Document:

Unassociated Document

    
      Exhibit
        10.49

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      LAURUS
        MASTER FUND, LTD.

       

      and

       

      XFONE,
        INC.

       

      Dated:
        September 27, 2005

       

      

       

      

      
        

          
             

            
              

            

          

          
             

            
            

        

      

       

      TABLE
        OF CONTENTS

      

        
          	 	 	
                  Page

                
	
                  1

                	
                  Agreement
                    to Sell and Purchase

                	
                  1

                
	
                  2

                	
                  Fees
                    and Warrant

                	
                  1

                
	
                  3

                	
                  Closing,
                    Delivery and Payment

                	
                  2

                
	
                  3.1

                	
                  Closing

                	
                  2

                
	
                  3.2

                	
                  Delivery

                	
                  2

                
	
                  4

                	
                  Representations
                    and Warranties of the Company

                	
                  2

                
	
                  4.1

                	
                  Organization,
                    Good Standing and Qualification

                	
                  2

                
	
                  4.2

                	
                  Subsidiaries

                	
                  3

                
	
                  4.3

                	
                  Capitalization;
                    Voting Rights

                	
                  4

                
	
                  4.4

                	
                  Authorization;
                    Binding Obligations

                	
                  4

                
	
                  4.5

                	
                  Liabilities

                	
                  5

                
	
                  4.6

                	
                  Agreements;
                    Action

                	
                  5

                
	
                  4.7

                	
                  Obligations
                    to Related Parties

                	
                  6

                
	
                  4.8

                	
                  Changes

                	
                  8

                
	
                  4.9

                	
                  Title
                    to Properties and Assets; Liens, Etc

                	
                  9

                
	
                  4.1

                	
                  Intellectual
                    Property

                	
                  9

                
	
                  4.11

                	
                  Compliance
                    with Other Instruments

                	
                  10

                
	
                  4.12

                	
                  Litigation

                	
                  10

                
	
                  4.13

                	
                  Tax
                    Returns and Payments

                	
                  10

                
	
                  4.14

                	
                  Employees

                	
                  11

                
	
                  4.15

                	
                  Registration
                    Rights and Voting Rights

                	
                  12

                
	
                  4.16

                	
                  Compliance
                    with Laws; Permits

                	
                  12

                
	
                  4.17

                	
                  Environmental
                    and Safety Laws

                	
                  12

                
	
                  4.18

                	
                  Valid
                    Offering

                	
                  13

                
	
                  4.19

                	
                  Full
                    Disclosure

                	
                  13

                
	
                  4.2

                	
                  Insurance

                	
                  13

                
	
                  4.21

                	
                  SEC
                    Reports

                	
                  13

                
	
                  4.22

                	
                  Listing

                	
                  13

                
	
                  4.23

                	
                  No
                    Integrated Offering

                	
                  14

                
	
                  4.24

                	
                  Stop
                    Transfer

                	
                  14

                
	
                  4.25

                	
                  Dilution

                	
                  14

                
	
                  4.26

                	
                  Patriot
                    Act

                	
                  14

                
	
                  4.27

                	
                  ERISA

                	
                  15

                
	
                  5

                	
                  Representations
                    and Warranties of the Purchaser

                	
                  15

                
	
                  5.1

                	
                  No
                    Shorting

                	
                  15

                
	
                  5.2

                	
                  Requisite
                    Power and Authority

                	
                  15

                
	
                  5.3

                	
                  Investment
                    Representations

                	
                  16

                
	
                  5.4

                	
                  The
                    Purchaser Bears Economic Risk

                	
                  16

                
	
                  5.5

                	
                  Acquisition
                    for Own Account

                	
                  16

                
	
                  5.6

                	
                  The
                    Purchaser Can Protect Its Interest

                	
                  16

                
	
                  5.7

                	
                  Accredited
                    Investor

                	
                  17

                
	
                  5.8

                	
                  Legends

                	
                  17

                
	
                  6

                	
                  Covenants
                    of the Company

                	
                  18

                
	
                  6.1

                	
                  Stop-Orders

                	
                  18

                
	
                  6.2

                	
                  Listing

                	
                  18

                
	
                  6.3

                	
                  Market
                    Regulations

                	
                  18

                
	
                  6.4

                	
                  Reporting
                    Requirements

                	
                  19

                
	
                  6.5

                	
                  Use
                    of Funds

                	
                  20

                
	
                  6.6

                	
                  Access
                    to Facilities

                	
                  20

                
	
                  6.7

                	
                  Taxes

                	
                  21

                
	
                  6.8

                	
                  Insurance

                	
                  21

                
	
                  6.9

                	
                  Intellectual
                    Property

                	
                  22

                
	
                  6.1

                	
                  Properties

                	
                  22

                
	
                  6.11

                	
                  Confidentiality

                	
                  22

                
	
                  6.12

                	
                  Required
                    Approvals

                	
                  22

                
	
                  6.13

                	
                  Reissuance
                    of Securities

                	
                  24

                
	
                  6.14

                	
                  Opinion

                	
                  24

                
	
                  6.15

                	
                  Margin
                    Stock

                	
                  24

                
	
                  6.16

                	
                  Financing
                    Right of First Refusal

                	
                  24

                
	
                  7

                	
                  Covenants
                    of the Purchaser

                	
                  25

                
	
                  7.1

                	
                  Confidentiality

                	
                  25

                
	
                  7.2

                	
                  Non-Public
                    Information

                	
                  25

                
	
                  7.3

                	
                  Limitation
                    on Acquisition of Common Stock of the Company

                	
                  25

                
	
                  8

                	
                  Covenants
                    of the Company and the Purchaser Regarding Indemnification

                	
                  26

                
	
                  8.1

                	
                  Company
                    Indemnification

                	
                  26

                
	
                  8.2

                	
                  Purchaser’s
                    Indemnification

                	
                  26

                
	
                  9

                	
                  Conversion
                    of Convertible Note

                	
                  27

                
	
                  9.1

                	
                  Mechanics
                    of Conversion

                	
                  27

                
	
                  10

                	
                  Registration
                    Rights

                	
                  28

                
	
                  10.1

                	
                  Registration
                    Rights Granted

                	
                  28

                
	
                  10.2

                	
                  Offering
                    Restrictions

                	
                  28

                
	
                  11

                	
                  Miscellaneous

                	
                  28

                
	
                  11.1

                	
                  Governing
                    Law

                	
                  28

                
	
                  11.2

                	
                  Survival

                	
                  29

                
	
                  11.3

                	
                  Successors

                	
                  30

                
	
                  11.4

                	
                  Entire
                    Agreement; Maximum Interest

                	
                  30

                
	
                  11.5

                	
                  Severability

                	
                  30

                
	
                  11.6

                	
                  Amendment
                    and Waiver

                	
                  30

                
	
                  11.7

                	
                  Delays
                    or Omissions

                	
                  30

                
	
                  11.8

                	
                  Notices

                	
                  31

                
	
                  11.9

                	
                  Attorneys’
                    Fees

                	
                  32

                
	
                  11.1

                	
                  Titles
                    and Subtitles

                	
                  32

                
	
                  11.11

                	
                  Facsimile
                    Signatures; Counterparts

                	
                  32

                
	
                  11.12

                	
                  Broker’s
                    Fees

                	
                  33

                
	
                  11.13

                	
                  Construction

                	
                  33

                

        

      

       

       

      LIST
        OF EXHIBITS

       

      
        
          
            	
                    Form
                      of Convertible Term Note

                  	
                    Exhibit
                      A

                  
	
                    Form
                      of Warrant

                  	
                    Exhibit
                      B

                  
	
                    Form
                      of Opinion

                  	
                    Exhibit
                      C

                  
	
                    Form
                      of Escrow Agreement

                  	
                    Exhibit
                      D

                  

          

        

      

       

       

       

      SECURITIES
        PURCHASE AGREEMENT

       

      THIS
        SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of
        September 27, 2005, by and between XFONE, INC., a Nevada corporation (the
        “Company”), and LAURUS MASTER FUND, LTD., a Cayman Islands company (the
“Purchaser”).

       

      RECITALS

       

      WHEREAS,
        the Company has authorized the sale to the Purchaser of a Secured Convertible
        Term Note in the aggregate principal amount of Two Million US Dollars
        ($2,000,000) in the form of Exhibit A hereto (as amended, modified and/or
        supplemented from time to time, the “Note”), which Note is convertible into
        shares of the Company’s common stock, $0.001 par value per share (the “Common
        Stock”) at an initial fixed conversion price of $3.48 per share of Common Stock
        (“Fixed Conversion Price”);

       

      WHEREAS,
        the Company wishes to issue to the Purchaser a warrant in the form of Exhibit
        B
        hereto (as amended, modified and/or supplemented from time to time, the
“Warrant”) to purchase up to 157,500 shares of the Company’s Common Stock in
        connection with the Purchaser’s purchase of the Note;

       

      WHEREAS,
        the Purchaser desires to purchase the Note and the Warrant on the terms and
        conditions set forth herein; and

       

      WHEREAS,
        the Company desires to issue and sell the Note and Warrant to the Purchaser
        on
        the terms and conditions set forth herein.

       

      AGREEMENT

       

      NOW,
        THEREFORE, in consideration of the foregoing recitals and the mutual promises,
        representations, warranties and covenants hereinafter set forth and for other
        good and valuable consideration, the receipt and sufficiency of which are
        hereby
        acknowledged, the parties hereto agree as follows:

       

      1.  Agreement
        to Sell and Purchase.
        Pursuant to the terms and conditions set forth in this Agreement, on the
        Closing
        Date (as defined in Section 3), the Company shall sell to the Purchaser,
        and the
        Purchaser shall purchase from the Company, the Note. The sale of the Note
        on the
        Closing Date shall be known as the “Offering.” The Note will mature on the
        Maturity Date (as defined in the Note). Collectively, the Note and Warrant
        and
        Common Stock issuable upon conversion of the Note and upon exercise of the
        Warrant are referred to as the “Securities.”

       

      2.  Fees
        and Warrant.
        On the
        Closing Date:

       

      (a)  The
        Company will issue and deliver to the Purchaser the Warrant to purchase up
        to
        157,500 shares of the Company’s Common Stock in connection with the Offering,
        pursuant to Section 1 hereof. All representations, covenants, warranties,
        undertakings, and indemnification, and other rights, applicable to a warrant
        holder, made or granted to or for the benefit of the Purchaser by the Company
        are hereby also made and granted for the benefit of the holder of the Warrant
        and shares of the Company’s Common Stock issuable upon exercise of the Warrant
        (the “Warrant Shares”).

       

      (b)  Subject
        to the terms of Section 2(d) below, the Company shall pay to Laurus Capital
        Management, LLC, the manager of the Purchaser, a closing payment in an amount
        equal to three and six tenths percent (3.60%) of the aggregate principal
        amount
        of the Note. The foregoing fee is referred to herein as the “Closing
        Payment.”

       

      (c)  The
        Company shall reimburse the Purchaser for its reasonable expenses (including
        legal fees and expenses) incurred in connection with the preparation and
        negotiation of this Agreement and the Related Agreements (as hereinafter
        defined), and expenses incurred in connection with the Purchaser’s due diligence
        review of the Company and its Subsidiaries (as defined in Section 4.2) and
        all
        related matters. Amounts required to be paid under this Section 2(c) will
        be
        paid on the Closing Date and shall not exceed $51,500.

       

      

       

        It
        is
        hereby declared that the Company had already paid the Purchaser a deposit
        of
        $26,000 in respect of the amounts due under Section 2(c) above.

       

      (d)  The
        Closing Payment and the expenses referred to in the preceding clause (c)
        (net of
        deposits previously paid by the Company) shall be paid at Closing out of
        funds
        held pursuant to the Escrow Agreement (as defined below) and a disbursement
        letter (the “Disbursement Letter”).

       

      3.  Closing,
        Delivery and Payment.

       

      3.1  Closing.
        Subject
        to the terms and conditions herein, the closing of the transactions contemplated
        hereby (the “Closing”), shall take place on the date hereof, at such time or
        place as the Company and the Purchaser may mutually agree (such date is
        hereinafter referred to as the “Closing Date”).

       

      3.2  Delivery.
        Pursuant to the Escrow Agreement, at the Closing on the Closing Date, the
        Company will deliver to the Purchaser, among other things, the Note and the
        Warrant and the Purchaser will deliver to the Company, among other things,
        the
        amounts set forth in the Disbursement Letter by certified funds or wire
        transfer.

       

      4.  Representations
        and Warranties of the Company.
        The
        Company hereby represents and warrants to the Purchaser as follows 

       

      4.1  Organization,
        Good Standing and Qualification.
        Each of
        the Company and each of its subsidiaries is a corporation, partnership or
        limited liability company, as the case may be, duly organized, validly existing
        and in good standing under the laws of its jurisdiction of organization.
        Each of
        the Company and each of the Subsidiaries (as
        defined below) has
        the
        corporate, limited liability company or partnership, as the case may be,
        power
        and authority to own and operate its properties and assets and, insofar as
        it is
        or shall be a party thereto, to (1) execute and deliver (i) this Agreement,
        (ii) the Note and the Warrant to be issued in connection with this Agreement,
        (iii) the Master Security Agreement dated as of the date hereof between the
        Company, certain of the Subsidiaries and the Purchaser (as amended, modified
        and/or supplemented from time to time, the “Master Security Agreement”), (iv)
        the Registration Rights Agreement relating to the Securities dated as of
        the
        date hereof between the Company and the Purchaser (as amended, modified and/or
        supplemented from time to time, the “Registration Rights Agreement”), (v) the
        Subsidiary Guaranty dated as of the date hereof made by certain of the
        Subsidiaries (as amended, modified and/or supplemented from time to time,
        the
“Subsidiary Guaranty”), (vi) the Stock Pledge Agreement dated as of the date
        hereof among the Company, certain of the Subsidiaries and the Purchaser (as
        amended, modified and/or or supplemented from time to time, the “Stock Pledge
        Agreement”), and (vii) the Funds escrow agreement dated as of the date hereof
        among the Company, the Purchaser and the escrow agent referred to therein,
        substantially in the form of Exhibit D hereto (as amended, modified and/or
        supplemented from time to time, the “Escrow Agreement”) (viii) all other
        documents, instruments and agreements entered into in connection with the
        transactions contemplated hereby and thereby (the preceding clauses (ii)
        through
        (viii), collectively, the “Related Agreements”); (2) issue and sell the Note and
        the shares of Common Stock issuable upon conversion of the Note (the “Note
        Shares”); (3) issue and sell the Warrant and the Warrant Shares; and (4)
        carry out the provisions of this Agreement and the Related Agreements and
        to
        carry on its business as presently conducted. Each of the Company and each
        of
        the Subsidiaries is duly qualified and is authorized to do business and is
        in
        good standing as a corporation, partnership or limited liability company,
        as the
        case may be, in all jurisdictions in which the nature or location of its
        activities and of its properties (both owned and leased) makes such
        qualification necessary, except for those jurisdictions in which failure
        to do
        so has not, or could not reasonably be expected to have, individually or
        in the
        aggregate, a material adverse effect on the business, assets, liabilities,
        condition (financial or otherwise), properties, operations or prospects of
        the
        Company and the Subsidiaries, taken individually and as a whole (a “Material
        Adverse Effect”).

       

      4.2  Subsidiaries.
        Each
        direct and indirect subsidiary of the Company is set forth on Schedule 4.2.
        For
        the purposes of this Agreement and the Related Agreements, a “Subsidiary” shall
        mean each of the entities listed on Schedule 4.2(a), and a “subsidiary” or "the
        subsidiaries", as applicable, shall mean the entities listed on Schedule
        4.2(b)
        hereto and (i) , any corporation or other entity, other than any Subsidiary,
        whose shares of stock or other ownership interests having ordinary voting
        power
        (other than stock or other ownership interests having such power only by
        reason
        of the happening of a contingency) to elect a majority of the directors of
        such
        corporation, or other persons or entities performing similar functions for
        such
        person or entity, are owned, directly or indirectly, by the Company or (ii)
        a
        corporation or other entity, other than any Subsidiary, in which the Company
        owns, directly or indirectly, more than 50% of the equity interests of such
        entity at such time.
        On the
        date hereof, no subsidiary (i) owns
        any
        assets in the United States (other than immaterial assets) or (ii) has any
        significant operations in the United States. If any Subsidiary shall at any
        time
        create or acquire, directly or indirectly, any subsidiary, such subsidiary
        shall, on the date of such creation or acquisition, be deemed for all purposes
        hereunder a Subsidiary.

       

      4.3  Capitalization;
        Voting Rights.

       

      (a)  The
        authorized capital stock of the Company, as of the date hereof consists of
        75,000,000 shares, of which 25,000,000 are shares of Common Stock, par value
        $0.001 per share, 6,887,671 shares of which are issued and outstanding, and
        50,000,000 are shares of preferred stock, par value $0.001 per share, none
        of
        which are issued and outstanding. The authorized, issued and outstanding
        capital
        stock of each Subsidiary is set forth on Schedule 4.3.

       

      (b)  Except
        as
        disclosed on Schedule 4.3, other than: (i) the shares reserved for issuance
        under the Company’s stock option plans; and (ii) shares which may be granted
        pursuant to this Agreement and the Related Agreements, there are no outstanding
        options, warrants, rights (including conversion or preemptive rights and
        rights
        of first refusal), proxy or stockholder agreements, or arrangements or
        agreements of any kind for the purchase or acquisition from the Company of
        any
        of its securities. Except as disclosed on Schedule 4.3, neither the offer,
        issuance or sale of any of the Note or the Warrant, or the issuance of any
        of
        the Note Shares or Warrant Shares, nor the consummation of any transaction
        contemplated hereby will result in a change in the price or number of any
        securities of the Company outstanding, under anti-dilution or other similar
        provisions contained in or affecting any such securities. 

       

      (c)  All
        issued and outstanding shares of the Company’s Common Stock: (i) have been
        duly authorized and validly issued and are fully paid and nonassessable;
        and
        (ii) were issued in compliance with all applicable state and federal laws
        concerning the issuance of securities.

       

      (d)  The
        rights, preferences, privileges and restrictions of the shares of the Common
        Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). When issued in compliance with the provisions of this Agreement and
        the Company’s Charter, the Securities will be validly issued, fully paid and
        nonassessable, and will be free of any liens or encumbrances; provided, however,
        that the Securities may be subject to restrictions on transfer under state
        and/or federal securities laws as set forth herein or as otherwise required
        by
        such laws at the time a transfer is proposed.

       

      4.4  Authorization;
        Binding Obligations.
        All
        corporate, partnership or limited liability company, as the case may be,
        action
        on the part of the Company and each of the Subsidiaries (including their
        respective officers and directors) necessary for the authorization of this
        Agreement and the Related Agreements, the performance of all obligations
        of the
        Company and the Subsidiaries hereunder and under the other Related Agreements
        at
        the Closing and, the authorization, sale, issuance and delivery of the Note
        and
        Warrant has been taken or will be taken prior to the Closing. This Agreement
        and
        the Related Agreements, when executed and delivered and to the extent it
        is a
        party thereto, will be valid and binding obligations of each of the Company
        and
        each of the Subsidiaries, enforceable against each such entity in accordance
        with their terms, except:

       

      (a)  as
        limited by applicable bankruptcy, insolvency, reorganization, moratorium
        or
        other laws of general application affecting enforcement of creditors’ rights;
        and

       

      (b)  general
        principles of equity that restrict the availability of equitable or legal
        remedies.

