Document:

<PAGE>

             EXHIBIT 10(i): PAYCHEX, INC. DEFERRED COMPENSATION PLAN

1.       PRELIMINARY MATTERS

         1.1.     Name. The Plan evidenced by this instrument shall be known as
                  the Paychex, Inc. Deferred Compensation Plan.

         1.2.     Purpose. The sole and exclusive purpose of the Plan is to
                  enable a select group of highly compensated and/or management
                  employees of the Corporation and Directors of the Corporation
                  to defer income tax on a portion of their Compensation.

2.       DEFINITIONS

         2.1.     "Board" means the Board of Directors of the Corporation.

         2.2.     "Change in Control" means: (i) one or more changes in the
                  ownership of stock of the Corporation if after the change or
                  changes, at least 50 percent of the total combined voting
                  power of all classes of stock of the Corporation is actually
                  or constructively owned by one person, corporate or otherwise;
                  or (ii) the transfer by the Corporation, in one or more
                  transactions, of all or substantially all of its assets to
                  another person, corporate or otherwise, or group of related
                  persons, whether by sale, merger, consolidation, or other
                  arrangement. The Board shall make the final determination of
                  whether a Change in Control has occurred.

         2.3.     "Compensation" means taxable wages paid by the Corporation for
                  services rendered by the Participant including contributions
                  made to the Paychex, Inc. 401(k) Incentive Retirement Plan,
                  excluding reimbursements of moving expenses, stock option
                  income, the imputed value of group-term life insurance,
                  Section 125 contributions, and amounts distributed from the
                  Paychex, Inc. 401(k) Incentive Retirement Plan. With respect
                  to a Director of the Corporation, "Compensation" means
                  Director's fees.

         2.4.     "Committee" means the Deferred Compensation Plan Committee of
                  the Corporation, as duly appointed from time to time.

         2.5.     "Corporation" means Paychex, Inc., or any other corporation
                  that is a member of the same affiliated group (as defined in
                  Section 1504(a) of the Internal Revenue Code) and adopts the
                  Plan.

         2.6.     "Deferred Compensation Account" or "Accounts" means the
                  account established by the Corporation for a Participant
                  pursuant to Section 3.3 of the Plan.

         2.7.     "Designated Fund" means any mutual fund selected by the
                  Committee to be an investment alternative under the Plan. The
                  Committee has sole authority to determine the funds that may
                  be used as investment alternatives under the Plan and may add,
                  delete or substitute funds from time to time.

         2.8.     "Participant" means an employee or Director of the Corporation
                  who has been designated by the Committee as eligible to
                  participate in the Plan, and who has signed a written deferral
                  election pursuant to Section 3.2 of the Plan.

         2.9.     "Plan" means the Paychex, Inc. Deferred Compensation Plan as
                  set forth in this document or as amended from time to time.

<PAGE>

         2.10.    "Termination Date" means, with respect to each Participant,
                  the date on which the Participant terminates active employment
                  with the Corporation. For purposes of this definition, (i)
                  payments for accrued vacation time or sick leave following an
                  employment termination shall not constitute active employment,
                  and (ii) the period of any paid or unpaid leave shall not be
                  treated as a termination of active employment unless and until
                  the Corporation or the Participant gives notice that the
                  Participant will not return to active employment with the
                  Corporation.

         2.11.    "Valuation Date" means each date set by the Committee, under
                  Section 3.4 of the Plan, for crediting investment returns to
                  Accounts.

3.       BENEFITS

         3.1.     Eligibility. The Plan is available to (a) Directors of the
                  Corporation and (b) employees of the Corporation who are
                  designated as eligible by the Committee. The determination as
                  to whether an employee of the Corporation is eligible to
                  participate in the Plan is within the sole and complete
                  discretion of the Committee. Notwithstanding the foregoing, no
                  employee may be designated as eligible unless the employee
                  belongs to "a select group of management or highly compensated
                  employees" as described in Title I of ERISA.

         3.2.     Deferral Elections. A Participant may elect to defer the
                  receipt of a portion of the Compensation otherwise payable to
                  him by delivering prior written notice to the Committee.
                  Deferral elections and modifications of existing elections,
                  shall take effect on the first day of January and July each
                  year (the normal enrollment periods), and on any additional
                  dates determined by the Committee. Once made, the
                  Participant's election shall be irrevocable and remain in
                  effect until the next enrollment period established by the
                  Committee at which point the election may be modified or
                  superseded in a new written election delivered to the
                  Committee. Notwithstanding the foregoing, the Committee, in
                  its sole discretion, may permit a Participant to change a
                  deferral election outside the normal enrollment periods if the
                  Committee believes such change is appropriate. All elections
                  shall be made in the form and manner prescribed by the
                  Committee in its sole discretion.

         3.3.     Establishment of Deferred Compensation Accounts. Subject to
                  the provisions of Section 3.7 of the Plan, the Corporation
                  shall establish on its books a Deferred Compensation Account
                  in the name of each Participant who elects to defer the
                  receipt of a portion of Compensation pursuant to Section 3.2
                  of the Plan. Each deferral of Compensation by a Participant
                  shall, as of a date determined by the Committee on a uniform
                  and consistent basis for all Participants in the Plan,
                  nominally be credited to the Participant's Deferred
                  Compensation Account. The Corporation is under no obligation
                  to segregate or otherwise set aside amounts nominally credited
                  to any Participant's Deferred Compensation Account.

         3.4.     Deemed Investment Returns. Participants shall elect, as part
                  of the written notice described in Section 3.2 of the Plan, to
                  have all amounts credited to their Deferred Compensation
                  Account deemed to earn income, or suffer loss, at the rate of
                  increase or decrease in the value of one or more Designated
                  Funds. Amounts of income or loss shall be added to, or
                  subtracted from, Participants' Deferred

                                       -2-

<PAGE>

                  Compensation Accounts on the Valuation Dates determined by the
                  Committee on a uniform and consistent basis for all
                  Participants in the Plan.

         3.5.     Reallocation Among Designated Indexes or Funds. Participants
                  may change the allocation of investments of future
                  contributions to or existing balances in their Deferred
                  Compensation Accounts among any of the Designated Funds at
                  such times and in such manner as determined by the Committee.

         3.6.     Maintenance of Records. The Committee shall maintain records,
                  including records relating to the amount nominally credited to
                  each Participant's Deferred Compensation Account for all
                  Participants who elect to defer the receipt of a portion of
                  their Compensation pursuant to the Plan. These records shall
                  indicate the effective date and amount of each deferral as
                  well as any income or loss credited to, or debited from, a
                  Participant's Deferred Compensation Account. The Committee
                  shall, no less frequently than once a year, deliver to each
                  Participant a statement of all amounts credited to his
                  Deferred Compensation Account.

