Document:

EXHIBIT 10.19

 

EXECUTION COPY

 

COMMON STOCK PURCHASE AGREEMENT

 

COMMON STOCK PURCHASE AGREEMENT (the
“Agreement”), dated as of January  13,
2006, by and between AKSYS, LTD., a
Delaware corporation (the “Company”), and FUSION CAPITAL FUND II,
LLC, an Illinois limited
liability company (the “Buyer”). 
Capitalized terms used herein and not otherwise defined herein are
defined in Section 10 hereof.

 

WHEREAS:

 

Subject
to the terms and conditions set forth in this Agreement, the Company wishes to
sell to the Buyer, and the Buyer wishes to buy from the Company, up to Twenty
Million Dollars ($20,000,000) of the Company’s common stock, par value $0.01
per share (the “Common Stock”).  The
shares of Common Stock to be purchased hereunder are referred to herein as the
“Purchase Shares.”

 

NOW THEREFORE, the
Company and the Buyer hereby agree as follows:

 

1.             PURCHASE
OF COMMON STOCK.

 

Subject
to the terms and conditions set forth in Sections 6, 7 and 9 below, the Company
hereby agrees to sell to the Buyer, and the Buyer hereby agrees to purchase
from the Company, Purchase Shares as follows:

 

(a)           Commencement of Purchases of
Common Stock.  The purchase and sale
of Purchase Shares hereunder shall commence (the “Commencement”) within five
(5) Trading Days following the date of satisfaction of the conditions to the
Commencement set forth in Sections 6 and 7 below  (the date of such Commencement, the
“Commencement Date”).

 

(b)           Buyer’s Purchase Rights and
Obligations.  Subject to the
Company’s right to suspend purchases under Section 1(d)(ii) hereof, the Buyer
shall buy Purchase Shares (“Daily Purchases”) on each Trading Day during each
Monthly Period equal to the Daily Purchase Amount (as defined in Section
1(c)(i)) at the Purchase Price.  From
time to time, the Company shall also have the right but not the obligation, by
its delivery to the Buyer of a Block Purchase Notice (as defined in Section
1(c)(iv)), to require the Buyer to buy Purchase Shares (a “Block Purchase”)
equal to the Block Purchase Amount (as defined in Section 1(c)(iv)) at the
Block Purchase Price (as defined in Section 1(c)(iv)).  The
Buyer shall pay to the Company an amount equal to the Purchase Amount with
respect to such Purchase Shares as full payment for the purchase of the
Purchase Shares so received.  The Company
shall not issue any fraction of a share of Common Stock upon any purchase.  If the issuance would result in the issuance
of a fraction of a share of Common Stock, the Company shall round such fraction
of a share of Common Stock up or down to the nearest whole share.  All payments made under this Agreement shall
be made in lawful money of the United States of America by check or wire
transfer of immediately available funds to such account as the Company may from
time to time designate by written notice in accordance with the provisions of
this Agreement.  Whenever any amount
expressed to be due by the terms of this Agreement is due on any day that is
not a Trading Day, the same shall instead be due on the next succeeding day
which is a Trading Day.

 

 

(c)           The Daily Purchase Amount;
Company’s Right to Decrease or Increase the Daily Purchase Amount; the Block
Purchase Amount.

 

(i)            The
Daily Purchase Amount.  As
used herein the term “Original Daily Purchase Amount” shall mean Forty Thousand
Dollars ($40,000) per Trading Day. As used herein, the term “Daily Purchase
Amount” shall mean initially Forty Thousand Dollars ($40,000) per Trading Day,
which amount may be increased or decreased from time to time by the Company
pursuant to this Section 1(c).

 

(ii)           Company’s Right to Decrease the
Daily Purchase Amount.  The Company
shall always have the right at any time to decrease the amount of the Daily
Purchase Amount by delivering written notice (a “Daily Purchase Amount Decrease
Notice”) to the Buyer which notice shall specify the new Daily Purchase
Amount.  The decrease in the Daily
Purchase Amount shall become effective one Trading Day after receipt by the
Buyer of the Daily Purchase Amount Decrease Notice.  Any purchases by the Buyer which have a
Purchase Date on or prior to the first (1st) Trading Day after receipt by the
Buyer of a Daily Purchase Amount Decrease Notice must be honored by the Company
as otherwise provided herein.  The
decrease in the Daily Purchase Amount shall remain in effect until the Company
delivers to the Buyer a Daily Purchase Amount Increase Notice (as defined
below).

 

(iii)          Company’s
Right to Increase the Daily Purchase Amount.  The Company shall have the right (but not the
obligation) to increase the amount of the Daily Purchase Amount in accordance
with the terms and conditions set forth in this Section 1(c)(iii) by delivering
written notice to the Buyer stating the new amount of the Daily Purchase Amount
(a “Daily Purchase Amount Increase Notice”). 
A Daily Purchase Amount Increase Notice shall be effective five (5)
Trading Days after receipt by the Buyer. 
The Company shall always have the right at any time to increase the
amount of the Daily Purchase Amount up to the Original Daily Purchase Amount.  With respect to increases in the Daily
Purchase Amount above the Original Daily Purchase Amount, as the market price
for the Common Stock increases the Company shall have the right from time to
time to increase the Daily Purchase Amount as follows.  For every $0.10 increase in Threshold Price
above $0.95 (subject to equitable adjustment for any reorganization,
recapitalization, non-cash dividend, stock split or other similar transaction),
the Company shall have the right to increase the Daily Purchase Amount by up to
an additional $4,000 in excess of the Original Daily Purchase Amount.  “Threshold Price” for purposes hereof means
the lowest Sale Price of the Common Stock during the five (5) consecutive
Trading Days immediately prior to the submission to the Buyer of a Daily
Purchase Amount Increase Notice (subject to equitable adjustment for any
reorganization, recapitalization, non-cash dividend, stock split or other
similar transaction).  For example, if
the Threshold Price is $1.05, the Company shall have the right to increase the
Daily Purchase Amount to up to $44,000 in the aggregate.  If the Threshold Price is $1.25, the Company
shall have the right to increase the Daily Purchase Amount to up to $52,000 in
the aggregate.  Any increase in the
amount of the Daily Purchase Amount shall continue in effect until the delivery
to the Buyer of a Daily Purchase Amount Decrease Notice.  However, if at any time during any Trading
Day the Sale Price of the Common Stock is below the applicable Threshold Price,
such increase in the Daily Purchase Amount shall be void and the Buyer’s
obligations to buy Purchase Shares hereunder in excess of the applicable
maximum Daily Purchase Amount shall be terminated.  Thereafter, the Company shall again have the
right to increase the amount of the Daily Purchase Amount as set forth herein
by delivery of a new Daily Purchase Amount Increase Notice only if the Sale
Price of the Common Stock is above the applicable Threshold Price on each of
five (5) consecutive Trading Days immediately prior to such new Daily Purchase
Amount Increase Notice.

 

 

(iv)          The
Block Purchase Amount.  As used herein the term “Block Purchase
Amount” shall mean such Purchase Amount as specified by the Company in a Block
Purchase Notice.  As used herein the term
“Block Purchase Notice” shall mean an irrevocable written notice from the
Company to the Buyer directing the Buyer to buy the Purchase Amount in Purchase
Shares as specified by the Company therein at the Block Purchase Price.  For a Block Purchase Notice to be valid the
following conditions must be met: (1) the Block Purchase Amount shall not
exceed Two Hundred Fifty Thousand Dollars ($250,000) per Block Purchase Notice,
(2) the Company must deliver the Purchase Shares on the same day as the Block
Purchase Notice is delivered and (3) the Sale Price of the Common Stock must
have been above $1.00 (subject to equitable adjustment for any
reorganization, recapitalization, non-cash dividend, stock split or other
similar transaction) on the date of the delivery of the Block Purchase Notice
and during the ten (10) Trading Days prior to the delivery of the Block
Purchase Notice.  The Block Purchase Amount may be increased to
up to $500,000 if the Sale Price of the Common Stock is above $2.00
(subject to equitable adjustment for any reorganization, recapitalization,
non-cash dividend, stock split or other similar transaction) during the ten
(10) Trading Days prior to the delivery of the Block Purchase Notice.  The
Block Purchase Amount may be increased to up to $750,000 if the Sale Price of
the Common Stock is above $3.00 (subject to equitable adjustment for any
reorganization, recapitalization, non-cash dividend, stock split or other
similar transaction) during the ten (10) Trading Days prior to the delivery of
the Block Purchase Notice.  The Block Purchase Amount may be increased to
up to $1,000,000 if the Sale Price of the Common Stock is above $4.00
(subject to equitable adjustment for any reorganization, recapitalization,
non-cash dividend, stock split or other similar transaction) during the ten (10)
Trading Days prior to the delivery of the Block Purchase Notice.  The
Company may deliver multiple Block Purchase Notices as it shall determine;
provided however, at least ten (10) Trading Days must have passed since the
most recent Block Purchase was completed. 
As used herein, the term “Block Purchase Price” shall mean the lesser of
(i) the lowest Sale Price of the Common Stock on the Trading Day that a valid
Block Purchase Notice was received by the Buyer or (ii) the lowest Purchase
Price during the previous fifteen (15) Trading Days prior to the date that the
valid Block Purchase Notice was received by the Buyer.  The daily purchases shall be automatically
suspended for ten (10) trading days each time any such block purchase notice is
delivered.

 

(d)           Limitations on Purchases.

 

(i)            Limitation
on Beneficial Ownership.  The Buyer
shall not have the right or the obligation to purchase shares of Common Stock
under this Agreement to the extent that after giving effect to such purchase
the Buyer together with its affiliates would beneficially own in excess of 9.9%
of the outstanding shares of the Common Stock following such purchase.  For purposes hereof, the number of shares of
Common Stock beneficially owned by the Buyer and its affiliates or acquired by
the Buyer and its affiliates, as the case may be, shall include the number of
shares of Common Stock issuable in connection with a purchase under this
Agreement with respect to which the determination is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (1) a
purchase of the remaining Available Amount which has not been submitted for
purchase and (2) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company (including, without limitation,
any notes or warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the Buyer
and its affiliates.  For purposes of this Section, in determining
the number of outstanding shares of Common Stock the Buyer may rely on the
number of outstanding shares of Common Stock as reflected in (1) the Company’s
most recent Form 10-Q or Form 10-K, as the case may be, (2) a more recent
public announcement by the 

 

 

Company
or (3) any other written communication by the Company or its Transfer Agent
setting forth the number of shares of Common Stock outstanding.  Upon the reasonable written or oral request
of the Buyer, the Company shall promptly confirm orally and in writing to the Buyer
the number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares
of Common Stock shall be determined after giving effect to any purchases under
this Agreement by the Buyer since the date as of which such number of
outstanding shares of Common Stock was reported.  Except as otherwise set forth herein, for
purposes of this Section 1(d)(i), beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.

 

(ii)           Company’s
Right to Suspend Purchases.  The
Company may, at any time, give written notice (a “ Daily Purchase Suspension
Notice”) to the Buyer suspending Daily Purchases of Purchase Shares by the
Buyer under this Agreement.  The Daily
Purchase Suspension Notice shall be effective only for Daily Purchases that
have a Purchase Date later than one (1) Trading Day after receipt of the Daily
Purchase Suspension Notice by the Buyer. Any Daily Purchase by the Buyer that
has a Purchase Date on or prior to the first (1st) Trading Day after receipt by
the Buyer of a Daily Purchase Suspension Notice from the Company must be
honored by the Company as otherwise provided herein.  Such Daily Purchase suspension shall continue
in effect until a revocation in writing by the Company, at its sole discretion.

 

(iii)          Purchase
Price Floor.  The Company shall not
effect any sales under this Agreement and the Buyer shall not have the right
nor the obligation to purchase any Purchase Shares under this Agreement on any
Trading Day where the Purchase Price for any purchases of Purchase Shares would
be less than the Floor Price.  “Floor
Price” means $0.10, which shall be appropriately adjusted for any
reorganization, recapitalization, non-cash dividend, stock split or other
similar transaction.

 

(e)           Records of Purchases.  The Buyer and the Company shall each maintain
records showing the remaining Available Amount at any give time and the dates
and Purchase Amounts for each purchase or shall use such other method,
reasonably satisfactory to the Buyer and the Company.

 

(f)            Taxes.  The Company shall pay any and all transfer,
stamp or similar taxes that may be payable with respect
to the issuance and delivery of any shares of Common Stock to the Buyer made
under this Agreement.