       

      The
        sale
        of the Note and the subsequent conversion of the Note into Note Shares are
        not
        and will not be subject to any preemptive rights or rights of first refusal
        that
        have not been properly waived or complied with. The issuance of the Warrant
        and
        the subsequent exercise of the Warrant for Warrant Shares are not and will
        not
        be subject to any preemptive rights or rights of first refusal that have
        not
        been properly waived or complied with. 

       

      4.5  Liabilities.
        Neither
        the Company, any of its Subsidiaries, nor any of its subsidiaries has any
        liabilities in
        excess
        of $50,000,
        except
        current liabilities incurred in the ordinary course of business and liabilities
        disclosed in any of
        the
        Company’s filings under the Securities Exchange Act of 1934, as amended
        (“Exchange Act”) made prior to the date of this Agreement (collectively, the
“Exchange Act Filings”).

       

      4.6  Agreements;
        Action.
        Except
        as set forth on Schedule 4.6 or as disclosed in any Exchange Act
        Filings:

       

      (a)  there
        are
        no agreements, understandings, instruments, contracts, proposed transactions,
        judgments, orders, writs or decrees to which the Company or any of its
        subsidiaries is a party or by which it is bound which may involve: (i)
        obligations (contingent or otherwise) of, or payments to, the Company or
        any of
        its subsidiaries in excess of $50,000 (other than obligations of, or payments
        to, the Company or any of its subsidiaries arising from agreements entered
        into
        in the ordinary course of business); or (ii) the transfer or license of any
        patent, copyright, trade secret or other proprietary right to or from the
        Company or any of its subsidiaries (other than licenses arising from the
        purchase of “off the shelf” or other standard products); or (iii) provisions
        restricting the development, manufacture or distribution of the Company’s or any
        of its subsidiaries products or services; or (iv) indemnification by the
        Company
        or any of its subsidiaries with respect to infringements of proprietary
        rights.

       

      (b)  Since
        December 31, 2004 (the “Balance Sheet Date”), neither the Company nor any of the
        Subsidiaries has: (i) declared or paid any dividends, or authorized or made
        any
        distribution upon or with respect to any class or series of its capital stock;
        (ii) incurred any indebtedness for money borrowed or any other liabilities
        (other than ordinary course obligations) individually in excess of $50,000
        or,
        in the case of indebtedness and/or liabilities individually less than $50,000,
        in excess of $100,000 in the aggregate; (iii) made any loans or advances
        to any
        person or entity not in excess, individually or in the aggregate, of $100,000,
        other than ordinary course advances for travel expenses; or (iv) sold, exchanged
        or otherwise disposed of any of its assets or rights, other than the sale
        of its
        inventory in the ordinary course of business.

       

      (c)  For
        the
        purposes of subsections (a) and (b) above, all indebtedness, liabilities,
        agreements, understandings, instruments, contracts involving the same person
        or
        entity (including persons or entities the Company or any subsidiary of the
        Company has reason to believe are affiliated therewith) shall be aggregated
        for
        the purpose of meeting the individual minimum dollar amounts of such
        subsections.

       

      (d)  The
        Company maintains disclosure controls and procedures (“Disclosure Controls”)
        designed to ensure that information required to be disclosed by the Company
        in
        the reports that it files or submits under the Exchange Act is recorded,
        processed, summarized, and reported, within the time periods specified in
        the
        rules and forms of the Securities and Exchange Commission (“SEC”).

       

      (e)  The
        Company makes and keeps books, records, and accounts that, in reasonable
        detail,
        accurately and fairly reflect the transactions and dispositions of the Company’s
        assets. The Company maintains internal control over financial reporting
        (“Financial Reporting Controls”) designed by, or under the supervision of, the
        Company’s principal executive and principal financial officers, and effected by
        the Company’s board of directors, management, and other personnel, to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles (“GAAP”), including that:

       

      (i)  transactions
        are executed in accordance with management’s general or specific
        authorization;

       

      (ii)  unauthorized
        acquisition, use, or disposition of the Company’s assets that could have a
        material effect on the financial statements are prevented or timely
        detected;

       

      (iii)  transactions
        are recorded as necessary to permit preparation of financial statements in
        accordance with GAAP, and that the Company’s receipts and expenditures are being
        made only in accordance with authorizations of the Company’s management and
        board of directors; 

       

      (iv)  transactions
        are recorded as necessary to maintain accountability for assets;
        and

       

      (v)  the
        recorded accountability for assets is compared with the existing assets at
        reasonable intervals, and appropriate action is taken with respect to any
        differences.

       

      (f)  There
        is
        no weakness in any of the Company’s Disclosure Controls or Financial Reporting
        Controls that is required to be disclosed in any of the Exchange Act Filings,
        except as so disclosed. 

       

      4.7  Obligations
        to Related Parties.
        Except
        as set forth on Schedule 4.7, there are no obligations of the Company or
        any of
        its Subsidiaries to officers, directors, stockholders or employees of the
        Company or any of its subsidiaries other than:

       

      (a)  for
        payment of salary for services rendered and for bonus payments;

       

      (b)  reimbursement
        for reasonable expenses incurred on behalf of the Company and its
        subsidiaries;

       

      

      (c) for
        other
        standard employee benefits made generally available to all employees (including
        stock option agreements outstanding under any stock option plan approved
        by the
        Board of Directors of the Company
        and each
        Subsidiary of the Company, as applicable);
        

       

                           
        (d) deferred
        compensation agreement, bonus plan, incentive plan, profit sharing plan,
        retirement agreement, stock option plan or other employee compensation agreement
        stock compensation plans for the benefit of officers, directors,
        and

       

                                                     
        (e) obligations
        listed in the Company’s and each of its Subsidiary’s financial statements or
        disclosed in any of the Exchange Act Filings.

       

      Except
        as
        described above, disclosed in any of the Exchange Act Filings, or set forth
        on
        Schedule 4.7, none of the officers, directors or, to the best of the Company’s
        knowledge, key employees or stockholders of the Company or any of its
        Subsidiaries or any members of their immediate families, are indebted to
        the
        Company or any of its subsidiaries, individually or in the aggregate, in
        excess
        of $50,000 or have any direct or indirect ownership interest in any firm
        or
        corporation with which the Company or any of its subsidiaries is affiliated
        or
        with which the Company or any of its Subsidiaries has a business relationship,
        or any firm or corporation which competes with the Company or any of its
        subsidiaries, other than passive investments in publicly traded companies
        (representing less than one percent (1%) of such company) which may compete
        with
        the Company or any of its Subsidiaries. Except as described above, disclosed
        in
        any of the Exchange Act Filings, or set forth on Schedule 4.7, no officer,
        director or, to the best of the Company’s knowledge, stockholder of the Company
        or any of its subsidiaries, or any member of their immediate families, is,
        directly or indirectly, interested in any material contract with the Company
        or
        any of its Subsidiaries and no agreements, understandings or proposed
        transactions are contemplated between the Company or any of its Subsidiaries
        and
        any such person. Except as set forth on Schedule 4.7 or disclosed in any
        of the
        Exchange Act Filings, neither the Company nor any of its Subsidiaries is
        a
        guarantor or indemnitor of any indebtedness of any other person or
        entity. 

       

      4.8  Changes.
        Since
        the
        Balance Sheet Date, except as disclosed in any Exchange Act Filing or in
        any
        Schedule to this Agreement or to any of the Related Agreements, there has
        not
        been:

       

      (a)  any
        change in the business, assets, liabilities, condition (financial or otherwise),
        properties, operations or prospects of the Company or any of its Subsidiaries,
        which individually or in the aggregate has had, or could reasonably be expected
        to have, individually or in the aggregate, a Material Adverse
        Effect;

       

      (b)  any
        resignation or termination of any officer, key employee or group of employees
        of
        the Company or any of its Subsidiaries; 

       

      (c)  any
        material change, except in the ordinary course of business, in the contingent
        obligations of the Company or any of its Subsidiaries by way of guaranty,
        endorsement, indemnity, warranty or otherwise;

       

      (d)  any
        damage, destruction or loss, whether or not covered by insurance, which has
        had,
        or could reasonably be expected to have, individually or in the aggregate,
        a
        Material Adverse Effect;

       

      (e)  any
        waiver by the Company or any of its Subsidiaries of a valuable right or of
        a
        material debt owed to it;

       

      (f)  any
        direct or indirect loans made by the Company or any of its Subsidiaries to
        any
        stockholder, employee, officer or director of the Company or any of its
        Subsidiaries, other than advances made in the ordinary course of
        business;

       

      (g)  any
        material change in any compensation arrangement or agreement with any employee,
        officer, director or stockholder of the Company or any of its Subsidiaries;
        

       

      (h)  any
        declaration or payment of any dividend or other distribution of the assets
        of
        the Company or any of its Subsidiaries;

       

      (i)  any
        labor
        organization activity related to the Company or any of its
        Subsidiaries;

       

      (j)  any
        debt,
        obligation or liability incurred, assumed or guaranteed by the Company or
        any of
        its Subsidiaries, except those for immaterial amounts and for current
        liabilities incurred in the ordinary course of business;

       

      (k)  any
        sale,
        assignment or transfer of any patents, trademarks, copyrights, trade secrets
        or
        other intangible assets owned by the Company or any of its
        Subsidiaries;

       

      (l)  any
        change in any material agreement to which the Company or any of the Subsidiaries
        is a party or by which either the Company or any of its Subsidiaries is bound
        which either individually or in the aggregate has had, or could reasonably
        be
        expected to have, individually or in the aggregate, a Material Adverse
        Effect;

       

      (m)  any
        other
        event or condition of any character that, either individually or in the
        aggregate, has had, or could reasonably be expected to have, individually
        or in
        the aggregate, a Material Adverse Effect; or

       

      (n)  any
        arrangement or commitment by the Company or any of its Subsidiaries to do
        any of
        the acts described in subsection (a) through (m) above.

       

      4.9  Title
        to Properties and Assets; Liens, Etc.
        Except
        as set forth on Schedule 4.9, each of the Company and each of the
        Subsidiaries has good and marketable title to its properties and assets,
        and
        good title to its leasehold interests, in each case subject to no mortgage,
        pledge, lien, lease, encumbrance or charge, other than:

       

      (a)  those
        resulting from taxes which have not yet become delinquent;

       

      (b)  minor
        liens and encumbrances which do not materially detract from the value of
        the
        property subject thereto or materially impair the operations of the Company
        or
        any of the Subsidiaries, so long as in each such case, such liens and
        encumbrances have no effect on the lien priority of the Purchaser in such
        property; and 

       

      (c)  those
        that have otherwise arisen in the ordinary course of business, so long as
        in
        each such case, such liens and encumbrances have no effect on the lien priority
        of the Purchaser in such property.

       

      All
        facilities, machinery, equipment, fixtures, vehicles and other properties
        owned,
        leased or used by the Company and the Subsidiaries are in good operating
        condition and repair and are reasonably fit and usable for the purposes for
        which they are being used. Except as set forth on Schedule 4.9, the Company
        and
        the Subsidiaries are in compliance with all material terms of each lease
        to
        which it is a party or is otherwise bound.

       

      4.10  Intellectual
        Property.

       

      (a)  Except
        as
        otherwise set forth in Schedule  4.10, each
        of
        the Company and each of its Subsidiaries owns or possesses sufficient legal
        rights to all patents, trademarks, service marks, trade names, copyrights,
        trade
        secrets, licenses, information and other proprietary rights and processes
        necessary for its business as now conducted and, to the best of the Company’s
        knowledge, as presently proposed to be conducted (the “Intellectual Property”),
        without any known infringement of the rights of others. There are no outstanding
        options, licenses or agreements of any kind relating to the foregoing
        proprietary rights, nor is the Company or any of its Subsidiaries bound by
        or a
        party to any options, licenses or agreements of any kind with respect to
        the
        patents, trademarks, service marks, trade names, copyrights, trade secrets,
        licenses, information and other proprietary rights and processes of any other
        person or entity other than such licenses or agreements arising from the
        purchase of “off the shelf” or standard products.

       

      (b)  Except
        as
        otherwise set forth in Schedule  4.10, neither
        the Company nor any of its Subsidiaries has received any communications alleging
        that the Company or any of its Subsidiaries has violated any of the patents,
        trademarks, service marks, trade names, copyrights or trade secrets or other
        proprietary rights of any other person or entity, nor is the Company or any
        of
        its Subsidiaries aware of any basis therefor.

       

      (c)  The
        Company does not believe it is or will be necessary to utilize any inventions,
        trade secrets or proprietary information of any of its employees made prior
        to
        their employment by the Company or any of its Subsidiaries, except for
        inventions, trade secrets or proprietary information that have been rightfully
        assigned to the Company or any of its Subsidiaries.

       

      (d) Encumbrances,
        if any, on Intellectual Property Rights are as set
        forth
        in Schedule 4.10.

       

      4.11  Compliance
        with Other Instruments.
        Neither
        the Company nor any of its Subsidiaries is in violation or default of (x)
        any
        term of its Charter or Bylaws, or (y) any provision of any indebtedness,
        mortgage, indenture, contract, agreement or instrument to which it is party
        or
        by which it is bound or of any judgment, decree, order or writ, which violation
        or default, in the case of clauses (x) and (y), has had, or could reasonably
        be
        expected to have, either individually or in the aggregate, a Material Adverse
        Effect. The execution, delivery and performance of and compliance with this
        Agreement and the Related Agreements to which it is a party, and the issuance
        and sale of the Note by the Company and the other Securities by the Company
        each
        pursuant hereto and thereto, will not, with or without the passage of time
        or
        giving of notice, result in any such material violation, or be in conflict
        with
        or constitute a default under any such term or provision, or result in the
        creation of any mortgage, pledge, lien, encumbrance or charge upon any of
        the
        properties or assets of the Company or any of its subsidiaries or the
        suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
        license, authorization or approval applicable to the Company, its business
        or
        operations or any of its assets or properties. 

       

      4.12  Litigation.
        Except
        as set forth on Schedule 4.12 hereto, there is no action, suit, proceeding
        or
        investigation pending or, to the best
        of
        the Company’s
        knowledge, currently threatened against the Company or any of its Subsidiaries
        that prevents the Company or any of its Subsidiaries from entering into this
        Agreement or the other Related Agreements, or from consummating the transactions
        contemplated hereby or thereby, or which has had, or could reasonably be
        expected to have, either individually or in the aggregate, a Material Adverse
        Effect or any change in the current equity ownership of the Company or any
        of
        its Subsidiaries, nor is the Company aware that there is any basis to assert
        any
        of the foregoing. Except as set forth on Schedule 4.12 hereto, neither the
        Company nor any of its Subsidiaries is a party to or subject to the provisions
        of any order, writ, injunction, judgment or decree of any court or government
        agency or instrumentality. Except as set forth on Schedule 4.12 hereto, there
        is
        no action, suit, proceeding or investigation by the Company or any of its
        Subsidiaries currently pending or which the Company or any of its Subsidiaries
        intends to initiate.

       

      4.13  Tax
        Returns and Payments.
        Each of
        the Company and each of the Subsidiaries has timely filed all tax returns
        (federal, state and local) required to be filed by it. All taxes shown to
        be due
        and payable on such returns, any assessments imposed, and all other taxes
        due
        and payable by the Company or any of the Subsidiaries on or before the Closing,
        have been paid or will be paid prior to the time they become delinquent.
        Except
        as set forth on Schedule 4.13, neither the Company nor any of the
        Subsidiaries has been advised:

       

      (a)  that
        any
        of its returns, federal, state or other, have been or are being audited as
        of
        the date hereof; or

       

      (b)  of
        any
        adjustment, deficiency, assessment or court decision in respect of its federal,
        state or other taxes.

       

      The
        Company has no knowledge of any liability for any tax to be imposed upon
        its
        properties or assets as of the date of this Agreement that is not adequately
        provided for. 

       

      4.14  Employees.
        Except
        as set forth on Schedule 4.14, neither the Company nor any of the Subsidiaries
        has any collective bargaining agreements with any of its employees. There
        is no
        labor union organizing activity pending or, to the best
        of
        the Company’s
        knowledge, threatened with respect to the Company or any of the Subsidiaries.
        Except as disclosed in the Exchange Act Filings or on Schedule 4.14, neither
        the
        Company nor any of the Subsidiaries is a party to or bound by any currently
        effective employment contract, deferred compensation arrangement, bonus plan,
        incentive plan, profit sharing plan, retirement agreement or other employee
        compensation plan or agreement. To the best
        of
        the Company’s
        knowledge, no employee of the Company or any of the Subsidiaries, nor any
        consultant with whom the Company or any of the Subsidiaries has contracted,
        is
        in material violation of any term of any employment contract, proprietary
        information agreement or any other agreement relating to the right of any
        such
        individual to be employed by, or to contract with, the Company or any of
        the
        Subsidiaries because of the nature of the business to be conducted by the
        Company or any of the Subsidiaries; and to the best
        of
        the Company’s
        knowledge the continued employment by the Company and the Subsidiaries of
        their
        present employees, and the performance of the Company’s and the Subsidiaries’
        contracts with its independent contractors, will not result in any such
        violation. Neither the Company nor any of the Subsidiaries is aware that
        any of
        its employees is obligated under any contract (including licenses, covenants
        or
        commitments of any nature) or other agreement, or subject to any judgment,
        decree or order of any court or administrative agency that would interfere
        with
        their duties to the Company or any of the Subsidiaries. Neither the Company
        nor
        any of the Subsidiaries has received any notice alleging that any such violation
        has occurred. Except for employees who have a current effective employment
        agreement with the Company or any of the Subsidiaries, no employee of the
        Company or any of the Subsidiaries has been granted the right to continued
        employment by the Company or any of the Subsidiaries or to any material
        compensation following termination of employment with the Company or any
        of its
        Subsidiaries. Except as set forth on Schedule 4.14, the Company is not aware
        that any officer, key employee or group of employees intends to terminate
        his,
        her or their employment with the Company or any of the Subsidiaries, nor
        does
        the Company or any of the Subsidiaries have a present intention to terminate
        the
        employment of any officer, key employee or group of employees.

       

      4.15  Registration
        Rights and Voting Rights.
        Except
        as set forth on Schedule 4.15 and except as disclosed in Exchange
        Act
        Filings, neither the Company nor any of its Subsidiaries is presently under
        any
        obligation, and neither the Company nor any of its Subsidiaries has granted
        any
        rights, to register any of the Company’s or its Subsidiaries’ presently
        outstanding securities or any of its securities that may hereafter be issued.
        Except as set forth on Schedule 4.15 and except as disclosed in Exchange
        Act
        Filings, to the best of the Company’s knowledge, no stockholder of the Company
        or any of its Subsidiaries has entered into any agreement with respect to
        the
        voting of equity securities of the Company or any of its
        Subsidiaries.