         3.7.     No Property Rights or Fiduciary Relationships Created. The
                  right of any Participant to receive future payments under the
                  provisions of the Plan shall be a contractual obligation of
                  the Corporation and is subject to the claims of the creditors
                  of the Corporation in the event of the Corporation's
                  insolvency or bankruptcy. Accordingly, the rights of any
                  Participant to amounts nominally credited to a Participant's
                  Deferred Compensation Account shall be no greater than the
                  right of any unsecured general creditor of the Corporation.
                  Title to and beneficial ownership of all assets the
                  Corporation may identify for the distribution of amounts under
                  the Plan shall remain at all times in the Corporation, and no
                  Participant shall have an interest in specific assets of the
                  Corporation, including amounts nominally credited to a
                  Participant's Deferred Compensation Account, by virtue of the
                  Plan. Neither the existence of the Plan nor the creation of
                  the Deferred Compensation Accounts on behalf of Participants
                  shall create or be construed to create a trust of any kind or
                  any type of fiduciary relationship between the Corporation and
                  any Participant.

4.       DISTRIBUTIONS

         4.1.     Payment of Benefits. In the first deferral election made under
                  Section 3.2 of the Plan, each Participant shall specify the
                  date and method of payment for amounts credited to his
                  Deferred Compensation Account. All elections shall be made in
                  the form and manner prescribed by the Committee.

                  4.1.1.   Timing. Participants may elect to begin receiving
                           payment of amounts credited to their Deferred
                           Compensation Accounts on any one of the following
                           dates: (i) the Participant's Termination Date; (ii)
                           the date on which the Participant retires from active
                           employment (including self-employment); or (iii) a
                           specific date selected by the Participant. Payments
                           shall begin as soon as administratively practical
                           after the payment date selected by the Participant.
                           If a Participant elects to commence distributions on
                           a specified date and the Participant is an active
                           employee or Director of the Corporation

                                       -3-

<PAGE>

                           on such date, the Participant may continue to
                           participate in the Plan by electing during any
                           following open enrollment period to make future
                           deferrals; provided that the following conditions are
                           satisfied:

                           -        the Participant's participation is suspended
                                    and future deferrals will not be permitted
                                    until the Participant receives all amounts
                                    credited to the Participant's Deferred
                                    Compensation Account; and

                           -        after such suspension, the Participant
                                    re-enrolls in the Plan (at which time the
                                    Participant can make a new election as to
                                    the commencement date and form of payment
                                    that will apply to the new Deferred
                                    Compensation Account that the Committee will
                                    establish for the Participant to track new
                                    deferrals).

                                       -4-

<PAGE>

                  4.1.2.   Method. Participants may elect to receive payment of
                           their Deferred Compensation Accounts in one lump sum,
                           or in annual installments over a term of years (not
                           to exceed ten) specified by Participants in their
                           initial or subsequent elections. If Participants
                           elect to receive their payment in annual
                           installments, subsequent payments shall continue in
                           January of each succeeding year, and each payment
                           shall equal the amount credited to the Participant's
                           Deferred Compensation Account divided by the
                           remaining number of annual installments selected by
                           the Participant. A Participant's Deferred
                           Compensation Account shall be credited with deemed
                           investment returns pursuant to Section 3.4 of the
                           Plan until all payments have been made to the
                           Participant or his designated beneficiary.

                  4.1.3.   Suspension of Payments. If a Participant who has
                           installment payments from the Plan pursuant to an
                           election made under Section 4.1.1(i) or (ii) above is
                           reemployed by the Corporation and again becomes
                           eligible for participation in the Plan, then all
                           payments shall cease until the Participant again
                           satisfies the conditions of Section 4.1.1(i) or (ii)
                           of the Plan. The payment elections previously made by
                           the Participant under the Plan shall apply to any
                           compensation deferred after re-employment.

         4.2.     One-Time Modification. A Participant may change the method of
                  payment initially elected by filing a written election with
                  the Committee at any time up to 12 months prior to the date
                  payments would otherwise have commenced under the Plan. Any
                  change of an earlier election that is made within 12 months of
                  the date payments commence under the Plan shall be disregarded
                  by the Committee. A Participant may also defer the date that
                  payments are to commence to a subsequent date by filing a
                  written election with the Committee at any time up to 12
                  months prior to the date payments would otherwise have
                  commenced under the Plan. Any change of an earlier election
                  that is made within 12 months of the date payments commence
                  under the Plan shall be disregarded by the Committee. A
                  Participant may not elect to defer the commencement date or
                  form of payment the Participant initially elected for
                  receiving benefits more than once.

         4.3.     Benefits Payable Upon Death. Participants may designate a
                  beneficiary to receive payments of their benefits under this
                  Plan in the event of their death. Beneficiary designations
                  shall be made in a form and manner prescribed by the
                  Committee. Participants may change their designations at any
                  time by making a subsequent designation. In the event that a
                  Participant dies before the payments of all amounts credited
                  to his Deferred Compensation Account, any remaining balance in
                  the Account shall be paid to his designated beneficiary in a
                  single cash sum. If a Participant dies without having
                  designated a beneficiary, or if the designated beneficiary
                  predeceases the Participant, a single cash sum payment of all
                  amounts due to the Participant shall be made to the
                  Participant's estate.

         4.4.     Benefits Payable Upon Unanticipated Emergency. In the event of
                  an unanticipated emergency that would result in severe
                  financial hardship, a

                                       -5-

<PAGE>

                  Participant may request the Committee to make a distribution
                  to him of all or a portion of the amounts deferred under this
                  Plan. The hardship must result from a sudden and unexpected
                  illness or accident of the Participant or a dependent of the
                  Participant, loss of the Participant's property due to
                  casualty, or similar extraordinary and unforeseeable
                  circumstances which are beyond the control of the Participant,
                  and which cannot be relieved by reimbursement through
                  insurance, liquidation of the Participant's assets (to the
                  extent that the liquidation itself would not cause severe
                  financial hardship), or the cessation of deferral
                  contributions under this Plan or any other plan maintained by
                  the Corporation. The amount of the distribution shall be no
                  greater than the amount necessary to meet the emergency and to
                  pay any income tax due on the withdrawal. The decision to make
                  a distribution to the Participant shall be made by the
                  Committee in its sole discretion.

         4.5.     Tax Consequences of Contributions/Distributions. Amounts
                  deferred into the Plan and distributions from the Plan are
                  subject to all applicable federal, state, and local employment
                  taxes and appropriate withholdings on such amounts will be
                  made to the extent required by applicable law.