 

(g)           Compliance with Principal Market
Rules.  The Company shall not effect
any sale under this Agreement and the Buyer shall not have the right or the
obligation to purchase shares of Common Stock under this Agreement to the
extent that after giving effect to such purchase the “Exchange Cap” shall be
deemed to be reached.  The “Exchange Cap”
shall be deemed to have been reached if, at any time prior to the shareholders
of the Company approving the transaction contemplated by this Agreement as
required by the rules and regulations of the Principal Market, upon a purchase
under this Agreement, the Purchase Shares issuable pursuant to such purchase
would, together with all Purchase Shares previously issued under this
Agreement, exceed 5,998,405 shares of Common Stock (19.99% of the 30,007,031
outstanding shares of Common Stock as of the date of this Agreement).  The Company may, but shall be under no
obligation to, request its shareholders to approve the transaction contemplated
by this Agreement.  The Company shall not
be required to issue any shares of Common Stock under this Agreement if such
issuance would breach the Company’s obligations under the rules or regulations
of the Principal Market.

 

 

2.             BUYER’S
REPRESENTATIONS AND WARRANTIES.

 

The
Buyer represents and warrants to the Company that as
of the date hereof and as of the Commencement Date:

 

(a)           Investment Purpose.  The Buyer is entering into this Agreement and
acquiring the Commitment Shares, (as defined in Section 4(f) hereof) (this
Agreement and the Commitment Shares  are collectively referred to herein
as the “Securities”), for its own account for investment only and not with a
view towards, or for resale in connection with, the public sale or distribution
thereof; provided however, by making the representations herein, except as set
forth in Section 4(f) hereof, the Buyer does not agree to hold any of the
Securities for any minimum or other specific term.

 

(b)           Accredited Investor Status.  The Buyer is an “accredited investor” as that
term is defined in Rule 501(a)(3) of Regulation D.

 

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

 

(d)           Information.  The Buyer has been furnished with all
materials relating to the business, finances and operations of the Company and
materials relating to the offer and sale of the Securities that have been
reasonably requested by the Buyer, including, without limitation, the SEC
Documents (as defined in Section 3(f) hereof). 
The Buyer understands that its investment in the Securities involves a high
degree of risk.  The Buyer (i) is able to
bear the economic risk of an investment in the Securities including a total
loss, (ii) has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of the proposed
investment in the Securities and (iii) has had an opportunity to ask questions
of and receive answers from the officers of the Company concerning the
financial condition and business of the Company and others matters related to
an investment in the Securities.  Neither
such inquiries nor any other due diligence investigations conducted by the
Buyer or its representatives shall modify, amend or affect the Buyer’s right to
rely on the Company’s representations and warranties contained in Section 3
below.  The Buyer has sought such accounting,
legal and tax advice as it has considered necessary to make an informed
investment decision with respect to its acquisition of the Securities.

 

(e)           No Governmental Review.  The Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.

 

(f)            Transfer or Sale.  The Buyer understands that except as provided
in the Registration Rights Agreement (as defined in Section 4(a) hereof): (i)
the Securities have not been and are not being registered under the 1933 Act or
any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder or (B) an exemption
exists permitting such Securities to be sold, assigned or transferred without
such registration; (ii) any sale of the Securities made in reliance on Rule 144
may be made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of the 
Securities under circumstances in which the seller (or the person
through whom the sale is made) may be deemed to be an underwriter (as that term
is defined in 

 

 

the
1933 Act) may require compliance with some other exemption under the 1933 Act
or the rules and regulations of the SEC thereunder; and (iii) neither the
Company nor any other person is under any obligation to register the Securities
under the 1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.

 

(g)           Validity; Enforcement.  This Agreement has been duly and validly authorized,
executed and delivered on behalf of the Buyer and is a valid and binding
agreement of the Buyer enforceable against the Buyer in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors’ rights and remedies.

 

(h)           Residency.  The Buyer is a resident of the State of
Illinois.

 

(i)            No Prior Short Selling.  The Buyer represents and warrants to the
Company that at no time prior to the date of this Agreement has any of the
Buyer, its agents, representatives or affiliates engaged in or effected, in any
manner whatsoever, directly or indirectly, any (i) “short sale” (as such term
is defined in Rule 3b-3 of the Securities Exchange Act of 1934, as amended (the
“1934 Act”)) of the Common Stock or (ii) hedging transaction, which establishes
a net short position with respect to the Common Stock.

 

 

3.             REPRESENTATIONS
AND WARRANTIES OF THE COMPANY.

 

The
Company represents and warrants to the Buyer that as
of the date hereof and as of the Commencement Date:

 

(a)           Organization and Qualification.  The Company and its “Subsidiaries” (which for
purposes of this Agreement means any entity in which the Company, directly or
indirectly, owns 50% or more of the voting stock or capital stock or other
similar equity interests) are corporations duly organized and validly existing
in good standing under the laws of the jurisdiction in which they are
incorporated, and have the requisite corporate power and authority to own their
properties and to carry on their business as now being conducted.  Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing could not
reasonably be expected to have a Material Adverse Effect.  As used in this Agreement, “Material Adverse
Effect” means any material adverse effect on any of: (i) the business,
properties, assets, operations, results of operations or financial condition of
the Company and its Subsidiaries, if any, taken as a whole, or (ii) the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined in Section 3(b) hereof).  The Company has no Subsidiaries except as set
forth on Schedule 3(a).

 

(b)           Authorization; Enforcement;
Validity.  (i) The Company has the
requisite corporate power and authority to enter into and perform its
obligations under this Agreement, the Registration Rights Agreement  and each of the other agreements entered into
by the parties on the Commencement Date and attached hereto as exhibits to this
Agreement (collectively, the “Transaction Documents”), and to issue the
Securities in accordance with the terms hereof and thereof, (ii) the execution
and delivery of the Transaction Documents by the Company and the consummation
by it of the transactions contemplated hereby and thereby, including without
limitation, the issuance of the Commitment Shares and the reservation for
issuance and the issuance of the Purchase Shares issuable under this Agreement,
have been duly authorized by the Company’s Board of Directors and no further
consent or authorization 

 

 

is
required by the Company, its Board of Directors or its shareholders, (iii) this
Agreement has been, and each other Transaction Document shall be on the
Commencement Date, duly executed and delivered by the Company and (iv) this
Agreement constitutes, and each other Transaction Document upon its execution
on behalf of the Company, shall constitute, the valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors’
rights and remedies.  The
Board of Directors of the Company has approved the resolutions (the “Signing
Resolutions”) substantially in the form as set forth as Exhibit C-1
attached hereto to authorize this Agreement and the transactions contemplated
hereby.  The Signing Resolutions are
valid, in full force and effect and have not been modified or supplemented in
any respect other than by the resolutions set forth in Exhibit C-2
attached hereto regarding the registration statement referred to in Section 4
hereof.  The Company
has delivered to the Buyer a true and
correct copy of a unanimous written consent adopting the Signing Resolutions
executed by all of the members of the Board of Directors of the Company.  No other approvals or consents of the
Company’s Board of Directors and/or shareholders is necessary under applicable
laws and the Company’s Certificate of Incorporation and/or Bylaws to authorize
the execution and delivery of this Agreement
or any of the transactions contemplated hereby, including, but not
limited to, the issuance of the Commitment Shares and the issuance of the
Purchase Shares.

 

(c)           Capitalization.  As of the date hereof, the authorized capital
stock of the Company consists of (i) 50,000,000 shares of Common Stock, of
which as of the date hereof, 30,007,031 shares are issued and outstanding, no
shares are held as treasury shares, 2,239,672 shares are reserved for issuance
pursuant to the Company’s stock option plans of which only approximately
541,096 shares remain available for future grants and 1,661,518 shares are
issuable and reserved for issuance pursuant to securities (other than stock
options issued pursuant to the Company’s stock option plans) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii)
1,000,000 shares of Preferred Stock, $0.01 par value with a  per share liquidation preference as set forth
in the Company’s Restated Certificate of Incorporation, of which as of the date
hereof no shares are issued and outstanding. 
All of such outstanding shares have been, or upon issuance will be,
validly issued and are fully paid and nonassessable.  Except as disclosed in Schedule 3(c), (i) no
shares of the Company’s capital stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company, (ii) there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by
which the Company or any of its Subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its Subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its Subsidiaries, (iv) there
are no agreements or arrangements under which the Company or any of its
Subsidiaries is obligated to register the sale of any of their securities under
the 1933 Act (except the Registration Rights Agreement), (v) there are no
outstanding securities or instruments of the Company or any of its Subsidiaries
which contain any redemption or similar provisions, and there are no contracts,
commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any
of its Subsidiaries, (vi) there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities as described in this Agreement and (vii) the Company does not
have any stock appreciation rights or “phantom stock” plans or agreements or
any similar plan or agreement.  The
Company has furnished to the Buyer true and correct copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof
(the “Certificate 

 

 

of
Incorporation”), and the Company’s By-laws, as amended and as in effect on the
date hereof (the “By-laws”), and summaries or copies of the terms of all
securities convertible into or exercisable for Common Stock, if any.

 

(d)           Issuance of Securities.  The Commitment Shares have been duly
authorized and, upon issuance in accordance with the terms hereof, the
Commitment Shares shall be (i) validly issued, fully paid and non-assessable
and (ii) free from all taxes, liens and charges with respect to the issue
thereof. 10,000,000 shares of Common Stock have been duly authorized and reserved
for issuance upon purchase under this Agreement.  Upon issuance and
payment therefor in accordance with the terms and conditions of this Agreement,
the Purchase Shares shall be validly issued, fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof, with
the holders being entitled to all rights accorded to a holder of Common Stock.

 

(e)           No Conflicts.  Except as disclosed in Schedule 3(e), the
execution, delivery and performance of the Transaction Documents by the Company
and the consummation by the Company of the transactions contemplated hereby and
thereby (including, without limitation, the reservation for issuance and
issuance of the Purchase Shares) will not (i) result in a violation of the Certificate
of Incorporation, any Certificate of Designations, Preferences and Rights of
any outstanding series of preferred stock of the Company or the By-laws or (ii)
conflict with, or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
indenture or instrument to which the Company or any of its Subsidiaries is a
party, or result in a violation of any law, rule, regulation, order, judgment
or decree (including federal and state securities laws and regulations and the
rules and regulations of the Principal Market applicable to the Company or any
of its Subsidiaries) or by which any property or asset of the Company or any of
its Subsidiaries is bound or affected, except in the case of conflicts,
defaults, terminations, amendments, accelerations, cancellations and violations
under clause (ii), which could not reasonably be expected to result in a
Material Adverse Effect.  Except as
disclosed in Schedule 3(e), neither the Company nor its Subsidiaries is in
violation of any term of or in default under its Certificate of Incorporation,
any Certificate of Designation, Preferences and Rights of any outstanding series
of preferred stock of the Company or By-laws or their organizational charter or
by-laws, respectively.  Except as
disclosed in Schedule 3(e), neither the Company nor any of its Subsidiaries is
in violation of any term of or is in default under any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
Subsidiaries, except for possible conflicts, defaults, terminations or
amendments which could not reasonably be expected to have a Material Adverse
Effect.  The business of the Company and
its Subsidiaries is not being conducted, and shall not be conducted, in
violation of any law, ordinance, regulation of any governmental entity, except
for possible violations, the sanctions for which either individually or in the
aggregate could not reasonably be expected to have a Material Adverse
Effect.  Except as specifically
contemplated by this Agreement and as required under the 1933 Act or applicable
state securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency or any regulatory or self-regulatory agency in order for
it to execute, deliver or perform any of its obligations under or contemplated
by the Transaction Documents in accordance with the terms hereof or
thereof.  Except as disclosed in Schedule
3(e), all consents, authorizations, orders, filings and registrations which the
Company is required to obtain pursuant to the preceding sentence shall be
obtained or effected on or prior to the Commencement Date.  Except as listed in Schedule 3(e), since
January 1, 2005, (1) the Company has not received nor delivered any notices or
correspondence from or to the Principal Market and (2) the Principal Market has
not commenced any delisting proceedings against the Company.