       

      4.16  Compliance
        with Laws; Permits.
        Neither
        the Company nor any of its Subsidiaries is in violation of any applicable
        provision of the Sarbanes-Oxley Act of 2002 or any SEC related regulation
        or
        rule or any rule of the Principal Market (as hereafter defined) promulgated
        thereunder or any other applicable statute, rule, regulation, order or
        restriction of any domestic or foreign government or any instrumentality
        or
        agency thereof in respect of the conduct of its business or the ownership
        of its
        properties which has had, or could reasonably be expected to have, either
        individually or in the aggregate, a Material Adverse Effect. No governmental
        orders, permissions, consents, approvals or authorizations are required to
        be
        obtained and no registrations or declarations are required to be filed in
        connection with the execution and delivery of this Agreement or any other
        Related Agreement and the issuance of any of the Securities, except such
        as have
        been duly and validly obtained or filed, or with respect to any filings that
        must be made after the Closing, as will be filed in a timely manner. Each
        of the
        Company and its Subsidiaries has all material franchises, permits, licenses
        and
        any similar authority necessary for the conduct of its business as now being
        conducted by it, the lack of which could, either individually or in the
        aggregate, reasonably be expected to have a Material Adverse
        Effect.

       

      4.17  Environmental
        and Safety Laws.
        Neither
        the Company nor any of its Subsidiaries is in violation of any applicable
        statute, law or regulation relating to the environment or occupational health
        and safety, and to the best of its knowledge, no material expenditures are
        or
        will be required in order to comply with any such existing statute, law or
        regulation. Except as set forth on Schedule 4.17, no Hazardous Materials
        (as
        defined below) are used or have been used, stored, or disposed of by the
        Company
        or any of its Subsidiaries or, to the best of the Company’s knowledge, by any
        other person or entity on any property owned, leased or used by the Company
        or
        any of its Subsidiaries. For the purposes of the preceding sentence, “Hazardous
        Materials” shall mean:

       

      (a)  materials
        which are listed or otherwise defined as “hazardous” or “toxic” under any
        applicable local, state, federal and/or foreign laws and regulations that
        govern the existence and/or remedy of contamination on property, the protection
        of the environment from contamination, the control of hazardous wastes, or
        other
        activities involving hazardous substances, including building materials;
        or

      
      

       

      (b)  any
        petroleum products or nuclear materials.

       

      4.18  Valid
        Offering.
        Assuming the accuracy of the representations and warranties of the Purchaser
        contained in this Agreement, the offer, sale and issuance of the Securities
        will
        be exempt from the registration requirements of the Securities Act of 1933,
        as
        amended (the “Securities Act”), and will have been registered or qualified (or
        are exempt from registration and qualification) under the registration, permit
        or qualification requirements of all applicable state securities
        laws. 

       

      4.19  Full
        Disclosure.
        Each of
        the Company and each of its Subsidiaries has provided the Purchaser with
        all
        information requested by the Purchaser in connection with its decision to
        purchase the Note and Warrant. Neither this Agreement, the Related Agreements,
        the exhibits and schedules hereto and thereto nor any other document delivered
        by the Company or any of its Subsidiaries to Purchaser or its attorneys or
        agents in connection herewith or therewith or with the transactions contemplated
        hereby or thereby, contain any untrue statement of a material fact nor omit
        to
        state a material fact necessary in order to make the statements contained
        herein
        or therein, in light of the circumstances in which they are made, not
        misleading. Any financial projections and other estimates provided to the
        Purchaser by the Company or any of its Subsidiaries were based on the Company’s
        and its Subsidiaries’ experience in the industry and on assumptions of fact and
        opinion as to future events which the Company or any of its Subsidiaries,
        at the
        date of the issuance of such projections or estimates, believed to be
        reasonable. 

       

      4.20  Insurance.
        Except
        as set forth on Schedule 4.20, each of the Company and each of the Subsidiaries
        has general commercial, product liability, fire and casualty insurance policies
        with coverages which the Company believes are customary for companies similarly
        situated to the Company and the Subsidiaries in the same or similar
        business.

       

      4.21  SEC
        Reports.
        Except
        as set forth on Schedule 4.21, the Company has filed all reports and other
        documents required to be filed by it under the Exchange Act. The Company
        has
        furnished the Purchaser copies of: (i) its Annual Reports on Form 10-KSB
        for its
        fiscal years ended 2004; and (ii) its Quarterly Reports on Form 10-QSB for
        its
        fiscal quarters ended March 31, 2005 and June 30, 2005, and the Form 8-K
        filings
        which it has made during the fiscal year 2005 to date (collectively, the
“SEC
        Reports”). Except as set forth on Schedule 4.21, each SEC Report was, at the
        time of its filing, in substantial compliance with the requirements of its
        respective form and none of the SEC Reports, nor the financial statements
        (and
        the notes thereto) included in the SEC Reports, as of their respective filing
        dates, contained any untrue statement of a material fact or omitted to state
        a
        material fact required to be stated therein or necessary to make the statements
        therein, in light of the circumstances under which they were made, not
        misleading.

       

      4.22  Listing.
        The
        Company’s Common Stock is listed or quoted, as applicable, on a Principal Market
        (as hereafter defined) and satisfies and at all times hereafter will satisfy,
        all requirements for the continuation of such listing or quotation, as
        applicable. The Company has not received any notice that its Common Stock
        will
        be delisted from, or no longer quoted on, as applicable, the Principal Market
        or
        that its Common Stock does not meet all requirements for such listing or
        quotation,
        as
        applicable. For purposes hereof, the term “Principal Market” means the NASD Over
        The Counter Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Markets
        System, American Stock Exchange or New York Stock Exchange (whichever of
        the
        foregoing is at the time the principal trading exchange or market for the
        Common
        Stock).

       

      4.23  No
        Integrated Offering.
        Neither
        the Company, nor any of its Subsidiaries or affiliates, nor any person acting
        on
        its or their behalf, has directly or indirectly made any offers or sales
        of any
        security or solicited any offers to buy any security under circumstances
        that
        would cause the offering of the Securities pursuant to this Agreement or
        any of
        the Related Agreements to be integrated with prior offerings by the Company
        for
        purposes of the Securities Act which would prevent the Company from selling
        the
        Securities pursuant to Rule 506 under the Securities Act nor will the Company
        or
        any of its affiliates or subsidiaries take any action or steps that would
        cause
        the offering of the Securities to be integrated with other
        offerings.

       

      4.24  Stop
        Transfer.
        The
        Securities are restricted securities as of the date of this Agreement. Neither
        the Company nor any of its Subsidiaries will issue any stop transfer order
        or
        other order impeding the sale and delivery of any of the Securities at such
        time
        as the Securities are registered for public sale or an exemption from
        registration is available, except as required by state and federal securities
        laws.

       

      4.25  Dilution.
        Subject
        to applicable law,
        the
        Company specifically acknowledges that its obligation to issue the shares
        of
        Common Stock upon conversion of the Note and exercise of the Warrant is binding
        upon the Company and enforceable regardless of the dilution such issuance
        may
        have on the ownership interests of other shareholders of the
        Company. 

       

      4.26  Patriot
        Act.The
        Company certifies that, to the best of the Company’s knowledge, neither the
        Company nor any of its Subsidiaries has been designated, nor is or shall
        be
        owned or controlled, by a “suspected terrorist” as defined in Executive Order
        13224. The Company hereby acknowledges that the Purchaser seeks to comply
        with
        all applicable laws concerning money laundering and related activities. In
        furtherance of those efforts, the Company hereby represents, warrants and
        covenants that: (i) none of the cash or property that the Company or any
        of its
        Subsidiaries will pay or will contribute to the Purchaser has been or shall
        be
        derived from, or related to, any activity that is deemed criminal under United
        States law; and (ii) no contribution or payment by the Company or any of
        its
        Subsidiaries to the Purchaser, to the extent that they are within the Company’s
        and/or its Subsidiaries’ control shall cause the Purchaser to be in violation of
        the United States Bank Secrecy Act, the United States International Money
        Laundering Control Act of 1986 or the United States International Money
        Laundering Abatement and Anti-Terrorist Financing Act of 2001. The Company
        shall
        promptly notify the Purchaser if any of these representations, warranties
        or
        covenants ceases to be true and accurate regarding the Company or any of
        its
        Subsidiaries. The Company shall provide the Purchaser all additional information
        regarding the Company or any of its Subsidiaries that the Purchaser deems
        necessary or convenient to ensure compliance with all applicable laws concerning
        money laundering and similar activities. The Company understands and agrees
        that
        if at any time it is discovered that any of the foregoing representations,
        warranties or covenants are incorrect, or if otherwise required by applicable
        law or regulation related to money laundering or similar activities, the
        Purchaser may undertake appropriate actions to ensure compliance with applicable
        law or regulation, including but not limited to segregation and/or redemption
        of
        the Purchaser’s investment in the Company. The Company further understands that
        the Purchaser may release confidential information about the Company and
        its
        Subsidiaries and, if applicable, any underlying beneficial owners, to proper
        authorities if the Purchaser's legal counsels determine that such release
        of
        confidential information is required in light of relevant rules and regulations
        under the laws set forth in subsection (ii) above.

       

      4.27  ERISA.
        Based
        upon the Employee Retirement Income Security Act of 1974 (“ERISA”),
        and
        the regulations and published interpretations thereunder: (i) neither the
        Company nor any of the Subsidiaries has engaged in any Prohibited Transactions
        (as defined in Section 406 of ERISA and Section 4975 of the Internal
        Revenue Code of 1986, as amended (the “Code”));
        (ii)
        each of the Company and each of the Subsidiaries has met all applicable minimum
        funding requirements under Section 302 of ERISA in respect of its plans;
        (iii)
        neither the Company nor any of the Subsidiaries has any knowledge of any
        event
        or occurrence which would cause the Pension Benefit Guaranty Corporation
        to
        institute proceedings under Title IV of ERISA to terminate any employee benefit
        plan(s); (iv) neither the Company nor any of the Subsidiaries has any fiduciary
        responsibility for investments with respect to any plan existing for the
        benefit
        of persons other than the Company’s or such Subsidiary’s employees; and (v)
        neither the Company nor any of the Subsidiaries has withdrawn, completely
        or
        partially, from any multi-employer pension plan so as to incur liability
        under
        the Multiemployer Pension Plan Amendments Act of 1980.

       

      5.  Representations
        and Warranties of the Purchaser.
        The
        Purchaser hereby represents and warrants to the Company as follows:

       

      5.1  No
        Shorting.
        The
        Purchaser or any of its subsidiaries, affiliates (including Laurus
        Capital Management, LLC),
        investment partners, directors, officers or key employees has not, will not
        and
        will not cause any person or entity, to engage, directly or indirectly, in
        “short sales” of the Company’s Common Stock.

       

      5.2  Requisite
        Power and Authority.
        The
        Purchaser has all necessary power and authority under all applicable provisions
        of law to execute and deliver this Agreement and the Related Agreements and
        to
        carry out their provisions. All corporate action on the Purchaser’s part
        required for the lawful execution and delivery of this Agreement and the
        Related
        Agreements have been or will be effectively taken prior to the Closing. Upon
        their execution and delivery, this Agreement and the Related Agreements will
        be
        valid and binding obligations of the Purchaser, enforceable in accordance
        with
        their terms, except:

       

      (a)  as
        limited by applicable bankruptcy, insolvency, reorganization, moratorium
        or
        other laws of general application affecting enforcement of creditors’ rights;
        and

       

      (b)  as
        limited by general principles of equity that restrict the availability of
        equitable and legal remedies.

       

      5.3  Investment
        Representations.
        The
        Purchaser understands that the Securities are being offered and sold pursuant
        to
        an exemption from registration contained in the Securities Act based in part
        upon the Purchaser’s representations contained in this Agreement, including,
        without limitation, that the Purchaser is an “accredited investor” within the
        meaning of Regulation D under the Securities Act. The Purchaser confirms
        that it
        has received or has had full access to all the information it considers
        necessary or appropriate to make an informed investment decision with respect
        to
        the Note and the Warrant to be purchased by it under this Agreement and the
        Note
        Shares and the Warrant Shares acquired by it upon the conversion of the Note
        and
        the exercise of the Warrant, respectively. The Purchaser further confirms
        that
        it has had an opportunity to ask questions and receive answers from the Company
        regarding the Company’s and its Subsidiaries’ business, management and financial
        affairs and the terms and conditions of the Offering, the Note, the Warrant
        and
        the Securities and to obtain additional information (to the extent the Company
        possessed such information or could acquire it without unreasonable effort
        or
        expense) necessary to verify any information furnished to the Purchaser or
        to
        which the Purchaser had access.
        Purchaser represents that the offer and sale of the Securities, herein, are
        exempt from the securities laws of the Cayman Islands.

       

      5.4  The
        Purchaser Bears Economic Risk.
        The
        Purchaser has substantial experience in evaluating and investing in private
        placement transactions of securities in companies similar to the Company
        so that
        it is capable of evaluating the merits and risks of its investment in the
        Company and has the capacity to protect its own interests. The Purchaser
        must
        bear the economic risk of this investment until the Securities are sold pursuant
        to: (i) an effective registration statement under the Securities Act; or
        (ii) an
        exemption from registration is available with respect to such sale.

       

      5.5  Acquisition
        for Own Account.
        The
        Purchaser is acquiring the Note and Warrant and the Note Shares and the Warrant
        Shares for the Purchaser’s own account for investment only, and not as a nominee
        or agent and not with a view towards or for resale in connection with their
        distribution.

       

      5.6  The
        Purchaser Can Protect Its Interest.
        The
        Purchaser represents that by reason of its, or of its management’s, business and
        financial experience, the Purchaser has the capacity to evaluate the merits
        and
        risks of its investment in the Note, the Warrant and the Securities and to
        protect its own interests in connection with the transactions contemplated
        in
        this Agreement and the Related Agreements, and
        is
        experienced in evaluating and investing in private placement transactions
        of
        securities of companies in a similar stage of development. Further,
        Purchaser has not purchased the Securities as a result of any form of general
        advertising, including advertisements, articles, notices, or other
        communications in any newspaper, magazine, or similar media, or
        telecommunications in connection with the transactions contemplated in the
        Agreement or the Related Agreements.

       

      5.7  Accredited
        Investor.
        The
        Purchaser represents that it is an accredited investor within the meaning
        of
        Regulation D under the Securities Act.

       

      5.8  Legends.

       

      (a)  The
        Note
        shall bear substantially the following legend: 

       

      “THIS
        NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
        BEEN
        REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
        STATE
        SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
        OF THIS
        NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE
        OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES UNDER
        SAID
        ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL SATISFACTORY
        TO XFONE, INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

       

      

       

      (b)  The
        Note
        Shares and the Warrant Shares, if not issued by DWAC system (as hereinafter
        defined), shall bear a legend which shall be in substantially the following
        form
        until such shares are covered by an effective registration statement filed
        with
        the SEC:

       

      “THE
        SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
        SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
        THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
        THE
        ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT
        AND
        APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO XFONE, INC.
        THAT
        SUCH REGISTRATION IS NOT REQUIRED.”

       

      

       

      (c)  The
        Warrant shall bear substantially the following legend:

       

      “THIS
        WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
        NOT
        BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
        STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
        OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED
        IN
        THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR
        THE
        UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES
        LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO XFONE, INC. THAT SUCH REGISTRATION
        IS NOT REQUIRED.”

       

      

       

       

       

      

       

      5.9 Tax
        Consequences.
        Purchaser understands there may be material tax consequences to the Purchaser
        of
        an acquisition or disposition of the Securities. Company makes no representation
        with respect to the tax consequences under US or foreign tax laws by reason
        of
        the Purchaser’s acquisition or disposition of the Securities.

       

      6.  Covenants
        of the Company.
        The
        Company covenants and agrees with the Purchaser as follows:

       

      6.1  Stop-Orders.
        As long
        as the Purchaser holds the Securities, the Company will advise the Purchaser,
        promptly after it receives notice of issuance by the SEC, any state securities
        commission or any other regulatory authority of any stop order or of any
        order
        preventing or suspending any offering of any securities of the Company, or
        of
        the suspension of the qualification of the Common Stock of the Company for
        offering or sale in any jurisdiction, or the initiation of any proceeding
        for
        any such purpose.

       

      6.2  Listing.
        The
        Company shall promptly secure the listing or quotation, as applicable, of
        the
        shares of Common Stock issuable upon conversion of the Note and upon the
        exercise of the Warrant on the Principal Market upon which shares of Common
        Stock are listed or quoted for trading, as applicable (subject to official
        notice of issuance) and shall maintain such listing or quotation, as applicable,
        so long as any other shares of Common Stock shall be so listed or quoted,
        as
        applicable. As long as the Purchaser holds the Securities, the Company will
        maintain the listing or quotation, as applicable, of its Common Stock on
        a
        Principal Market, and will comply in all material respects with the Company’s
        reporting, filing and other obligations under the bylaws or rules of the
        National Association of Securities Dealers (“NASD”) and such exchanges, as
        applicable. 

       

      6.3  Market
        Regulations.
        The
        Company shall notify the SEC, NASD and applicable state authorities, in
        accordance with their requirements, of the transactions contemplated by this
        Agreement, and shall take all other necessary action and proceedings as may
        be
        required and permitted by applicable law, rule and regulation, for the legal
        and
        valid issuance of the Securities to the Purchaser and promptly provide copies
        thereof to the Purchaser.