5.       AMENDMENT AND TERMINATION OF THE PLAN

         5.1.     Amendment. The Corporation may amend the Plan at any time or
                  from time to time by a written instrument executed by an
                  officer of the Corporation and approved by the Board.

         5.2.     Termination by the Corporation. The Plan is intended by the
                  Corporation to be a long-term program for the deferral of
                  income by Participants. The Corporation, by action of the
                  Board, nevertheless reserves the right to terminate the Plan
                  at any time and for any reason. Upon termination of the Plan,
                  all amounts held in the Participants' Deferred Compensation
                  Accounts, determined as of the date of termination, shall be
                  distributed to Participants within thirty days.

         5.3.     Termination Upon Change in Control. In the event of a Change
                  in Control, the Plan shall immediately terminate, and all
                  amounts held in a Participant's Deferred Compensation Account,
                  determined as of the date of termination, shall be distributed
                  to the Participants within thirty days.

6.       MISCELLANEOUS

         6.1.     No Employment Rights Conferred. The adoption and maintenance
                  of the Plan shall not be deemed to constitute an employment
                  contract between the Corporation and any Participant or to be
                  in consideration for, or an inducement to or condition of, the
                  employment of any person. Nothing herein contained shall be
                  deemed to: (i) give to any Participant the right to be
                  retained in the employment of the Corporation; (ii) interfere
                  with the right of the Corporation to discharge any Participant
                  at any time; (iii) give to the Corporation the right to
                  require any Participant to remain in its employment; or (iv)
                  interfere with any Participant's right to terminate his
                  employment with the Corporation at any time.

                                       -6-

<PAGE>

         6.2.     No Compensation for Other Purposes. Amounts deferred under the
                  terms of the Plan and distributions paid under the Plan shall
                  not be treated as compensation to the Participant for purposes
                  of any qualified retirement plan maintained by the Corporation
                  or for purposes of any other benefit obligations of the
                  Corporation, unless otherwise provided under the terms of the
                  relevant plan.

         6.3.     Spendthrift Provision. Except to the extent that this
                  provision may be contrary to law, the rights of Participants
                  under the Plan shall not be subject in any manner to
                  anticipation, alienation, sale, transfer, assignment, pledge,
                  encumbrance, attachment, or garnishment by creditors of the
                  Participant or the Participant's beneficiary.

         6.4.     Impossibility of Performance. In the event that it becomes
                  impossible for the Corporation to perform any act under the
                  Plan, that act shall be performed which in the judgment of the
                  Corporation will most nearly carry out the intent and purposes
                  of the Plan.

         6.5.     Interpretation/Administration. The Committee shall have full
                  discretionary power and authority to interpret this Plan and
                  decide any and all questions arising in the application of its
                  terms. The interpretation and construction of this Plan by the
                  Committee, and any actions taken by the Committee, shall be
                  binding and conclusive upon all parties. The Committee also
                  has full discretionary authority to administer the Plan. The
                  Committee's powers include the power, in its sole discretion
                  and consistent with the terms of the Plan, to determine who is
                  eligible to participate in this Plan, to determine the amount
                  of benefits payable under the Plan, to determine when and how
                  amounts are allocated to a Participant's Deferred Compensation
                  Account, to establish rules for determining when and how
                  elections can be made, to adopt any rules relating to
                  administering the Plan and to take any other action it deems
                  appropriate to administer the Plan.

         6.6.     Claims Procedures. The Committee shall maintain a procedure
                  under which a Participant or a Participant's beneficiary
                  (hereinafter called "claimant") whose claim for benefits under
                  the Plan has been denied will receive written notice which
                  clearly sets forth the specific reason or reasons for such
                  denial, the specific plan provision or provisions on which the
                  denial is based, any additional information necessary for the
                  claimant to perfect the claim, if possible, (including an
                  explanation of why such additional information is needed), and
                  an explanation of the Plan's claims review procedures. Such
                  procedures shall allow a claimant 60 days after receipt of the
                  written notice of denial to request a review of such denied
                  claim, and the Committee shall make its decision based on such
                  review within 60 days (120 days if special circumstances
                  require more time) of its receipt of the request for review.
                  The decision on review shall be in writing and shall clearly
                  describe the reasons for the Committee's decision. The
                  decisions of the Committee shall be final and binding on the
                  Participant and beneficiary.

         6.7.     Governing Law. All legal questions pertaining to the Plan
                  shall be determined in accordance with the laws of the State
                  of New York.

                                       -7-

<PAGE>

         IN WITNESS WHEREOF, Paychex, Inc. has caused this instrument to be
executed effective as of February 1, 2002.

                                             PAYCHEX, INC.

                                             By: /S/ John M. Morphy
                                                 -------------------------------

                                       -8-Exhibit 10.1

 

SERIES B CONVERTIBLE
PREFERRED STOCK PURCHASE

AGREEMENT

Dated as of July 19, 2004

among

HOME SOLUTIONS OF AMERICA, INC.

and

THE PURCHASERS LISTED ON EXHIBIT A

 

 

 

 

 

 

 

  

TABLE OF CONTENTS

	 	 	

PAGE

    
	ARTICLE I Purchase and Sale of Preferred
    Stock............................................................................	1
	  	 
	 	Section 1.1       Purchase and Sale of Stock...........................................................................  	1
	 	Section 1.2       The Conversion Shares..................................................................................  	1
	 	Section 1.3       Purchase Price and Closing............................................................................  	1
	 	  	 
	ARTICLE II Representations and
    Warranties...................................................................................	2
	  	 
	 	Section 2.1       Representations and Warranties of the
Company............................................	2
	 	Section 2.2       Representations and Warranties of the Purchasers..........................................	13
	 	  	 
	ARTICLE III Covenants.................................................................................................................	15
	  	 
	 	Section 3.1       Securities Compliance..................................................................................  	15
	 	Section 3.2       Registration and Listing................................................................................  	15
	 	Section 3.3       Inspection Rights.........................................................................................  	16
	 	Section 3.4       Compliance with Laws.................................................................................  	16
	 	Section 3.5       Keeping of Records and Books of Account.................................................  	16
	 	Section 3.6       Reporting Requirements...............................................................................  	16
	 	Section 3.7       Status of Dividends......................................................................................  	16
	 	Section 3.7       Amendments...............................................................................................  	16
	 	Section 3.8       Other Agreements.......................................................................................  	18
	 	Section 3.9       Distributions................................................................................................  	18
	 	Section 3.10     Status of Dividends......................................................................................  	18
	 	Section 3.11     Intentionally Omitted....................................................................................  	19
	 	Section 3.12     Future Financings; Right of First Offer and
Refusal........................................  	20
	 	Section 3.13     Reservation of Shares..................................................................................  	20
	 	Section 3.14     Transfer Agent Instructions..........................................................................  	19
	 	Section 3.15     Disposition of Assets...................................................................................
    	19
	 	 