 

 

(f)            SEC Documents; Financial
Statements. Except as disclosed in Schedule 3(f), since January 1, 2005,
the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the SEC pursuant to the
reporting requirements of the 1934 Act (all of the foregoing filed prior to the
date hereof and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein being
hereinafter referred to as the “SEC Documents”).  As of their respective dates (except as they
have been correctly amended), the SEC Documents complied in all material
respects with the requirements of the 1934 Act and the rules and regulations of
the SEC promulgated thereunder applicable to the SEC Documents, and none of the
SEC Documents, at the time they were filed with the SEC (except as they may
have been properly amended), contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.  As
of their respective dates (except as they have been properly amended), the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto.  Such financial statements have been prepared
in accordance with generally accepted accounting principles, consistently
applied, during the periods involved (except (i) as may be otherwise indicated
in such financial statements or the notes thereto or (ii) in the case of
unaudited interim statements, to the extent they may exclude footnotes or may
be condensed or summary statements) and fairly present in all material respects
the financial position of the Company as of the dates thereof and the results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).  Except as listed in Schedule 3(f), the
Company has received no notices or correspondence from the SEC since January 1,
2005.  The SEC has not commenced any
enforcement proceedings against the Company or any of its subsidiaries.

 

(g)           Absence of Certain Changes.  Except as disclosed in Schedule 3(g), since
September 30, 2005, there has been no material adverse change in the business,
properties, operations, financial condition or results of operations of the
Company or its Subsidiaries.  The Company
has not taken any steps, and does not currently expect to take any steps, to
seek protection pursuant to any Bankruptcy Law nor does the Company or any of
its Subsidiaries have any knowledge or reason to believe that its creditors
intend to initiate involuntary bankruptcy or insolvency
proceedings.  The Company is financially
solvent and is generally able to pay its debts as they become due.

 

(h)           Absence of Litigation. There
is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, self-regulatory organization or body
pending or, to the knowledge of the Company or any of its Subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Company’s Subsidiaries or any of the Company’s or the Company’s Subsidiaries’
officers or directors in their capacities as such, which could reasonably be
expected to have a Material Adverse Effect.  
A description of each action, suit, proceeding, inquiry or investigation
before or by any court, public board, government agency, self-regulatory
organization or body which, as of the date of this Agreement, is pending or
threatened in writing against or affecting the Company, the Common Stock or any
of the Company’s Subsidiaries or any of the Company’s or the Company’s
Subsidiaries’ officers or directors in their capacities as such, is set forth
in Schedule 3(h).

 

(i)            Acknowledgment Regarding Buyer’s
Status.  The Company acknowledges and
agrees that the Buyer is acting solely in the capacity of arm’s length
purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby.  The
Company further acknowledges that the Buyer is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect
to the Transaction Documents and the transactions contemplated hereby and
thereby and any 

 

 

advice
given by the Buyer or any of its representatives or agents in connection with
the Transaction Documents and the transactions contemplated hereby and thereby
is merely incidental to the Buyer’s purchase of the Securities.  The Company further represents to the Buyer
that the Company’s decision to enter into the Transaction Documents has been
based solely on the independent evaluation by the Company and its
representatives and advisors.

 

(j)            No General Solicitation.  Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.

 

 (k)          Intellectual
Property Rights.  The Company and its
Subsidiaries own or possess adequate rights or licenses to use all material
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct
their respective businesses as now conducted. 
Except as set forth on Schedule 3(k), none of the Company’s material
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
government authorizations, trade secrets or other intellectual property rights
have expired or terminated, or, by the terms and conditions thereof, could
expire or terminate within two years from the date of this Agreement.  The Company and its Subsidiaries do not have
any knowledge of any infringement by the Company or its Subsidiaries of any
material trademark, trade name rights, patents, patent rights, copyrights,
inventions, licenses, service names, service marks, service mark registrations,
trade secret or other similar rights of others, or of any such development of
similar or identical trade secrets or technical information by others and,
except as set forth on Schedule 3(k), there is no claim, action or proceeding
being made or brought against, or to the Company’s knowledge, being threatened
against, the Company or its Subsidiaries regarding trademark, trade name,
patents, patent rights, invention, copyright, license, service names, service
marks, service mark registrations, trade secret or other infringement, which
could reasonably be expected to have a Material Adverse Effect.

 

(l)            Environmental Laws.  The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (“Environmental Laws”), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval, except where, in each
of the three foregoing clauses, the failure to so comply could not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect.

 

(m)          Title.  The Company and its Subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its Subsidiaries, in each case free and clear of all liens, encumbrances
and defects except such as are described in Schedule 3(m) or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company and any of its
Subsidiaries.  Any real property and
facilities held under lease by the Company and any of its Subsidiaries are held
by them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to be made
of such property and buildings by the Company and its Subsidiaries.

 

(n)           Insurance.  The Company and each of its Subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its 

 

 

Subsidiaries
are engaged.  Neither the Company nor any
such Subsidiary has been refused any insurance coverage sought or applied for
and neither the Company nor any such Subsidiary has any reason to believe that
it will not be able to renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operations of the Company and its Subsidiaries, taken as a whole.

 

(o)           Regulatory Permits.  The Company and its Subsidiaries possess all
material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such Subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.

 

(p)           Tax Status.  The Company and each of its Subsidiaries has
made or filed all federal and state income and all other material tax returns,
reports and declarations required by any jurisdiction to which it is subject
(unless and only to the extent that the Company and each of its Subsidiaries
has set aside on its books provisions reasonably adequate for the payment of
all unpaid and unreported taxes) and has paid all taxes and other governmental
assessments and charges that are material in amount, shown or determined to be
due on such returns, reports and declarations, except those being contested in
good faith and has set aside on its books provision reasonably adequate for the
payment of all taxes for periods subsequent to the periods to which such
returns, reports or declarations apply. 
There are no unpaid taxes in any material amount claimed to be due by
the taxing authority of any jurisdiction, and the officers of the Company know
of no basis for any such claim.

 

(q)           Transactions With Affiliates.  Except as set forth on Schedule 3(q) and
other than the grant or exercise of stock options disclosed on Schedule 3(c),
none of the officers, directors, or employees of the Company is presently a
party to any transaction with the Company or any of its Subsidiaries (other
than for services as employees, officers and directors), including any
contract, agreement or other arrangement providing for the furnishing of
services to or by, providing for rental of real or personal property to or
from, or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any officer, director, or any such employee has
an interest or is an officer, director, trustee or partner.

 

(r)            Application of Takeover
Protections.  The Company and its
board of directors have taken or will take prior to the Commencement Date all
necessary action, if any, in order to render inapplicable any control share
acquisition, business combination, poison pill (including any distribution
under a rights agreement) or other similar anti-takeover provision under the
Certificate of Incorporation or the laws of the state of its incorporation
which is or could become applicable to the Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Commitment Shares and Purchase Shares hereunder, so
long as under any and all conditions the Buyer’s ownership of any shares of
Common Stock is at or below the 9.9% Ownership Threshold.  The “9.9% Ownership Threshold” means that the
Buyer together with its affiliates would beneficially own 9.9% or less of the
outstanding shares of the Common Stock. 
For purposes hereof, the number of shares of Common Stock beneficially
owned by the Buyer and its affiliates or acquired by the Buyer and its
affiliates, as the case may be, shall include the number of shares of Common
Stock issuable in connection with a purchase under this Agreement with respect
to which the determination is being made, but shall exclude the number of
shares of Common Stock which would be issuable upon (1) a purchase of the remaining
Available Amount which has not been submitted for purchase, and (2) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company 

 

 

(including,
without limitation, any notes or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the Buyer and its affiliates.  For purposes in
determining the number of outstanding shares of Common Stock the Buyer may rely
on the number of outstanding shares of Common Stock as reflected in (1) the
Company’s most recent Form 10-Q or Form 10-K, as the case may be, (2) a more
recent public announcement by the Company or (3) any other written
communication by the Company or its Transfer Agent setting forth the number of
shares of Common Stock outstanding.  Upon
the reasonable written or oral request of the Buyer, the Company shall promptly
confirm orally and in writing to the Buyer the number of shares of Common Stock
then outstanding.  In any case, the number
of outstanding shares of Common Stock shall be determined after giving effect
to any purchases under this Agreement by the Buyer since the date as of which
such number of outstanding shares of Common Stock was reported.  Except as otherwise set forth herein, for
purposes of this Section 1(d)(i), beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended.

 

(s)           Foreign Corrupt Practices.  Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or made any unlawful bribe, rebate, payoff,
influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

 

4.             COVENANTS.

 

(a)           Filing of Form 8-K and
Registration Statement.  The Company
agrees that it shall, within the time required under the 1934 Act file a Report
on Form 8-K disclosing this Agreement and the transaction contemplated
hereby.  The Company shall also use best
efforts to file on or prior to May 31, 2006 a new registration statement
covering only the sale of the Commitment Shares and at least 10,000,000
Purchase Shares in accordance with the terms of the Registration Rights
Agreement between the Company and the Buyer, dated as of the date hereof (“Registration
Rights Agreement”).   After such
registration statement is declared effective by the SEC, the Company agrees and
acknowledges that any sales by the Company to the Buyer pursuant to this
Agreement are sales of the
Company’s equity securities in a transaction that is registered under the 1933
Act.

 

(b)           Blue Sky. The Company shall
take such action, if any, as is reasonably necessary in order to obtain an
exemption for or to qualify (i) the initial sale of the Commitment Shares and
any Purchase Shares to the Buyer under this Agreement and (ii) any subsequent
resale of the Commitment Shares and any Purchase Shares by the Buyer, in each
case, under applicable securities or “Blue Sky” laws of the states of the
United States in such states as is reasonably requested by the Buyer from time
to time, and shall provide evidence of any such action so taken to the Buyer.

 

(c)           No Variable Priced Financing.  Other than pursuant to this Agreement, the
Company agrees that beginning on the date of this Agreement and ending on the
date of termination of this Agreement (as provided in Section 11(k) hereof),
neither the Company nor any of its Subsidiaries shall, without the prior
written consent of the Buyer, contract for any equity financing (including any
debt financing with an equity component) or issue any equity securities of the
Company or any Subsidiary or securities convertible or exchangeable into or for
equity securities of the Company or any Subsidiary (including debt securities
with an equity component) which, in any case (i) are convertible into or 

 

 

exchangeable
for an indeterminate number of shares of common stock, (ii) are convertible
into or exchangeable for Common Stock at a price which varies with the market
price of the Common Stock, (iii) directly or indirectly provide for any
“re-set” or adjustment of the purchase price, conversion rate or exercise price
after the issuance of the security, or (iv) contain any “make-whole” provision
based upon, directly or indirectly, the market price of the Common Stock after
the issuance of the security, in each case, other than reasonable and customary
anti-dilution adjustments for issuance of shares of Common Stock at a price
which is below the market price of the Common Stock.

 

(d)           Listing.  The Company shall promptly secure the listing
of all of the Purchase Shares and Commitment Shares upon each national
securities exchange and automated quotation system, if any, upon which shares
of Common Stock are then listed (subject to official notice of issuance) and
shall maintain, so long as any other shares of Common Stock shall be so listed,
such listing of all such securities from time to time issuable under the terms
of the Transaction Documents.  The
Company shall maintain the Common Stock’s authorization for quotation on a
Principal Market.  Neither the Company
nor any of its Subsidiaries shall voluntarily take any action that would be
reasonably expected to directly result in the Common Stock not to be listed on
a Principal Market (which for the purpose of this Section 4(c), shall mean the
Nasdaq OTC Bulletin Board if the Common Stock is then trading on the Nasdaq OTC
Bulletin Board).  The Company shall
promptly, and in no event later than the following Trading Day, provide to the
Buyer copies of any notices it receives from the Principal Market regarding the
continued eligibility of the Common Stock for listing on such automated
quotation system or securities exchange. 
The Company shall pay all fees and expenses in connection with
satisfying its obligations under this Section.

 

(e)           Limitation on Short Sales and
Hedging Transactions.  The Buyer
agrees that beginning on the date of this Agreement and ending on the date of
termination of this Agreement as provided in Section 11(k), the Buyer and its
agents, representatives and affiliates shall not in any manner whatsoever enter
into or effect, directly or indirectly, any (i) “short sale” (as such term is
defined in Rule 3b-3 of the 1934 Act) of the Common Stock or (ii) hedging
transaction, which establishes a net short position with respect to the Common
Stock.

 

(f)            Issuance of Commitment Shares;
Limitation on Sales of Commitment Shares. 
Immediately upon the execution of this Agreement, the Company shall
issue to the Buyer 2,170,543 shares of Common Stock (the “Commitment Shares”).  The Commitment
Shares shall be issued in certificated form and (subject to Section 5 hereof)
shall bear the following  restrictive
legend:

 

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
HOLDER’S COUNSEL, IN A CUSTOMARY FORM, THAT REGISTRATION IS NOT REQUIRED UNDER
SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE
144 UNDER SAID ACT.

