, with respect to or affecting any of the facilities or any
other properties and assets (whether real, personal, or mixed) in which Sellers
or Innerspace has or had an interest.

      3.20  EMPLOYEES

      (a) Part 3.20 of the Disclosure Letter contains a complete and accurate
list of the following information for each employee or director of Innerspace,
including each employee on leave of absence or layoff status: name; job title;
current compensation paid or payable and any change in compensation since
1/1/02; vacation accrued; and service credited for purposes of vesting and
eligibility to participate under any pension, retirement, profit-sharing,
thrift-savings, deferred compensation, stock bonus, stock options, cash bonus,
employee stock ownership (including investment credit or payroll stock
ownership), severance pay, insurance, medical, welfare, or vacation plan, other
Employee Pension Benefit Plan or Employee Welfare Benefit Plan, or any other
employee benefit plan or any director plan.

      (b) No employee or director is a party to, or is otherwise bound by, any
agreement or arrangement, including any confidentiality, noncompetition, or
proprietary rights agreement, between such employee or director and any other
Person ("Proprietary Rights Agreement"), that in any way adversely affects or
will affect (i) the performance of his duties as an employee or director of
Innerspace, or (ii) the ability of Innerspace to

                                       18
<PAGE>

conduct its business, including any Proprietary Rights Agreements with Sellers
or Innerspace by any such employee or director. To sellers' knowledge, no
director, officer, or other key employee intends to terminate his employment
with Innerspace.

      (c) Part 3.20 of the Disclosure Letter also contains a complete and
accurate list of the following information for each retired employee or
director, or their dependents, receiving benefits or scheduled to receive
benefits in the future: name, pension benefit, pension option election, retiree
medical insurance coverage, retiree life insurance coverage, and other benefits.

      3.21  LABOR RELATIONS; COMPLIANCE

      Since January 1, 2000, Innerspace has not been nor is a party to any
collective bargaining or other labor Contract. There is no threatened, (a)
employee grievance process, (b) Proceeding relating to the alleged violation of
any legal requirement pertaining to labor relations or employment or (c)
application for certification of a collective bargaining agent. Innerspace has
complied in all respects with all legal requirements relating to employment,
equal employment opportunity, nondiscrimination, immigration, wages, hours,
benefits, collective bargaining, the payment of social security and similar
taxes, occupational safety and health, and plant closing.

      3.22  INTELLECTUAL PROPERTY

      (a) Intellectual Property Assets - The term "Intellectual Property Assets"
includes:

            (i) Innerspace's name, all fictional business names, trading names,
registered and unregistered trademarks, service marks, and applications
(collectively, "Marks");

            (ii) all patents, patent applications and inventions and discoveries
that may be patentable (collectively, "Patents");

            (iii) all copyrights in both published works and unpublished works
(collectively, "Copyrights")

            (iv) all rights in mask works (collectively, "Rights in Mask
Works"); and

            (v) all know-how, trade secrets, confidential information, data,
process technology, plans, drawings, and blue prints (collectively, "Trade
Secrets"), owned, used or licensed by Innerspace as licensee or licensor.

      (b) Agreements - Part 3.22 of the Disclosure Letter contains a complete
and accurate list and summary description, including any royalties paid or
received, of all contracts relating to the Intellectual Property Assets to which
Innerspace is a party or by which it is bound, except for any license implied by
the sale of a product and perpetual, paid-up licenses for commonly available
software programs with a value of less than $5,000 under which it is the
licensee. There are no outstandings and, to Sellers' knowledge, no Threatened
disputes or disagreements with respect to any such agreement.

      (c) Know-How Necessary for the Business

            (i) The Intellectual Property Assets are all those necessary for the
operation of Innerspace' business as it is currently conducted. Innerspace is
the owner of all right, title, and interest in and to each of the Intellectual
Property Assets, free and clear

                                       19
<PAGE>

of all liens, security interests, charges, encumbrances, equities, and other
adverse claims, and has the right to use without payment to a third party all of
the Intellectual Property Assets.

            (ii) Except as set forth in Part 3.22 of the Disclosure Letter, all
former and current employees have executed written contracts with Innerspace
that assign to Innerspace all rights to any inventions, improvements,
discoveries, or information relating to the business. No employee has entered
into any contract that restricts or limits in any way the scope or type of work
in which the employee may be engaged or requires the employee to transfer,
assign, or disclose information concerning his work to anyone other than
Innerspace.

      (d) Patents

            (i) Part 3.22(d) of the Disclosure Letter contains a complete and
accurate list and summary description of all Patents. Innerspace is the owner of
all right, title, and interest in and to each of the Patents, free and clear of
all liens, security interests, charges, encumbrances, entities, and other
adverse claims.

            (ii) All of the issued Patents are currently in compliance with
formal legal requirements (including payment of filing, examination, and
maintenance fees and proofs of working or use), are valid and enforceable, and
are not subject to any maintenance fees or taxes or actions falling due within
ninety days after the Closing Date.

            (iii) No Patent has been or is now involved in any interference,
reissue, reexamination, or opposing proceeding. To Sellers' Knowledge, there is
no potentially interfering patent or patent application of any third party.

            (iv) No Patent is infringed or, to Sellers' Knowledge, has been
challenged or threatened in any way. None of the products manufactured and sold,
nor any process or know-how used, infringes or is alleged to infringe any patent
or other proprietary right of any other Person.

            (v) All products made, used, leased or sold under the Patents have
been marked with the proper patent notice.

      (e) Trademarks

            (i) Part 3.22(e) of Disclosure Letter contains a complete and
accurate list and summary description of all Marks. Innerspace is the owner of
all right, title, and interest in and to each of the Marks, free and clear of
all liens, security interests, charges, encumbrances, equities, and other
adverse claims.

            (ii) All Marks that have been registered by the United States Patent
and Trademark Office are currently in compliance with all formal legal
requirements (including the timely post-registration filing of affidavits of use
and incontestability and renewal applications), are valid and enforceable, and
are not subject to any maintenance fees or taxes or actions falling due within
ninety days after the Closing Date.

            (iii) No Mark has been or is now involved in any opposition,
invalidation, or cancellation proceeding and, to Sellers knowledge, no such
action is threatened with the respect to any of the Marks.

            (iv) To Sellers' knowledge, there is no potentially interfering
trademark or trademark application of any third party.

            (v) No Mark is infringed or, to Sellers' knowledge, has been
challenged or threatened in any way. None of the Marks used by Innerspace
infringes or is alleged to infringe any trade name, trademark, or service mark
or any third party.

                                       20
<PAGE>

            (vi) All products and materials containing a Mark bear the proper
federal registration notice when permitted by law.

      (f) Copyrights

            (i) Part 3.22(f) of the Disclosure Letter contains a complete and
accurate list and summary description of all Copyrights. Innerspace is the owner
of all right, title, and interest in and to each of the Copyrights, free and
clear of all liens, security interests, charges, encumbrances, equities, and
other adverse claims.

            (ii) All the Copyrights have been registered and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject no any maintenance fees or taxes or actions falling due within
ninety days after the date of Closing.

            (iii) No Copyright is infringed or, to Sellers' knowledge, has been
challenged or threatened in any way. None of the subject matter of any of the
Copyright infringes or is alleged to infringe any copyright of any third party
or is a derivative work based on the work of a third party.

            (iv) All works encompassed by the Copyrights have been marked with
the proper copyright notice.

      (g) Trade Secrets

            (i) With respect to each Trade Secret, the documentation relating to
such Trade Secret is current, accurate, and sufficient in detail and content to
identify and explain it and to allow its full and proper use without reliance on
the knowledge or memory of any individual and all such documentation is located
in Innerspace's premises.

            (ii) Sellers and Innerspace have taken all reasonable precautions to
protect the secrecy, confidentiality, and value of their Trade Secrets.