    	 
	ARTICLE IV
    Conditions................................................................................................................	21
	  	 
	 	Section 4.1       Conditions Precedent to the Obligation of
the Company to Sell the Shares.....  	21
	 	Section 4.2       Conditions Precedent to the Obligation of
the Purchasers to Purchase the Shares..	21
	 	  	 
	ARTICLE V Intentionally Omitted...................................................................................................  	23
	  	 

 

	ARTICLE VI Stock Certificate Legend...........................................................................................  	24
	  	 
	 	Section 6.1       Legend..........................................................................................................  	24
	 	  	 
	ARTICLE VII Intentionally Omitted.................................................................................................  	24
	  	 
	ARTICLE VIII Indemnification........................................................................................................  	24
	  	 
	 	Section 8.1       General Indemnity..........................................................................................  	25
	 	Section 8.2       Indemnification Procedure...............................................................................	25
	 	  	 
	ARTICLE IX Miscellaneous............................................................................................................  	26
	  	 
	 	Section 9.1       Fees and Expenses.........................................................................................  	26
	 	Section 9.2       Specific Enforcement, Consent to
Jurisdiction..................................................  	26
	 	Section 9.3       Entire Agreement; Amendment........................................................................  	27
	 	Section 9.4       Notices..........................................................................................................  	27
	 	Section 9.5       Waivers..........................................................................................................  	28
	 	Section 9.6       Headings........................................................................................................  	28
	 	Section 9.7       Successors and Assigns...................................................................................  	28
	 	Section 9.8       No Third Party Beneficiaries...........................................................................  	28
	 	Section 9.9       Governing Law...............................................................................................  	28
	 	Section 9.10     Survival..........................................................................................................  	28
	 	Section 9.11     Counterparts..................................................................................................  	29
	 	Section 9.12     Publicity.........................................................................................................  	29
	 	Section 9.13     Severability.....................................................................................................  	29
	 	Section 9.14     Further Assurances.........................................................................................  	29

SERIES B
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT 

This SERIES B
CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is dated as of
July 19, 2004 by and among Home Solutions of America, Inc., a Delaware corporation
(the "Company"), and each of the Purchasers of shares of Series B Convertible
Preferred Stock of the Company whose names are set forth on Exhibit A hereto
(individually, a "Purchaser" and collectively, the "Purchasers").

The parties
hereto agree as follows:

ARTICLE I

Purchase and Sale of Preferred Stock

Section
1.1             
Purchase and Sale of Stock.  Upon the following terms and
conditions, the Company shall issue and sell to the Purchasers and each of the Purchasers
shall purchase from the Company, the number of shares of the Company's Series B
Convertible Preferred Stock, par value $.001 per share (the "Preferred
Shares"), at a purchase price of $25,000 per share, set forth opposite such
Purchaser's name on Exhibit A hereto.  The aggregate purchase price for
the Preferred Shares shall be up to $1,000,000.  The designation, rights, preferences
and other terms and provisions of the Series B Convertible Preferred Stock are
set forth in the Certificate of Designation of the Relative Rights and
Preferences of the Series B Convertible Preferred Stock attached hereto as Exhibit
B (the "Certificate of Designation").  The Company and the Purchasers are
executing and delivering this Agreement in accordance with and in reliance upon
the exemption from securities registration afforded by Rule 506 of Regulation D
("Regulation D") as promulgated by the United States Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act") or Section 4(2) of the Securities Act. 

Section
1.2             
The Conversion Shares. The Company has authorized and has
reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares then outstanding; provided that the
number of shares of Common Stock so reserved shall at no time be less than 120%
of its authorized but unissued shares of its Common Stock, to effect the
conversion of the Preferred Shares.  Any shares of Common Stock issuable upon
conversion of the Preferred Shares (and such shares when issued) are herein
referred to as the "Conversion Shares".  The Preferred Shares and the
Conversion Shares are sometimes collectively referred to as the "Shares".

Section
1.3             
Purchase Price and Closing.  The Company agrees to issue and sell
to the Purchasers and, in consideration of and in express reliance upon the
representations, warranties, covenants, terms and conditions of this Agreement,
the Purchasers, severally but not jointly, agree to purchase that number of the
Preferred Shares set forth opposite their respective names on Exhibit A. 
The aggregate purchase price of the Preferred Shares being acquired by each Purchaser
is set forth opposite such Purchaser's name on Exhibit A (for each such
Purchaser, the "Purchase Price" and collectively referred to as the "Purchase
Prices").  The closing of the purchase and sale of the Preferred Shares shall
take place at such location as the Company and the Purchasers shall agree (the
"Closing") at 1:00 p.m. (eastern time) upon the satisfaction of each of the
conditions set forth in Article IV hereof (the "Closing Date").  Funding with respect to the
Closing shall take place by wire transfer of immediately available funds on or
prior to the Closing Date. 

 

ARTICLE II

Representations and Warranties

Section 2.1             
Representations and Warranties of the Company.  The Company
hereby makes the following representations and
warranties to the Purchasers, except as set forth in the Company's disclosure
schedule delivered with this Agreement as follows:

(a)               
Organization, Good Standing and Power.  The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it
is now being conducted.  The Company does not have any subsidiaries except as
set forth in the Company's Form 10-KSB/A for the year ended December 31, 2003,
including the accompanying financial statements (the "Form 10-KSB"), or in the
Company's Form 10-QSB for the fiscal quarter ended March 31, 2004
(collectively, the "Form 10-QSB"), or on Schedule 2.1(a) hereto.  The
Company and each such subsidiary is duly qualified as a foreign corporation to
do business and is in good standing in every jurisdiction in which the nature
of the business conducted or property owned by it makes such qualification
necessary except for any jurisdiction(s) (alone or in the aggregate) in which
the failure to be so qualified will not have a Material Adverse Effect (as
defined in Section 2.1(c) hereof) on the Company's financial condition.

(b)              
Authorization; Enforcement.  The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement attached hereto as Exhibit C (the
"Registration Rights Agreement"), the Irrevocable Transfer Agent Instructions
(as defined in Section 3.14), and the Certificate of Designation (collectively,
the "Transaction Documents") and to issue and sell the Shares in accordance
with the terms hereof.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action, and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required.  This Agreement has been duly executed and delivered by the Company. 
The other Transaction Documents will have been duly executed and delivered by
the Company at the Closing.  Each of the Transaction Documents constitutes, or
shall constitute when executed and delivered, a valid and binding obligation of
the Company enforceable against the Company in accordance with its terms, except
as such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor's
rights and remedies or by other equitable principles of general application.