 

The
Buyer agrees that the Buyer shall not transfer or sell the Commitment Shares
until the earlier of 500 Trading Days (25 Monthly Periods) from the date hereof
or the date on which this 

 

 

Agreement
has been terminated, provided, however, that such restrictions shall not apply:
(i) in connection with any transfers to or among affiliates (as defined in the
1934 Act), (ii) in connection with any pledge in connection with a bona fide
loan or margin account, (iii) in the event that the Commencement does not occur
on or before June 30, 2006, due to the failure of the Company to satisfy the
conditions set forth in Section 7 or (iv) if an Event of Default has occurred,
or any event which, after notice and/or lapse of time, would become an Event of
Default, including any failure by the Company to timely issue Purchase Shares
under this Agreement.  Notwithstanding
the forgoing, the Buyer may transfer Commitment Shares to a third party in
order to settle a sale made by the Buyer where the Buyer reasonably expects the
Company to deliver Purchase Shares to the Buyer under this Agreement so long as
the Buyer maintains ownership of the same overall number of shares of Common
Stock by “replacing” the Commitment Shares so transferred with Purchase Shares
when the Purchase Shares are actually issued by the Company to the Buyer.

 

(g)           Due Diligence.  The Buyer shall have the right, from time to
time as the Buyer may reasonably deem appropriate, to perform reasonable due
diligence on the Company during normal business hours.  The Company and its officers and employees
shall provide information and reasonably cooperate with the Buyer in connection
with any reasonable request by the Buyer related to the Buyer’s due diligence
of the Company, including, but not limited to, any such request made by the
Buyer in connection with (i) the filing of the registration statement described
in Section 4(a) hereof and (ii) the Commencement.  Each party hereto agrees not to disclose any
Confidential Information of the other party to any third party and shall not
use the Confidential Information for any purpose other than in connection with,
or in furtherance of, the transactions contemplated hereby.  Each party hereto acknowledges that the
Confidential Information shall remain the property of the disclosing party and
agrees that it shall take all reasonable measures to protect the secrecy of any
Confidential Information disclosed by the other party.

 

5.             TRANSFER
AGENT INSTRUCTIONS.

 

Immediately upon the execution of this
Agreement, the Company shall deliver to the Transfer Agent a letter in the form
as set forth as Exhibit E attached hereto with respect to the issuance
of the Commitment Shares.  On the
Commencement Date, the Company shall cause any restrictive legend on the
Commitment Shares to be removed and all of the Purchase Shares to be issued
under this Agreement shall be issued without any restrictive legend unless the
Buyer expressly consents otherwise.  The
Company shall issue irrevocable instructions to the Transfer Agent, and any
subsequent transfer agent, to issue Purchase Shares in the name of the Buyer
for the Purchase Shares (the “Irrevocable Transfer Agent Instructions”).  The Company warrants to the Buyer that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, will be given by the Company to the Transfer Agent with
respect to the Purchase Shares and that the Commitment Shares and the Purchase
Shares shall otherwise be freely transferable on the books and records of the
Company as and to the extent provided in this Agreement and the Registration
Rights Agreement subject to the provisions of Section 4(f) in the case of the
Commitment Shares.

 

 

6.                                      CONDITIONS TO THE COMPANY’S OBLIGATION TO COMMENCE SALES OF SHARES OF
COMMON STOCK.

 

The
obligation of the Company hereunder to commence sales of the Purchase Shares is
subject to the satisfaction of each of the following conditions on or before
the Commencement Date (the date that sales begin) and once such conditions have
been initially satisfied, there shall not be any ongoing obligation to satisfy
such conditions after the Commencement has occurred; provided that these
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion by providing the Buyer with prior written
notice thereof:

 

(a)           The Buyer shall have executed each of
the Transaction Documents and delivered the same to the Company.

 

(b)           Subject to the Company’s compliance
with Section 4(a), a registration statement covering the sale of all of the
Commitment Shares and at least 10,000,000 Purchase Shares shall have been
declared effective under the 1933 Act by the SEC and no stop order with respect
to the Registration Statement shall be pending or threatened by the SEC.

 

(c)           The representations and warranties of
the Buyer shall be true and correct in all material respects as of the date
when made and as of the Commencement Date as though made at that time (except
for representations and warranties that speak as of a specific date), and the
Buyer shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Buyer at or prior to the
Commencement Date.

 

7.                                      CONDITIONS TO THE BUYER’S OBLIGATION TO COMMENCE PURCHASES OF SHARES OF
COMMON STOCK.

 

The
obligation of the Buyer to commence purchases of Purchase Shares under this
Agreement is subject to the satisfaction of each of the following conditions on
or before the Commencement Date (the date that sales begin) and once such
conditions have been initially satisfied, there shall not be any ongoing
obligation to satisfy such conditions after the Commencement has occurred:

 

(a)           The Company shall have executed each
of the Transaction Documents and delivered the same to the Buyer.

 

(b)           The Company shall have issued to the
Buyer the Commitment Shares and shall have removed the restrictive transfer
legend from the certificate representing the Commitment Shares.

 

(c)           The Common Stock shall be, as
applicable, listed on or authorized for quotation on the then applicable
Principal Market, trading in the Common Stock shall not then be suspended by
the then Principal Market nor shall trading in the Common Stock have been
within the last 365 days suspended by the SEC, and the Purchase Shares and the
Commitment Shares shall be approved for listing upon the then Principal Market
if required by the rules and regulations of the then Principal Market.

 

(d)           The Buyer shall have received the
opinions of the Company’s legal counsel dated as of the Commencement Date in
reasonable and customary form and substance.

 

 

(e)           The representations and warranties of
the Company shall be true and correct in all material respects (except to the
extent that any of such representations and warranties is already qualified as
to materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Commencement Date as though made at that time
(except for representations and warranties that speak as of a specific date)
and the Company shall have performed, satisfied and complied with the
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by the Company at or prior to the
Commencement Date.  The Buyer shall have
received a certificate, executed by the CEO, President or CFO of the Company,
dated as of the Commencement Date, to the foregoing effect in the form attached
hereto as Exhibit B.

 

(f)            The Board of Directors of the
Company shall have adopted resolutions in the form attached hereto as Exhibit C which shall be in full
force and effect without any amendment or supplement thereto as of the
Commencement Date.

 

(g)           As of the Commencement Date, the
Company shall have reserved out of its authorized and unissued Common Stock,
solely for the purpose of effecting purchases of Purchase Shares hereunder, at
least 10,000,000 shares of Common Stock.

 

(h)           The Irrevocable Transfer Agent
Instructions, in form acceptable to the Buyer shall have been delivered to and
acknowledged in writing by the Company and the Company’s Transfer Agent.

 

(i)            The Company shall have delivered to
the Buyer a certificate evidencing the incorporation and good standing of the
Company in the State of Delaware issued by the Secretary of State of the State
of Delaware as of a date within ten (10) Trading Days of the Commencement Date.

 

(j)            The Company shall have delivered to
the Buyer a certified copy of the Certificate of Incorporation as certified by
the Secretary of State of the State of Delaware within ten (10) Trading Days of
the Commencement Date.

 

(k)           The Company shall have delivered to
the Buyer a secretary’s certificate executed by the Secretary of the Company,
dated as of the Commencement Date, in the form attached hereto as Exhibit D.

 

(l)            A registration statement covering
the sale of all of the Commitment Shares and at least 10,000,000 Purchase
Shares shall have been declared effective under the 1933 Act by the SEC and no
stop order with respect to the registration statement shall be pending or
threatened by the SEC.  The Company shall
have prepared and delivered to the Buyer a final form of prospectus to be used
by the Buyer in connection with any sales of any Commitment Shares or any
Purchase Shares. The Company shall have made all filings under all applicable
federal and state securities laws necessary to consummate the issuance of the
Commitment Shares and the Purchase Shares pursuant to this Agreement in
compliance with such laws.

 

(m)          No Event of Default has occurred, or
any event which, after notice and/or lapse of time, would become an Event of
Default has occurred.

 

(n)           On or prior to the Commencement Date,
the Company shall take all necessary action, if any, and such actions as
reasonably requested by the Buyer, in order to render inapplicable any control
share acquisition, business combination, shareholder rights plan or poison pill
(including any distribution 

 

 

under
a rights agreement) or other similar anti-takeover provision under the
Certificate of Incorporation or the laws of the state of its incorporation
which is or could become applicable to the Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company’s issuance of the Commitment Shares and Purchase Shares hereunder, so
long as under any and all conditions the Buyer’s ownership of any shares of
Common Stock is at or below the 9.9% Ownership Threshold.

 

(o)           The Company shall have provided the
Buyer with the information requested by the Buyer in connection with its due
diligence requests made prior to, or in connection with, the Commencement, in
accordance with the terms of Section 4(g) hereof.

 

8.                                      INDEMNIFICATION.

 

In
consideration of the Buyer’s execution and delivery of the Transaction
Documents and acquiring the Securities hereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless the Buyer and all of its
affiliates, shareholders, officers, directors, employees and direct or indirect
investors and any of the foregoing person’s agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents
or any other certificate, instrument or document contemplated hereby or
thereby, or (c) any cause of action, suit or claim brought or made against such
Indemnitee and arising out of or resulting from the execution, delivery,
performance or enforcement of the Transaction Documents or any other
certificate, instrument or  document
contemplated hereby or thereby, other than with respect to Indemnified Liabilities
which directly and primarily result from the gross negligence or willful
misconduct of the Indemnitee.  To the
extent that the foregoing undertaking by the Company may be unenforceable for
any reason, the Company shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law.

 

9.             EVENTS
OF DEFAULT.

 

An
“Event of Default” shall be deemed to have occurred at any time as any of the
following events occurs:

 

(a)           while any registration statement is
required to be maintained effective pursuant to the terms of the Registration
Rights Agreement, the effectiveness of such registration statement lapses for
any reason (including, without limitation, the issuance of a stop order) or is
unavailable to the Buyer for sale of all of the Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
for a period of ten (10) consecutive Trading Days or for more than an aggregate
of thirty (30) Trading Days in any 365-day period;

 

 

(b)           the failure of the Common Stock to be
listed on any Principal Market for a period of three (3) consecutive Trading
Days or the suspension from trading of the Common Stock on a Principal Market,
(provided, however, that the Common Stock is not within three (3) Trading Days
thereafter trading on another Principal Market and during any suspension from
trading of the Common Stock, Buyer shall not 
buy any Purchase Shares hereunder);

 

(c)           the delisting of the Company’s Common
Stock from a Principal Market, provided, however, that the Common Stock is not
immediately thereafter trading on another Principal Market;

 

(d)           the failure for any reason by the
Transfer Agent to issue Purchase Shares to the Buyer within five (5) Trading
Days after the applicable Purchase Date which the Buyer is entitled to receive;

 

(e)           the Company breaches any
representation, warranty, covenant or other term or condition under any
Transaction Document if such breach could have a Material Adverse Effect and
except, in the case of a breach of a covenant which is reasonably curable, only
if such breach continues for a period of at least five (5) Trading Days after
the Buyer’s notice of breach of such a covenant;

 

(f)            if any Person commences a proceeding
against the Company pursuant to or within the meaning of any Bankruptcy Law;

 

(g)           if the Company pursuant to or within
the meaning of any Bankruptcy Law; (A) commences a voluntary case, (B) consents
to the entry of an order for relief against it in an involuntary case, (C)
consents to the appointment of a Custodian of it or for all or substantially
all of its property, (D) makes a general assignment for the benefit of its creditors,
(E) becomes insolvent, or (F) is generally unable to pay its debts as the same
become due;

 

(h)           a court of competent jurisdiction
enters an order or decree under any Bankruptcy Law that (A) is for relief
against the Company in an involuntary case, (B) appoints a Custodian of the
Company or for all or substantially all of its property, or (C) orders the
liquidation of the Company or any Subsidiary;

 

(i)            a material adverse change in the
business, properties, operations, financial condition or results of operations
of the Company and its Subsidiaries taken as a whole;

 

(j)            if at any time after the
Commencement Date, the “Exchange Cap” is reached. (The “Exchange Cap” shall be
deemed to be reached at such time if, upon submission of a Purchase Notice
under this Agreement, the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue under this
Agreement without breaching the Company’s obligations under the rules or
regulations of the Principal Market).