            (iii) Innerspace has good title and an absolute (but not necessarily
exclusive) right to use the Trade Secrets. The Trade Secrets are not part of the
public knowledge or literature, and, to Sellers' knowledge, have not been used,
divulged, or appropriated either for the benefit of any Person or to the
detriment of Innerspace. No Trade Secret is subject to any adverse claim or has
been challenged or threatened in any way.

      3.23  CERTAIN PAYMENTS

      Since January 1, 2000, neither Innerspace nor any of its directors,
officials, agents, or employees or any other person associated with or acting
for or on behalf of Innerspace, has directly or indirectly (a) made any
contribution, gift (other than gifts under $75.00 and made in the ordinary
course), bribe, rebate, payoff, influence payment, kickback, or other payment to
any person, private or public, regardless of form, whether in money, property,
or services (i) to obtain favorable treatment in securing business, (ii) to pay
for favorable treatment for business secured, (iii) to obtain special
concessions or for special concessions already obtained, for or in respect of
Innerspace, or (iv) in violation of any legal requirement, (b) established or
maintained any fund or asset that has not been recorded in the books and records
of Innerspace.

                                       21
<PAGE>

      3.24  DISCLOSURE

      (a) No representation or warranty of Sellers in this Agreement and no
statement in the Disclosure Letter omits to state a material fact necessary to
make the statements herein or therein, in light of the circumstances in which
they were made, not misleading.

      (b) No notice given pursuant to Section 5.5 will contain any untrue
statement or omit to state a material fact necessary to make the statements
therein or in this Agreement, in light of the circumstances in which they were
made, not misleading.

      (c) There is no fact known to either Seller that has specific application
to either Seller or Innerspace (other than general economic or industry
conditions) and that materially adversely affects Innerspace or its business,
that has not been set forth in this Agreement or the Disclosure Letter.

      3.25  RELATIONSHIPS WITH RELATED PERSONS

      No Seller or any related person of either Seller or of Innerspace has, or
since the first day of the next to last completed fiscal year of Innerspace has
had, any interest in any property (whether real, personal, or mixed and whether
tangible or intangible), used in or pertaining to Innerspace's business. No
Seller or any related person of either Seller or of Innerspace is, or since the
first day of the next to last completed fiscal year of Innerspace has owned (of
record or as a beneficial owner) an equity interest or any other financial or
profit interest in, a person that has (i) had business dealings with, or a
material financial interest in any transaction with Innerspace, or (ii) engaged
in competition with Innerspace with respect to any of its line of products or
services (a "Competing Business") in any market presently served by Innerspace
(except for less than one percent of the outstanding capital stock of any
competing business that is publicly traded on any recognized exchange or in the
over-the-counter market). Except as set forth in Part 3.25 of the Disclosure
Letter, no Seller or any related person of Sellers or of Innerspace is a party
to any contract with, or has any claim or right against, Innerspace.

      3.26  BROKERS OR FINDERS

      Sellers and their agents have incurred no obligation or liability,
contingent or otherwise, for brokerage or finders' fees or agents' commissions
or other similar payment in connection with this Agreement except as may be set
forth in Section 11.1, and will indemnify and hold Buyer harmless from any such
payment alleged to have been incurred by or through Sellers or Innerspace as a
result of the action of Sellers or Innerspace.

4.    REPRESENATIONS AND WARRANTIES OF BUYER

      Buyer represents and warrants to Sellers that:

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<PAGE>

      4.1   ORGANIZATION AND GOOD STANDING

      Buyer is a corporation duly organized, validly existing, and in good
standing under the laws of the State of New Jersey.

      4.2   AUTHORITY; NO CONFLICT

      (a) This Agreement constitutes the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Upon the
execution and delivery by Buyer of the Employment Agreements, and the Promissory
Note (collectively, the "Buyer's Closing Documents"), the Buyer's Closing
Documents will constitute the legal, valid, and binding obligations of Buyer,
enforceable against Buyer in accordance with their respective terms. Buyer has
the absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and the Buyer's Closing Documents and to perform its obligations
under this Agreement and the Buyer's Closing Documents.

      (b) Except as set forth in Schedule 4.2, neither the execution and
delivery of this Agreement by Buyer nor the consummation or performance of any
of the contemplated transactions by Buyer will give any person the right to
prevent, delay, or otherwise interfere with any of the contemplated transactions
pursuant to:

            (i)   any provision of Buyer's Closing Documents;

            (ii)  any resolution adopted by the Board of Directors or the
                  stockholders of Buyer;

            (iii) any legal requirement or order to which Buyer may be subject;
                  or

            (iv)  any contract to which Buyer is a party or by which Buyer may
                  be bound.

Except as set forth in Schedule 4.2, Buyer is not and will not be required to
obtain any consent from any person in connection with the execution and delivery
of this Agreement or the consummation or performance of any of the contemplated
transactions.

            4.3   INVESTMENT INTENT

      Buyer, or its wholly owned subsidiary, is acquiring the Shares for its own
account and not with a view to their distribution within the meaning of Section
2(11) of the Securities Act.

            4.4   CERTAIN PROCEEDINGS

      There is no pending proceeding that has been commenced against Buyer and
that challenges, or may have the effect of preventing, delaying, making illegal,
or otherwise interfering with, any of the contemplated transactions. To Buyer's
knowledge, no such proceeding has been threatened.

                                       23
<PAGE>

            4.5   BROKERS OR FINDERS

      Buyer and its officers and agents have incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold Sellers harmless from any such payment alleged to be due by
or through Buyer as a result of the action of Buyer or its officers or agents.

5.    COVENANTS OF SELLERS PRIOR TO CLOSING DATE

      5.1   ACCESS AND INVESTIGATION

      Between the date of this Agreement and the Closing Date, Sellers will, and
will cause Innerspace and its representatives to, (a) afford Buyer and its
representatives (collectively, "Buyer's Advisors") full and free access to
Innerspace's personnel, properties (including subsurface testing), contracts,
books and records, and other documents and data (b) furnish Buyer and Buyer's
Advisors with copies of all such contracts, books and records, and other
existing documents and data as Buyer may reasonably request, and (c) furnish
Buyer and Buyer's Advisors with such additional financial, operating, and other
data and information as Buyer may reasonably request.

      5.2   OPERATION OF THE BUSINESSES OF INNERSPACE

      Between the Date of this Agreement and the Closing Date, Sellers will, and
will cause Innerspace to:

            (a) conduct the business of Innerspace only in the ordinary course
of business;

            (b) use their best efforts to preserve intact the current business
organization of Innerspace, keep available the services of the current officers,
employees, and agents of Innerspace, and maintain the relations and good will
with suppliers, customers, landlords, creditors, employees, agents, and others
having business relationships with Innerspace;

            (c) confer with Buyer concerning operational matters of a material
nature; and

            (d) otherwise report periodically to Buyer concerning the status of
the business, operations, and finances of Innerspace.

      5.3   NEGATIVE COVENANT

      Except as otherwise expressly permitted by this Agreement, between the
date of this Agreement and the Closing Date, Sellers will not, and will cause
Innerspace not to, without the prior consent of Buyer, take any affirmative
action, or fail to take any reasonable action within their or its control, as a
result of which any of the changes or events listed in Section 3.16 is likely to
occur.

      5.4   REQUIRED APPROVALS

      As promptly as practical after the date of this Agreement, Sellers will,
and will cause Innerspace to, make all filings required by legal requirements to
be made by them

                                       24
<PAGE>

in order to consummate the contemplated transactions. Between the date of this
Agreement and the Closing Date, Sellers will, and will cause Innerspace to (a)
cooperate with Buyer with respect to all filings that Buyer elects to make or is
required by legal requirements to make in connection with the contemplated
transactions, and (b) cooperate with Buyer in obtaining all consents identified
in Schedule 4.2.