 

 

2

(c)               
Capitalization.  The authorized capital stock of the Company and
the shares thereof currently issued and outstanding as of July 19, 2004 are set
forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the
Company's Common Stock, Series A Convertible Preferred Stock, and Series B
Convertible Preferred Stock have been duly and validly authorized.  Except as
set forth in this Agreement and the Registration Rights Agreement and as set
forth on Schedule 2.1(c) hereto, no shares of Common Stock are entitled
to preemptive rights or registration rights and there are no outstanding
options, warrants, scrip, rights to subscribe to, call or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company (Purchasers are deemed to be aware, for
all purposes of this Agreement, of all agreements related to the Company's
offering of 80 shares of Series A Convertible Preferred Stock on March 1, 2004,
a portion of which was purchased by Victus Capital, L.P.).  Furthermore, except
as set forth in this Agreement and the Registration Rights Agreement or on Schedule
2.1(c), there are no contracts, commitments, understandings, or
arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company.  Except for customary
transfer restrictions contained in agreements entered into by the Company in
order to sell restricted securities or as set forth on Schedule 2.1(c)
hereto, the Company is not a party to any agreement granting registration or
anti-dilution rights to any person with respect to any of its equity or debt
securities.  The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company.  Except as set forth on Schedule 2.1(c) hereto, the
offer and sale of all capital stock, convertible securities, rights, warrants,
or options of the Company issued prior to the Closing complied with all
applicable Federal and state securities laws, and no stockholder has a right of
rescission or claim for damages with respect thereto which would have a
Material Adverse Effect (as defined below) on the Company's financial condition
or operating results.  The Company has furnished or made available to the Purchasers
true and correct copies of the Company's Certificate of Incorporation as in
effect on the date hereof (the "Certificate"), and the Company's Bylaws as in
effect on the date hereof (the "Bylaws").  For the purposes of this Agreement,
"Material Adverse Effect" means any material adverse effect on the business,
operations, properties, prospects, or financial condition of the Company and
its subsidiaries and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
perform any of its obligations under this Agreement in any material respect.

(d)              
Issuance of Shares.  The Preferred Shares to be issued at the
Closing have been duly authorized by all necessary corporate action and the
Preferred Shares, when paid for or issued in accordance with the terms hereof, shall
be validly issued and outstanding, fully paid and nonassessable and entitled to
the rights and preferences set forth in the Certificate of Designation.  When
the Conversion Shares are issued in accordance with the terms of the
Certificate of Designation, such shares will be duly authorized by all
necessary corporate action and validly issued and outstanding, fully paid and
nonassessable, and the holders shall be entitled to all rights accorded to a
holder of Common Stock. 

 

3

(e)               
No Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated herein and therein do not and will not
(i) violate any provision of the Company's Certificate or Bylaws, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time
or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, any agreement,
mortgage, deed of trust, indenture, note, bond, license, lease agreement,
instrument or obligation to which the Company is a party or by which it or its
properties or assets are bound, (iii) create or impose a lien, mortgage,
security interest, charge or encumbrance of any nature on any property of the
Company under any agreement or any commitment to which the Company is a party
or by which the Company is bound or by which any of its respective properties
or assets are bound, or (iv) result in a violation of any federal, state, local
or foreign statute, rule, regulation, order, judgment or decree (including
Federal and state securities laws and regulations) applicable to the Company or
any of its subsidiaries or by which any property or asset of the Company or any
of its subsidiaries are bound or affected, except, in all cases other than
violations pursuant to clauses (i) and (iv) above, for such conflicts,
defaults, terminations, amendments, accelerations, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse
Effect.  The business of the Company and its subsidiaries is not being
conducted in violation of any laws, ordinances or regulations of any governmental
entity, except for possible violations which singularly or in the aggregate do
not and will not have a Material Adverse Effect.  The Company is not required
under Federal, state or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under the Transaction Documents, or issue and sell the
Preferred Shares or the Conversion Shares in accordance with the terms hereof
or thereof (other than any filings which may be required to be made by the
Company with the Commission or state securities administrators subsequent to
the Closing, any registration statement which may be filed pursuant hereto, and
the Certificate of Designation); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon
the accuracy of the relevant representations and agreements of the Purchasers
herein.

(f)                
Commission Documents, Financial Statements.  The Common Stock is
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and, since March 31, 2004, the Company
has timely filed all reports, schedules, forms, statements and other documents
required to be filed by it with the Commission pursuant to the reporting
requirements of the Exchange Act, including material filed pursuant to Section
13(a) or 15(d) of the Exchange Act (all of the foregoing including filings incorporated
by reference therein being referred to herein as the "Commission Documents"). 
The Company has delivered or made available to each of the Purchasers true and
complete copies of the Commission Documents filed with the Commission since
December 31, 2002.  The Company has not provided to the Purchasers any material
non-public information or other information which, according to applicable law,
rule or regulation, was required to have been disclosed publicly by the Company
but which has not been so disclosed, other than with respect to the
transactions contemplated by this Agreement.  As of their respective dates, the
Form 10-KSB and the Form 10-QSB complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder and other federal, state and local laws,
rules and regulations applicable to such documents, and, as of their respective
dates, none of the Form 10-KSB and the Form 10-QSB contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.  The financial
statements of the Company included in the Commission Documents comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto.  Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
("GAAP") applied on a consistent basis during the periods involved (except (i)
as may be otherwise indicated in such financial statements or the notes thereto
or (ii) in the case of unaudited interim statements, to the extent they may not
include footnotes or may be condensed or summary statements), and fairly
present in all material respects the financial position of the Company and its
subsidiaries as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).

 

4

(g)               
Subsidiaries.  Schedule 2.1(g) hereto sets forth each
subsidiary of the Company, showing the jurisdiction of its incorporation or
organization and showing the percentage of each person's ownership.  For the
purposes of this Agreement, "subsidiary" shall mean any corporation or other
entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by the Company and/or any of its other
subsidiaries.  All of the outstanding shares of capital stock of each
subsidiary have been duly authorized and validly issued, and are fully paid and
nonassessable.  There are no outstanding preemptive, conversion or other
rights, options, warrants or agreements granted or issued by or binding upon
any subsidiary for the purchase or acquisition of any shares of capital stock
of any subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. 
Neither the Company nor any subsidiary is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence.  Neither the
Company nor any subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.

(h)               
No Material Adverse Change.  Since March 31, 2004, the Company
has not experienced or suffered any Material Adverse Effect, except as
disclosed on Schedule 2.1(h) hereto.