 

In
addition to any other rights and remedies under applicable law and this
Agreement, including the Buyer termination rights under Section 11(k) hereof,
so long as an Event of Default has occurred and is continuing, or if any event
which, after notice and/or lapse of time, would become an Event of Default, has
occurred and is continuing, or so long as the Purchase Price is below the
Purchase Price Floor, the Buyer shall not be obligated to purchase any shares
of Common Stock under this Agreement.  If
pursuant to or within the meaning of any Bankruptcy Law, the Company commences
a voluntary case or any Person commences a proceeding against the Company, a
Custodian is appointed for the Company or for all or substantially all of its
property, or the Company makes a general assignment for the benefit of its
creditors, (any of which would be an Event of Default as described in Sections
9(f), 9(g) and 9(h) hereof) this
Agreement shall automatically terminate without any liability or payment to the
Company without 

 

 

further
action or notice by any Person.  No such
termination of this Agreement under Section 11(k)(i) shall affect the Company’s
or the Buyer’s obligations under this Agreement with respect to pending
purchases and the Company and the Buyer shall complete their respective
obligations with respect to any pending purchases under this Agreement.

 

10.          CERTAIN
DEFINED TERMS.

 

For
purposes of this Agreement, the following terms shall have the following
meanings:

 

(a)           “1933 Act” means the Securities Act of
1933, as amended.

 

(b)           “Available Amount” means initially
Twenty Million Dollars ($20,000,000) in the aggregate which amount shall be
reduced by the Purchase Amount each time the Buyer purchases shares of Common
Stock pursuant to Section 1 hereof.

 

(c)           “Bankruptcy Law” means Title 11, U.S.
Code, or any similar federal or state law for the relief of debtors.

 

(d)           “Closing Sale Price” means, for any
security as of any date, the last closing trade price for such security on the
Principal Market as reported by  the
Principal Market, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last closing trade price of
such security on the principal securities exchange or trading market where such
security is listed or traded as reported by 
the Principal Market.

 

(e)           “Confidential Information” means any
information disclosed by either party to the other party, either directly or
indirectly, in writing, orally or by inspection of tangible objects (including,
without limitation, documents, prototypes, samples, plant and equipment), which
is designated as “Confidential,” “Proprietary” or some similar designation.
Information communicated orally shall be considered Confidential Information if
such information is confirmed in writing as being Confidential Information
within ten (10) business days after the initial disclosure. Confidential
Information may also include information disclosed to a disclosing party by
third parties. Confidential Information shall not, however, include any
information which (i) was publicly known and made generally available in the
public domain prior to the time of disclosure by the disclosing party; (ii)
becomes publicly known and made generally available after disclosure by the
disclosing party to the receiving party through no action or inaction of the
receiving party; (iii) is already in the possession of the receiving party at
the time of disclosure by the disclosing party as shown by the receiving
party’s files and records immediately prior to the time of disclosure; (iv) is
obtained by the receiving party from a third party without a breach of such
third party’s obligations of confidentiality; (v) is independently developed by
the receiving party without use of or reference to the disclosing party’s
Confidential Information, as shown by documents and other competent evidence in
the receiving party’s possession; or (vi) is required by law to be disclosed by
the receiving party, provided that the receiving party gives the disclosing party
prompt written notice of such requirement prior to such disclosure and
assistance in obtaining an order protecting the information from public
disclosure.

 

(f)            “Custodian” means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.

 

(g)           “Maturity Date” means the date that
is 500 Trading Days (25 Monthly Periods) from the Commencement Date.

 

 

(h)           “Monthly Period” means each
successive 20 Trading Day period commencing with the Commencement Date.

 

(i)            “Person” means an individual or
entity including any limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.

 

(j)            “Principal Market” means the Nasdaq National Market; provided however, that in the event the
Company’s Common Stock is ever de-listed from the Nasdaq National Market and is
subsequently listed or traded on the Nasdaq SmallCap Market, the Nasdaq OTC
Bulletin Board, the New York Stock Exchange or the American Stock Exchange,
than the “Principal Market” shall mean such other market or exchange on which
the Company’s Common Stock is then listed or traded.

 

(k)           “Purchase Amount” means the portion
of the Available Amount to be purchased by the Buyer pursuant to Section 1
hereof.

 

(l)            “Purchase Date” means the actual
date that the Buyer is to buy Purchase Shares pursuant to Section 1 hereof.

 

(m)          “Purchase Price” means, as of any
Trading Day the lower of the (A) the lowest Sale Price of the Common Stock on
such Trading Day and (B) the arithmetic average of the three (3) lowest Closing
Sale Prices for the Common Stock during the twelve (12) consecutive Trading
Days ending on the Trading Day immediately preceding such date of determination
(to be appropriately adjusted for any reorganization, recapitalization,
non-cash dividend, stock split or other similar transaction).

 

(n)            “Sale Price” means, for any security
as of any date, any trade price for such security on the Principal Market as
reported by the Principal Market, or, if the Principal Market is not the
principal securities exchange or trading market for such security, the trade
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by the Principal Market.

 

(o)           “SEC” means the United States
Securities and Exchange Commission.

 

(q)          
“Transfer Agent” means the transfer agent of the Company as set forth in
Section 11(f) hereof or such other person who is then serving as the transfer
agent for the Company in respect of the Common Stock.

 

(r)             “Trading Day” means any day on
which the Principal Market is open for 
trading including any day on which the Principal Market is open for
trading for a period of time less than the customary time.

 

11.          MISCELLANEOUS.

 

(a)           Governing Law; Jurisdiction; Jury
Trial.  The corporate laws of the
State of Delaware shall govern all issues concerning the relative rights of the
Company and its shareholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Agreement and the other
Transaction Documents shall be governed by the internal laws of the State of
Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or 

 

 

any
other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Illinois. 
Each party hereby irrevocably submits to the exclusive jurisdiction of
the state and federal courts sitting in the City of Chicago, for the
adjudication of any dispute hereunder or under the other Transaction Documents
or in connection herewith or therewith, or with any transaction contemplated
hereby or discussed herein, and hereby irrevocably waives, and agrees not to
assert in any suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of any such court, that such suit, action or
proceeding is brought in an inconvenient forum or that the venue of such suit,
action or proceeding is improper.  Each
party hereby irrevocably waives personal service of process and consents to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address for such notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. 
Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.  EACH PARTY HEREBY
IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY
TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH
OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

 

(b)           Counterparts.  This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature shall
be considered due execution and shall be binding upon the signatory thereto
with the same force and effect as if the signature were an original, not a
facsimile signature.

 

(c)           Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

 

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

 

(e)           Entire Agreement.  With the exception of the Mutual
Nondisclosure Agreement between the parties dated as of December 29, 2005, this
Agreement supersedes all other prior oral or written agreements between the
Buyer, the Company, their affiliates and persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein contain the entire
understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the
Company nor the Buyer makes any representation, warranty, covenant or
undertaking with respect to such matters. 
The Company acknowledges and agrees that is has not relied on, in any
manner whatsoever, any representations or statements, written or oral, other
than as expressly set forth in this Agreement.

 

(f)            Notices.  Any notices, consents or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by
the sending party); or (iii) one Trading Day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same.  The addresses
and facsimile numbers for such communications shall be:

 

 

	
  If
  to the Company:

  	
   

  	
   

  
	
   

  	
   

  	
  Aksys, Ltd.

  	
   

  	
   

  
	
   

  	
   

  	
  Two
  Marriott Drive

  	
   

  	
   

  
	
   

  	
   

  	
  Lincolnshire,
  Illinois 60069

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  847-229-2020

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  847-229-2080

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Laurence
  P. Birch

  
	
   

  
	
  With
  a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
  Kirkland
  & Ellis

  	
   

  	
   

  
	
   

  	
   

  	
  200
  East Randolph Drive

  	
   

  	
   

  
	
   

  	
   

  	
  Chicago,
  IL 60601

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  312-861-2181

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  312-861-2200

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Keith
  S. Crow, P.C.

  
	
   

  
	
  If
  to the Buyer:

  	
   

  	
   

  
	
   

  	
   

  	
  Fusion
  Capital Fund II, LLC

  	
   

  	
   

  
	
   

  	
   

  	
  222
  Merchandise Mart Plaza, Suite 9-112

  	
   

  	
   

  
	
   

  	
   

  	
  Chicago,
  IL 60654

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  312-644-6644

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  312-644-6244

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Steven
  G. Martin

  
	
   

  
	
  If
  to the Transfer Agent:

  	
   

  	
   

  
	
   

  	
   

  	
  Computershare
  Trust Company Inc.

  	
   

  	
   

  
	
   

  	
   

  	
  2
  North LaSalle Street

  	
   

  	
   

  
	
   

  	
   

  	
  Chicago,
  IL 60602

  
	
   

  	
   

  	
  Telephone:

  	
   

  	
  312-499-7041

  
	
   

  	
   

  	
  Facsimile:

  	
   

  	
  312-499-7065

  
	
   

  	
   

  	
  Attention:

  	
   

  	
  Sofia
  Busko

  
														

 

or
at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party three (3) Trading Days prior to the effectiveness of such
change.  Written confirmation of receipt
(A) given by the recipient of such notice, consent or other communication, (B)
mechanically or electronically generated by the sender’s facsimile machine
containing the time, date, and recipient facsimile number or (C) provided by a
nationally recognized overnight delivery service, shall be rebuttable evidence
of personal service, receipt by facsimile or receipt from a nationally
recognized overnight delivery service in accordance with clause (i), (ii) or
(iii) above, respectively.

 

(g)           Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and
assigns.  The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the Buyer, including by merger or consolidation.  The Buyer may not assign its rights or
obligations under this Agreement.

 

(h)           No Third Party Beneficiaries.  This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.

 

 

(i)            Publicity.  The Buyer shall have the right to approve
before issuance any press release, SEC filing or any other public disclosure
made by or on behalf of the Company whatsoever with respect to, in any manner,
the Buyer, its purchases hereunder or any aspect of this Agreement or the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of the Buyer, to make any press release or
other public disclosure (including any filings with the SEC) with respect to
such transactions as is required by applicable law and regulations; provided
however, the Company and its counsel must consult with the Buyer in connection
with any such press release or other public disclosure at least one (1) Trading
Day prior to its release.  The Company
agrees and acknowledges that its failure to fully comply with this provision
constitutes a material adverse effect on its ability to perform its obligations
under this Agreement.

 

(j)            Further Assurances.  Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.

 

(k)           Termination.  This Agreement may be terminated only as
follows:

 

(i)            By
the Buyer any time an Event of Default exists without any liability or payment
to the Company.  However, if pursuant to
or within the meaning of any Bankruptcy Law, the Company commences a voluntary
case or any Person commences a proceeding against the Company, a Custodian is
appointed for the Company or for all or substantially all of its property, or
the Company makes a general assignment for the benefit of its creditors, (any
of which would be an Event of Default as described in Sections 9(f), 9(g) and
9(h) hereof) this Agreement shall automatically terminate without any liability
or payment to the Company without further action or notice by any Person.  No such termination of this Agreement under
this Section 11(k)(i) shall affect the Company’s or the Buyer’s obligations under
this Agreement with respect to pending purchases and the Company and the Buyer
shall complete their respective obligations with respect to any pending
purchases under this Agreement.

 

(ii)           In
the event that the Commencement shall not have occurred, the Company shall have
the option to terminate this Agreement for any reason or for no reason without
liability of any party to any other party.

 

(iii)          In
the event that the Commencement shall not have occurred on or before September
30, 2006, due to the failure to satisfy the conditions set forth in Sections 6
and 7 above with respect to the Commencement (and the nonbreaching party’s
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement at the close of business on such
date or thereafter without liability of any party to any other party.

 

(iv)          If
by the Maturity Date (including any extension thereof by the Company pursuant
to Section 10(g) hereof), for any reason or for no reason the full Available
Amount under this Agreement has not been purchased as provided for in Section 1
of this Agreement, by the Buyer without any liability or payment to the
Company.

 

(v)          
At any time after the Commencement Date, the Company shall have the option to
terminate this Agreement for any reason or for no reason by delivering notice
(a “Company Termination Notice”) to the Buyer electing to terminate this
Agreement without any liability or 

 

 

payment
to the Buyer.  The Company Termination
Notice shall not be effective until one (1) Trading Day after it has been
received by the Buyer.

 

(vi)          This
Agreement shall automatically terminate on the date that the Company sells and
the Buyer purchases the full Available Amount as provided herein, without any
action or notice on the part of any party.