      5.5   NOTIFICATION

      Between the date of this Agreement and the Closing Date, each Seller will
promptly notify Buyer in writing if such Seller or Innerspace becomes aware of
any fact or condition that causes or constitutes a breach of any of Seller's
representations and warranties as of the date of this Agreement, or if such
Seller or Innerspace becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would (except as expressly contemplated
by this Agreement) cause or constitute a breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Disclosure Letter if the Disclosure Letter
were dated the date of the occurrence or discovery of any such fact or
condition, Sellers will promptly deliver to Buyer a supplement to the Disclosure
Letter specifying such change. During the same period, each Seller will promptly
notify Buyer of the occurrence of any breach of any convent of Sellers in this
Section 5 or of the occurrence of any event that may make the satisfaction of
the conditions in Section 7 impossible or unlikely.

      5.6   PAYMENT OF INDEBTEDNESS BY RELATED PERSONS

      Except as expressly provided in this Agreement, Sellers will cause all
indebtedness owed to Innerspace by either Seller or any related person of either
Seller to be paid in full prior to Closing.

      5.7   NO NEGOTIATION

      (a) Until such time, if any, as this Agreement is terminated pursuant to
Section 9, Sellers will not, and will cause Innerspace and each of their
representatives not to, directly or indirectly, solicit, initiate, or encourage
any inquiries or proposals from, discuss or negotiate with, provide any
non-public information to, or consider the merits of any unsolicited inquiries
or proposals from, any person (other than Buyer) relating to any transaction
involving the sale of the business or assets (other than in the ordinary course
of business) of Innerspace, or any of the capital stock of Innerspace, or any
merger, consolidation, business combination, or similar transaction involving
Innerspace.

      (b) Break up Fee. If (i) Sellers breach Section 5.7(a) above, or the
Sellers provide to the Buyer written notice that negotiations toward a
Definitive Agreement are terminated, and (ii) within six months after the date
of such breach or three months after the Termination Date, as the case may be,
either Seller or Innerspace signs a letter of intent or other agreement relating
to the sale of a material portion of the stock in the Company, or a sale of its
assets or business, in whole or in part, whether directly or indirectly, through
purchase, merger, consolidation, or otherwise (other than sales of

                                       25
<PAGE>

inventory in the ordinary course) and such transaction is ultimately
consummated, then, immediately upon the closing of such transaction, the Sellers
will pay, or cause Innerspace to pay, to the Buyer the sum of $100,000. This fee
will not serve as the exclusive remedy to the Buyer in the event of a breach of
by the Sellers of Section 5.7(a) and the Buyer will be entitled to all other
rights and remedies provided by law or in equity.

      5.8   BEST EFFORTS

      Between the date of this Agreement and the Closing Date, Sellers will use
their best efforts to cause the conditions in Sections 7 and 8 to be satisfied.

6.    COVENANTS OF BUYER PRIOR TO CLOSING DATE

      6.1   APPROVAL OF GOVERNMENTAL BODIES

      As promptly as practicable after the date of this Agreement, Buyer will,
and will cause each of its related persons to, make all filings required by
legal requirements to be made by them to consummate the contemplated
transactions. Between the date of this Agreement and the Closing Date, Buyer
will, and will cause each related person to, cooperate with Sellers with respect
to all filings that Sellers are required by legal requirements to make in
connection with the contemplate transactions, and cooperate with Sellers in
obtaining all consents identified in Part 3.2 of the Disclosure Letter; provided
that this Agreement will not require Buyer to dispose of or make any change in
any portion of its business or to incur any other burden to obtain a
governmental authorization.

      6.2   BEST EFFORTS

      Except as set forth in the provision to Section 6.1, between the date of
this Agreement and the Closing Date, Buyer will use its best efforts to cause
the conditions in Sections 7 and 8 to be satisfied.

7.    CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE

      Buyer's obligation to purchase the Shares and to take the other actions
required to be taken by Buyer at the Closing is subject to the satisfaction, at
or prior to the Closing, of each of the following conditions (any of which can
be waived by Buyer, in whole or in part):

      7.1   ACCURACY OF REPRESENTATIONS

      (a) All of Sellers' representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the date of this Agreement, and must be accurate in all material respects as
of the Closing Date as if

                                       26
<PAGE>

made on the Closing Date, without giving effect to any supplement to the
Disclosure Letter.

      (b) Each of Sellers' representations and warranties in Sections 3.3, 3.4,
3.12, and 3.24 must have been accurate in all respects as of the date of this
Agreement, and must be accurate in all respects as of the Closing Date as if
made on the Closing Date, without giving effect to any supplement to the
Disclosure Letter.

      7.2   SELLERS' PERFORMANCE

      (a) All of the covenants and obligations that Sellers are required to
perform or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been duly performed and complied with in
all material respects.

      (b) Each document required to be delivered pursuant to Section 2.4 must
have been delivered, and each of the other covenants and obligations in
Sections 5.4 and 5.8 must have been performed and complied with in all respects.

      7.3   CONSENTS

      Each of the Consents identified in Section 3.2 of the Disclosure Letter,
and each Consent identified in Schedule 4.2, must have been obtained and must be
in full force and effect.

      7.4   ADDITIONAL DOCUMENTS

      Each of the following documents must have been delivered to Buyer:

      (a) an opinion of Donald Reeder, Esq., dated the Closing Date, in usual
form;

      (b) such other documents as Buyer may reasonably request for the purpose
of (i) enabling its counsel to provide the opinion referred to in Section
8.4(a), (ii) evidencing the accuracy of either of Sellers' representations and
warranties, (iii) evidencing the performance by either Seller of, or the
compliance by either Seller with, any covenant or obligation required to be
performed or complied with by such Seller, (iv) evidencing the satisfaction of
any condition referred to in this Section 7, or (v) otherwise facilitating the
consummation or performance of any of the Contemplated Transactions.

      7.5   NO PROCEEDINGS

      Since the date of this Agreement, there must not have been commenced or
threatened against Buyer, or against any Person affiliated with Buyer, any
proceeding (a) involving any challenge to, or seeking damages or other relief in
connection with, any of the Contemplated Transactions, or (b) that may have the
effect of preventing, delaying, making illegal, or otherwise interfering with
any of the Contemplated Transactions.

                                       27
<PAGE>

      7.6   NO CLAIM REGARDING STOCK OWNERSHIP OR SALE PROCEEDS

      There must not have been made or threatened by any Person any claim
asserting that such Person (a) is the holder or the beneficial owner of, or has
the right to acquire or to obtain beneficial ownership of, any stock of, or any
other voting, equity, or ownership interest in, Innerspace, or (b) is entitled
to all or any portion of the Purchase Price payable for the Shares.

      7.7   NO PROHIBITION

      Neither the consummation nor the performance of any of the Contemplated
Transactions will, directly or indirectly (with or without notice or lapse of
time), materially contravene, or conflict with, or result in a material
violation of, or cause Buyer or any Person affiliated with Buyer to suffer any
material adverse consequence under, (a) any applicable Legal Requirement or
Order, or (b) any Legal Requirement or Order that has been published,
introduced, or otherwise proposed by or before any Governmental Body.

8.    CONDITIONS PRECEDENT TO SELLERS' OBLIGATION TO CLOSE

      Sellers' obligation to sell the Shares and to take the other actions
required to be taken by Sellers at the Closing is subject to the satisfaction,
at or prior to the Closing, of each of the following conditions (any of which
may be waived by Sellers, in whole or in part).

      8.1   ACCURACY OF REPRESENTATIONS

      All of Buyer's representations and warranties in this Agreement
(considered collectively), and each of these representations and warranties
(considered individually), must have been accurate in all material respects as
of the Closing Date as if made on the Closing Date.

      8.2   BUYER'S PERFORMANCE

      (a) All of the covenants and obligations that Buyer is required to perform
or to comply with pursuant to this Agreement at or prior to the Closing
(considered collectively), and each of these covenants and obligations
(considered individually), must have been performed and complied in all material
respects.