       

      6.4  Reporting
        Requirements.
         As
        long
        as the Purchaser holds the Securities, the
        Company will timely file with the SEC all reports required to be filed pursuant
        to the Exchange Act and refrain from terminating its status as an issuer
        required by the Exchange Act to file reports thereunder even if the Exchange
        Act
        or the rules or regulations thereunder would permit such termination and
        

       

      (a)  As
        soon
        as available, and in any event within ninety (90) days after the end of each
        fiscal year of the Company, each of the Company’s and each of its Subsidiaries’
        audited financial statements with a report of independent certified public
        accountants of recognized standing selected by the Company and acceptable
        to the
        Purchaser (the “Accountants”),
        which
        annual financial statements shall be without qualification and shall include
        each of the Company’s and each of its Subsidiaries’ balance sheet as at the end
        of such fiscal year and the related statements of each of the Company’s and each
        of its Subsidiaries’ income, retained earnings and cash flows for the fiscal
        year then ended, prepared on a consolidating and consolidated basis to include
        the Company, each Subsidiary of the Company and each of their respective
        affiliates, all in reasonable detail and prepared in accordance with GAAP,
        together with (i) if and when available, copies of any management letters
        prepared by the Accountants; and (ii) a certificate of the Company’s President,
        Chief Executive Officer or Chief Financial Officer stating that such financial
        statements have been prepared in accordance with GAAP and whether or not
        such
        officer has knowledge of the occurrence of any Event of Default (as defined
        in
        the Note) and, if so, stating in reasonable detail the facts with respect
        thereto;

       

      (b)  As
        soon
        as available and in any event within forty five (45) days after the end of
        each
        fiscal quarter of the Company, an unaudited/internal balance sheet and
        statements of income, retained earnings and cash flows of the Company and
        each
        of its Subsidiaries as at the end of and for such quarter and for the year
        to
        date period then ended, prepared on a consolidating and consolidated basis
        to
        include all the Company, each Subsidiary of the Company and each of their
        respective affiliates, in reasonable detail and stating in comparative form
        the
        figures for the corresponding date and periods in the previous year, all
        prepared in accordance with GAAP, subject to year-end adjustments and
        accompanied by a certificate of the Company’s President, Chief Executive Officer
        or Chief Financial Officer, stating (i) that such financial statements have
        been
        prepared in accordance with GAAP, subject to year-end audit adjustments,
        and
        (ii) whether or not such officer has knowledge of the occurrence of any Event
        of
        Default (as defined in the Note) not theretofore reported and remedied and,
        if
        so, stating in reasonable detail the facts with respect thereto; 

       

      (c)  As
        soon
        as available and in any event within twenty (20) days after the end of each
        calendar month, an unaudited/internal balance sheet and statements of income,
        retained earnings and cash flows of each of the Subsidiaries as at the end
        of
        and for such month and for the year to date period then ended, prepared on
        a
        consolidating basis for each Subsidiary, in reasonable detail and stating
        in
        comparative form the figures for the corresponding date and periods in the
        previous year, and accompanied by a certificate of the Company’s President,
        Chief Executive Officer or Chief Financial Officer, stating whether or not
        such
        officer has knowledge of the occurrence of any Event of Default (as defined
        in
        the Note) not theretofore reported and remedied and, if so, stating in
        reasonable detail the facts with respect thereto;

       

      (d)  The
        Company shall timely file with the SEC all reports required to be filed pursuant
        to the Exchange Act and refrain from terminating its status as an issuer
        required by the Exchange Act to file reports thereunder even if the Exchange
        Act
        or the rules or regulations thereunder would permit such termination.
Promptly
        after (i) the filing thereof, copies of the Company’s most recent registration
        statements and annual, quarterly, monthly or other regular reports which
        the
        Company files with the Securities and Exchange Commission (the “SEC”),
        and
        (ii) the issuance thereof, copies of such financial statements, reports and
        proxy statements as the Company shall send to its stockholders; and

       

      (e) The
        Company shall deliver, or cause the applicable Subsidiary of the Company
        to
        deliver, such other information as the Purchaser shall reasonably
        request.
         

       

      6.5 Use
        of
        Funds.
        The
        Company shall use the proceeds of the sale of the Note and the Warrant as
        follows: (i) the Company shall invest or cause Xfone USA, Inc. to invest
        an
        aggregate amount of approximately $1,000,000 of such proceeds in capital
        equipment to be owned by Xfone USA, Inc., which such capital equipment shall
        for
        all purposes hereunder constitute Collateral (as defined in the Master Security
        Agreement); (ii) up to $799,900 of such proceeds shall be used by the Company
        and/or the Subsidiaries for general working capital purposes only; and (iii)
        the
        Company shall use up to $200,100 of such proceeds to pay or cause Xfone USA,
        Inc. to repay in full and irrevocably terminate that certain loan from AmSouth
        Bank to Xfone USA, Inc. 

       

      6.6 Access
        to Facilities.
        As long
        as the Purchaser holds the Securities, each of the Company and each of the
        Subsidiaries will permit any representatives designated by the Purchaser
        (or any
        successor of the Purchaser), upon reasonable notice and during normal business
        hours, at such person’s expense and accompanied by a representative of the
        Company or any Subsidiary (provided that no such prior notice shall be required
        to be given and no such representative of the Company or any Subsidiary shall
        be
        required to accompany the Purchaser in the event the Purchaser believes such
        access is necessary to preserve or protect the Collateral (as defined in
        the
        Master Security Agreement) or following the occurrence and during the
        continuance of an Event of Default (as defined in the Note)), to:

       

      (a)
        visit
        and inspect any of the properties of the Company or any of the
        Subsidiaries;

       

      (b)
        examine the corporate and financial records of the Company or any of the
        Subsidiaries (unless such examination is not permitted by federal, state
        or
        local law or by contract) and make copies thereof or extracts therefrom;
        and

       

      (c)
        discuss the affairs, finances and accounts of the Company or any of the
        Subsidiaries with the directors, officers and independent accountants of
        the
        Company or any of the Subsidiaries.

       

      Notwithstanding
        the foregoing, neither the Company nor any of the Subsidiaries will provide
        any
        non-public information to the Purchaser unless the Purchaser signs a
        confidentiality agreement and otherwise complies with Regulation FD, under
        the
        federal securities laws.

       

      6.7 Taxes.
        Each of
        the Company and each of its Subsidiaries will promptly pay and discharge,
        or
        cause to be paid and discharged, when due and payable, all taxes, assessments
        and governmental charges or levies imposed upon the income, profits, property
        or
        business of the Company and its Subsidiaries; provided, however, that any
        such
        tax, assessment, charge or levy need not be paid currently if (i) the validity
        thereof shall currently and diligently be contested in good faith by appropriate
        proceedings, (ii) such tax, assessment, charge or levy shall have no effect
        on
        the lien priority of the Purchaser in any property of the Company or any
        of its
        Subsidiaries and (iii) if the Company and/or such Subsidiary shall have set
        aside on its books adequate reserves with respect thereto in accordance with
        GAAP; and provided, further, that the Company and its Subsidiaries will pay
        all
        such taxes, assessments, charges or levies forthwith upon the commencement
        of
        proceedings to foreclose any lien which may have attached as security
        therefor.

       

      6.8 Insurance.
        As long
        as the Purchaser holds the Securities: Each of the Company and the Subsidiaries
        will keep its assets which are of an insurable character insured by financially
        sound and reputable insurers against loss or damage by fire, explosion and
        other
        risks customarily insured against by companies in similar business similarly
        situated as the Company and the Subsidiaries; and the Company and the
        Subsidiaries will maintain, with financially sound and reputable insurers,
        insurance against other hazards and risks and liability to persons and property
        to the extent and in the manner which the Company reasonably believes is
        customary for companies in similar business similarly situated as the Company
        and the Subsidiaries and to the extent available on commercially reasonable
        terms. The Company, and each of the Subsidiaries, will jointly and severally
        bear the full risk of loss from any loss of any nature whatsoever with respect
        to the assets pledged to the Purchaser as security for their respective
        obligations hereunder and under the Related Agreements. At the Company’s and
        each of the Subsidiaries’ joint and several cost and expense in amounts and with
        carriers reasonably acceptable to the Purchaser, each of the Company and
        each of
        the Subsidiaries shall (i) keep all its insurable properties and properties
        in
        which it has an interest insured against the hazards of fire, flood, sprinkler
        leakage, those hazards covered by extended coverage insurance and such other
        hazards, and for such amounts, as is customary in the case of companies engaged
        in businesses similar to the Company’s or the respective Subsidiary’s including
        business interruption insurance; (ii) intentionally omitted (iii) maintain
        public and product liability insurance against claims for personal injury,
        death
        or property damage suffered by others; (iv) maintain all such worker’s
        compensation or similar insurance as may be required under the laws of any
        state
        or jurisdiction in which the Company or the respective Subsidiary is engaged
        in
        business; (v) furnish the Purchaser with (x) copies of all policies and evidence
        of the maintenance of such policies at least thirty (30) days before any
        expiration date, (y) excepting the Company’s workers’ compensation policy,
        endorsements to such policies naming the Purchaser as “co-insured” or
“additional insured” and appropriate loss payable endorsements in form and
        substance satisfactory to the Purchaser, naming the Purchaser as loss payee,
        and
        (z) evidence that as to the Purchaser the insurance coverage shall not be
        impaired or invalidated by any act or neglect of the Company or any Subsidiary
        and the insurer will provide the Purchaser with at least thirty (30) days
        notice
        prior to cancellation. The Company and each Subsidiary shall instruct the
        insurance carriers that in the event of any loss thereunder, the carriers
        shall
        make payment for such loss to the Company and/or the Subsidiary and the
        Purchaser jointly. In the event that as of the date of receipt of each loss
        recovery upon any such insurance, the Purchaser has not declared an event
        of
        default with respect to this Agreement or any of the Related Agreements,
        then
        the Company and/or such Subsidiary shall be permitted to direct the application
        of such loss recovery proceeds toward investment in property, plant and
        equipment that would comprise “Collateral” secured by the Purchaser’s security
        interest pursuant to the Master Security Agreement or such other security
        agreement as shall be required by the Purchaser, with any surplus funds to
        be
        applied toward payment of the obligations of the Company to the Purchaser.
        In
        the event that the Purchaser has properly declared an event of default with
        respect to this Agreement or any of the Related Agreements, then all loss
        recoveries received by the Purchaser upon any such insurance thereafter may
        be
        applied to the obligations of the Company hereunder and under the Related
        Agreements, in such order as the Purchaser may determine. Any surplus (following
        satisfaction of all Company obligations to the Purchaser) shall be paid by
        the
        Purchaser to the Company or applied as may be otherwise required by law.
        Any
        deficiency thereon shall be paid by the Company or the Subsidiary, as
        applicable, to the Purchaser, on demand. 

       

      6.9 Intellectual
        Property.
        As long
        as the Purchaser holds the Securities, each of the Company and each of its
        Subsidiaries shall maintain in full force and effect its existence, rights
        and
        franchises and all licenses and other rights to use Intellectual Property
        owned
        or possessed by it and reasonably deemed to be necessary to the conduct of
        its
        business.

       

      6.10 Properties.
        As long
        as the Purchaser holds the Securities, each of the Company and each of its
        Subsidiaries will keep its properties in good repair, working order and
        condition, reasonable wear and tear excepted, and from time to time make
        all
        needful and proper repairs, renewals, replacements, additions and improvements
        thereto; and each of the Company and each of its Subsidiaries will at all
        times
        comply with each provision of all leases to which it is a party or under
        which
        it occupies property if the breach of such provision could, either individually
        or in the aggregate, reasonably be expected to have a Material Adverse
        Effect.

       

      6.11 Confidentiality.
        The
        Company will not, and will not permit any of its Subsidiaries to, disclose,
        and
        will not include in any public announcement, the name of the Purchaser, unless
        expressly agreed to by the Purchaser or unless and until such disclosure
        is
        required by law or applicable regulation, and then only to the extent of
        such
        requirement. Notwithstanding the foregoing, the Company may disclose the
        Purchaser’s identity and the terms of this Agreement to its current and
        prospective debt and equity financing sources.

       

      6.12 Required
        Approvals.
        (I) For
        so long as twenty five percent (25%) of the principal amount of the Note
        is
        outstanding, the Company, without the prior written consent of the Purchaser,
        shall not, and shall not permit any of the Subsidiaries to:

       

      (a)  (i)
        directly or indirectly declare or pay any dividends, other than dividends
        paid
        to the Company or any of its wholly-owned Subsidiaries, (ii) issue
        any
        preferred stock that is manditorily redeemable prior to the one year anniversary
        of Maturity Date (as defined in the Note or (iii) redeem any of its preferred
        stock or other equity interests;

       

      (b)  liquidate,
        dissolve or effect a material reorganization (it being understood that in
        no
        event shall the Company or any of the Subsidiaries dissolve, liquidate or
        merge
        with any other person or entity (unless, in the case of such a merger, the
        Company or, in the case of merger not involving the Company, such Subsidiary,
        as
        applicable, is the surviving entity);

       

      (c)  become
        subject to (including, without limitation, by way of amendment to or
        modification of) any agreement or instrument which by its terms would (under
        any
        circumstances) restrict the Company’s or any of the Subsidiaries, right to
        perform the provisions of this Agreement, any Related Agreement or any of
        the
        agreements contemplated hereby or thereby; 

       

      (d)  materially
        alter or change the scope of the business of the Company and the Subsidiaries
        taken as a whole; and

       

      (e)  (i)
        create, incur, assume or suffer to exist any indebtedness (exclusive of trade
        debt and debt incurred to finance the purchase of equipment (not to exceed
        $250,000 in the aggregate in any calendar year ) whether secured or unsecured
        other than (x) the Company’s obligations owed to the Purchaser, (y) indebtedness
        set forth on Schedule 6.12(e) attached hereto and made a part hereof and
        any
        refinancings or replacements thereof on terms no less favorable to the Purchaser
        than the indebtedness being refinanced or replaced, and (z) any indebtedness
        incurred in connection with the purchase of assets (other than equipment)
        in the
        ordinary course of business, or any refinancings or replacements thereof
        on
        terms no less favorable to the Purchaser than the indebtedness being refinanced
        or replaced, so long as any lien relating thereto shall only encumber the
        fixed
        assets so purchased and no other assets of the Company or any of the
        Subsidiaries; (ii) cancel any indebtedness owing to it in excess of $400,000
        in
        the aggregate during any 12 month period; (iii) assume, guarantee, endorse
        or
        otherwise become directly or contingently liable in connection with any
        obligations of any other person or entity that is not a subsidiary or affiliate
        of the Company except the endorsement of negotiable instruments by the Company
        or any Subsidiary thereof for deposit or collection or similar transactions
        in
        the ordinary course of business or guarantees of indebtedness otherwise
        permitted to be outstanding pursuant to this clause (e); and

       

      (II)
        The
        Company, without the prior written consent of the Purchaser, shall not (a)
        permit any of its Subsidiaries to, create or acquire any subsidiary or
        Subsidiary after the date hereof unless (i) such subsidiary is a wholly-owned
        subsidiary of the Company or any Subsidiary and (ii) such subsidiary or
        Subsidiary becomes a party to the Master Security Agreement, the Stock Pledge
        Agreement and the Subsidiary Guaranty (either by executing a counterpart
        thereof
        or an assumption or joinder agreement in respect thereof) and, to the extent
        required by the Purchaser, satisfies each condition of this Agreement and
        the
        Related Agreements as if such subsidiary were a Subsidiary on the Closing
        Date
        or (b) (i) permit any of its Subsidiaries to make, any investments in, or
        any
        loans or advances to any subsidiary, other than, so long as no Event of Default
        (as defined in the Note) has occurred and is continuing, immaterial investments,
        loans and/or advances made in the ordinary course of business or (ii) permit
        any
        of its Subsidiaries to transfer, any of its assets to its subsidiaries, other
        than, so long as no Event of Default has occurred and is continuing, immaterial
        asset transfers made in the ordinary course of business. 

       

      

       

      6.13 Reissuance
        of Securities.
        The
        Company agrees to reissue certificates representing the Securities without
        the
        legends set forth in Section 5.8 above at such time as:

       

      (f)  the
        holder thereof is permitted to dispose of such Securities pursuant to Rule
        144(k) under the Securities Act; or

       

      (g)  upon
        resale subject to an effective registration statement after such Securities
        are
        registered under the Securities Act.

       

      The
        Company agrees to cooperate with the Purchaser in connection with all resales
        pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary
        to
        allow such resales provided the Company and its counsel receive reasonably
        requested representations from the Purchaser and broker, if any. 

       

      6.14 Opinion.
        On the
        Closing Date, the Company will deliver to the Purchaser an opinion acceptable
        to
        the Purchaser from the Company’s external legal counsel. The Company will
        provide, at the Company’s expense, such other legal opinions in the future as
        are deemed reasonably necessary by the Purchaser (and acceptable to the
        Purchaser) in connection with the conversion of the Note and exercise of
        the
        Warrant.

       

      6.15 Margin
        Stock. The
        Company will not permit any of the proceeds of the Note or the Warrant to
        be
        used directly or indirectly to “purchase” or “carry”“margin stock” or to repay
        indebtedness incurred to “purchase” or “carry”“margin stock” within the
        respective meanings of each of the quoted terms under Regulation U of the
        Board
        of Governors of the Federal Reserve System as now and from time to time
        hereafter in effect.

       

      6.16 Financing
        Right of First Refusal.

       

      (a)  With
        effect for eighteen (18 ) months from the date hereof (the “Period”), the
        Company hereby grants to the Purchaser a right of first refusal to provide
        any
        Additional Financing (as defined below) to be issued by the Company and/or
        any
        of the Subsidiaries, subject to the following terms and conditions. During
        the
        Period, prior to the incurrence of any additional indebtedness and/or the
        sale
        or issuance of any secured convertible debt securities of the Company or
        any of
        the Subsidiaries (an “Additional Financing”), the Company and/or any Subsidiary,
        as the case may be, shall notify the Purchaser of its intention to enter
        into
        such Additional Financing. In connection therewith, the Company and/or the
        applicable Subsidiary thereof shall submit a fully executed term sheet (a
        “Proposed Term Sheet”) to the Purchaser setting forth the terms, conditions and
        pricing of any such Additional Financing (such financing to be negotiated
        on
“arm’s length” terms and the terms thereof to be negotiated in good faith)
        proposed to be entered into by the Company and/or such Subsidiary. The Purchaser
        shall have the right, but not the obligation, to deliver its own proposed
        term
        sheet (the “Purchaser Term Sheet”) setting forth the terms and conditions upon
        which the Purchaser would be willing to provide such Additional Financing
        to the
        Company and/or such Subsidiary. The Purchaser shall deliver such Purchaser
        Term
        Sheet within five (5) business days of receipt of each such Proposed Term
        Sheet.
        If the provisions of the Purchaser Term Sheet are substantially similar in
        net
        economic effect to the provisions of the Proposed Term Sheet, the Company
        and/or
        such Subsidiary shall enter into and consummate the Additional Financing
        transaction outlined in the Purchaser Term Sheet.
        If the
        provisions of the Purchaser Term Sheet are not substantially similar in net
        economic effect to the provisions of the Proposed Term Sheet, the Company
        and/or
        such Subsidiary may enter into and consummate the Additional Financing
        transaction outlined in the Proposed Term Sheet.

       

      (b)  Subject
        to section 6.16 (a) above, the Company will not, and will not permit the
        Subsidiaries to, agree, directly or indirectly, to any restriction with any
        person or entity which limits the ability of the Purchaser to consummate
        an
        Additional Financing with the Company or any of the Subsidiaries.

       

         6.17 Authorization
        and Reservation of Shares.
        The
        Company shall at all times have authorized and reserved a sufficient number
        of
        shares of Common Stock to provide for the conversion of the Note and exercise
        of
        the Warrants.

       

      7.  Covenants
        of the Purchaser.
        The
        Purchaser covenants and agrees with the Company as follows:

       

      7.1  Confidentiality.
        The
        Purchaser will not disclose, and will not include in any public announcement,
        the name of the Company or any of its subsidiaries, unless expressly agreed
        to
        by the Company or unless and until such disclosure is required by law or
        applicable regulation, and then only to the extent of such
        requirement.

       

      7.2  Non-Public
        Information.
        The
        Purchaser will not effect any sales in the shares of the Company’s Common Stock
        while in possession of material, non-public information regarding the Company
        if
        such sales would violate applicable securities law.