 

Except
as set forth in Sections 11(k)(i) (in respect of an Event of Default under
Sections 9(f), 9(g) and 9(h)) and 11(k)(vi), any termination of this Agreement
pursuant to this Section 11(k) shall be effected by written notice from the
Company to the Buyer, or the Buyer to the Company, as the case may be, setting
forth the basis for the termination hereof. 
The representations and warranties of the Company and the Buyer
contained in Sections 2 and 3 hereof, the indemnification provisions set forth
in Section 8 hereof and the agreements and covenants set forth in Section 11, shall survive the Commencement and any termination of
this Agreement.  No termination of this
Agreement shall affect the Company’s or the Buyer’s rights or obligations (i)
under the Registration Rights Agreement which shall survive any such
termination or (ii) under this Agreement with respect to pending purchases and
the Company and the Buyer shall complete their respective obligations with
respect to any pending purchases under this Agreement.

 

(l)            No Financial Advisor, Placement
Agent, Broker or Finder.  The Company
acknowledges that it has retained William Blair and Company, L.L.C. as
financial advisor in connection with the transactions contemplated hereby.  The Company represents and warrants to the
Buyer that it has not engaged any other financial advisor, placement agent,
broker or finder in connection with the transactions contemplated hereby.  The Buyer represents and warrants to the
Company that it has not engaged any financial advisor, placement agent, broker
or finder in connection with the transactions contemplated hereby.  The Company shall be responsible for the
payment of any fees or commissions, if any, of any financial advisor, placement
agent, broker or finder relating to or arising out of the transactions
contemplated hereby.  The Company shall
pay, and hold the Buyer harmless against, any liability, loss or expense
(including, without limitation, attorneys’ fees and out of pocket expenses)
arising in connection with any such claim.

 

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

 

(n)           Remedies, Other Obligations,
Breaches and Injunctive Relief.  The
Buyer’s remedies provided in this Agreement shall be cumulative and in addition
to all other remedies available to the Buyer under this Agreement, at law or in
equity (including a decree of specific performance and/or other injunctive
relief), no remedy of the Buyer contained herein shall be deemed a waiver of
compliance with the provisions giving rise to such remedy and nothing herein
shall limit the Buyer’s right to pursue actual damages for any failure by the
Company to comply with the terms of this Agreement.  The Company acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the Buyer and that the
remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the Buyer shall be entitled, in
addition to all other available remedies, to an injunction restraining any breach,
without the necessity of showing economic loss and without any bond or other
security being required.

 

(0)           Enforcement Costs.  If: (i) this Agreement is placed by the Buyer
in the hands of an attorney for enforcement or is enforced by the Buyer through
any legal proceeding; or (ii) an attorney is retained to represent the Buyer in
any bankruptcy, reorganization, receivership or other proceedings 

 

 

affecting
creditors’ rights and involving a claim under this Agreement; or (iii) an
attorney is retained to represent the Buyer in any other proceedings whatsoever
in connection with this Agreement, then the Company shall pay to the Buyer, as
incurred by the Buyer, all reasonable costs and expenses including attorneys’
fees incurred in connection therewith, in addition to all other amounts due hereunder.
Notwithstanding the foregoing, in the case of subparagraphs “i” and “iii” Buyer
shall not be entitled to such reasonable costs and expenses unless the Buyer is
the prevailing party.

 

(p)           Failure or Indulgence Not Waiver.  No failure or delay in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.

 

*     *    
*     *     *

 

 

IN
WITNESS WHEREOF, the Buyer and the Company have caused this
Common Stock Purchase Agreement to be duly executed as of the date first
written above.

 

	
   

  	
   

  	
   

  
	
   

  	
  THE COMPANY:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  AKSYS, LTD.

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William C. Dow

  	
   

  
	
   

  	
  Name:

  	
  William C. Dow

  
	
   

  	
  Title:

  	
  President and CEO

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  BUYER:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  FUSION CAPITAL FUND II, LLC

  	
   

  
	
   

  	
  BY:
  FUSION CAPITAL PARTNERS, LLC

  
	
   

  	
  BY: SGM HOLDINGS CORP.

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Steven G. Martin

  	
   

  
	
   

  	
  Name: Steven G. Martin

  
	
   

  	
  Title: President

  
							

 

 

Execution Copy

1/13/2006

 

DISCLOSURE SCHEDULES

 

The following Disclosure Schedules relate to that
certain Common Stock Purchase Agreement between AKSYS, LTD. and FUSION CAPITAL
FUND II, LLC dated as of January 13, 2006 (the “Agreement”).  Capitalized terms used but not defined herein
shall have the same meanings ascribed to them in the Agreement.  The headings in the following sections of the
Disclosure Schedules are for reference only and shall not affect the
disclosures contained therein.  Nothing
in the following Disclosure Schedules is intended to broaden the scope of any
representation or warranty contained in the Agreement or to create any covenant
on the part of the Company or the Buyer. 
Inclusion of any item in the Disclosure Schedules does not represent a
determination by the Company or the Buyer that such item is material nor shall
it be deemed to establish a standard of materiality (it being the intent that
neither the Company nor the Buyer shall not be penalized for having disclosed
more than they may be required to disclose by the terms of the Agreement).

 

AKSYS, LTD.; CONFIDENTIAL

 

 

SCHEDULE 3(a)

OF

THE DISCLOSURE SCHEDULES

 

[Subsidiaries]

 

	
  Subsidiary

  	
   

  	
  State/Jurisdiction
  of Incorporation

  
	
   

  	
   

  	
   

  
	
  Aksys Healthcare Ltd.

  	
   

  	
  United Kingdom*

  
	
  Aksys International Inc.

  	
   

  	
  Delaware

  
	
  Aksys Japan, K.K.

  	
   

  	
  Japan*

  

 

* Indirect wholly owned subsidiaries.

 

 

SCHEDULE 3(c)

OF

THE DISCLOSURE SCHEDULES

 

[Capitalization]

 

1.  Registration Rights
Agreement, dated as of April 7, 2000, by and among the Company and the
investors named in the signature pages thereto.

 

2.  Registration Rights
Agreement, dated as of August 14, 2000, by and among the Company and the
investors named in the signature pages thereto.

 

3.  Registration Rights
Agreement, dated as of December 19, 2001, by and among the Company and the
investors named in the signature pages thereto.

 

4.  Registration Rights
Agreement, dated as of May 7, 2002, by and among the Company and the investors
named in the signature pages thereto.

 

5.  Registration Rights
Agreement, dated as of October 15, 2002 by and between the Company and
Kingsbridge Capital Limited.

 

6.  Amended Registration Rights
Agreement, dated as of January 22, 2003 by and between the Company and
Kingsbridge Capital Limited.

 

7.  Registration Rights
Agreement, dated as of February 23, 2004 by and among the Company, Durus Life
Sciences Master Fund Ltd. and Artal Long Biotech Portfolio LLC.

 

8.  See attached Schedule 3(c)(1)

 

10.  $15,788,000 Unsecured
Subordinated Promissory Note issued by the Company in favor of Durus Life Sciences
Master Fund, dated February 26, 2004.

 

11.  $322,000 Unsecured
Subordinated Promissory Note issued by the Company in favor of Artal Long
Biotech Portfolio LLC, dated February 26, 2004.

 

12.  Settlement and Mutual
Release, dated February 23, 2004, among the Company, Durus Life Sciences Master
Fund Ltd., Scott Sarcane and Artal Long Biotech Portfolio LLC (the “Settlement
Agreement”).

 

13.  Rights Agreement, dated as
of October 28, 1996, by and between the Company and First Chicago Trust Company
of New York (the “Rights Agreement”).

 

 

 

Schedule
3(c)(1)

 

Aksys,
Ltd.

 

Detail
of Outstanding Options, Warrants and Other Share Commitments

12-Jan-06

 

	
  Options
  available for issuance under employee and director stock option program

  	
   

  	
  541,096

  	
   

  
	
  Options granted not exercised under employee and
  director stock option program

  	
   

  	
  2,239,672

  	
   

  
	
  Shares available for issuance under the employee
  stock purchase program

  	
   

  	
  26,118

  	
   

  
	
  Outstanding warrants

  	
   

  	
  1,635,400

  	
   

  
	
  Total

  	
   

  	
  4,442,286

  	
   

  

 

 

SCHEDULE 3(e)

OF

THE DISCLOSURE SCHEDULES

 

[Conflicts]

 

1.  The
Company received notice on November 14, 2005 from the Nasdaq indicating that
the Company does not currently meet the requirements set forth in Maintenance
Standard 1.  The notice specified that
the Company had failed to comply with the minimum $10 million of stockholders’
equity required by Maintenance Standard 1. 
In addition, the November 14, 2005 notification indicated that the
Company did not meet the alternative requirements of Maintenance Standard 2
relating to market value of list security (and related assets and revenue
tests), market value of publicly held shares and bid price.

 

2.  The
Company received notice on December 16, 2005 from the Nasdaq that for the
previous 30 consecutive business days the bid price of the Company’s common
stock had closed below the minimum $1.00 per share required by Marketplace Rule
4450(a)(5).

 

3.  The Company received notice
on December 27, 2005 from the Nasdaq indicating that the Nasdaq had denied the
Company’s request for continued listing on The Nasdaq National Market. 
The December 27, 2005 letter from the Nasdaq indicates that the Company’s
securities will be delisted from The Nasdaq National Market unless the Company
requests a hearing in accordance with Marketplace Rule 4800 Series. 
The Company has requested a hearing before the Nasdaq Listing Qualifications
Panel to review the Nasdaq staff’s determination.  The Company’s hearing
request will stay the de-listing until the hearing process is completed.

 

4.  The Company received notice
on January 3, 2006 from the Nasdaq indicating that the Nasdaq had received the
Company’s request to appeal the Nasdaq Listing Qualification Staff’s
determination to de-list the Company’s securities from the Nasdaq National
Market.  The January 3, 2006 letter
indicates that a hearing has been scheduled regarding the determination to
de-list the Company’s securities on February 2, 2006.

 

5.  The Company’s Restated
Certificate of Incorporation may need to be amended for this transaction as the
Company has only 50,000,000 shares of authorized common stock under its
Restated Certificate of Incorporation.

 

6.  Shareholder approval may be
required for the transaction under the Nasdaq’s Marketplace Rules.  A Notification of Listing of Additional
Shares will need to be filed with the Nasdaq in connection with this
transaction.

 

7.  The PHD System is
manufactured by Delphi Medical Systems Corporation (“Delphi”).  On October
8, 2005, Delphi and its parent corporation filed a voluntary petition for
business reorganization under chapter 11 of the U.S. Bankruptcy
Code.   The ultimate effect of the bankruptcy on our relationship
with Delphi is unclear.

 

 

SCHEDULE 3(f)

OF

THE DISCLOSURE SCHEDULES

 

[SEC Documents; Financial
Statements]

 

1.  The
Company has received an October 17, 2005 letter from the Securities and
Exchange Commission relating to the Company’s filing on Form 10-K for the year
ended December 31, 2004 filed March 16, 2005 and Form 10-Q filing for the
quarterly period ended June 30, 2005 File No. 000-28290.

 

2.  The
Company has received a November 25, 2005 letter from the Securities and
Exchange Commission relating to the Company’s filing on Form 10-K for the year
ended December 31, 2004 filed March 16, 2005.

 

3.  The
Company received notice on November 14, 2005 from the Nasdaq indicating that
the Company does not currently meet the requirements set forth in Maintenance
Standard 1.  The notice specified that
the Company had failed to comply with the minimum $10 million of stockholders’
equity required by Maintenance Standard 1. 
In addition, the November 14, 2005 notification indicated that the
Company did not meet the alternative requirements of Maintenance Standard 2
relating to market value of list security (and related assets and revenue
tests), market value of publicly held shares and bid price.

 

4.  The
Company received notice on December 16, 2005 from the Nasdaq that for the
previous 30 consecutive business days the bid price of the Company’s common
stock had closed below the minimum $1.00 per share required by Marketplace Rule
4450(a)(5).

 

5.  The
Company received notice on December 27, 2005 from the Nasdaq indicating that
the Nasdaq had denied the Company’s request for continued listing on The Nasdaq
National Market.  The December 27, 2005 letter from the Nasdaq
indicates that the Company’s securities will be delisted from The Nasdaq
National Market unless the Company requests a hearing in accordance with
Marketplace Rule 4800 Series.  The Company has requested a hearing
before the Nasdaq Listing Qualifications Panel to review the Nasdaq staff’s
determination.  The Company’s hearing request will stay the de-listing
until the hearing process is completed.

 

6.  The Company received notice
on January 3, 2006 from the Nasdaq indicating that the Nasdaq had received the
Company’s request to appeal the Nasdaq Listing Qualification Staff’s
determination to de-list the Company’s securities from the Nasdaq National
Market.  The January 3, 2006 letter
indicates that a hearing has been scheduled regarding the determination to
de-list the Company’s securities on February 2, 2006.