      (b) Buyer must have delivered each of the documents required to be
delivered by Buyer pursuant to Section 2.4 and must have made the cash payment
required to be made by Buyer pursuant to Sections 2.4(b)(i).

                                       28
<PAGE>

      8.3   CONSENTS

      Each of the Consents identified in Section 3.2 of the Disclosure Letter
must have been obtained and must be in full force and effect.

      8.4   ADDITIONAL DOCUMENTS

      Buyer must have caused the following documents to be delivered to Sellers:

      (a) an opinion of Sokolow, Dunaud, Mercadier & Carreras LLP, dated the
Closing Date, in usual form; and

      (b) such documents as Sellers may reasonably request for the purpose of
(i) enabling their counsel to provide the opinion referred to in Section 7.4(a),
(ii) evidencing the accuracy of any representation or warranty of Buyer, (iii)
evidencing the performance by Buyer of, or the compliance by Buyer with, any
covenant or obligation required to be performed or complied with by Buyer, (iv)
evidencing the satisfaction of any condition referred to in this Section 8, or
(v) otherwise facilitating the consummation of any of the Contemplated
Transactions.

      8.5   NO INJUNCTION

      There must not be in effect any legal requirement or any injunction or
other Order that (a) prohibits the sale of the Shares by Sellers to Buyer, and
(b) has been adopted or issued, or has otherwise become effective, since the
date of this Agreement.

9.    TERMINATION

      9.1   TERMINATION EVENTS

      This Agreement may, by notice given prior to or at the Closing, be
terminated:

      (a) by either Buyer or Sellers if a material Breach of any provision of
this agreement has been committed by the other party and such Breach has not
been waived;

      (b) (i) by Buyer if any of the conditions in Section 7 has not been
satisfied as of the Closing Date or if satisfaction of such a condition is or
becomes impossible (other than through the failure of Buyer to comply with its
obligations under this agreement) and Buyer has not waived such condition on or
before the Closing Date; or (ii) by Sellers, if any of the conditions in Section
8 has not been satisfied as of the Closing Date or if satisfaction of such a
condition is or becomes impossible as (other than through the failure of Sellers
to comply with their obligations under this Agreement) and Sellers have not
waived such condition on or before the Closing Date;

      (c) by mutual consent of Buyer and Sellers; or

      (d) by either Buyer or Sellers if the Closing has not occurred (other than
through the failure of any party seeking to terminate this Agreement to comply
fully with

                                       29
<PAGE>

its obligations under this Agreement) on or before January 31, 2004, or such
later date as the parties may agree upon.

      9.2   EFFECTS OF TERMINATION

      Each party's right of termination under Section 9.1 is in addition to any
other rights it may have under this Agreement or otherwise, and the exercise of
a right of termination will not be an election of remedies. If this Agreement is
terminated pursuant to Section 9.1, all further obligations of the parties under
this Agreement will terminate, except that the obligations in Sections 11.1 and
11.3 will survive; provided, however, that if this Agreement is terminated by a
party because of the Breach of the Agreement by the other party or because one
or more of the conditions to the terminating party's obligations under this
Agreement is not satisfied as a result of the other party's failure to comply
with its obligations under this Agreement, the terminating party's right to
pursue all legal remedies will survive such termination unimpaired.

10.   INDEMNIFICATION; REMEDIES

      10.1  SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE

      All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Letter, the supplements to the Disclosure Letter, the
certificates delivered pursuant to Section 2.4(a)(v), and any other certificate
or document delivered pursuant to this Agreement will survive the Closing. The
right to indemnification, payment of damages or other remedy based on such
representations, warranties, covenants, and obligations will not be affected by
any investigation conducted with respect to, or any knowledge acquired (or
capable of being acquired) at any time, whether before or after the execution
and delivery of this Agreement or the Closing Date, with respect to the accuracy
or inaccuracy of or compliance with, any such representation, warranty, covenant
or obligation, will not affect the right to indemnification, payment of damages,
or other remedy based on such representations, warranties, covenants, and
obligations.

      10.2  INDEMNIFICATION AND PAYMENT OF DAMAGES BY SELLERS

      Sellers, jointly and severally, will indemnify and hold harmless Buyer,
and its respective representatives, stockholders, controlling persons, and
affiliates (collectively, the "Indemnified Persons") for, and will pay to the
Indemnified Persons the amount of, any loss, liability, claim, damage (including
incidental and consequential damages), expenses (including costs of
investigation and defense and reasonable attorneys' fees) or diminution of
value, whether or not involving a third party claim (collectively, "Damages"),
arising, directly or indirectly, from or in connection with:

      (a) any Breach of any representation or warranty made by Sellers in this
Agreement (without giving effect to any supplement to the Disclosure Letter),
the

                                       30
<PAGE>

Disclosure Letter, the supplements to the Disclosure Letter, or any other
certificate or document delivered by sellers pursuant to this Agreement;

      (b) any Breach of any representation or warranty made by Sellers in this
Agreement as if such representation or warranty were made on and as of the
Closing Date without giving effect to any supplement to the Disclosure Letter,
other than any such Breach that is disclosed in a supplement to the Disclosure
Letter and is expressly identified in the certificate delivered pursuant to
Section 2.4(a)(v) as having caused the condition specified in Section 7.1 not to
be satisfied;

      (c) any Breach by either Seller of any covenant or obligation of such
Seller in this Agreement;

      (d) any claim by any Person for brokerage or finder's fees or commissions
or similar payments based upon any agreement or understanding alleged to have
been made by any such Person with either Seller or Innerspace (or any Person
acting on their behalf) in connection with any of the Contemplated Transactions.

      The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Buyer or the other Indemnified
Persons.

      10.3  INDEMNIFICATION AND PAYMENT OF DAMAGES BY BUYER

      Buyer will indemnify and hold harmless Sellers, and will pay to Sellers
the amount of any Damages arising, directly or indirectly, from or in connection
with (a) any Breach of any representation or warranty made by Buyer in this
Agreement or in any certificate delivered by Buyer pursuant to this Agreement,
(b) any breach by Buyer of any covenant or obligation of Buyer in this
Agreement, or (c) any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by such Person with Buyer (or any Person acting on its
behalf) in connection with any of the Contemplated Transactions.

      10.4  TIME LIMITATIONS

      If the Closing occurs, Sellers will have no liability (for indemnification
or otherwise) with respect to any representation or warranty, or covenant or
obligation to be performed and complied with prior to the Closing Date, other
than those in Section 3.3, 3.11, 3.13, and 3.19, unless on or before June 30,
2005 Buyer notifies Sellers of a claim specifying the factual basis of that
claim in reasonable detail to the extent then known by Buyer; a claim with
respect to Section 3.3, 3.11, 3.13, or 3.19, or a claim for indemnification or
reimbursement not based upon any representation or warranty, or covenant or
obligation to be performed and complied with prior to the Closing Date may be
made at any time. If the Closing occurs, Buyer will have no liability (for
indemnification or otherwise) with respect to any representation or warranty or
covenant or obligation to be performed and complied with prior to the Closing
Date unless on or before June 30, 2004 Sellers notify Buyer of a claim
specifying the factual basis of that claim in reasonable detail to the extent
then known by Sellers.

                                       31
<PAGE>

      10.5  LIMITATIONS ON AMOUNT - SELLERS

      Sellers will have no liability (for indemnification or otherwise) with
respect to the matters described in clause (a), clause (b) or, to the extent
relating to any failure to perform or comply prior to the Closing Date, clause
(c) of Section 10.2 until the total of all Damages with respect to such matters
exceeds $25,000, and then only for the amount by which such Damages exceed
$25,000. Furthermore, Sellers shall not be liable for the matters set forth in
the preceding sentence, to the extent that any such damages exceed $636,000.
However, this Section 10.5 will not apply to any Breach of any of Sellers'
representations and warranties of which either Seller had knowledge at any time
prior to the date of which such representation and warranty is made or any
intentional breach by either Seller of any covenant or obligation, and Sellers
will be jointly and severally liable for all Damages with respect to such
breaches.