       

      7.3  Limitation
        on Acquisition of Common Stock of the Company.
        Notwithstanding anything to the contrary contained in this Agreement, any
        Related Agreement or any document, instrument or agreement entered into in
        connection with any other transactions between the Purchaser and the Company,
        the Purchaser may not acquire stock in the Company (including, without
        limitation, pursuant to a contract to purchase, by exercising an option or
        warrant, by converting any other security or instrument, by acquiring or
        exercising any other right to acquire, shares of stock or other security
        convertible into shares of stock in the Company, or otherwise, and such
        contracts, options, warrants, conversion or other rights shall not be
        enforceable or exercisable) to the extent such stock acquisition would cause
        any
        interest (including any original issue discount) payable by the Company to
        the
        Purchaser not to qualify as “portfolio interest” within the meaning of Section
        881(c)(2) of the Code, by reason of Section 881(c)(3) of the Code,
        taking
        into account the constructive ownership rules under Section 871(h)(3)(C)
        of the
        Code (the “Stock Acquisition Limitation”). The Stock Acquisition Limitation
        shall automatically become null and void without any notice to the Company
        upon
        the earlier to occur of either (a) the Company’s delivery to the Purchaser of a
        Notice of Redemption (as defined in the Note) or (b) the existence of an
        Event
        of Default (as defined in the Note) at a time when the average closing price
        of
        the Company’s common stock as reported by Bloomberg, L.P. on the Principal
        Market for the immediately preceding five trading days is greater than or
        equal
        to 150% of the Fixed Conversion Price (as defined in the Note).
        The
        Note
        is intended to be a registered obligation within the meaning of Treasury
        Regulation Section 1.871-14(c)(1)(i) and the Company (or its agent) shall
        register the Note (and thereafter shall maintain such registration) as to
        both
        principal and any stated interest. Notwithstanding any document, instrument
        or
        agreement relating to the Note to the contrary, transfer of the Note (or
        the
        right to any payments of principal or stated interest thereunder) may only
        be
        effected by (i) surrender of the Note and either the reissuance by the Company
        of the Note to the new holder or the issuance by the Company of a new instrument
        to the new holder, or (ii) transfer through a book entry system maintained
        by
        the Company (or its agent), within the meaning of Treasury Regulation Section
        1.871-14(c)(1)(i)(B).

       

      8.  Covenants
        of the Company and the Purchaser Regarding Indemnification.

       

      8.1  Company
        Indemnification.
        The
        Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser,
        each of the Purchaser’s officers, directors, agents, affiliates, control
        persons, and principal shareholders, against all claims, costs, expenses,
        liabilities, obligations, losses or damages (including reasonable legal fees)
        of
        any nature, incurred by or imposed upon the Purchaser which result, arise
        out of
        or are based upon: (i) any misrepresentation by the Company or any of its
        Subsidiaries or breach of any warranty by the Company or any of its Subsidiaries
        in this Agreement, any other Related Agreement or in any exhibits or schedules
        attached hereto or thereto; or (ii) any breach or default in performance
        by
        Company or any of its Subsidiaries of any covenant or undertaking to be
        performed by Company or any of its Subsidiaries hereunder, under any other
        Related Agreement or any other agreement entered into by the Company and/or
        any
        of its Subsidiaries and the Purchaser relating hereto or thereto. 

       

      8.2  Purchaser’s
        Indemnification.
        The
        Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company,
        each of the Company's Subsidiaries and each of the Company’s or any of its
        subsidiary's officers, directors, agents, affiliates, control persons and
        principal shareholders, at all times against all claims, costs, expenses,
        liabilities, obligations, losses or damages (including reasonable legal fees)
        of
        any nature, incurred by or imposed upon the Company and/or any of its
        Subsidiaries which result, arise out of or are based upon: (i) any
        misrepresentation by the Purchaser or breach of any warranty by the Purchaser
        in
        this Agreement, any other Related Agreement or in any exhibits or schedules
        attached hereto or thereto; or (ii) any breach or default in performance
        by
        the Purchaser of any covenant or undertaking to be performed by the Purchaser
        hereunder, under any other Related Agreement or any other agreement entered
        into
        by the Company and/or ant of its Subsidiaries and the Purchaser relating
        hereto
        or thereto.

       

      9.  Conversion
        of Convertible Note.

       

      9.1  Mechanics
        of Conversion.

       

      (a)  Provided
        the Purchaser has notified the Company of the Purchaser’s intention to sell the
        Note Shares and the Note Shares are included in an effective registration
        statement or are otherwise exempt from registration when sold: (i) upon the
        conversion of the Note or part thereof, the Company shall, at its own cost
        and
        expense, take all necessary action (including the issuance of an opinion
        of
        counsel reasonably acceptable to the Purchaser following a request by the
        Purchaser) to assure that the Company’s transfer agent shall issue shares of the
        Company’s Common Stock in the name of the Purchaser (or its nominee) or such
        other persons as designated by the Purchaser in accordance with Section 9.1(b)
        hereof and in such denominations to be specified representing the number
        of Note
        Shares issuable upon such conversion; and (ii) the Company warrants
        that no
        instructions other than these instructions have been or will be given to
        the
        transfer agent of the Company’s Common Stock and that after the Effectiveness
        Date (as defined in the Registration Rights Agreement) the Note Shares issued
        will be freely transferable subject to the prospectus delivery requirements
        of
        the Securities Act and the provisions of this Agreement or any other Related
        Agreement and will not contain a legend restricting the resale or
        transferability of the Note Shares.

       

      (b)  The
        Purchaser will give notice of its decision to exercise its right to convert
        the
        Note or part thereof by telecopying or otherwise delivering an executed and
        completed notice of the number of shares to be converted to the Company (the
        “Notice of Conversion”). The Purchaser will not be required to surrender the
        Note until the Purchaser receives a credit to the account of the Purchaser’s
        prime broker through the DWAC system (as defined below), representing the
        Note
        Shares or until the Note has been fully satisfied. Each date on which a Notice
        of Conversion is telecopied or delivered to the Company in accordance with
        the
        provisions hereof shall be deemed a “Conversion Date.” Pursuant to the terms of
        the Notice of Conversion, the Company will issue instructions to the transfer
        agent accompanied by an opinion of counsel within three (3) business days
        of the
        date of the delivery to the Company of the Notice of Conversion and shall
        cause
        the transfer agent to transmit the certificates representing the Note Shares
        issued to the Purchaser (or its nominee) by crediting the account of the
        Purchaser’s prime broker with the Depository Trust Company (“DTC”) through its
        Deposit Withdrawal Agent Commission (“DWAC”) system within three (3) business
        days after receipt by the Company of the Notice of Conversion (the “Delivery
        Date”).

       

      (c)  The
        Company understands that a delay in the delivery of the Note Shares in the
        form
        required pursuant to Section 9 hereof beyond the Delivery Date could result
        in
        economic loss to the Purchaser. In the event that the Company fails to direct
        its transfer agent to deliver the Note Shares to the Purchaser via the DWAC
        system within the time frame set forth in Section 9.1(b) above and the Note
        Shares are not delivered to the Purchaser by the Delivery Date, as compensation
        to the Purchaser for such loss, the Company agrees to pay late payments to
        the
        Purchaser for late issuance of the Note Shares in the form required pursuant
        to
        Section 9 hereof upon conversion of the Note in the amount equal to the greater
        of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser’s
        actual damages from such delayed delivery. The Company shall pay any payments
        incurred under this Section in immediately available funds upon demand and,
        in
        the case of actual damages, accompanied by reasonable documentation of the
        amount of such damages. Such documentation shall show the number of shares
        of
        Common Stock the Purchaser is forced to purchase (in an open market transaction)
        which the Purchaser anticipated receiving upon such conversion, and shall
        be
        calculated as the amount by which (A) the Purchaser’s total purchase price
        (including customary brokerage commissions, if any) for the shares of Common
        Stock so purchased exceeds (B) the aggregate principal and/or interest amount
        of
        the Note, for which such Conversion Notice was not timely honored.

       

      10.  Registration
        Rights.

       

      10.1  Registration
        Rights Granted.
        The
        Company hereby grants registration rights to the Purchaser pursuant to the
        Registration Rights Agreement. 

       

      10.2  Offering
        Restrictions.
        Except
        as set forth on Schedule 10.2 and
        except as previously disclosed in the SEC Reports or in the Exchange Act
        Filings, or stock or stock options granted (including future extensions thereto)
        to employees, officers or directors of the Company (these exceptions hereinafter
        referred to as the “Excepted Issuances”), neither the Company nor any of its
        Subsidiaries will, prior to the full repayment or conversion of the Note
        (together with all accrued and unpaid interest and fees related thereto),
        (x)
        enter into any equity line of credit agreement or similar agreement or (y)
        issue, or enter into any agreement to issue, any securities with a
        variable/floating conversion and/or pricing feature which are or could be
        (by
        conversion or registration) free-trading securities (i.e. common stock subject
        to a registration statement).

       

      11.  Miscellaneous.

       

      11.1  Governing
        Law, Jurisdiction and Waiver of Jury Trial.

       

      

       

      (a)  THIS
        AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED
        AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE
        TO
        CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO PRINCIPLES
        OF
        CONFLICTS OF LAWS.

       

      (b)  THE
        COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
        IN
        THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
        TO
        HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE
        HAND,
        AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY
        OF THE
        RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT
        OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED,
        THAT
        THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS
        MAY
        HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE
        OF
        NEW YORK; AND FURTHER PROVIDED,
        THAT
        NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE PURCHASER
        FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION
        TO
        COLLECT THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE
        MASTER
        SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE OBLIGATIONS (AS DEFINED
        IN THE
        MASTER SECURITY AGREEMENT), OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER
        IN
        FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE
        TO
        SUCH JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND
        THE
        COMPANY HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF
        PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM
        NON CONVENIENS.
        THE
        COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
        PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
        SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
        MAIL
        ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.9 AND THAT
        SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
        ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS,
        PROPER
        POSTAGE PREPAID.

       

      

      THE
        PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
        APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
        OF
        THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS
        TO
        TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
        WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR
        THE
        COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
        RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT,
        ANY
        OTHER RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR
        THERETO.

      

       

       

      11.2  Severability.
        Wherever possible each provision of this Agreement and the Related Agreements
        shall be interpreted in such manner as to be effective and valid under
        applicable law, but if any provision of this Agreement or any Related Agreement
        shall be prohibited by or invalid or illegal under applicable law such provision
        shall be ineffective to the extent of such prohibition or invalidity or
        illegality, without invalidating the remainder of such provision or the
        remaining provisions thereof which shall not in any way be affected or impaired
        thereby.

       

      11.3  Survival.
        The
        representations, warranties, covenants and agreements made herein shall survive
        any investigation made by the Purchaser and the closing of the transactions
        contemplated hereby to the extent provided therein. All statements as to
        factual
        matters contained in any certificate or other instrument delivered by or
        on
        behalf of the Company pursuant hereto in connection with the transactions
        contemplated hereby shall be deemed to be representations and warranties
        by the
        Company hereunder solely as of the date of such certificate or
        instrument.
        All
        indemnities set forth herein shall survive the execution, delivery and
        termination of this Agreement and the Note and the making and repayment of
        the
        obligations arising hereunder, under the Note and under the other Related
        Agreements.

       

      11.4  Successors.
        Except
        as otherwise expressly provided herein and
        under
        applicable securities laws,
        the
        provisions hereof shall inure to the benefit of, and be binding upon, the
        successors, heirs, executors and administrators of the parties hereto and
        shall
        inure to the benefit of and be enforceable by each person or entity which
        shall
        be a holder of the Securities from time to time, other than the holders of
        Common Stock which has been sold by the Purchaser pursuant to Rule 144 or
        an
        effective registration statement. The Purchaser shall not be permitted to
        assign
        its rights hereunder or under any Related Agreement to a competitor of the
        Company.

       

      11.5  Entire
        Agreement; Maximum Interest.
        This
        Agreement, the Related Agreements, the exhibits and schedules hereto and
        thereto
        and the other documents delivered pursuant hereto constitute the full and
        entire
        understanding and agreement between the parties with regard to the subjects
        hereof and no party shall be liable or bound to any other in any manner by
        any
        representations, warranties, covenants and agreements except as specifically
        set
        forth herein and therein. Nothing contained in this Agreement, any Related
        Agreement or in any document referred to herein or delivered in connection
        herewith shall be deemed to establish or require the payment of a rate of
        interest or other charges in excess of the maximum rate permitted by applicable
        law. In the event that the rate of interest or dividends required to be paid
        or
        other charges hereunder exceed the maximum rate permitted by such law, any
        payments in excess of such maximum shall be credited against amounts owed
        by the
        Company to the Purchaser and thus refunded to the Company.

       

      11.6  Amendment
        and Waiver.

       

      (a)  This
        Agreement may be amended or modified only upon the written consent of the
        Company and the Purchaser.

       

      (b)  The
        obligations of the Company and the rights of the Purchaser under this Agreement
        may be waived only with the written consent of the Purchaser. 

       

      (c)  The
        obligations of the Purchaser and the rights of the Company under this Agreement
        may be waived only with the written consent of the Company.

       

      11.7  Delays
        or Omissions.
        It is
        agreed that no delay or omission to exercise any right, power or remedy accruing
        to any party, upon any breach, default or noncompliance by another party
        under
        this Agreement or the Related Agreements, shall impair any such right, power
        or
        remedy, nor shall it be construed to be a waiver of any such breach, default
        or
        noncompliance, or any acquiescence therein, or of or in any similar breach,
        default or noncompliance thereafter occurring. All remedies, either under
        this
        Agreement or the Related Agreements, by law or otherwise afforded to any
        party,
        shall be cumulative and not alternative.

       

      11.8  Notices.
        All
        notices required or permitted hereunder shall be in writing and shall be
        deemed
        effectively given:

       

      (a)  upon
        personal delivery to the party to be notified;

       

      (b)  when
        sent
        by confirmed facsimile if sent during normal business hours of the recipient,
        if
        not, then on the next business day;

       

      (c)  five
        (5)
        business days after having been sent by registered or certified mail, return
        receipt requested, postage prepaid; or

       

      (d)  two
        (2)
        day after deposit with a nationally recognized overnight courier, specifying
        next day delivery, with written verification of receipt.

       

      All
        communications shall be sent as follows:

       

      
        	
                If
                  to the Company, by courier, to:

                 

                 

                 

                 

                 

                If
                  to the Company, by mail, to:

                 

              	
                Xfone,
                  Inc.

                c/o
                  Xfone 018 Ltd.

                1
                  Haodem Street, 3rd
                  Floor

                Kiryat
                  Matalon,

                Petach
                  Tikva

                Israel

                 

                Xfone,
                  Inc.

                c/o
                  Xfone 018 Ltd.

                POB
                  7616

                Petach
                  Tikva 49170

                Israel

                 

                Attention: Alon
                  Reisser, Adv.

                Facsimile: 011.972.39238838

              
	 	
                 

                with
                  a copy to:

              
	 	
                 

                Yitzhak
                  Rosenbaum

                Advocate
                  and Attorney-at-Law 

                Rosenbaum
                  & Co.

                Giron
                  Center, Room 315

                Ra'anana
                  43363

                Israel

                Facsimile:
                  011.972.508966694

              
	
                 

                If
                  to the Purchaser, to:

                 

              	
                 

                Laurus
                  Master Fund, Ltd.

                c/o
                  M&C Corporate Services Limited

                P.O.
                  Box 309 GT

                Ugland
                  House 

                George
                  Town

                South
                  Church Street

                Grand
                  Cayman, Cayman Islands

                 

                Attention:_______________

                Facsimile: 345-949-8080

              
	 	
                 

                with
                  a copy to:

              
	 	
                 

                John
                  E. Tucker, Esq.

                825
                  Third Avenue 14th Floor

                New
                  York, NY 10022

                Facsimile: 212-541-4434

              

      

       

      or
        at
        such other address as the Company or the Purchaser may designate by written
        notice to the other parties hereto given in accordance herewith.

       

      11.9  Attorneys’
        Fees.
        In the
        event that any suit or action is instituted to enforce any provision in this
        Agreement or any Related Agreement, the prevailing party in such dispute
        shall
        be entitled to recover from the losing party all fees, costs and expenses
        of
        enforcing any right of such prevailing party under or with respect to this
        Agreement and/or such Related Agreement, including, without limitation, such
        reasonable fees and expenses of attorneys and accountants, which shall include,
        without limitation, all fees, costs and expenses of appeals.

       

      11.10  Titles
        and Subtitles.
        The
        titles of the sections and subsections of this Agreement are for convenience
        of
        reference only and are not to be considered in construing this
        Agreement.

       

      11.11  Facsimile
        Signatures; Counterparts.
        This
        Agreement may be executed by facsimile signatures and in any number of
        counterparts, each of which shall be an original, but all of which together
        shall constitute one agreement.

       

      11.12  Broker’s
        Fees.
        Except
        as set forth on Schedule 11.12 hereof, each party hereto represents and warrants
        that no agent, broker, investment banker, person or firm acting on behalf
        of or
        under the authority of such party hereto is or will be entitled to any broker’s
        or finder’s fee or any other commission directly or indirectly in connection
        with the transactions contemplated herein. Each party hereto further agrees
        to
        indemnify each other party for any claims, losses or expenses incurred by
        such
        other party as a result of the representation in this Section 11.12 being
        untrue.

       

      11.13  Construction.
        Each
        party acknowledges that its legal counsel participated in the preparation
        of
        this Agreement and the Related Agreements and, therefore, stipulates that
        the
        rule of construction that ambiguities are to be resolved against the drafting
        party shall not be applied in the interpretation of this Agreement or any
        Related Agreement to favor any party against the other.

       

      [THE
        REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

       

      IN
        WITNESS WHEREOF, the parties hereto have executed this SECURITIES PURCHASE
        AGREEMENT as of the date set forth in the first paragraph hereof.

       

      
        	
                COMPANY:

              	
                PURCHASER:

              
	
                 

                XFONE,
                  INC.

              	
                 

                LAURUS
                  MASTER FUND, LTD.

              
	
                 

                By:                                                 
                  

              	
                 

                By:                                                  
                  

              
	
                 

                Name:
                  Guy Nissenson

              	
                 

                Name:                                            
                  

              
	
                 

                Title:
                  President
                  & CEO

              	
                 

                Title:                                               

              

      

       

       

      

        
          

        

      

      

        
        

       

      EXHIBIT
        A

       

      FORM
        OF CONVERTIBLE NOTE

       

      

       

      

      
         

        
           

          
            

          

        

        
           

          
          

        

      

       

      EXHIBIT
        B

       

      FORM
        OF WARRANT

       

      

       

      

      
        
          
             

          

        

         

        
           

          
          

        

      

       

      EXHIBIT
        C

       

      FORM
        OF OPINION

       

      

      
        
          
             

          

           

        

        
           

          
            

          

        

        
           

          
          

        

      

       

      EXHIBIT
        D

       

      FORM
        OF ESCROW AGREEMENT

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.2(a) - Subsidiaries

      

      
        	
                 

                The
                  Subsidiary

              	
                 

                The
                  Direct Owner

              	
                 

                Percentage

              
	
                 

                Xfone
                  USA, Inc.

              	
                 

                Xfone,
                  Inc.