(i)                 
No Undisclosed Liabilities.  Except as set forth on Schedule
2.1(i) hereto, neither the Company nor any of its subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those incurred in the ordinary course of the Company's or its subsidiaries respective
businesses since March 31, 2004 and which, individually or in the aggregate, do
not or would not have a Material Adverse Effect on the Company or its
subsidiaries.

(j)                
No Undisclosed Events or Circumstances.  Except as set forth on Schedule
2.1(j) hereto, no event or circumstance has occurred or exists with respect
to the Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule
or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed.

 

5

(k)              
Indebtedness.  The Form 10-KSB, Form 10-QSB or Schedule 2.1(k)
hereto sets forth as of a recent date all outstanding secured and unsecured
Indebtedness of the Company or any subsidiary, or for which the Company or any
subsidiary has commitments.  For the purposes of this Agreement, "Indebtedness"
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$100,000 (other than trade accounts payable incurred in the ordinary course of
business), (b) all guaranties, endorsements and other contingent obligations in
respect of Indebtedness of others, whether or not the same are or should be
reflected in the Company's balance sheet (or the notes thereto), except
guaranties by endorsement of negotiable instruments for deposit or collection
or similar transactions in the ordinary course of business; and (c) the present
value of any lease payments in excess of $25,000 due under leases required to
be capitalized in accordance with GAAP.  Except as set forth on Schedule
2.1(k), neither the Company nor any subsidiary is in default with respect
to any Indebtedness.

(l)                 
Title to Assets.  Each of the Company and the subsidiaries has
good and marketable title to all of its real and personal property reflected in
the Form 10-KSB, free and clear of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the
Form 10-KSB, Form 10-QSB or on Schedule 2.1(l) hereto or such that,
individually or in the aggregate, do not cause a Material Adverse Effect on the
Company's financial condition or operating results.  All said leases of the
Company and each of its subsidiaries are valid and subsisting and in full force
and effect.

(m)             
Actions Pending.  There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or any other proceeding
pending or, to the knowledge of the Company, threatened against the Company or
any subsidiary which questions the validity of this Agreement or any of the
other Transaction Documents or the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto.  Except as set
forth in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(m) hereto,
there is no action, suit, claim, investigation, arbitration, alternate dispute
resolution proceeding or any other proceeding pending or, to the knowledge of
the Company, threatened, against or involving the Company, any subsidiary or
any of their respective properties or assets.  Except as set forth in the Form
10-KSB, Form 10-QSB or Schedule 2.1(m) hereto, there are no outstanding
orders, judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such.

(n)               
Compliance with Law.  The business of the Company and the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the Form 10-KSB, Form 10-QSB, or such that,
individually or in the aggregate, do not cause a Material Adverse Effect.  The
Company and each of its subsidiaries have all franchises, permits, licenses,
consents and other governmental or regulatory authorizations and approvals
necessary for the conduct of its business as now being conducted by it unless
the failure to possess such franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.

 

6

(o)              
Taxes.  Except as set forth in the Form 10-KSB or in the Form 10-QSB,
the Company and each of the subsidiaries has accurately prepared and filed all
federal, state and other tax returns required by law to be filed by it, has
paid or made provisions for the payment of all taxes shown to be due and all
additional assessments, and adequate provisions have been and are reflected in
the financial statements of the Company and the subsidiaries for all current
taxes and other charges to which the Company or any subsidiary is subject and
which are not currently due and payable.  None of the federal income tax
returns of the Company or any subsidiary have been audited by the Internal
Revenue Service.  The Company has no knowledge of any additional assessments,
adjustments or contingent tax liability (whether federal or state) of any
nature whatsoever, whether pending or threatened against the Company or any
subsidiary for any period, nor of any basis for any such assessment, adjustment
or contingency.

(p)              
Certain Fees.  Except as set forth in this Agreement or on Schedule
2.1(p) hereto, no brokers, finders or financial advisory fees or
commissions will be payable by the Company or any subsidiary or any Purchaser
with respect to the transactions contemplated by this Agreement.

(q)              
Disclosure.  To the best of the Company's knowledge, neither this
Agreement or the Schedules hereto nor any other documents, certificates or
instruments furnished to the Purchasers by or on behalf of the Company or any
subsidiary in connection with the transactions contemplated by this Agreement
contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements made herein or therein, in the
light of the circumstances under which they were made herein or therein, not
misleading.

(r)                
Operation of Business.  The Company and each of the subsidiaries
owns or possesses all patents, trademarks, domain names (whether or not
registered) and any patentable improvements or copyrightable derivative works
thereof, websites and intellectual property rights relating thereto, service
marks, trade names, copyrights, licenses and authorizations as set forth in the
Form 10-KSB, Form 10-QSB and on Schedule 2.1(r) hereto, and all rights
with respect to the foregoing, which are necessary for the conduct of its
business as now conducted without any conflict with the rights of others.

(s)               
Environmental Compliance.  The Company and each of its
subsidiaries have obtained all material approvals, authorization, certificates,
consents, licenses, orders and permits or other similar authorizations of all
governmental authorities, or from any other person, that are required under
any  Environmental Laws.  The Form 10-KSB or Form 10-QSB describes all material
permits, licenses and other authorizations issued under any Environmental Laws
to the Company or its subsidiaries.  "Environmental Laws" shall mean all
applicable laws relating to the protection of the environment including,
without limitation, all requirements pertaining to reporting, licensing,
permitting, controlling, investigating or remediating emissions, discharges,
releases or threatened releases of hazardous substances, chemical substances,
pollutants, contaminants or toxic substances, materials or wastes, whether
solid, liquid or gaseous in nature, into the air, surface water, groundwater or
land, or relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of hazardous substances, chemical
substances, pollutants, contaminants or toxic substances, material or wastes,
whether solid, liquid or gaseous in nature.  The Company has all necessary
governmental approvals required under all Environmental Laws and used in its
business or in the business of any of its subsidiaries.  The Company and each
of its subsidiaries are also in compliance with all other limitations,
restrictions, conditions, standards, requirements, schedules and timetables
required or imposed under all Environmental Laws.  Except for such instances as
would not individually or in the aggregate have a Material Adverse Effect, there
are no past or present events, conditions, circumstances, incidents, actions or
omissions relating to or in any way affecting the Company or its subsidiaries
that violate or may violate any Environmental Law after the Closing Date or
that may give rise to any environmental liability, or otherwise form the basis
of any claim, action, demand, suit, proceeding, hearing, study or investigation
(i) under any Environmental Law, or (ii) based on or related to the
manufacture, processing, distribution, use, treatment, storage (including
without limitation underground storage tanks), disposal, transport or handling,
or the emission, discharge, release or threatened release of any hazardous
substance.  