 

 

SCHEDULE 3(g)

OF

THE DISCLOSURE SCHEDULES

 

[Absence of Certain
Changes]

 

1.  On December 6, 2005, the
Company issued a press release announcing that it has undertaken a plan to
reduce costs and provide a more focused resource allocation.  The Company’s cost reduction plan included a
total reduction in headcount of approximately 44 employees.  The majority of the employee terminations
were completed on December 6, 2005.  The
Company incurred a cash expense of approximately $300,000 for one time
termination benefits.

 

2.  The Company will need to
obtain financing above and beyond the Fusion facility to fund its operations.

 

 

SCHEDULE 3(h)

OF

THE DISCLOSURE SCHEDULES

 

[Litigation]

 

1.  Collier
v. Aksys, Ltd. et al., District of Connecticut, Civil Action No. 3:04-CV-01232

In July 2004, an alleged short-seller of Aksys stock filed a lawsuit
against the Durus funds and the Company in the Federal District for the State
of Connecticut (Collier v. Aksys, Ltd. et
al., District of Connecticut, Civil Action No. 3:04-CV-01232). 
The lawsuit is a purported class action filed on behalf of all short-sellers of
the Company’s stock during the period of January 1, 2003 through July 24,
2003.  The Company was voluntarily
dismissed as a party from this case and was not named as a defendant in the
plaintiff’s subsequent amended complaint. 
In late 2005, the United States District Court in Connecticut dismissed
Collier’s claims as to all parties. 
Collier has filed an appeal with the United States Court of Appeals for
the Second Circuit.  Aksys is not a party
to those proceedings.

 

2.  The Company received notice on November 14, 2005 from the Nasdaq
indicating that the Company does not currently meet the requirements set forth
in Maintenance Standard 1.  The notice
specified that the Company had failed to comply with the minimum $10 million of
stockholders’ equity required by Maintenance Standard 1.  In addition, the November 14, 2005
notification indicated that the Company did not meet the alternative
requirements of Maintenance Standard 2 relating to market value of list
security (and related assets and revenue tests), market value of publicly held
shares and bid price.

 

3.  The
Company received notice on December 16, 2005 from the Nasdaq that for the
previous 30 consecutive business days the bid price of the Company’s common
stock had closed below the minimum $1.00 per share required by Marketplace Rule
4450(a)(5).

 

4.  The
Company received notice on December 27, 2005 from the Nasdaq indicating that
the Nasdaq had denied the Company’s request for continued listing on The Nasdaq
National Market.  The December 27, 2005 letter from the Nasdaq
indicates that the Company’s securities will be delisted from The Nasdaq National
Market unless the Company requests a hearing in accordance with Marketplace
Rule 4800 Series.  The Company has requested a hearing before the
Nasdaq Listing Qualifications Panel to review the Nasdaq staff’s
determination.  The Company’s hearing request will stay the de-listing
until the hearing process is completed.

 

5.  The Company received notice
on January 3, 2006 from the Nasdaq indicating that the Nasdaq had received the
Company’s request to appeal the Nasdaq Listing Qualification Staff’s
determination to de-list the Company’s securities from the Nasdaq National
Market.  The January 3, 2006 letter
indicates that a hearing has been scheduled regarding the determination to
de-list the Company’s securities on February 2, 2006.

 

 

SCHEDULE 3(k)

OF

THE DISCLOSURE SCHEDULES

 

[Intellectual Property]

 

1.  On November 1, 2005, the Company entered into
a Research, Development and License Agreement (the “Research, Development
and License Agreement”) with DEKA Products Limited Partnership and DEKA
Research and Development Corp. (“DEKA”).

 

Under the
Research, Development and License Agreement, DEKA will develop a next
generation product for the Company consisting of certain hemodialysis equipment
and related solution preparation processes.  DEKA will be compensated for
its development work on a cost plus basis, which will be generally determined
based upon DEKA’s costs incurred and hours spent on the project.  The Company made a payment to DEKA of
approximately $950,000 for services performed through December 10,
2005.  Thereafter,  the Company is
required to make payments to DEKA of approximately $200,000 per month, again
subject to periodic reconciliation to DEKA’s actual costs incurred and hours
spent pursuant to the project.  The
Company retains the right to terminate this development work at any time. 
In addition, the Company will pay DEKA royalties based upon a percentage of net
sales of products developed under the Research, Development and License
Agreement (the “Product”) with the applicable percentage based upon the
number of patients using such Product.

 

DEKA will own the
intellectual property under the Research, Development and License Agreement,
except that the Company shall own title to any and all intellectual property
created and developed solely by the Company independent of any assistance from
DEKA as a result of the Company’s own development efforts.  Under the
Research, Development and License Agreement DEKA grants to the Company a
license to use certain patents and technical information related to hemodialysis
and solution preparation processes.  This
license may be terminated upon the occurrence of certain events specified in
the Research, Development and License Agreement.

 

The Research,
Development and License Agreement provides for the issuance to DEKA of warrants
to purchase 350,000 shares of the Company’s common stock (the “Warrants”).  The Warrants become exercisable upon
achievement of the following milestones: (i) 100,000 warrant shares shall
vest upon a concept freeze of the Product (ii) 100,000 warrant shares
shall vest upon a prototype being built for the Product (iii) 100,000
warrant shares shall vest upon transfer of the Product to a manufacturer and
(iv) 50,000 warrant shares shall vest upon commercial shipment of the
Product.  The Warrants have a term of ten years.  If specified dates which are targeted for
reaching milestones in the Research, Development and License Agreement are not
achieved warrants to purchase up to 120,000 shares of the Company’s common
stock may be forfeited by DEKA.

 

The exercise price of the Warrants is $1.62 per share, the average of
the high and low trading price of the Company’s common stock on the Nasdaq
National Market System on the date of execution of the Research, Development
and License Agreement.

 

2.  On April 1, 1993, the Company
entered into a License Agreement (the “Twardowski License”) with Dr.
Zbylut Twardowski granting to us worldwide exclusive license to the patent
filed on August 21, 1991 entitled “Artificial Kidney for Frequent (Daily)
Hemodialysis” expiring August 21, 2011, and several subsequent patents (the “Twardowski
Patents”).  The Twardowski Patents
relate to an artificial kidney intended to provide frequent (daily) home
hemodialysis.  The Twardowski License
continues for as long as the Twardowski Patents remain in effect.  The Twardowski License provides for royalty
payments to Dr. Twardowski based on the revenue the Company receives from the
sale or lease of the licensed product, with certain minimum semiannual royalty
payments.  If the Company fails to make
any such minimum royalty payment, Dr. Twardowski has the option to convert the
Twardowski License to a non-exclusive license.

 

 

3.  On March 11, 1996, the
Company entered into a License Agreement (the “Allergan License”) with
Allergan, Inc. for the use of a U.S. patent entitled “Pressure Transducer
Magnetically-Coupled Interface Complementing Minimal Diaphragm Movement During
Operation” issued February 28, 1995, which expires on December 16, 2013, and
its foreign counterparts (the “Allergan Patent”).  The Company has exclusive worldwide rights to
the patented technology, limited to the field of use of kidney dialysis
machines and methods.  The Allergan
License continues for as long as the Allergan Patent remains in effect and
provides for royalty payments to Allergan based on manufacturing of the PHD
System, which incorporates the patented technology.  Royalty payments are to be made quarterly,
with minimum annual royalty payments beginning in 1998.  If the Company fails to pay the full minimum
annual royalties, the License Agreement will terminate.  If the Company pays at least half of the
minimum annual royalties but do not pay such royalties in full, the License
Agreement shall be converted to a non-exclusive license.

 

 

SCHEDULE 3(m)

OF

THE DISCLOSURE SCHEDULES

 

[Title]

 

1.  Liens
imposed by law that are incurred in the ordinary course of business and do not
secure indebtedness for borrowed money, such as carriers’, warehousemen’s,
mechanics’, landlords’, materialmen’s, employees’, laborers’, employers’,
banks’, repairmen’s and other like liens, in each case, for sums not yet due or
that are being contested in good faith by appropriate proceedings and that are
appropriately reserved for in accordance with GAAP if required by GAAP.

 

2.  Liens
for taxes, assessments and governmental charges not yet due or payable or
subject to penalties for nonpayment or that are being contested in good faith
and that are appropriately reserved for in accordance with GAAP if required by
GAAP.

 

3.  Liens on assets acquired or
constructed after the date hereof securing purchase money indebtedness and
capital lease obligations.

 

4.  Zoning restrictions,
easements, rights-of-way, restrictions on the use of real property, other
similar encumbrances on real property incurred in the ordinary course of
business and minor irregularities of title to real property that do not
individually or in the aggregate materially impair the value or marketability
of the real property affected thereby or the occupation, use and enjoyment with
the ordinary course of business of the Company and its subsidiaries at such
real property.

 

5.  Liens occurring solely by the
filing of a UCC statement, which filing has not been consented to by the
Company or any subsidiary of the Company.

 

 

SCHEDULE 3(q)

OF

THE DISCLOSURE SCHEDULES

 

[Transactions with
Affiliates]

 

Nothing to DiscloseExhibit 4.01

 

	
  CUSIP NO. 52517PD81

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  REGISTERED

  	
   

  	
  PRINCIPAL
  AMOUNT: $5,000,000

  
	
  No. R-1

  	
   

  	
   

  

 

LEHMAN BROTHERS HOLDINGS INC.

 

MEDIUM-TERM NOTE, SERIES H

 

FX DUAL CURRENCY NOTE
DUE APRIL 12, 2006

 

THIS NOTE IS A GLOBAL SECURITY WITHIN THE MEANING OF
THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE
DEPOSITORY OR A NOMINEE OF THE DEPOSITORY. 
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY (55 WATER STREET, NEW YORK, NEW YORK) TO THE
COMPANY (AS DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE
OR PAYMENT AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE &
CO. OR SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY AND ANY PAYMENT IS MADE TO CEDE & CO., ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN
INTEREST HEREIN.

 

UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
NOTES IN CERTIFICATED FORM (A “CERTIFICATED NOTE”), THIS GLOBAL SECURITY MAY NOT
BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE
DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER
NOMINEE OF THE DEPOSITORY OR BY THE DEPOSITORY OR ANY SUCH NOMINEE TO A
SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY.

 

 

LEHMAN BROTHERS HOLDINGS INC., a corporation duly
organized and existing under the laws of the State of Delaware (herein called
the “Company,” which term includes any successor corporation under the
Indenture referred to on the reverse hereof), for value received, hereby
promises to pay to CEDE & Co., or registered assigns, on the Maturity
Date, an amount equal to the Redemption Amount. 
The Notes do not bear interest. No payments on the Notes will be made
until the Maturity Date.

 

The “Maturity Date” is April 12, 2006, or if such
day is not a Business Day, on the next following Business Day.

 

The “Redemption Amount” is the amount equal to the
product of (A) the sum of the principal amount of the Notes plus the
Interest Amount times (B) the Conversion
Rate, divided by the Settlement Rate.

 

The “Interest Amount” is the product of the principal
amount of the Notes times 16.00%
per annum times the Day Count Fraction.

 

The “Day Count Fraction” is computed on the basis of a
360-day year and the actual number of days elapsed.

 

The
“Conversion Rate” is 2.2710.

 

The
“Settlement Rate” is the Reference Exchange Rate on the Valuation Date,
observed as per the Settlement Rate Option, provided that the Settlement Rate
shall not be lower than the Settlement Rate Floor.

 

The
“Settlement Rate Floor” is 2.1900.

 

The
“Reference Exchange Rate” is the spot exchange rate for the Reference Currency
expressed as the number of units of Reference Currency per 1 U.S. Dollar (USD).

 

The
“Reference Currency” is the Brazilian Real (BRL).

 

The
“Settlement Rate Option” is the Brazilian Real/U.S. Dollar offered rate for
U.S. Dollars, expressed as the amount of Brazilian Reals per one U.S. Dollar,
for settlement in two Business Days reported by the Banco Central do Brasil on
SISBACEN Data System under transaction code PTAX-800 (“Consulta de Cambio” or
Exchange Rate Inquiry), Option 5 (“Cotacoes para Contabilidade” or Rates for
Accounting Purposes), which appears on Reuters Screen BRFR Page under the
caption “Dolar PTAX” at approximately 6:30 pm Sao Paolo time on the Valuation
Date.

 

The
“Valuation Date” is April 5, 2006, or if such day is not a Valuation
Business Day, the next succeeding Valuation Business Day.