              	
                 

                100%

              
	
                 

                eXpeTel
                  Communications, Inc.

              	
                 

                Xfone
                  USA, Inc.

              	
                 

                100%

              
	
                 

                Gulf
                  Coast Utilities, Inc.

              	
                 

                Xfone
                  USA, Inc.

              	
                 

                100%

              

      

      

      Note:
        Xfone, Inc. owns 40% of Story Telecom, Inc., which is intentionally excluded
        from this Schedule 4.2(a). 

      

      

       

       

       

      
 

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.2 (b) - subsidiaries

      

      
        	
                 

                The
                  subsidiary

              	
                 

                The
                  Direct Owner

              	
                 

                Percentage

              
	
                 

                Swiftnet
                  Limited

              	
                 

                Xfone,
                  Inc.

              	
                 

                100%

              
	
                 

                Xfone
                  018 Ltd.

              	
                 

                Xfone,
                  Inc.

              	
                 

                69%

              

      

      

      Note:
        Xfone, Inc. owns directly
        40% of
        Story Telecom, Inc. Xfone, Inc. owns indirectly
        47.5% of
        Auracall Limited, 40% of Story Telecom Limited and 40% of Story Telecom
        (Ireland) Limited. All these entities have been intentionally excluded from
        this
        Schedule 4.2 (b). 

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.3

      

      (a)
         Authorized,
        issued and outstanding capital stock of each Subsidiary:

       

      Xfone
        USA, Inc. - 1,000 shares of common stock. 

       

      eXpeTel
        Communications, Inc. - 10,000 shares of common stock. 

       

      Gulf
        Coast Utilities, Inc. - 1,000 shares of common stock. 

       

      (b)
         

      
        	
                Party
                  to whom shares and/or warrants which
                  will be issued and/or granted to:

              	
                Number
                  of Shares 

                to
                  be issued

              
	
                 

                (i)
                  Shares of common stock of the Company issued to the Purchaser in
                  connection with the Purchaser's $1,500,000 potential incremental
                  funding.

              	
                 

                Up
                  to 550,000

              
	
                 

                (ii)
                  Shares of common stock of the Company issued in connection with
                  the
                  acquisition by the Company of I-55 Internet Services, Inc. pursuant
                  to
                  that certain Agreement and Plan of Merger, dated as of August 18,
                  2005, by
                  and among the Company, Xfone USA, Inc., I-55 Internet Services,
                  Inc. and
                  the Principals (as defined therein), as may be amended, modified,
                  restated
                  or supplemented from time to time, including issuance of shares
                  to MCG
                  Capital Corporation, (though no more than 2,700,000 shares and/or
                  warrants
                  may be issued and/or granted without prior written approval by
                  Purchaser).
                  

              	
                 

                Up
                  to 2,700,000

                 

                 

              
	
                 

                (iii)
                  Shares of common stock of the Company issued in connection with
                  the
                  acquisition of I-55 Telecommunications, LLC pursuant to that certain
                  Agreement and Plan of Merger, dated as of August 26, 2005 by and
                  among the
                  Company, Xfone USA, Inc., I-55 Telecommunications, LLC and the
                  Principal
                  (as defined therein), as may be amended, modified, restated or
                  supplemented from time to time, (though no more than 900,000 shares
                  and/or
                  warrants may be issued and/or granted without prior written approval
                  by
                  Purchaser).

              	
                 

                Up
                  to 900,000

              

      

       

      (iv)
        Shares of common stock and/or warrants which will be issued, issuable and/or
        granted by the Company in connection with additional
        financing transactions
        by and
        among the Company and investors other than the Purchaser, in an aggregate
        amount
        not to exceed $5,000,000, provided that such additional financing transactions
        are consummated on or before March 1, 2006.

       

      (v)
        Shares underlying warrants valued in the aggregate amount of up to $50,000
        in
        connection with a Legal Services Agreement between the Company and Mr. Yitzhak
        Rosenbaum.

       

      (vi)
        All
        options, warrants, rights (including conversion or preemptive rights and
        rights
        of first refusal), proxy or stockholder agreements, or arrangements or
        agreements of any kind (as each may be amended, modified, restated and/or
        supplemented from time to time) for the purchase or acquisition from the
        Company
        of any of its securities which have been disclosed
        in the SEC Reports and in the Exchange Act Filings filed with the SEC prior
        to
        and including the date hereof, including without prejudice to the generality
        of
        the above, in
        connection with the Finders Agreement and the Financial Consulting Agreement
        by
        and among the Company and Oberon Securities, LLC, as may be amended, modified,
        restated or supplemented from time to time.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.6

      

       

      (i)
        Purchaser's $1,500,000 incremental funding.

       

      (ii)
        Additional financing transactions by and among the Company and investors
        other
        than the Purchaser, in an aggregate amount not to exceed $5,000,000, to be
        completed on or before March 1, 2006, including any additional shares and/or
        warrants to be issued, issuable and/or granted to such investors as a result
        of
        an adjustment to the Fixed Conversion Price (as defined in the
        Note).

       

      (iii)
        As
        disclosed in the SEC Reports.

      

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.7

       

      (i)
        The
        Company's majority owned Israeli-based subsidiary, Xfone 018 Ltd., has received
        credit facilities from Bank Hapoalim B.M. in Israel to finance its start-up
        activities. The credit facilities are secured, inter alia, with a personal
        collateral by Abraham Keinan and/or Guy Nissenson (which includes a stock
        pledge). The Company undertook to indemnify Abraham Keinan and/or Guy Nissenson
        on account of any damage and/or loss and/or expenses (including legal expenses)
        that they may incur in connection with the stock pledge and/or any other
        obligation made by them to Bank Hapoalim. 

       

      (ii)
        As
        disclosed in the SEC Reports. 

       

      

       

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.9

      

      (i)
        Pat
        Ryan lien on Shell Landing Plant - up to $130,000. 

      

      (ii)
        I-55
        Internet Services: Homestead Bank lien on two cars, 2004 Ford Escort, 2002
        Ford
        Focus - up to $90,000. 

      

      (iii)
        As
disclosed
        in the SEC Reports and in the Exchange Act Filings.

      

       

      

       

      

       

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.10

      

      I-55
        Internet Services occasionally receives communications regarding intellectual
        property rights that allegedly may be violated by end users. I-55 Internet
        Services responds to such inquiries in the normal course of its business,
        and no
        owner of such intellectual property rights has pursues any recourse from
        I-55
        Internet Services. 

      

      

      

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.12

      

      (i)
        As
        disclosed in the SEC Reports and in the Exchange Act Filings.

      

      (ii)
        Notwithstanding (i) above, on December 1, 2004, WS Telecom, Inc. (now Xfone
        USA,
        Inc.) filed before the Mississippi Public Service Commission a formal complaint
        against BellSouth Telecommunications, Inc. (“BellSouth”) for expedited relief,
        for negotiations, or in the alternative, for final resolution of disputes.
        This
        complaint sought credits to Xfone USA account with BellSouth in the total
        amount
        of $386,292.40. Xfone USA alleged that these charges were improperly billed
        by
        BellSouth to its account. BellSouth filed an answer to Xfone USA's
        complaint denying that the charges were improperly billed. The parties
        have
        reached a confidential settlement arrangement regarding the disputed charges.
        

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.13

      

      Xfone
        USA, Inc. has an outstanding E-911 tax liability in the amount of
        approximately $420,000. This debt was represented on the consolidated financial
        statements of Xfone, Inc. under other liabilities and accrued
        expenses.

      

      Xfone
        USA, Inc. and its subsidiaries are currently in the midst of a tax audit
        performed by the Mississippi State Tax Commission.

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.14

      

      As
        disclosed in the SEC Reports and in the Exchange Act Filings.

      

      

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.15

      

      	·  	
              5,500,000
                shares underlying the 5,500,000 options under The Company's 2004
                SOP.

            

      	·  	
              Up
                to 125,000 shares plus up to 750,000 shares underlying 750,000 warrants
                in
                connection with the Finders Agreement and the Financial Consulting
                Agreement between the Company and Oberon Securities, LLC (as each
                may be
                amended, modified, restated and/or supplemented from time to
                time).

            

      	·  	
              Up
                to 125,000 shares underlying 125,000 warrants in connection with
                the
                Public Relations Agreement between the Company and Elite Financial
                Communications Group, LLC.

            

      	·  	
              Shares
                underlying warrants valued in the aggregate amount of up to $50,000
                in
                connection with a Legal Services Agreement between the Company and
                Mr.
                Yitzhak Rosenbaum.

            

      	·  	
              3,150
                shares issued to Mr. Simon Langbart.

            

      	·  	
              Up
                to 2,700,000 shares and/or warrants which will be issued and/or granted
                in
                connection with that certain Agreement and Plan of Merger by and
                among the
                Company, Xfone USA, Inc., I-55 Internet Services, Inc. and the Principals
                (as defined therein) dated August 18, 2005, as may be amended, modified,
                restated or supplemented from time to time (though no more than 2,700,000
                shares and/or warrants may be issued and/or granted without prior
                written
                approval by Purchaser), and the acquisition of I-55 Internet Services,
                including any issuance and/or grant of shares and/or warrants to
                creditors
                and/or debt holders of I-55 Internet Services and/or to MCG Capital
                Corporation.

            

      	·  	
              Up
                to 900,000 shares and/or warrants which may be issued and/or granted
                in
                connection with that certain Agreement and Plan of Merger by and
                among the
                Company, Xfone USA, Inc., I-55 Telecommunications, LLC and the Principal
                (as defined therein) dated August 26, 2005, as may be amended, modified,
                restated or supplemented from time to time (though no more than 900,000
                shares and/or warrants may be issued and/or granted without prior
                written
                approval by Purchaser), and the acquisition of I-55 Telecommunications,
                including any issuance and/or grant of shares and/or warrants to
                creditors
                and/or debt holders of I-55
                Telecommunications.

            

      	·  	
              Up
                to 550,000 shares and/or warrants which will be issued and/or granted
                to
                the Purchaser in connection with the Purchaser's $1,500,000 incremental
                funding.

            

      	·  	
              Shares
                and/or warrants which will be issued, issuable and/or granted by
                the
                Company in connection with additional financing transactions between
                the
                Company and investors other than the Purchaser, in an aggregate amount
                not
                to exceed $5,000,000, to be completed on or before March 1, 2006,
                together
                with any additional shares and/or warrants to be issued, issuable
                and/or
                granted to such investors as a result of an adjustment to the Fixed
                Conversion Price (as defined in the
                Note).

            

      	·  	
              As
                disclosed in the SEC Reports.

            

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.17

      

      None

      

      

      

      

      

      

      

      

      

      

      

      

       

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.20

      

       

      The
        following entities have no such insurance:

       

      Xfone,
        Inc.

       

      eXpeTel
        Communications, Inc.

       

      Gulf
        Coast Utilities, Inc.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        4.21

      

      None

      

      

      

      

      

      

      

      

      

      

      

      

       

      

       

      

       

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        6.12 (e)

      None
        

       

      

       

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      SECURITIES
        PURCHASE AGREEMENT

       

      Schedule
        10.2

       

      In
        return
        for services provided and/or to be provided, Oberon Securities, LLC, will
        be
        entitled to a number of shares of common stock of the Company that will not
        exceed the product of: (a) $350,000; divided by (b) the closing share price
        of
        the Company's common stock as of the closing date five days following the
        effectiveness date of the registration statement for these underlying
        shares.

       

       SECURITIES
        PURCHASE AGREEMENT

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

       

      Schedule
        11.12

       

      Oberon
        Securities, LLC.Exhibit 10.50

    
      Exhibit
        10.50

       

      THIS
        NOTE AND THE COMMON SHARES ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
        BEEN
        REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
        APPLICABLE STATE
        SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE
        UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
        HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO
        THIS
        NOTE OR SUCH SHARES UNDER
        SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
        REASONABLY SATISFACTORY TO XFONE, INC. THAT SUCH REGISTRATION IS NOT
        REQUIRED.

       

      SECURED
        CONVERTIBLE TERM NOTE

       

      FOR
        VALUE
        RECEIVED, XFONE, INC., a Nevada corporation (the “Company”),
        promises to pay to LAURUS MASTER FUND, LTD., c/o M&C Corporate Services
        Limited, P.O. Box 309 GT, Ugland House, South Church Street, George Town,
        Grand
        Cayman, Cayman Islands, Fax: 345-949-8080 (the “Holder”)
        or its
        registered assigns or successors in interest, the sum of Two Million Dollars
        of
        the United States of America (US$2,000,000), together with any accrued and
        unpaid interest hereon, on September 27, 2008 (the “Maturity
        Date”)
        if not
        sooner paid.

       

      Capitalized
        terms used herein without definition shall have the meanings ascribed to
        such
        terms in that certain Securities Purchase Agreement dated as of the date
        hereof
        by and between the Company and the Holder (as amended, modified and/or
        supplemented from time to time, the “Purchase
        Agreement”)

       

      The
        following terms shall apply to this Secured Convertible Term Note (this
“Note”):

       

      ARTICLE
        I  

       

      CONTRACT
        RATE AND AMORTIZATION

       

      1.1  Contract
        Rate.
        Subject
        to Sections 4.2 and 5.10, interest payable on the outstanding principal amount
        of this Note (the “Principal
        Amount”)
        shall
        accrue at a rate per annum equal to the “prime rate” published in The
        Wall Street Journal
        from
        time to time (the “Prime
        Rate”),
        plus
        one and one half percent (1.50%) (the “Contract
        Rate”).
        The
        Contract Rate shall be increased or decreased as the case may be for each
        increase or decrease in the Prime Rate in an amount equal to such increase
        or
        decrease in the Prime Rate; each change to be effective as of the day of
        the
        change in the Prime Rate. Subject to Section 1.2, the Contract Rate shall
        not at
        any time be less than six percent (6.0%). Interest shall be (i) calculated
        on
        the basis of a 360 day year, and (ii) payable monthly, in arrears, commencing
        on
        October 1, 2005, on the first business day of each consecutive calendar month
        thereafter through and including the Maturity Date, and on the Maturity Date,
        whether by acceleration or otherwise.

       

      1.2  Contract
        Rate Adjustments and Payments.
        The
        Contract Rate shall be calculated on the last business day of each calendar
        month hereafter (other than for increases or decreases in the Prime Rate
        which
        shall be calculated and become effective in accordance with the terms of
        Section
        1.1) until the Maturity Date (each a “Determination
        Date”)
        and
        shall be subject to adjustment as set forth herein. If (i) the Company shall
        have registered the shares of the Common Stock underlying the conversion
        of this
        Note and the exercise of the Warrant on a registration statement declared
        effective by the Securities and Exchange Commission (the “SEC”),
        and
        (ii) the market price (the “Market
        Price”)
        of the
        Common Stock as reported by Bloomberg, L.P. on the Principal Market for the
        five
        (5) trading days immediately preceding a Determination Date exceeds the then
        applicable Fixed Conversion Price (as defined in Section 2.1(a)) by at least
        twenty-five percent (25%), the Contract Rate for the succeeding calendar
        month
        shall automatically be reduced by 200 basis points (200 b.p.) (2%) for each
        incremental twenty-five percent (25%) increase in the Market Price of the
        Common
        Stock above the then applicable Fixed Conversion Price. Notwithstanding the
        foregoing (and anything to the contrary contained herein), in no event shall
        the
        Contract Rate at any time be less than zero percent (0%). 

       

      1.3  Principal
        Payments.
        Amortizing payments of the aggregate principal amount outstanding under this
        Note at any time (the “Principal
        Amount”)
        shall
        be made by the Company on April 1, 2006 and on the first business day of
        each
        succeeding month thereafter through and including the Maturity Date (each,
        an
“Amortization
        Date”).
        Subject to Article III below, commencing on the first Amortization Date,
        the
        Company shall make monthly payments to the Holder on each Amortization Date,
        each such payment in the amount of $66,666.67 together with any accrued and
        unpaid interest on such portion of the Principal Amount plus any and all
        other
        unpaid amounts which are then owing under this Note, the Purchase Agreement
        and/or any other Related Agreement (collectively, the “Monthly
        Amount”).
        Any
        outstanding Principal Amount together with any accrued and unpaid interest
        and
        any and all other unpaid amounts which are then owing by the Company to the
        Holder under this Note, the Purchase Agreement and/or any other Related
        Agreement shall be due and payable on the Maturity Date.

       

      ARTICLE
        II  

       

      CONVERSION
        AND REDEMPTION

       

      2.1  Payment
        of Monthly Amount.

       

      (a)  Payment
        in Cash or Common Stock.
        Subject
        to Section 2.1(b),
        each
        month by the fifth (5th)
        business day prior to each Amortization
        Date
        (the
“Notice
        Date”),
        the
        Holder shall deliver to the Company a written notice in the form of Exhibit
        A
        attached hereto (appropriately
        completed) (each,
        a
“Repayment
        Notice”)
        stating whether, according to the Conversion Criteria (as defined below),
        the
        Monthly Amount payable on the next Amortization
        Date
        shall be
        paid in cash or shares of Common Stock, or a combination of both.  If
        a
        Payment Election Notice
        is
        not delivered by the Holder on or before the applicable Notice Date for such
        Amortization Date,
        then the Company shall pay the Monthly Amount due on such Amortization Date
        in
        cash. If
        the
        Monthly Amount (or a portion of such Monthly Amount if not all of the Monthly
        Amount shall have been converted into shares of Common Stock pursuant to
        Section
        3.2) is required to be paid in cash pursuant to Section 2.1(b), then
        the
        Company shall pay the Holder an amount in cash equal to 101% of the Monthly
        Amount (or such portion of such Monthly Amount to be paid in cash) due and
        owing
        to the Holder on the Amortization Date. If the Monthly Amount (or a portion
        of
        such Monthly Amount if not all of the Monthly Amount may be converted into
        shares of Common Stock pursuant to Section 3.2) is required to be paid in
        shares
        of Common Stock pursuant to Section 2.1(b), the number of such shares to
        be
        issued by the Company to the Holder on such Amortization Date (in respect
        of
        such portion of the Monthly Amount converted into shares of Common Stock
        pursuant to Section 2.1(b)), shall be the number determined by dividing (i)
        the
        portion of the Monthly Amount converted into shares of Common Stock, by (ii)
        the
        then applicable Fixed Conversion Price. For purposes hereof, subject to Section
        3.6 hereof, the initial “Fixed
        Conversion Price”
        means
        $3.48.

       

      (b)  Monthly
        Amount Conversion Conditions.
        Subject
        to Sections 2.1(a), 2.2, and 3.2 hereof, the Holder shall convert
        into
        shares of Common Stock all or a portion of the Monthly Amount due on each
        Amortization Date if the following conditions (the “Conversion
        Criteria”)
        are
        satisfied: (i) the average closing price of the Common Stock as reported
        by
        Bloomberg, L.P. on the Principal Market for the five (5) trading days
        immediately preceding such Amortization Date shall be greater than or equal
        to
        115% of the Fixed Conversion Price and (ii) the amount of such conversion
        does
        not exceed twenty five percent (25%) of the aggregate dollar trading volume
        of
        the Common Stock for the period of twenty-two (22) trading days immediately
        preceding such Amortization Date. If subsection (i) of the Conversion Criteria
        is met but subsection (ii) of the Conversion Criteria is not met as to the
        entire Monthly Amount, the Holder shall convert only such part of the Monthly
        Amount that meets subsection (ii) of the Conversion Criteria. Any portion
        of the
        Monthly Amount due on an Amortization Date that the Holder has not been able
        to
        convert into shares of Common Stock due to the failure to meet the Conversion
        Criteria, shall be paid in cash by the Company at the rate of 101% of the
        Monthly Amount otherwise due on such Amortization Date, within three (3)
        business days of such Amortization Date. 