 

7

(t)                
Books and Record Internal Accounting Controls.  The books and
records of the Company and its subsidiaries accurately reflect in all material
respects the information relating to the business of the Company and the
subsidiaries, the location and collection of their assets, and the nature of
all transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary.  The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the
Company, to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
actions is taken with respect to any differences.

(u)               
Material Agreements.  Except as set forth in the Form 10-KSB,
Form 10-QSB or on Schedule 2.1(u) hereto, neither the Company nor any
subsidiary is a party to any written or oral contract, instrument, agreement,
commitment, obligation, plan or arrangement, a copy of which would be required
to be filed with the Commission as an exhibit to a registration statement on
Form S-3 or applicable form (collectively, "Material Agreements") if the
Company or any subsidiary were registering securities under the Securities
Act.  Except as set forth on Schedule 2.1(u) or in the Commission
Documents, the Company and each of its subsidiaries has in all material
respects performed all the obligations required to be performed by them to date
under the foregoing agreements, have received no notice of default and, to the
best of the Company's knowledge are not in default under any Material Agreement
now in effect, the result of which could cause a Material Adverse Effect. 
Except as set forth on Schedule 2.1(u) or in the Commission Documents,
no written or oral contract, instrument, agreement, commitment, obligation,
plan or arrangement of the Company or of any subsidiary limits or shall limit
the payment of dividends on the Company's Preferred Shares, other Preferred
Stock, if any, or its Common Stock.

(v)               
Transactions with Affiliates.  Except as set forth in the Form
10-KSB, Form 10-QSB or on Schedule 2.1(v) hereto, there are no loans,
leases, agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.

 

8

(w)             
Securities Act of 1933.  Based in material part upon the
representations herein of the Purchasers, the Company has complied and will
comply with all applicable federal and state securities laws in connection with
the offer, issuance and sale of the Shares hereunder.  Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or will sell, offer to
sell or solicit offers to buy any of the Shares or similar securities to, or
solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person, or has taken
or will take any action so as to bring the issuance and sale of any of the
Shares under the registration provisions of the Securities Act and applicable
state securities laws, and neither the Company nor any of its affiliates, nor
any person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of any of the Shares.

(x)               
Governmental Approvals.  Except as set forth in the Form 10-KSB
or Form 10-QSB, and except for the filing of any notice prior or subsequent to
the Closing Date that may be required under applicable state and/or Federal
securities laws (which if required, shall be filed on a timely basis),
including the filing of a Form D and a registration statement or statements
pursuant to the Registration Rights Agreement, and the filing of the
Certificate of Designation with the Secretary of State for the State of Delaware,
no authorization, consent, approval, license, exemption of, filing or registration
with any court or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Preferred Shares, or for the
performance by the Company of its obligations under the Transaction Documents.

(y)               
Employees.  Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees,
except as set forth in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(y)
hereto.  Except as set forth in the Form 10-KSB, Form 10-QSB or on Schedule
2.1(y) hereto, neither the Company nor any subsidiary has any employment
contract, agreement regarding proprietary information, non-competition
agreement, non-solicitation agreement, confidentiality agreement, or any other
similar contract or restrictive covenant, relating to the right of any officer,
employee or consultant to be employed or engaged by the Company or such
subsidiary.  Since September 30, 2002, no officer, consultant or key employee
of the Company or any subsidiary whose termination, either individually or in
the aggregate, could have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any subsidiary.

 

9

(z)               
Absence of Certain Developments.  Except as provided on Schedule
2.1(z) hereto, since March 31, 2004, neither the Company nor any subsidiary
has:

(i)                 
issued any stock, bonds or other corporate securities or any rights,
options or warrants with respect thereto;

(ii)               
borrowed any amount or incurred or become subject to any liabilities
(absolute or contingent) except current liabilities incurred in the ordinary
course of business which are comparable in nature and amount to the current
liabilities incurred in the ordinary course of business during the comparable
portion of its prior fiscal year, as adjusted to reflect the current nature and
volume of the Company's or such subsidiary's business;

(iii)              
discharged or satisfied any lien or encumbrance or paid any obligation
or liability (absolute or contingent), other than current liabilities paid in
the ordinary course of business;

(iv)             
declared or made any payment or distribution of cash or other property
to stockholders with respect to its stock, or purchased or redeemed, or made
any agreements so to purchase or redeem, any shares of its capital stock;

(v)               
sold, assigned or transferred any other tangible assets, or canceled any
debts or claims, except in the ordinary course of business;

(vi)             
sold, assigned or transferred any patent rights, trademarks, trade
names, copyrights, trade secrets or other intangible assets or intellectual
property rights, or disclosed any proprietary confidential information to any
person except to customers in the ordinary course of business or to the Purchasers
or their representatives;

(vii)            
suffered any substantial losses or waived any rights of material value,
whether or not in the ordinary course of business, or suffered the loss of any
material amount of prospective business;

(viii)          
made any changes in employee compensation except in the ordinary course
of business and consistent with past practices;

(ix)             
made capital expenditures or commitments therefor that aggregate in
excess of $100,000;

(x)               
entered into any other transaction other than in the ordinary course of
business, or entered into any other material transaction, whether or not in the
ordinary course of business;

(xi)             
made charitable contributions or pledges in excess of $25,000;

(xii)            
suffered any material damage, destruction or casualty loss, whether or
not covered by insurance;

 

10

(xiii)          
experienced any material problems with labor or management in connection
with the terms and conditions of their employment;

(xiv)          
effected any two or more events of the foregoing kind which in the
aggregate would be material to the Company or its subsidiaries; or

(xv)           
entered into an agreement, written or otherwise, to take any of the
foregoing actions.

(aa)           
Public Utility Holding Company Act and Investment Company Act Status. 
The Company is not a "holding company" or a "public utility company" as such
terms are defined in the Public Utility Holding Company Act of 1935, as
amended.  The Company is not, and as a result of and immediately upon the
Closing will not be, an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

(bb)          
ERISA.  No liability to the Pension Benefit Guaranty Corporation
has been incurred with respect to any Plan by the Company or any of its
subsidiaries which is or would be materially adverse to the Company and its
subsidiaries.  The execution and delivery of this Agreement and the issuance
and sale of the Preferred Shares will not involve any transaction which is
subject to the prohibitions of Section 406 of ERISA or in connection with which
a tax could be imposed pursuant to Section 4975 of the Internal Revenue Code of
1986, as amended, provided that, if any of the Purchasers, or any person or
entity that owns a beneficial interest in any of the Purchasers, is an
"employee pension benefit plan" (within the meaning of Section 3(2) of ERISA)
with respect to which the Company is a "party in interest" (within the meaning
of Section 3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e)
of ERISA, if applicable, are met.  As used in this Section 2.1(ac), the term
"Plan" shall mean an "employee pension benefit plan" (as defined in Section 3
of ERISA) which is or has been established or maintained, or to which
contributions are or have been made, by the Company or any subsidiary or by any
trade or business, whether or not incorporated, which, together with the
Company or any subsidiary, is under common control, as described in Section
414(b) or (c) of the Code.