      10.6  LIMITATIONS ON AMOUNT - BUYER

      Buyer will have no liability (for indemnification or otherwise) with
respect to the matters described in clause (a) or (b) of Section 10.4 until the
total of all Damages with respect to such matters exceeds $25,000 and then only
for the amount by with such Damages exceed $25,000. However, this Section 10.6
will not apply to any Breach of any of Buyer's representations and warranties of
which Buyer had knowledge at any time prior to the date on which such
representation and warranty is made of any intentional Breach by Buyer of any
covenant or obligation, and Buyer will be liable for all Damages with respect to
such breaches.

      10.7  RIGHT OF SET-OFF

      Upon notice to Sellers specifying in reasonable detail the basis for such
set-off, Buyer may set off any amount to which it may be entitled under this
Section 10 against amounts otherwise payable under the Promissory Note or
otherwise. The exercise of such right of set-off by Buyer in good faith, whether
or not ultimately determined to be justified, will not constitute an event of
default under the Promissory Note or any instrument securing the Promissory
Note. The exercise of nor the failure to exercise such right of set-off will not
constitute an election of remedies or limit Buyer in any manner in the
enforcement of any other remedies that may be available to it.

      10.8  PROCEDURES FOR INDEMNIFICATION - THIRD PARTY CLAIMS

      (a) Promptly after receipt by an indemnified party under Section 10.2 or
Section 10.3 of notice of the commencement of any proceeding against it, such
indemnified party will, if a claim is to be made against an indemnifying party
under such Section, give notice to the indemnifying party of the commencement of
such claim, but

                                       32
<PAGE>

the failure to notify the indemnifying party will not relieve the indemnifying
party of any liability that it may have to any indemnified party, except to the
extent that the indemnified party demonstrates that the defense of such action
is prejudiced by the indemnifying party's failure to give such notice.

      (b) If any proceeding referred to in Section 10.8(a) is brought against an
indemnified party and it gives notice to the indemnifying party of the
commencement of such proceeding, the indemnifying party will, unless the claim
involves taxes, be entitled to participate in such proceeding and, to the extent
that it wishes (unless (i) the indemnifying party is also a party to such
proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such proceeding and provide indemnification with respect to such
proceeding), assume the defense of such proceeding with counsel reasonably
satisfactory to the indemnified party and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
proceeding, the indemnifying party will not, as long as it diligently conducts
such defense, be liable to the indemnified party under this Section 10 for any
fees of other counsel or any other expenses with respect to the defense of such
proceeding, in each case subsequently incurred by the indemnified party in
connection with the defense of such proceeding, other than reasonable costs of
investigation. If the indemnifying party assumes the defense of a proceeding,
(i) it will be conclusively established for purposes of this Agreement that the
claims made in that proceeding are within the scope of and subject to
indemnification; (ii) no compromise or settlement of such claims may be effected
by the indemnifying party without the indemnified party's consent unless (A)
there is no finding or admission of any violation of legal requirements or any
violation of the rights of any person and no effect on any other claims that may
be made against the indemnified party, and (B) the sole relief provided is
monetary damages that are paid in full by the indemnifying party; and (iii) the
indemnified party will have no liability with respect to any compromise or
settlement of such claims effected without its consent. If notice is given to an
indemnifying party of the commencement of any proceeding and the indemnifying
party does not, within ten days after the indemnified party's notice is given,
give notice to the indemnified party of its election to assume the defense of
such proceeding, the indemnifying party will be bound by any determination made
in such proceeding or any compromise or settlement effected by the indemnified
party.

      (c) Notwithstanding the foregoing, if an indemnified party determines in
good faith that there is a reasonable probability that a proceeding may
adversely affect it or its affiliates other than as a result of monetary damages
for which it would be entitled to indemnification under this Agreement, the
indemnified party may, by notice to the indemnifying party, assume the exclusive
right to defend, compromise, or settle such proceeding, but the indemnifying
party will not be bound by any determination of a proceeding so defended or any
compromise or settlement effected without its consent (which may not be
unreasonably withheld).

      (d) Sellers hereby consent to the non-exclusive jurisdiction of any court
in which a proceeding is brought against any indemnified person by a third
party, for purposes of any claim that an indemnified person may have under this
agreement with

                                       33
<PAGE>

respect to such proceeding or the matters alleged therein, and agree that
process may be served on Sellers with respect to such a claim anywhere in the
world.

11.   GENERAL PROVISIONS

      11.1  EXPENSES

      Except as otherwise expressly provided in this Agreement, each party to
this agreement will bear his or its respective expenses incurred in connection
with the preparation, execution and performance of this Agreement and the
Contemplated Transactions including all fees and expenses of agents,
representatives, counsel, and accountants. Sellers will pay all amounts payable
to Oxford Capital Group, Inc. or any affiliate or agent, in connection with this
Agreement and the Contemplated Transactions. Sellers will not cause Innerspace
to incur any out-of-pocket expenses in connection with this Agreement. In the
event of termination of this Agreement, the obligation of each party to pay his
or its own expenses will be subject to any rights of such party arising from a
breach of this Agreement by another party.

      11.2  PUBLIC ANNOUNCEMENTS

      Any public announcement or similar publicity with respect to this
Agreement or the contemplated transactions will be issued if at all, at such
time and in such manner as Buyer determines. Unless consented to by Buyer in
advance or required by legal requirements, prior to the Closing, Sellers shall,
and shall cause Innerspace to, keep this Agreement strictly confidential and may
not make any disclosure of this Agreement to any person. Sellers and Buyer will
consult with each other concerning the means by which Innerspace's employees,
customers, and suppliers and others who deal with Innerspace will be informed of
the contemplated transactions, and Buyer will have the right to be presented at
any such communication.

      11.3  CONFIDENTIALITY

      Between the date of the Agreement and the Closing Date, Buyer will
maintain in confidence, and will cause its directors, officers, employees,
agents, and advisors to maintain in confidence, and Sellers and Innerspace, and
their employees, agents and representatives, will maintain in confidence, and
not use to the detriment of another party any written, oral or other information
which is Confidential Information as defined in Section 2 of the Non-Competition
Agreement between the Parties, of even date herewith, unless a) such information
is already known to such party or to others not bound by a duty of
confidentiality or such information becomes publicly available through no fault
of such party, (b) the use of such information is necessary or appropriate in
making any filing or obtaining any consent or approval required for the
consummation of the contemplated transactions, or (c) the furnishings or use of
such information is required by or necessary or appropriate in connection with
legal proceedings.

                                       34
<PAGE>

      If the Contemplated Transactions are not consummated, each party will
return or destroy as such of such written information as the other party may
reasonably request.

      11.4  NOTICES

      All notices, consents, waivers and other communications under this
Agreement must be in writing and will have been duly given when (a) delivered by
hand (with written confirmation of receipt), (b) sent by telecopier (with
written confirmation of receipt), or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
each case to the appropriate addresses and telecopier numbers set forth below
(or to such other addresses and telecopier numbers as a party may designate by
notice to the other parties):

      Sellers:

      Stephen Holowacz
      Innerspace Technology, Inc.
      36 Industrial Park
      Waldwick, NJ  07943

      James Blockburger
      Innerspace Technology, Inc.
      36 Industrial Park
      Waldwick, NJ  07943

      With a copy to:                    Donald W. Reeder, Esq.
                                         10 South Franklin Turnpike
                                         Suite 105 (P.O. Box 630)
                                         Ramsey, NJ  07446
                                         Facismile No.(201) 818-0427

      Buyer:                             Tel-Instrument Electronics Corp.
                                         728 Garden Street
                                         Carlstadt, NJ  07072
                                         Attention: Mr. Robert J. Melnick
                                         Facismile No.: (201) 933-7340

      With a copy to:                    Donald Stuart Bab, Esq.
                                         Sokolow, Dunaud, Mercadier & Carreras
                                         770 Lexington Avenue, 6th Floor
                                         New York, NY  10021
                                         Facismile No.:(212) 935-4865

                                       35
<PAGE>

      11.5  JURISDICTION: SERVICE OF PROCESS

      Any action or proceeding seeking to enforce any provision of, or based on
any right arising out of, this Agreement may be brought against any of the
parties in the courts of the State of New Jersey, County of Bergen, or, if it
has or can acquire jurisdiction, in the United States District Court for the
District of New Jersey and each of the parties consents to the jurisdiction of
such courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any action
or proceeding referred to in the preceding sentence may be served on any party
anywhere in the world.