       

      2.2  No
        Effective Registration.
        Notwithstanding anything to the contrary herein, none of the Company’s
        obligations to the Holder may be converted into Common Stock unless (a) either
        (i) an effective current Registration Statement (as defined in the Registration
        Rights Agreement) covering the shares of Common Stock to be issued in connection
        with satisfaction of such obligations exists or (ii) an exemption from
        registration for resale of all of the Common Stock issued and issuable is
        available pursuant to Rule 144 of the Securities Act and (b) no Event of
        Default
        (as hereinafter defined) exists and is continuing, unless such Event of Default
        is cured within any applicable cure period or otherwise waived in writing
        by the
        Holder.

       

      2.3  Optional
        Redemption in Cash.
        The
        Company will have the option of redeeming this Note (“Optional
        Redemption”)
        by
        paying to the Holder a sum of money equal to one hundred twenty percent (120%)
        of the Principal Amount outstanding at such time together with accrued but
        unpaid interest thereon and any and all other sums due, accrued or payable
        to
        the Holder arising under this Note, the Purchase Agreement or any other Related
        Agreement (the “Redemption
        Amount”)
        outstanding on the Redemption Payment Date (as defined below). The Company
        shall
        deliver to the Holder a written notice of redemption (the “Notice
        of Redemption”)
        specifying the date for such Optional Redemption (the “Redemption
        Payment Date”),
        which
        date shall be seven (7) business days after the date of the Notice of Redemption
        (the “Redemption
        Period”).
        A
        Notice of Redemption shall not be effective with respect to any portion of
        this
        Note for which the Holder has previously delivered a Notice of Conversion
        (as
        hereinafter defined) or for conversions elected to be made by the Holder
        pursuant to Section 3.3 during the Redemption Period. The Redemption Amount
        shall be determined as if the Holder’s conversion elections had been completed
        immediately prior to the date of the Notice of Redemption. On the Redemption
        Payment Date, the Redemption Amount must be paid in full in good funds to
        the
        Holder. In the event the Company fails to pay the Redemption Amount on the
        Redemption Payment Date as set forth herein, then such Redemption Notice
        will be
        null and void.

       

      ARTICLE
        III  

       

      HOLDER’S
        CONVERSION RIGHTS

       

      3.1  Optional
        Conversion.
        Subject
        to the terms set forth in this Article III, the Holder shall have the right,
        but
        not the obligation, to convert all or any portion of the outstanding Principal
        Amount and/or accrued interest and fees due and payable into fully paid and
        nonassessable shares of Common Stock at the Fixed Conversion Price. The shares
        of Common Stock to be issued upon such conversion are herein referred to
        as, the
“Conversion
        Shares.”

       

      3.2  Conversion
        Limitation.
        Notwithstanding anything contained herein to the contrary, the Holder shall
        not
        be entitled to convert pursuant to the terms of this Note an amount that
        would
        be convertible into that number of Conversion Shares which would exceed the
        difference between (i) 4.99% of the issued and outstanding shares of Common
        Stock and (ii) the number of shares of Common Stock beneficially owned by
        the
        Holder. For purposes of the immediately preceding sentence, beneficial ownership
        shall be determined in accordance with Section 13(d) of the Exchange Act
        and
        Regulation 13d-3 thereunder. The Conversion Share limitation described in
        this
        Section 3.2 shall automatically become null and void following notice to
        the
        Company upon the occurrence and during the continuance of an Event of Default,
        or upon 75 days prior notice to the Company, except that at no time shall
        the
        number of shares of Common Stock beneficially owned by the Holder a exceed
        19.99% of the outstanding shares of Common Stock. Notwithstanding anything
        contained herein to the contrary, the number of shares of Common Stock issuable
        by the Company and acquirable by the Holder at a price below $3.10 per share
        pursuant to the terms of this Note, the Purchase Agreement or any other Related
        Agreement, shall not exceed an aggregate of 1,377,533 shares of Common Stock
        (subject to appropriate adjustment for stock splits, stock dividends, or
        other
        similar recapitalizations affecting the Common Stock) (the “Maximum
        Common Stock Issuance”),
        unless the issuance of Common Stock hereunder in excess of the Maximum Common
        Stock Issuance shall first be approved by the Company’s shareholders. If at any
        point in time and from time to time the number of shares of Common Stock
        issued
        pursuant to the terms of this Note, the Purchase Agreement or any other Related
        Agreement, together with the number of shares of Common Stock that would
        then be
        issuable by the Company to the Holder in the event of a conversion or exercise
        pursuant to the terms of this Note, the Purchase Agreement or any other Related
        Agreement, would exceed the Maximum Common Stock Issuance but for this
        Section 3.2, the Company shall promptly call a shareholders meeting
        to
        solicit shareholder approval for the issuance of the shares of Common Stock
        hereunder in excess of the Maximum Common Stock Issuance. Notwithstanding
        anything contained herein to the contrary, the provisions of this Section
        3.2
        are irrevocable and may not be waived by the Holder or the Company. Except
        for
        conversions of lesser amounts made pursuant to Section 2.1(a) above, the
        Holder
        shall not, pursuant to any Notice of Conversion (defined below) convert an
        amount less than Ten Thousand Dollars (US$10,000).

       

      3.3  Mechanics
        of Holder’s Conversion.
        

       

      In
        the
        event that the Holder elects to convert this Note into Common Stock, the
        Holder
        shall give notice of such election by delivering an executed and completed
        notice of conversion in substantially the form of Exhibit A hereto
        (appropriately completed) (“Notice
        of Conversion”)
        to the
        Company and such Notice of Conversion shall provide a breakdown in reasonable
        detail of the Principal Amount, accrued interest and fees that are being
        converted. On each Conversion Date (as hereinafter defined) and in accordance
        with its Notice of Conversion, the Holder shall make the appropriate reduction
        to the Principal Amount, accrued interest and fees as entered in its records
        and
        shall provide written notice thereof to the Company within two (2) business
        days
        after the Conversion Date. Each date on which a Notice of Conversion is
        delivered or telecopied to the Company in accordance with the provisions
        hereof
        shall be deemed a Conversion Date (the “Conversion
        Date”).
        Pursuant to the terms of the Notice of Conversion, the Company will issue
        instructions to the transfer agent accompanied by an opinion of counsel within
        three (3) business days of the date of the delivery to the Company of the
        Notice
        of Conversion and shall cause the transfer agent to transmit the certificates
        representing the Conversion Shares to the Holder by crediting the account
        of the
        Holder’s designated broker with the Depository Trust Corporation (“DTC”)
        through its Deposit Withdrawal Agent Commission (“DWAC”)
        system
        within three (3) business days after receipt by the Company of the Notice
        of
        Conversion (the “Delivery
        Date”).
        In
        the case of the exercise of the conversion rights set forth herein the
        conversion privilege shall be deemed to have been exercised and the Conversion
        Shares issuable upon such conversion shall be deemed to have been issued
        upon
        the date of receipt by the Company of the Notice of Conversion. The Holder
        shall
        be treated for all purposes as the record holder of the Conversion Shares,
        unless the Holder provides the Company written instructions to the contrary.
        

       

      3.4  Late
        Payments.
        The
        Company understands that a delay in the delivery of the Conversion Shares
        in the
        form required pursuant to this Article beyond the Delivery Date could result
        in
        economic loss to the Holder. As compensation to the Holder for such loss,
        in
        addition to all other rights and remedies which the Holder may have under
        this
        Note, applicable law or otherwise, the Company shall pay late payments to
        the
        Holder for any late issuance of Conversion Shares in the form required pursuant
        to this Article II upon conversion of this Note, in the amount equal to $500
        per
        business day after the Delivery Date. The Company shall make any payments
        incurred under this Section in immediately available funds upon
        demand.

       

      3.5  Conversion
        Mechanics.
        The
        number of shares of Common Stock to be issued upon each conversion of this
        Note
        shall be determined by dividing that portion of the principal and interest
        and
        fees to be converted, if any, by the then applicable Fixed Conversion Price.
        In
        the event of any conversions of a portion of the outstanding Principal Amount
        pursuant to this Article III, such conversions shall be deemed to constitute
        conversions of the outstanding Principal Amount applying to Monthly Amounts
        for
        the remaining Amortization Dates in chronological order.

       

      3.6  Adjustment
        Provisions.
        The
        Fixed Conversion Price and number and kind of shares or other securities
        to be
        issued upon conversion determined pursuant to this Note shall be subject
        to
        adjustment from time to time upon the occurrence of certain events during
        the
        period that this conversion right remains outstanding, as follows:

       

      (a)  Reclassification.
        If the
        Company at any time shall, by reclassification or otherwise, change the Common
        Stock into the same or a different number of securities of any class or classes,
        this Note, as to the unpaid Principal Amount and accrued interest thereon,
        shall
        thereafter be deemed to evidence the right to purchase an adjusted number
        of
        such securities and kind of securities as would have been issuable as the
        result
        of such change with respect to the Common Stock (i) immediately prior to
        or (ii)
        immediately after, such reclassification or other change at the sole election
        of
        the Holder.

       

      (b)  Stock
        Splits, Combinations and Dividends.
        If the
        shares of Common Stock are subdivided or combined into a greater or smaller
        number of shares of Common Stock, or if a dividend is paid on the Common
        Stock
        or any preferred stock issued by the Company in shares of Common Stock, the
        Fixed Conversion Price shall be proportionately reduced in case of subdivision
        of shares or stock dividend or proportionately increased in the case of
        combination of shares, in each such case by the ratio which the total number
        of
        shares of Common Stock outstanding immediately after such event bears to
        the
        total number of shares of Common Stock outstanding immediately prior to such
        event.

       

      (c)  Share
        Issuances.
        Subject
        to the provisions of this Section 3.6, if the Company shall at any time prior
        to
        the conversion or repayment in full of the Principal Amount issue any shares
        of
        Common Stock or securities convertible into Common Stock to a Person other
        than
        the Holder (except (i) pursuant to Sections 3.6(a) or (b) above; (ii) pursuant
        to options, warrants, or other obligations to issue shares outstanding on
        the
        date hereof as disclosed to the Holder in writing; or (iii) pursuant to options
        that may be issued under any employee incentive stock option and/or any
        qualified stock option plan adopted by the Company) for a consideration per
        share (the “Offer
        Price”)
        less
        than the Fixed Conversion Price in effect at the time of such issuance, then
        the
        Fixed Conversion Price shall be immediately reset pursuant to the formula
        below.
        For purposes hereof, the issuance of any security of the Company convertible
        into or exercisable or exchangeable for Common Stock shall result in an
        adjustment to the Fixed Conversion Price upon the issuance of such securities.
        Notwithstanding the immediately foregoing, no adjustment contemplated by
        this
        Section 3.6(c) shall be required if the Company shall make such share issuances
        as contemplated by this Section 3.6(c) in aggregate amount not to exceed
        Five
        Million Dollars ($5,000,000) in the period beginning September 1, 2005 and
        ending on March 1, 2006 (the “Additional Financing Transactions”).

       

      Other
        than as expressly stated above, if the Company issues any additional shares
        of
        Common Stock for a consideration per share less than the then-applicable
        Fixed
        Conversion Price pursuant to this Section 3.6 then, and thereafter successively
        upon each such issue, the Fixed Conversion Price shall be adjusted by
        multiplying the then applicable Fixed Conversion Price by the following
        fraction: 

       

      
        	
                A
                  +
                  B

              
	
                 

                (A
                  + B) + [((C - D) x B) / C]

              

      

                                                             

      
        
          	 	
                   

                  A
                    =
                    Total amount of shares convertible pursuant to this
                    Note

                
	 	
                   

                  B
                    =
                    Actual shares sold in the offering

                
	 	
                   

                  C
                    =
                    Fixed Conversion Price

                
	 	
                   

                  D
                    =
                    Offer Price.

                

        

      

       

      (d)  Computation
        of Consideration.
        For
        purposes of any computation respecting consideration received pursuant to
        Section 3.6(c) above, the following shall apply:

       

      (i)  in
        the
        case of the issuance of shares of Common Stock for cash, the consideration
        shall
        be the amount of such cash, provided that in no case shall any deduction
        be made
        for any commissions, discounts or other expenses incurred by the Company
        for any
        underwriting of the issue or otherwise in connection therewith;

       

      (ii)  in
        the
        case of the issuance of shares of Common Stock for a consideration in whole
        or
        in part other than cash, the consideration other than cash shall be deemed
        to be
        the fair market value thereof as determined in good faith by the Board of
        Directors of the Company (irrespective of the accounting treatment thereof);
        and

       

      (iii)  upon
        any
        such exercise, the aggregate consideration received for such securities shall
        be
        deemed to be the consideration received by the Company for the issuance of
        such
        securities plus the additional minimum consideration, if any, to be received
        by
        the Company upon the conversion or exchange thereof (the consideration in
        each
        case to be determined in the same manner as provided in subsections (i) and
        (ii)
        of this Section 3.6(d)).

       

      3.7  Reservation
        of Shares.
        During
        the period the conversion right exists, the Company will reserve from its
        authorized and unissued Common Stock a sufficient number of shares to provide
        for the issuance of Conversion Shares upon the full conversion of this Note
        and
        the Warrant. The Company represents that upon issuance, the Conversion Shares
        will be duly and validly issued, fully paid and non-assessable. The Company
        agrees that its issuance of this Note shall constitute full authority to
        its
        officers, agents, and transfer agents who are charged with the duty of executing
        and issuing stock certificates to execute and issue the necessary certificates
        for the Conversion Shares upon the conversion of this Note.

       

      3.8  Registration
        Rights.
        The
        Holder has been granted registration rights with respect to the Conversion
        Shares as set forth in the Registration Rights Agreement.

       

      3.9  Issuance
        of New Note.
        Upon
        any partial conversion of this Note, upon the surrender of the original Note
        outstanding at the time of the conversion, a new Note containing the same
        date
        and provisions of this Note shall, at the request of the Holder, be issued
        by
        the Company to the Holder for the principal balance of this Note and interest
        which shall not have been converted or paid. Subject to the provisions of
        Article IV of this Note, the Company shall not pay any costs, fees or any
        other
        consideration to the Holder for the production and issuance of a new
        Note.

       

      3.10  
        Holder’s Status.
        The
        Holder shall not, by virtue of its status as a Holder of this Note, be entitled
        to any rights of a shareholder in the Company, either at law or equity, and
        the
        rights of the Holder are limited to those expressly set forth in this
        Note.

       

      

       

      ARTICLE
        IV  

       

      EVENTS
        OF DEFAULT

       

      4.1  Events
        of Default.
        The
        occurrence of any of the following events set forth in this Section 4.1 shall
        constitute an event of default (“Event
        of Default”)
        hereunder:

       

      (a)  Failure
        to Pay.
        The
        Company fails to pay when due any installment of principal, interest or other
        fees hereon in accordance herewith, or the Company fails to pay any of the
        other
        Obligations (under and as defined in the Master Security Agreement) when
        due,
        and, in any such case, such failure shall continue for a period of five (5)
        days
        following the date upon which any such payment was due.

       

      (b)  Breach
        of Covenant.
        The
        Company or any of its Subsidiaries breaches any covenant or any other term
        or
        condition of this Note in any material respect and such breach, if subject
        to
        cure, continues for a period of twenty (20) days after the occurrence
        thereof.

       

      (c)  Breach
        of Representations and Warranties.
        Any
        representation, warranty or statement made or furnished by the Company or
        any of
        its Subsidiaries in this Note, the Purchase Agreement or any other Related
        Agreement shall at any time be false or misleading in any material respect
        on
        the date as of which made or deemed made and have a Material Adverse
        Effect.

       

      (d)  Default
        Under Other Agreements.
        The
        occurrence of any default (or similar term) in the observance or performance
        of
        any other agreement or condition relating to any indebtedness or contingent
        obligation of the Company or any of its Subsidiaries (including, without
        limitation, the indebtedness evidenced by the Subordinated Debt Documentation
        beyond the period of grace (if any), the effect of which default is to cause,
        or
        permit the holder or holders of such indebtedness or beneficiary or
        beneficiaries of such contingent obligation to cause, such indebtedness to
        become due prior to its stated maturity or such contingent obligation to
        become
        payable; 

       

      (e)  Intentionally
        omitted. ;

       

      (f)  Bankruptcy.
        The
        Company or any of its Subsidiaries shall (i) apply for, consent to
        or
        suffer to exist the appointment of, or the taking of possession by, a receiver,
        custodian, trustee or liquidator of itself or of all or a substantial part
        of
        its property, (ii) make a general assignment for the benefit of creditors,
        (iii) commence a voluntary case under the federal bankruptcy laws (as now
        or
        hereafter in effect), (iv) be adjudicated a bankrupt or insolvent, (v) file
        a
        petition seeking to take advantage of any other law providing for the relief
        of
        debtors, (vi) acquiesce to, without challenge within ten (10) days of the
        filing
        thereof, or failure to have dismissed, within thirty (30) days, any petition
        filed against it in any involuntary case under such bankruptcy laws, or (vii)
        take any action for the purpose of effecting any of the foregoing;

       

      (g)  Judgments.
        Attachments or levies in excess of $100,000 in the aggregate are made upon
        the
        Company or any of its Subsidiary’s assets or a judgment is rendered against the
        Company’s property involving a liability of more than $100,000 which shall not
        have been vacated, discharged, stayed or bonded within forty five (45) days
        from
        the entry thereof;

       

      (h)  Insolvency.
        The
        Company or any of its Subsidiaries shall admit in writing its inability,
        or be
        generally unable, to pay its debts as they become due or cease operations
        of its
        present business;

       

      (i)  Change
        of Control.
        A
        Change of Control (as defined below) shall occur with respect to the Company,
        unless Holder shall have expressly consented to such Change of Control in
        writing. A “Change of Control” shall mean any event or circumstance as a result
        of which (i) any “Person” or “group” (as such terms are defined in Sections
        13(d) and 14(d) of the Exchange Act, as in effect on the date hereof), other
        than the Holder, is or becomes the “beneficial owner” (as defined in Rules
        13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of 35%
        or
        more on a fully diluted basis of the then outstanding voting equity interest
        of
        the Company (other than a “Person” or “group” that beneficially owns 35% or more
        of such outstanding voting equity interests of the Company on the date hereof),
        (ii) the Board of Directors of the Company shall cease to consist of a majority
        of the Parent’s board of directors on the date hereof (or directors appointed by
        a majority of the board of directors in effect immediately prior to such
        appointment) or (iii) the Company or any of its Subsidiaries merges or
        consolidates with, or sells all or substantially all of its assets to, any
        other
        person or entity;

       

      (j)  Indictment;
        Proceedings.
        The
        indictment or threatened indictment of the Company or any of its Subsidiaries
        or
        any executive officer of the Company or any of its Subsidiaries under any
        criminal statute, or commencement or threatened commencement of criminal
        or
        civil proceeding against the Company or any of its Subsidiaries or any executive
        officer of the Company or any of its Subsidiaries pursuant to which statute
        or
        proceeding penalties or remedies sought or available include forfeiture of
        any
        of the property of the Company or any of its Subsidiaries;

       

      (k)  The
        Purchase Agreement and Related Agreements.
        (i) An
        Event of Default shall occur under and as defined in the Purchase Agreement
        or
        any other Related Agreement, (ii) the Company or any of its Subsidiaries
        shall
        breach any term or provision of the Purchase Agreement or any other Related
        Agreement in any material respect and such breach, if capable of cure, continues
        unremedied for a period of fifteen (15) days after the occurrence thereof,
        (iii)
        the Company or any of its Subsidiaries attempts to terminate, challenges
        the
        validity of, or its liability under, the Purchase Agreement or any Related
        Agreement, (iv) any proceeding shall be brought to challenge the validity,
        binding effect of the Purchase Agreement or any Related Agreement or (v)
        the
        Purchase Agreement or any Related Agreement ceases to be a valid, binding
        and
        enforceable obligation of the Company or any of its Subsidiaries (to the
        extent
        such persons or entities are a party thereto);

       

      (l)  Stop
        Trade.
        An SEC
        stop trade order or Principal Market trading suspension of the Common Stock
        shall be in effect for five (5) consecutive days or five (5) days during
        a
        period of ten (10) consecutive days, excluding in all cases a suspension
        of all
        trading on a Principal Market, provided that the Company shall not have been
        able to cure such trading suspension within thirty (30) days of the notice
        thereof or list the Common Stock on another Principal Market within sixty
        (60)
        days of such notice; or

       

      (m)  Failure
        to Deliver Common Stock or Replacement Note.
        The
        Company’s failure to deliver Common Stock to the Holder pursuant to and in the
        form required by this Note and the Purchase Agreement and, if such failure
        to
        deliver Common Stock shall not be cured within two (2) business days or the
        Company is required to issue a replacement Note to the Holder and the Company
        shall fail to deliver such replacement Note within seven (7) business
        days.