 

Upon the occurrence of a Disruption Event with
respect to the Reference Currency on any day during the term of the Notes, the Calculation Agent shall determine the Redemption
Amount payable on the Maturity Date in good faith and in a commercially
reasonable manner.

 

2

 

A “Disruption Event” means any of the following
events (other than a Price Source Unavailability Event), as determined in good
faith by the Calculation Agent:

 

(A)                              the occurrence and/or
existence of an event on any day that has the effect of preventing or making
impossible the delivery of USD from accounts inside Brazil to accounts outside
Brazil; or

 

(B)                                the occurrence and/or existence of any event
(other than those set forth in (A) above or those constituting a Price
Source Unavailability Event) with respect to the Reference Currency that prevents
or makes impossible (x) the Calculation Agent’s ability to calculate the
Redemption Amount, (y) the Company’s fulfillment of its obligations under the
notes, or (z) the ability of the Company or any of its affiliates through which
it hedges its position under the Notes to hedge such position or to unwind all or a material portion of such hedge.

 

Upon the occurrence of a Price Source Unavailability
Event, the Settlement Rate will be determined in accordance with the Fallback
Rate Observation Methodology.

 

A “Price Source Unavailability Event” means, as determined in good
faith by the Calculation Agent, the Settlement Rate being unavailable for the Reference Currency, or the occurrence of an event
(other than an event constituting a Disruption Event) that generally makes it
impossible to obtain the Settlement Rate, on the Valuation Date.

 

The “Fallback
Rate Observation Methodology” means that the Settlement Rate will be calculated
on the basis of the arithmetic mean of the applicable spot quotations received
by the Calculation Agent at approximately 10:00 a.m., New York City time,
on the Valuation Business Day next succeeding the Valuation Date for the
purchase or sale for deposits in the Reference Currency by the Reference
Banks.  If fewer than three Reference
Banks provide spot quotations then the Settlement Rate will be determined by
the Calculation Agent in good faith and in a commercially reasonable manner.

 

The “Reference
Banks” means the New York offices of three leading banks engaged in the
interbank market selected in the sole discretion of the Calculation Agent.

 

A “Valuation Business Day”,
with respect to the Reference Currency, is  any day, other than a
Saturday or Sunday, that is neither a legal holiday nor a day on which
commercial banks are authorized or required by law, regulation or executive
order to close (including for dealings in foreign exchange in accordance with
the practice of the foreign exchange market) in Sao Paolo, Brasilia or Rio de
Janeiro.

 

A “Business Day”, notwithstanding any
provision in the Indenture, is any day that is not is not a Saturday or Sunday
and that is not a day on which banking institutions in New York City generally
are authorized or obligated by law or executive order to be closed.

 

Except
as provided below, the Redemption Amount may, at the option of the Company, be
made by check mailed to the person entitled thereto at such person’s address as
it appears on the registry books of the Company.

 

3

 

Payment
of the Redemption Amount will be made in immediately available funds upon
surrender of this Note at the corporate trust office or agency of the Trustee
(or any duly appointed Paying Agent) maintained for that purpose in the Borough
of Manhattan, New York City (the “Corporate Trust Office”), provided that this
Note is presented to the Trustee (or any such Paying Agent) in time for the Trustee
(or any such Paying Agent) to make such payments in such funds in accordance
with its normal procedures.

 

The
Company will pay any administrative costs imposed by banks in making payments
in immediately available funds, but any tax, assessment or governmental charge
imposed upon payments hereunder, including, without limitation, any withholding
tax, will be borne by the Holder hereof.

 

References
herein to “U.S. dollars” or “U.S.$” or “$” are to the coin or currency of the
United States as at the time of payment is legal tender for the payment of
public and private debts.

 

REFERENCE
IS HEREBY MADE TO THE FURTHER PROVISIONS OF THIS NOTE SET FORTH ON THE REVERSE
HEREOF.  SUCH FURTHER PROVISIONS SHALL
FOR ALL PURPOSES HAVE THE SAME EFFECT AS IF SET FORTH AT THIS PLACE.

 

This
Note shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by the Trustee
under the Indenture.

 

4

 

IN
WITNESS WHEREOF, Lehman Brothers Holdings Inc. has caused this instrument to be
signed by its Chairman of the Board, its President, its Vice Chairman, its
Chief Financial Officer, one of its Vice Presidents or its Treasurer, by manual
or facsimile signature under its corporate seal, attested by its Secretary or
one of its Assistant Secretaries by manual or facsimile signature.

 

Dated:  January 12, 2006

 

	
  [SEAL]

  	
  LEHMAN BROTHERS
  HOLDINGS INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Attest:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  

 

 

TRUSTEE’S CERTIFICATE OF AUTHENTICATION

 

This is one of the
Securities of the series designated herein referred to in the within-mentioned
Indenture.

 

CITIBANK, N.A.

  as Trustee

 

	
  By:

  	
   

  	
   

  
	
   

  	
  Authorized
  Officer

  	
   

  

 

5

 

[REVERSE OF NOTE]

 

LEHMAN BROTHERS HOLDINGS INC.

MEDIUM-TERM NOTES, SERIES H

FX DUAL CURRENCY NOTE
DUE APRIL 12, 2006

 

Section 1.  General.  This Note is one of a duly authorized series
of Notes of the Company designated as the Medium-Term Notes, Series H, FX
Dual Currency Note (herein called the “Notes”).  The Notes are one of an indefinite
number of series of debt securities of the Company (collectively, the “Securities”)
issued or issuable under and pursuant to an indenture dated as of September 1,
1987, as amended and supplemented (the “Indenture”), duly executed and
delivered by the Company and Citibank, N.A., as Trustee (herein called the “Trustee”),
to which Indenture and all indentures supplemental thereto reference is hereby
made for a description of the rights, limitations of rights, obligations,
duties and immunities thereunder of the Trustee, the Company and the holders of
the Securities.  The separate series of
Securities may be issued in various aggregate principal amounts, may mature at different
times, may bear interest (if any) at different rates, may be subject to
different redemption provisions or repurchase rights (if any), may be subject
to different sinking, purchase or analogous funds (if any), may be subject to
different covenants and Events of Default and may otherwise vary as in the
Indenture provided.

 

Section 2.  Principal Amount for Indenture Purposes.  For the purpose of determining whether
Holders of the requisite amount of Notes of this series outstanding under the
Indenture have made a demand, given a notice or waiver or taken any other
action, the principal amount of this Note will be deemed to be the principal
amount of this Note then outstanding.

 

Section 3.  Modification and Waivers.  The Indenture contains provisions permitting
the Company and the Trustee, with the consent of the Holders of not less than 66-2/3%
in aggregate principal amount of each series of the Securities at the time
Outstanding to be affected, evidenced as in the Indenture provided, to execute
supplemental indentures adding any provisions to or changing in any manner or
eliminating any of the provisions of the Indenture or of any supplemental
indenture or modifying in any manner the rights of the holders of the
Securities of all such series; provided, however, that no such supplemental
indenture shall, among other things, (i) change the fixed maturity of any
Security, or reduce the Redemption Amount or the principal amount thereof, or
reduce the rate or extend the time of payment of interest thereon or reduce any
premium or other amount payable on redemption, or make the Redemption Amount or
the principal amount thereof, premium or other amount payable, if any, or
interest thereon payable in any coin or currency other than that hereinabove
provided, without the consent of the Holder of each Security so affected, or (ii) change
the place of payment on any Security, or impair the right to institute suit for
payment on any Security, or reduce the aforesaid percentage of Securities, the
holders of which are required to consent to any such supplemental indenture,
without the consent of the holders of each Security so affected.  It is also provided in the Indenture that,
prior to any declaration accelerating the maturity of any series of Securities,

 

 

the holders of a majority
in aggregate principal amount of the Securities of such series Outstanding may
on behalf of the holders of all the Securities of such series waive any past
default or Event of Default under the Indenture with respect to such series and
its consequences, except a default in the payment of interest, if any, on the
Redemption Amount or the principal amount, or premium, if any, on any of the
Securities of such series, or in the payment of any sinking fund installment or
analogous obligation with respect to Securities of such series.  Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
holders and owners of this Note and any Notes of this series which may be
issued in exchange or substitution herefor, irrespective of whether or not any
notation thereof is made upon this Note or such other Notes of this series.

 

Section 4.  Obligations Unconditional.  No reference herein to the Indenture and no
provisions of this Note or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional, to pay the
Redemption Amount or the principal amount on this Note at the place, at the
respective times, at the rate, and in the coin or currency herein prescribed.

 

Section 5.  Defeasance.  The Indenture contains provisions for the
discharge of the Indenture and defeasance at any time of the indebtedness on
this Note upon compliance by the Company with certain conditions set forth
therein, which provisions apply to this Note.

 

Section 6.  Authorized Form and Denominations.  The Notes of this series are issuable in
registered form, without coupons.  Each
Note will be issued initially as either a Global Security or a Certificated
Note, at the option of the Company, in denominations of $100,000 or whole
multiples of $100,000, either at the office or agency to be designated and
maintained by the Company for such purpose in the Borough of Manhattan, New
York City, pursuant to the provisions of the Indenture or at any of such other
offices or agencies as may be designated and maintained by the Company for such
purpose pursuant to the provisions of the Indenture, and in the manner and
subject to the limitations provided in the Indenture, but without the payment of
any service charge, except for any tax or other governmental charges imposed in
connection therewith.  Notes of this
series are exchangeable for a like aggregate principal amount of Notes of this
series of a different authorized denomination, except that Global Securities
will not be exchangeable for Certificated Notes of this series.

 

Section 7.  Registration of Transfer.  As provided in the Indenture and subject to
certain limitations as therein set forth, the transfer of this Note is
registrable in the Security Register, upon surrender of this Note for
registration of transfer, at the Corporate Trust Office or agency in a Place of
Payment for this Note, duly endorsed by, or accompanied by a written instrument
of transfer in form satisfactory to the Company and the Security Registrar
requiring such written instrument of transfer duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more
new Notes of this series, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.

 

If at
any time the Depository notifies the Company that it is unwilling or unable to
continue as Depository or if at any time the Depository shall no longer be
eligible under the Indenture, the Company shall appoint a successor
Depository.  If a successor Depository
for the

 

 

Notes of this series is
not appointed by the Company within 90 days after the Company receives such
notice or becomes aware of such ineligibility, the Company will issue, and the
Trustee will authenticate and deliver, Notes of this series in definitive form
in an aggregate principal amount equal to the principal amount of this Note.

 

No
service charge shall be made for any such registration of transfer or exchange,
but the Company may require payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith.

 

Prior
to due presentment of this Note for registration of transfer, the Company, the
Trustee and any agent of the Company or the Trustee may treat the person in
whose name this Note is registered as the owner hereof for all purposes, and
neither the Company nor the Trustee nor any agent of the Company or of the
Trustee shall be affected by any notice to the contrary.

 

Section 8.  Events of Default.  If an Event of Default with respect to Notes
of this series shall occur and be continuing, the amount declared due and
payable upon any acceleration of the Notes will be determined by the
Calculation Agent and will equal the Redemption Amount calculated as though the
maturity of the Notes were the date of early repayment in the manner and with
the effect provided in the Indenture. 
The amount payable to the Holder hereof upon any acceleration permitted
under the Indenture will be equal to the Redemption Amount calculated as though
the date to which the maturity has been accelerated were the Valuation Date as
determined by the Calculation Agent.

 

Section 9.  No Recourse Against Certain Persons.  No recourse for the payment of the Redemption
Amount or for any claim based hereon or otherwise in respect hereof, and no
recourse under or upon any obligation, covenant or agreement of the Company in
the Indenture or any Indenture supplemental thereto or in any Note, or because
of the creation of any indebtedness represented thereby, shall be had against
any incorporator, stockholder, officer or director, as such, past, present or
future, of the Company or of any successor corporation, either directly or
through the Company or any successor corporation, whether by virtue of any
constitution, statute or rule of law or by the enforcement of any
assessment or penalty or otherwise, all such liability being, by the acceptance
hereof and as part of the consideration for the issue hereof, expressly waived
and released.

 

Section 10.  Tax Treatment.  The Company intends to treat and, by purchase of the Note, the Holder
hereof agrees to treat, for all tax purposes, this Note as a cash-settled
financial contract subject to the foreign currency rules of section 988
of the Internal Revenue Code of 1986, as amended, rather than as a debt
instrument.

 

Section 11.  Defined
Terms.  All terms used but not
defined in this Note are used herein as defined in the Indenture.

 

Section 12.  GOVERNING LAW.  THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

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