      11.6  FURTHER ASSURANCES

      The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for purpose of carrying out the intention of this Agreement and the
documents referred to in this Agreement.

      11.7  WAIVER

      The rights and remedies of the parties to this Agreement are cumulative
and not alternative. Neither the failure nor any delay by any party in
exercising any right, power, or privilege under this Agreement or the documents
referred to in this Agreement will operate as a waiver of such right, power, or
privilege, and no single or partial exercise of any such right, power, or
privilege will preclude any other or further exercise of such right, power or
privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement can be discharged by one party, in whole or in part, by a waiver
or renunciation of the claim or right unless in writing signed by the other
party; (b) no waiver that may be given by a party will be applicable except in
the specific instance for which it is given; and (c) no notice to or demand on
one party will be deemed to be a waiver of any obligation of such party or of
the right of the party giving such notice or demand to take further action
without notice or demand as provided in this Agreement or the documents referred
to in this Agreement.

      11.8  ENTIRE AGREEMENT AND MODIFICATION

      This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including the Letter of Intent between Buyer and
Sellers dated November 12, 2003) and constitutes (along with the documents
referred to in this Agreement) a complete and exclusive statement of the terms
of the Agreement between

                                       36
<PAGE>

the parties with respect to its subject matter. This Agreement may not be
changed or terminated except by a written agreement executed by the party to be
charged with the amendment.

      11.9  DISCLOSURE LETTER

      (a) The disclosures in the Disclosure Letter, and those in any
supplemental letter thereto, must relate only to the representations and
warranties in the Section of the Agreement to which they expressly relate and
not to any other representation or warranty in this Agreement.

      (b) In the event of any inconsistency between the statements in the body
of this Agreement and those in the Disclosure Letter (other than an exception
expressly set forth as such in the Disclosure Letter with respect to a
specifically identified representation or warranty), the statements in the body
of this Agreement will control.

      11.10 ASSIGNMENT, SUCCESSORS, AND NO THIRD-PARTY RIGHTS

      Neither party may assign any of its rights under this Agreement without
the prior consent of the other parties except that Buyer may assign any of its
rights under this Agreement to any Subsidiary of Buyer. Any attempt to assign
this Agreement or rights under it in breach of this 11.10 shall be null and
void. Subject to the preceding sentence, this Agreement will apply to, be
binding in all respects upon, and inure to the benefit of the successors and
permitted assigns of the parties. Nothing expressed or referred to in this
Agreement will be construed to give any person other than the parties to this
Agreement any legal or equitable right, remedy, or claim under or with respect
to this Agreement or any provisions of this Agreement. This Agreement and all of
its provisions and conditions are for the sole and exclusive benefit of the
parties to this Agreement and their successors and assigns.

      11.11 SEVERABILITY

      If any provision of this Agreement is held invalid or unenforceable by any
court of competent jurisdiction, the other provisions of this Agreement will
remain in full force and effect. Any provision of this agreement held invalid or
unenforceable only in part or degree will remain in full force and effect to the
extent not held invalid or unenforceable.

      11.12 SECTION HEADINGS, CONSTRUCTION

      The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. All references to
"Section" or "Sections" refer to the corresponding Section or Sections of this
Agreement. All words used in this Agreement will be construed to be of such
gender or number as the circumstances require. Unless otherwise expressly
provided, the word "including" does not limit the preceding words or terms.

                                       37
<PAGE>

      11.13 TIME OF ESSENCE

      With regard to all dates and time periods set forth or referred to in this
Agreement, time is of the essence.

      11.14 GOVERNING LAW

      This Agreement will be governed by the laws of the State of New York
without regard to conflicts of law principles.

      11.15 COUNTERPARTS

      This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same Agreement.

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

      BUYER:                                      SELLERS:

      By:____________________________    ___________________________

                                         ___________________________

                                       38Exhibit 10.9

                                  May 25, 2004

Mr. Harold K. Fletcher
Tel-Instrument Electronics Corp.
728 Garden Street
Carlstadt, NJ 07072

Dear Hal:

      We want to confirm the terms and provisions pursuant to which Semaphore
Capital Advisors, LLP ("Semaphore") will act as investment banker for Tel
Instrument Electronics Corp. (the "Company"). This agreement supercedes all
prior written and oral agreements between us (and with our predecessor in
interest), which prior agreements are hereby declared null and void.

Section I: Services to be Rendered

      A)    Our services as investment banker will include (but not be limited
            to) the following, as requested by the Company:

            (i) Consulting with the Company and assisting in the development of
a long-term strategic plan for realizing the value of the Company's assets,
initiating discussions and negotiations with investor candidates, including
strategic investor candidates (defined as corporations or other business
entities in similar or related businesses or industries, hereinafter referred to
as "Strategic Investors") and merger or acquisition candidates ("Merger
Candidates"), as well as potential financial investment candidates (Strategic
Investors, Merger Candidates and financial investment candidates are called
herein collectively "Candidates"), and for achieving other agreed upon financial
objectives;

            (ii) Advising the Company with respect to possible merger
opportunities or acquisition candidates, including financial analysis, the
receptivity of the financial markets and the effects on the Company of pursuing
various opportunities;

            (iii) Attempting to arrange a sale of existing shares of the
Company's stock held by certain shareholders to be identified by the Company, if
requested by the Company, as part of an investment or separately, in one or more
series of block sales or Transactions at market price or at another price that
may be negotiated between the shareholders and one or more buyers introduced by
us;
<PAGE>

            (iv) Assisting the Company in raising capital by (a) arranging a
private placement of the Company's securities in the amount and on the terms
agreed in writing and/or (b) advising on and assisting in obtaining an
underwriter for a public offering of the Company's securities in such amount and
on such terms as are agreed in writing;

            (v) Providing any other investment banking, financial, advisory or
management-consulting services as may be agreed in writing between us and the
Company, including (but not limited to) reviewing other business opportunities,
rendering an opinion as to the potential impact of such business opportunities
on the Company's valuation and assisting management in identifying candidates
for the Board of Directors if requested by the Company.

      B) Information Memorandum. We will assist in the preparation of a private
placement, executive summary, investment or information memorandum ("Information
Memorandum"), which Information Memorandum may be in one or more formats and
will include an executive summary and a business plan with detailed historical
and projected financial statements which will describe the Company, its current
and proposed future businesses, the Company's management and the investment
opportunity. The Information Memorandum will also incorporate any other relevant
information that may be customary and necessary or may be deemed by you and us
to be desirable. The Company confirms that, in assisting in the preparation of
the Information Memorandum, we will be relying upon information, both written
and oral, and documents and data furnished by the Company to us or which have
been approved by the Company, as well as information from generally recognized
public sources (the "Information").