       

      4.2  Default
        Interest.
        Following the occurrence and during the continuance of an Event of Default,
        the
        Company shall pay additional interest on this Note in an amount equal to
        the
        Contract Rate plus seven percent (7%) per annum and all outstanding obligations
        under this Note, the Purchase Agreement and each other Related Agreement,
        including unpaid interest, shall continue to accrue interest at such additional
        interest rate from the date of such Event of Default until the date such
        Event
        of Default is cured or waived.

       

      4.3  Default
        Payment.
        Following the occurrence and during the continuance of an Event of Default,
        the
        Holder, at its option, may demand repayment in full of all obligations and
        liabilities owing by Company to the Holder under this Note, the Purchase
        Agreement and/or any other Related Agreement and/or may elect, in addition
        to
        all rights and remedies of the Holder under the Purchase Agreement and the
        other
        Related Agreements and all obligations and liabilities of the Company under
        the
        Purchase Agreement and the other Related Agreements, to require the Company
        to
        make a Default Payment (“Default
        Payment”).
        The
        Default Payment shall be one hundred and twenty five percent (125%) of the
        outstanding principal amount of the Note, plus accrued but unpaid interest,
        all
        other fees then remaining unpaid, and all other amounts payable hereunder.
        The
        Default Payment shall be applied first to any fees due and payable to the
        Holder
        pursuant to this Note, the Purchase Agreement, and/or the other Related
        Agreements, then to accrued and unpaid interest due on this Note and then
        to the
        outstanding principal balance of this Note. The Default Payment shall be
        due and
        payable immediately on the date that the Holder has exercised its rights
        pursuant to this Section 4.3.

       

      ARTICLE
        V  

       

      MISCELLANEOUS

       

      5.1  Conversion
        Privileges.
        The
        conversion privileges set forth in Article III shall remain in full force
        and
        effect immediately from the date hereof until the date this Note is indefeasibly
        paid in full and irrevocably terminated.

       

      5.2  Cumulative
        Remedies.
        The
        remedies under this Note shall be cumulative and not exclusive of, any rights
        or
        remedies otherwise available.

       

      5.3  Failure
        or Indulgence Not Waiver.
        No
        failure or delay on the part of the Holder hereof 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.
        .

       

      5.4  Notices.
        Any
        notice herein required or permitted to be given shall be in writing and shall
        be
        deemed effectively given: (a) upon personal delivery to the party notified,
        (b)
        when sent by confirmed telex or facsimile if sent during normal business
        hours
        of the recipient, if not, then on the next business day, (c) five business
        days
        after having been sent by registered or certified mail, return receipt
        requested, postage prepaid, or (d) two (2) days after deposit with a nationally
        recognized overnight courier, specifying next day delivery, with written
        verification of receipt. All communications shall be sent to the Company
        at the
        address provided in the Purchase Agreement executed in connection herewith,
        and
        to the Holder at the address provided in the Purchase Agreement for such
        Holder,
        with a copy to John E. Tucker, Esq., 825 Third Avenue, 14th
        Floor,
        New York, New York 10022, facsimile number (212) 541-4434, or at such other
        address as the Company or the Holder may designate by ten days advance written
        notice to the other parties hereto. A Notice of Conversion shall be deemed
        given
        when made to the Company pursuant to the Purchase Agreement.

       

      5.5  Amendment
        Provision.
        The
        term “Note” and all references thereto, as used throughout this instrument,
        shall mean this instrument as originally executed, or if later amended or
        supplemented, then as so amended or supplemented, and any successor instrument
        as such successor instrument may be amended or supplemented.

       

      5.6  Assignability.
        This
        Note shall be binding upon the Company and its successors and assigns, and
        shall
        inure to the benefit of the Holder and its successors and assigns, and may
        be
        assigned by the Holder in accordance with the requirements of the Purchase
        Agreement. The Company may not assign any of its obligations under this Note
        without the prior written consent of the Holder, any such purported assignment
        without such consent being null and void.

       

      5.7  Cost
        of Collection.
        In case
        of any Event of Default under this Note, the Company shall pay the Holder
        reasonable costs of collection, including reasonable attorneys’
        fees.

       

      5.8  Governing
        Law, Jurisdiction and Waiver of Jury Trial.

       

      (a)  THIS
        NOTE
        SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
        OF
        THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
        LAW.

       

      (b)  THE
        COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS LOCATED
        IN
        THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION
        TO
        HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY, ON THE ONE
        HAND,
        AND THE HOLDER, ON THE OTHER HAND, PERTAINING TO THIS NOTE OR ANY OF THE
        OTHER
        RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE
        OR
        ANY OF THE RELATED AGREEMENTS; PROVIDED,
        THAT
        THE COMPANY ACKNOWLEDGES THAT ANY APPEALS FROM THOSE COURTS MAY HAVE TO BE
        HEARD
        BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF NEW YORK;
        AND
FURTHER PROVIDED,
        THAT
        NOTHING IN THIS NOTE SHALL BE DEEMED OR OPERATE TO PRECLUDE THE HOLDER FROM
        BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT
        THE OBLIGATIONS, TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE
        OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE
        HOLDER. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH
        JURISDICTION IN ANY ACTION OR SUIT COMMENCED IN ANY SUCH COURT, AND THE COMPANY
        HEREBY WAIVES ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL
        JURISDICTION, IMPROPER VENUE OR FORUM
        NON CONVENIENS.
        THE
        COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER
        PROCESS ISSUED IN ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH
        SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED
        MAIL
        ADDRESSED TO THE COMPANY AT THE ADDRESS SET FORTH IN THE PURCHASE AGREEMENT
        AND
        THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE EARLIER OF THE COMPANY’S
        ACTUAL RECEIPT THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS,
        PROPER
        POSTAGE PREPAID.

       

      (c)  THE
        COMPANY DESIRES THAT ITS DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
        APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS
        OF
        THE JUDICIAL SYSTEM AND OF ARBITRATION, THE COMPANY HERETO WAIVES ALL RIGHTS
        TO
        TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE,
        WHETHER ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE HOLDER AND THE
        COMPANY ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE
        RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS NOTE, ANY OTHER
        RELATED AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

       

      5.9  Severability.
        In the
        event that any provision of this Note is invalid or unenforceable under any
        applicable statute or rule of law, then such provision shall be deemed
        inoperative to the extent that it may conflict therewith and shall be deemed
        modified to conform with such statute or rule of law. Any such provision
        which
        may prove invalid or unenforceable under any law shall not affect the validity
        or enforceability of any other provision of this Note.

       

      5.10  Maximum
        Payments.
        Nothing
        contained herein shall be deemed to establish or require the payment of a
        rate
        of interest or other charges in excess of the maximum permitted by applicable
        law. In the event that the rate of interest required to be paid or other
        charges
        hereunder exceed the maximum rate permitted by such law, any payments in
        excess
        of such maximum rate shall be credited against amounts owed by the Company
        to
        the Holder and thus refunded to the Company.

       

      5.11  Security
        Interest and Guarantee.
        The
        Holder has been granted a security interest (i) in certain assets of the
        Company
        and its Subsidiaries as more fully described in the Master Security Agreement
        dated as of the date hereof and (ii) in the equity interests of the Companies’
        Subsidiaries pursuant to the Stock Pledge Agreement dated as of the date
        hereof.
        The obligations of the Company under this Note are guaranteed by certain
        Subsidiaries of the Company pursuant to the Subsidiary Guaranty dated as
        of the
        date hereof.

       

      5.12  Accredited
        Investor.
        The
        Holder has substantial experience in evaluating, lending and investing in
        private placement transactions of securities in companies similar to the
        Company
        so that it is capable of evaluating the merits and risks of its investment
        in
        the Company and has the capacity to protect its own interests. The Holder
        must
        bear the economic risk of this transaction until the Securities are sold
        pursuant to: (i) an effective registration statement under the Securities
        Act;
        or (ii) an exemption from registration is available with respect to such
        sale.
        The Holder represents that by reason of its, or of its management’s, business
        and financial experience, the Holder has the capacity to evaluate the merits
        and
        risks of its investment in the Note, the Warrant and the Securities deriving
        from this transaction, and to protect its own interests in connection with
        the
        transactions contemplated in the Purchase Agreement and any Related Agreement,
        and is experienced in evaluating and investing in private placement transactions
        of securities of companies in a similar stage of development. Further, Holder
        has not lent the monies involved and entered into this transaction as a result
        of any form of general advertising, including advertisements, articles, notices,
        or other communications in any newspaper, magazine, or similar media, or
        telecommunications in connection with the transactions contemplated in the
        Purchases Agreement or any Related Agreement. The
        Holder represents that it is an accredited investor within the meaning of
        Regulation D under the Securities Act

       

      5.13  Construction.
        Each
        party acknowledges that its legal counsel participated in the preparation
        of
        this Note and, therefore, stipulates that the rule of construction that
        ambiguities are to be resolved against the drafting party shall not be applied
        in the interpretation of this Note to favor any party against the
        other.

       

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        of page intentionally left blank; signature page follows]

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      IN
        WITNESS WHEREOF,
        the
        Company has caused this Secured Convertible Term Note to be signed in its
        name
        effective as of this 27th day of September 2005.

       

      XFONE,
        INC.

       

      By:__________________________________

      Name: Guy
        Nissenson

      Title: President
        & CEO

       

      WITNESS:

       

      __________________________________

       

      

       

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

          
          

        

      

       

      EXHIBIT
        A

       

      NOTICE
        OF CONVERSION

       

      (To
        be
        executed by the Holder in order to convert all or part of

       

      the
        Secured Convertible Term Note into Common Stock)

       

      [Name
        and
        Address of Company]

       

      The
        undersigned hereby converts $_________ of the principal due on [specify
        applicable Amortization Date] under the Secured Convertible Term Note dated
        as
        of _________, 200__ (the “Note”)
        issued
        by XFONE, INC.(the “Company”)
        by
        delivery of shares of Common Stock of the Company (“Shares”)
        on and
        subject to the conditions set forth in the Note.

       

      1. Date
        of
        Conversion   _______________________

       

      2. Shares
        To
        Be Delivered: 
_______________________

       

      [HOLDER]

       

      By:_______________________________

      Name:_____________________________

      Title:______________________________

      

      

      

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      Laurus
        Master Fund, Ltd.

       

      c/o
        Laurus Capital Management, LLC

      825
        Third
        Avenue, 14th
        Floor

       

      New
        York,
        New York, 10022

      

      

      

      September
        27, 2005

      

      Xfone,
        Inc.

      c/o
        Xfone
        018 Ltd.

      1
        Haodem
        Street, 3rd
        Floor

      Kiryat
        Matalon,

      Petach
        Tikva

      Israel

      

      

      

      Re: Adjustment
        Provision Waiver Agreement

      

      

      Reference
        is made in this letter agreement (this “Agreement”) to that certain Securities
        Purchase Agreement, dated as of September 27, 2005 (as amended, modified
        or
        supplemented from time to time, the “Purchase Agreement”), between Xfone, Inc.,
        a Nevada corporation (“Xfone” or the “Company”), and Laurus Master Fund, Ltd.
        (“Laurus”), pursuant to which Xfone issued to Laurus a Secured Convertible Term
        Note in the aggregate principal amount of Two Million Dollars ($2,000,000)
        (as
        amended, modified or supplemented from time to time, the "Note"). Capitalized
        terms used but not defined herein shall have the meanings ascribed to such
        terms
        in the Purchase Agreement or the Note, as applicable, including, without
        limitation, the meaning of the defined term “Additional Financing Transactions”
        as defined in Section 3.6(c) of the Note.

      

      In
        supplement of, and notwithstanding anything to the contrary set forth in,
        Section 3.6(c) of the Note, the provisions relating to the adjustment of
        the
        Fixed Conversion Price set forth in said Section 3.6(c) shall not be applicable
        in respect of any shares of Common Stock and/or warrants exercisable for
        shares
        of Common Stock to the extent issued, issuable and/or granted by the Company
        in
        connection with the Additional Financing Transactions by and among the Company
        and the original investors (other than Laurus) in respect of such Additional
        Financing Transactions (collectively, the “Original Investors”); provided that,
        (x) such Additional Financing Transactions shall not be in the form of
        convertible indebtedness and (y) the per share price of the Common Stock
        issued
        and/or granted by the Company to the Original Investors pursuant to the terms
        of
        such Additional Financing Transactions on the closing date of each such
        transaction shall be no less than $2.25 per share.

      

      Furthermore,
        in connection with the foregoing and subject to the conditions set forth
        herein,
        in addition to the waiver of the application of Section 3.6(c) of the Note
        as
        contemplated in the paragraph set forth immediately above, Laurus hereby
        further
        agrees in respect of the Additional Financing Transaction, to waive the
        application of Section 3.6(c) of the Note to the extent otherwise applicable
        to
        additional shares of Common Stock and/or warrants issued, issuable and/or
        granted by the Company to the Original Investors subsequent to the consummation
        of such Additional Financing Transactions; provided that, (x) such issuance
        and/or grant is expressly required by the terms of such Additional Financing
        Transactions (as in effect on the initial closing date of each such transaction
        without giving effect to amendments subsequent to such initial closing date)
        in
        response to a reduction in the Fixed Conversion Price (other than a reduction
        occurring as a result of application of Section 3.6 of the Note), (y) such
        subsequent issuance and/or grant to the Original Investors occurs within
        ten
        (10) business days after a reduction in the Fixed Conversion Price (other
        than a
        reduction occurring as a result of application of Sections 3.6 of the Note)
        and
        (z) such subsequent issuance and/or grant to such Original Investors shall
        be
        proportional in economic effect, based on the initial amounts of such Additional
        Financing Transactions to which such Original Investors are party as compared
        to
        the amount of the financing extended to the Company pursuant to the Purchase
        Agreement and the Related Agreements referred to therein, to the economic
        benefit derived by Laurus as a result of such reduction to the Fixed Conversion
        Price; such determination by the Company of proportionality to be reasonably
        acceptable to Laurus with the foregoing principal of economic parity in mind.
        

      

      The
        Company understands that the Company has an affirmative obligation to make
        prompt public disclosure of material agreements and material amendments to
        such
        agreements. It is the Company’s determination that neither this Agreement nor
        the terms and provisions of this Agreement, (collectively, the “Information”)
        are material. The Company has had an opportunity to consult with counsel
        concerning this determination. The Company hereby agrees that Laurus shall
        not
        be in violation of any duty to the Company or its shareholders, nor shall
        Laurus
        be deemed to be misappropriating any information of the Company, if Laurus
        sells
        shares of common stock of the Company, or otherwise engages in transactions
        with
        respect to securities of the Company, while in possession of the Information.
        

      

      Except
        as
        specifically set forth in this Agreement, there are no other amendments,
        modifications or waivers to the Note and all of the other forms, terms and
        provisions of the Note remain in full force and effect.

      

      From
        and
        after the date on which each of the parties hereto shall have signed and
        returned to Laurus their respective signature pages to this Agreement, all
        references in the Note, the Purchase Agreement and the other Related Agreements
        referred to therein to the Note shall be deemed to be a reference to the
        Note as
        modified hereby.

      

      This
        Agreement (and Xfone’s rights and obligations hereunder and thereunder) shall
        not be assignable by Xfone to any person or entity without the prior written
        consent of Laurus (and any purported assignment without such consent shall
        be
        null and void). This Agreement may not be amended or waived except by an
        instrument in writing signed by Xfone and Laurus. This Agreement may be executed
        in any number of counterparts, each of which shall be an original and all
        of
        which, when taken together, shall constitute one agreement. Delivery of an
        executed signature page of this Agreement by facsimile transmission shall
        be
        effective as delivery of a manually executed counterpart hereof or thereof,
        as
        the case may be. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
        ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
        OF CONFLICTS OF LAWS. This Agreement sets forth the entire agreement between
        the
        parties hereto as to the matters set forth herein and supersede all prior
        communications, written or oral, with respect to the matters
        herein.

       

      EACH
        OF
        XFONE AND LAURUS HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO
        ANY
        CLAIM, ACTION, SUIT OR PROCEEDING ARISING OUT OF OR CONTEMPLATED BY THIS
        AGREEMENT. EACH OF XFONE AND LAURUS HEREBY SUBMIT TO THE NON-EXCLUSIVE
        JURISDICTION OF THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE COUNTY
        OF
        NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO THIS AGREEMENT OR ANY
        MATTERS
        CONTEMPLATED HEREBY OR THEREBY.

      * * * *

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

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

      

      LAURUS
        MASTER FUND, LTD.

      

      By:________________________

      Name:

      Title:

      

      XFONE,
        INC.

      

      By:________________________

      Name:
        Guy
        Nissenson

      Title:
        President and CEO

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