      C) Information and Documents. The Company will furnish to us such
information, documents and other materials, respond to requests for information
and take such other action as (i) shall be reasonably requested by us so as to
permit and facilitate the carrying out of our activities under this Agreement
and (ii) shall be reasonably requested by any Candidates (if approved by the
Company) in connection with their analysis or due diligence review of a
Transaction. (A "Transaction" is defined herein as any investment, corporate
acquisition, merger, business combination or other corporate event described in
Section I, A, (I) - (IV).) If any event shall occur or condition develop as a
result of which it is necessary or advisable, in our opinion, to amend or
supplement any such previously furnished documents or materials in order that
they will not contain an untrue statement of a material fact or omit any
material fact necessary to make the statements made therein not misleading, then
the Company shall prepare or cause to be prepared such updated, additional or
supplemental documentation, which shall be acceptable to us for delivery to
Candidates for the purpose of correcting such statement or omission. In the
event that the Company determines that no such amendment or supplement is
required, we may terminate the Agreement. The Company may unilaterally decide to
amend, update, revise or add supplemental data to the Information at any time it
chooses and we may distribute such updated information and documents to the
Candidates. We agree that we will only distribute information or documents
pursuant to this Agreement, which we in good faith believe to be in compliance
with Federal and state securities and other laws.

                                       2
<PAGE>

      We will not provide an Information Memorandum or other confidential
information about the Company to any Candidate that is in a business similar to
or competing with the Company unless such Candidate executes a confidentiality
or non-disclosure agreement acceptable to the Company. We will use our best
effort to obtain an executed non-disclosure agreement before providing an
Information Memorandum or other confidential information to any other Candidate,
not in a similar or competing business. In any event, we will not provide an
Information Memorandum or Confidential Information to any Candidate unless first
approved by the Company.

      The Company shall be under no obligation to negotiate with any Candidate
and the Company has the sole discretion whether or not to enter into a
definitive agreement for a Transaction with a Candidate.

Section II: Fees, Expenses and Term

      A) Term. We will be the exclusive investment bankers to the Company
commencing on the date of execution of this Agreement by both parties, provided
however, that either party may withdraw from this Agreement at any time upon
thirty days written notice to the other party given in accordance with Section
IV, F, hereof.

      B) Post Termination. Within three business days after the effective date
of any termination by the Company (the "Termination Date"), we will deliver to
the Company a list of all Candidates (the "Covered Parties") with which we can
confirm that (a) the Company, at our instigation or by our introduction, has had
discussions or one or more meetings concerning a Transaction or has specifically
requested Semaphore to have such a discussion during the term of this Agreement
and prior to receipt of the notice of termination or (b) such Covered Parties
have, prior to such notice of termination, expressed an interest in considering
or pursuing a Transaction by requesting a copy of the Information Memorandum
after qualifying discussions with us and have received such Information
Memorandum. Covered Parties shall not include Candidates contacted by us that
have indicated they are not interested in the Company either during a
preliminary qualifying conversation or after reading an executive summary or
other preliminary business description.

      If the Company completes a Transaction with a Covered Party, within
eighteen months of the termination of this Agreement, Semaphore shall be
entitled to the fees set forth under subsections C, (iii) and (iv) or subsection
(D) under this Section II.

      On and after the Termination Date, we shall also, upon request, either
destroy or return to the Company any and all Information, Information Memoranda,
documents and confidential information of the Company (including extracts
thereof), which are in our possession or control; except that we may keep copies
of documents if required by NASD or SEC rules. The provisions concerning
confidentiality, indemnification, compensation and the Company's obligation to
pay fees and reimburse expenses contained herein, and ours and the Company's
obligations contained in the Indemnification provisions, will survive any such
termination, except to the extent expressly stated otherwise herein. We agree
not to use any confidential

                                       3
<PAGE>

information about the Company provided to us by the Company for any purpose
other than in connection with our services hereunder or as directed by the
Company.

      C) Compensation. The Company agrees to pay us the following compensation
for our services hereunder (provided that no such fee shall apply to any
Transaction with a current officer, director, shareholder or employee of the
Company, or any family member or affiliate of any such person, all contrary
provisions notwithstanding):

            (i) A non-refundable retainer in the amount of $30,000.00, payable
in three installments, the initial $10,000.00 of which shall be paid upon
signing this agreement and the remaining two installments of $10,000.00 each
shall be paid in thirty-calendar-day increments beginning thirty days after the
initial payment and the third shall be paid sixty calendar days after the
initial payment. The retainer is intended to compensate us for investment
banking services, particularly as described in subparagraphs (i), and (ii) in
Section I. The Company considers time of the essence in connection with these
services and if, in the Company's reasonable judgment, we have not provided the
services contemplated hereunder in a diligent manner, the Company may exercise
its termination rights any time after sixty days from the date thereof, and
after such termination, no further amounts specified in this subparagraph (i)
shall be due and payable. In the event that we exercise our termination rights,
no further amounts under this subparagraph (i) shall become due and payable.

            (ii) Monthly Payments. Commencing on the 90th day after execution
hereof, the Company will pay Semaphore $5,000 per month, in advance, for the
investment banking services set forth in this Agreement, for as many months as
both the Company and Semaphore agree. In the event that either party wishes to
terminate the arrangement set forth in this Paragraph C (ii), such Party shall
give the other Party 15 days written notice thereof in accordance with Section
IV, F.

            (iii) Success Fee. A Success Fee which shall be a percentage
(defined below) of the Aggregate Consideration (except as further defined below)
received by the Company from a Transaction closed with a Candidate (or upon
closing a Transaction with a Covered Party, as defined in Section II, B, within
twelve months after the Termination Date), which Success Fee will be paid when
the Company receives the proceeds from the Transaction. The Success Fee is
calculated as a percentage of the proceeds from the Aggregate Consideration
(except as further defined in subsection E below) of any Transaction (or, in the
event of a second transaction on an accumulated basis) according to the
following formula:

                  8% on the first $5 million of transaction;
                  5% on the next $2.5 million;
                  2% on the next $2.5 million;
                  1% on the excess over $10 million.

      The $30,000 of monthly payments made under paragraph C (i) above shall be
credited against the Success Fee payable under this subparagraph (iii) but shall
not affect the warrants issuable under subparagraph (iv) below.

                                       4
<PAGE>

In no event will the Success Fee payable be less than $100,000.

            The Success Fee payable to Semaphore for raising capital for the
Company, in lieu of the above percentages, shall be 3% of the amount of
mezzanine capital, 1% of bank debt and the percentages set forth above, for
raising equity.

            (iv) Warrants. In addition to the Success Fee set forth above, the
Company will issue to Semaphore, 5 year warrants to purchase shares of common
stock of the Company.

            The warrants shall contain usual and customary exercise rights,
terms and conditions (to be covered in a separate warrant agreement) and shall
be exercisable (a) for that number of shares of common stock that shall be equal
to 12.5% of the dollar amount of the Success Fee except that warrants issuable
in connection with raising mezzanine financing shall be exercisable for Shares
equal to 5% of the dollars so raised, and there shall be no warrants issuable in
connection with raising bank debt; and (b) at a price per share equal to the
value per share used in the Transaction, or if none, or if the Transaction
effects a change of control, then at the closing price on the American Stock
Exchange on the 20th business day prior to public disclosure of the letter of
intent or the Transaction, whichever is sooner.

            For example, Semaphore's compensation based on a $5 million
transaction shall be equal to success fee of $400,000 (8% x $5MM) less a $30,000
credit for the retainer paid and 5 year warrants to purchase 50,000 shares of
common stock (12.5% of the dollar amount of the Success Fee) at an exercise
price per share equal to the value of the shares in the Transaction, or if none,
or if the Transaction effects a change of control then at the Closing price on
the Amex, 20 business days before public disclosure of the letter or intent or
Transaction, whichever is sooner.

            (v) The Company will also reimburse Semaphore for all documented,
reasonable, out-of-pocket expenses incurred directly in connection with the
completion of the first Transaction, in an amount not to exceed $10,000.

            (vi) Reset Provisions. In the event of a transaction in excess of
$20 million in Aggregate Consideration, or in the event of a full auction sale
of the Company, the Compensation payable to Semaphore shall be (a) a Cash
Success Fee equal to 2% of the aggregate consideration of such Transaction,
except that in the case of a full auction sale of the Company, the Cash Success
Fee shall not be less than $600,000 and (b) warrants, calculated pursuant to the
same formula used in subparagraph IV above.

            Other transactions, if any, and the formula used in subparagraphs
(ii) and (iv) of this Subsection C, shall not be otherwise taken into account in
calculating the Reset Provision.

      (D) Subsequent Transactions. If a Transaction is consummated with a
Candidate, then at any time thereafter prior to the anniversary of the date of
termination of this Agreement, if the Company closes any additional Transaction
or business combination with such Candidate, we will be entitled to receive a
fee in cash payable upon the receipt of the proceeds from any

                                       5
<PAGE>

such Transaction or business combination, based on the Aggregate Consideration
of the Transaction or business combination using the following formula:

            i.    Two and one-half percent (2.5%) of the first five million
                  dollars of Aggregate Consideration or part thereof, plus

            ii.   One percent (1%) of any remaining Aggregate Consideration.

      (E) Aggregate Consideration. For purposes of this Agreement, "Aggregate
Consideration" shall mean the total value of all cash, securities, other
property and any other consideration, including, without limitation (as, if and
when received), any contingent, earned or other assets or consideration, aid or
payable, directly or indirectly, in connection with the Transaction, net of any
indebtedness owed upon the same, it being the intention of this provision that
the Aggregate Consideration shall mean the net equity value of any cash,
tangible assets or measurable intangible assets acquired by, invested in, loaned
to or transferred to the Company. The fair market value of any securities
(whether debt or equity) or other similar property shall be determined by the
closing or last sale prices of these securities (in the principal market on
which the are traded) on the date of the consummation of the Transaction or the
valuation of other assets placed upon them by the parties to the Transaction. If
any non-cash consideration is a class of newly-issued, publicly-traded
securities, then the fair market value thereof shall be the average of the
closing prices for the twenty trading days subsequent to the fifth trading day
after the consummation of the Transaction. If no public market exists for any
securities issued in the Transaction or a class of securities is not intended to
be publicly traded or convertible into publicly-traded securities, then the fair
market value thereof shall be determined by the valuation placed upon these
securities by the parties to the Transaction.

      In the event that the Company completes more than one Transaction during
the term hereof, the Aggregate Consideration of all Transactions shall be
combined for the purposes of applying the Success Fee schedule.

      (F) Notwithstanding any other provision herein, particularly including the
exclusivity provisions, the parties agree that:

            (i) The current agreement among the Company, Semaphore and
Investment Partners Group, shall continue according to its terms and the Company
may extend such agreement on the same terms; and

            (ii) The Company may raise mezzanine and bank debt on its own,
without using Semaphore for this purpose, and no fee will accrue to Semaphore in
respect of any such mezzanine or bank debt raised by the Company; and

            (iii) Directors, officers or shareholders may bring potential
merger, acquisition or other business combination candidates to the attention of
the Board and the Board may, if it chooses, pay such directors, officers or
shareholders a finders fee.

                                       6
<PAGE>

      It is the intent of this agreement that the Company will compensate
Semaphore only for investment banking services outlined in Section 1, which are
requested by the Company and provided by Semaphore.

Section III: Indemnification

      In consideration of our services on behalf of the Company in connection
with any offering of securities, the Company agrees to indemnify and hold us
harmless and each of our affiliates, stockholders, directors, officers,
employees, agents and controlling persons (within the meaning of ss.15 of the
Securities Act of 1933) to the extent and as provided for in the indemnification
provisions attached hereto as Addendum A and incorporated herein in their
entirety. We agree to indemnify the Company, its affiliates, officers, agents
and controlling persons, for our own willful misconduct or gross negligence in
performing the services herein.

Section IV: Other

      A) Exclusivity. During the period that we are engaged by the Company, the
Company shall not directly or indirectly initiate any discussions or other
contacts or solicit any inquiries or indications of interest concerning a
Transaction with any person without identifying such person to us within a
reasonable period of time. The Company shall promptly furnish us with the names
of all parties with whom the Company, its directors, officers and/or its
controlling shareholders have conducted any discussions, received inquiries from
or had any other related contacts within three months prior to the date hereof,
concerning any potential investment in the Company or in any related Transaction
with the Company and shall promptly inform us of the identity of any third party
that subsequently makes any such inquiry and whose interest in a possible
investment in the Company or in any other form of Transaction subsequently
becomes known to the Company during the term of this Agreement.

      B) Confidentiality. Each party to this Agreement agrees to keep in strict
confidence the proprietary and non-public information of the other party during
the term of this Agreement and thereafter, provided, however, that the foregoing
shall not prohibit disclosures (i) permitted by the parties in performing its
obligations hereunder; (ii) required by law or legal process (provided notice is
given prior to such disclosure); or (iii) of matters which become public other
than by the actions of the disclosing party hereunder.

      C) No Brokers. The Company represents that, to the best of its knowledge,
there are no brokers, representatives or other persons that have an interest in
compensation due from this engagement or any Transaction contemplated hereunder
that have not been identified to us.

      D) Applicable Law. This Agreement shall be constructed and enforced in
accordance with the laws of the State of New York and the parties agree to
submit themselves to the jurisdiction of the Federal and state courts located in
New York City, which shall be the sole tribunals in which either party may
institute and maintain a legal proceeding against the other party arising from
any dispute thereunder. Service of process hereunder may be effected any where
by such court's procedures or pursuant to the notice provisions set forth in
Paragraph F under this Section (IV).

                                       7
<PAGE>

      E) Waivers, Etc. If any agreement, covenant, warranty or other provision
of this Agreement is invalid, illegal or incapable of being enforced by reason
of any rule of law or public policy, all other agreements, covenants, warranties
and other provisions of this Agreement shall, nevertheless, remain in full force
and effect. No waiver by either party of a breach or non-performance of any
provision or obligation of this Agreement shall be deemed to be a waiver of any
preceding or succeeding breach of the same or any other provision of this
Agreement. This Agreement is the entire agreement of the parties with respect to
the subject matter hereof, supersedes all prior agreements and understandings,
oral or written, relating to the subject matter hereof, and may not be amended,
supplemented, or modified except by written instrument executed by all parties
hereto.

      Neither party may assign any of its rights or obligations under this
Agreement without the prior written consent of the other party, except that
Semaphore may assign its rights hereunder to an affiliate licensed as a broker
under the Securities Exchange Act of 1934, provided that Semaphore guarantees
the performance of its affiliate-assignee hereunder.

      F) Notices. All notices or other communications under this Agreement
(including service of process pursuant to Paragraph D) must be in writing and
sent by prepaid, first class mail, return receipt requested, or Federal Express,
delivered by hand or transmitted by facsimile or email to the email address or
facsimile number the other party. The addresses, email addresses and facsimile
numbers of the parties for purposes of this Agreement are:

      (i) The Company:                  (ii) Semaphore Capital Advisors LLC

      Tel-Instrument Electronics Corp.   Semaphore Capital Advisors LLC
      728 Garden Street                  6 Suburban Avenue
      Carlstadt, NJ  07072               Stamford, CT  06901
      Attn: Joseph P. Macaluso           Attn: Roger Boyle
      Director, Finance and Admin.       Attn: Raymond J. Martin
      Fax: (203) 461-9421                Fax:  (203) 286-1463
      Email: JMAC@telinst.com            Email: rmartin@Semaphorecap.com

      With a copy to:

      Donald Stuart Bab, Esq.
      Sokolow Carreras LLP
      770 Lexington Avenue
      New York, NY  10021
      Tel.: (212) 935-6000
      Fax: (212) 935-4865

                                       8
<PAGE>

      If the foregoing is acceptable to you, please indicate your approval by
signing in the space provided and returning an executed copy of this Agreement
to us.

                                           Sincerely yours,

      Accepted and agreed, this _____________ day of May, 2004

      TEL-INSTRUMENT ELECTRONICS CORP.

                                       9

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