(cc)           
Dilutive Effect.  The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred
Shares will increase in certain circumstances.  The Company further
acknowledges that its obligation to issue Conversion Shares upon conversion of
the Preferred Shares in accordance with this Agreement and the Certificate of
Designation is absolute and unconditional regardless of the dilutive effect
that such issuance may have on the ownership interest of other stockholders of
the Company.

(dd)          
Delisting Notification.  The Company has not received notice (written or oral)
from the American Stock Exchange to the effect that the Company is not in
compliance with the listing or maintenance requirements of such market. 

 

11

(ee)           
Independent Nature of Purchasers.  The Company acknowledges that
the obligations of each Purchaser under the Transaction Documents are several
and not joint with the obligations of any other Purchaser, and no Purchaser
shall be responsible in any way for the performance of the obligations of any
other Purchaser under the Transaction Documents.  The Company acknowledges that
the decision of each Purchaser to purchase Securities pursuant to this
Agreement has been made by such Purchaser independently of any other purchase
and independently of any information, materials, statements or opinions as to
the business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or
of its Subsidiaries which may have made or given by any other Purchaser or by
any agent or employee of any other Purchaser, and no Purchaser or any of its
agents or employees shall have any liability to any Purchaser (or any other
person) relating to or arising from any such information, materials, statements
or opinions.  The Company acknowledges that nothing contained herein, or in any
Transaction Document, and no action taken by any Purchaser pursuant hereto or
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  The Company acknowledges that each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.  The
Company acknowledges that it has elected to provide all Purchasers with the
same terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers.  The Company
acknowledges that such procedure with respect to the Transaction Documents in
no way creates a presumption that the Purchasers are in any way acting in
concert or as a group with respect to the Transaction Documents or the
transactions contemplated hereby or thereby.

(ff)              
No Integrated Offering. 
Neither the Company, nor any of its affiliates, nor any person acting on its or
their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would cause the offering of the Shares pursuant to this Agreement to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Shares pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
subsidiaries take any action or steps that would cause the offering of the
Shares to be integrated with other offerings.  The Company does not have any
registration statement pending before the Commission or currently under the
Commission's review.

(gg)           
Sarbanes-Oxley Act

(hh)           
..  The Company is in substantial compliance with the applicable
provisions of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), and
the rules and regulations promulgated thereunder, that are effective and
intends to comply substantially with other applicable provisions of the
Sarbanes-Oxley Act, and the rules and regulations promulgated thereunder, upon
the effectiveness of such provisions.

Section
2.2             
Representations and Warranties of the Purchasers.  Each of the Purchasers
hereby makes the following representations and warranties to the Company:

 

12

(a)               
Organization and Standing of the Purchasers.  If the Purchaser is
an entity, such Purchaser is a corporation or partnership duly incorporated or
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation or organization.

(b)              
Authorization and Power.  The Purchaser has the requisite power
and authority to enter into and perform this Agreement and to purchase the
Preferred Shares being sold to it hereunder.  The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by such
Purchaser and the consummation by it of the transactions contemplated hereby
and thereby have been duly authorized by all necessary corporate or partnership
action, and no further consent or authorization of such Purchaser or its Board
of Directors, stockholders, or partners, as the case may be, is required.  Each
of this Agreement and the Registration Rights Agreement has been duly
authorized, executed and delivered by such Purchaser and constitutes, or shall
constitute when executed and delivered, a valid and binding obligation of the
Purchaser enforceable against the Purchaser in accordance with the terms
thereof.

(c)               
No Conflicts.  The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and the consummation by such
Purchaser of the transactions contemplated hereby and thereby or relating
hereto do not and will not (i) result in a violation of such Purchaser's charter
documents or bylaws or other organizational documents or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any agreement, indenture or
instrument or obligation to which such Purchaser is a party or by which its
properties or assets are bound, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental
agency applicable to such Purchaser or its properties (except for such
conflicts, defaults and violations as would not, individually or in the
aggregate, have a material adverse effect on such Purchaser).  Such Purchaser
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it
to execute, deliver or perform any of its obligations under this Agreement or
the Registration Rights Agreement or to purchase the Preferred Shares in
accordance with the terms hereof, provided that for purposes of the
representation made in this sentence, such Purchaser is assuming and relying
upon the accuracy of the relevant representations and agreements of the Company
herein.

(d)              
Acquisition for Investment.  Such Purchaser is acquiring the
Preferred Shares solely for its own account for the purpose of investment and
not with a view to or for sale in connection with distribution.  Such Purchaser
does not have a present intention to sell the Preferred Shares, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares to or through any person or entity; provided,
however, that by making the representations herein and subject to
Section 2.2(f) below, such Purchaser does not agree to hold the Shares for any
minimum or other specific term and reserves the right to dispose of the Shares
at any time in accordance with Federal and state securities laws applicable to
such disposition.  Such Purchaser acknowledges that it is able to bear the
financial risks associated with an investment in the Preferred Shares and that
it has been given full access to such records of the Company and the
subsidiaries and to the officers of the Company and the subsidiaries and
received such information as it has deemed necessary or appropriate to conduct
its due diligence investigation and has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company's stage
of development so as to be able to evaluate the risks and merits of its
investment in the Company.

 

13

(e)               
Status of Purchasers.  Such Purchaser is an "accredited investor"
as defined in Regulation D promulgated under the Securities Act.  Such
Purchaser is not required to be registered as a broker-dealer under Section 15
of the Exchange Act and such Purchaser is not a broker-dealer.

(f)                
Opportunities for Additional Information.  Each Purchaser
acknowledges that such Purchaser has had the opportunity to ask questions of
and receive answers from, or obtain additional information from, the executive
officers of the Company concerning the financial and other affairs of the
Company, and to the extent deemed necessary in light of such Purchaser's personal
knowledge of the Company's affairs, such Purchaser has asked such questions and
received answers to the full satisfaction of such Purchaser, and such Purchaser
desires to invest in the Company.

(g)               
No General Solicitation.  Each Purchaser acknowledges that the
Preferred Shares were not offered to such Purchaser by means of any form of
general or public solicitation or general advertising, or publicly disseminated
advertisements or sales literature, including (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media, or broadcast over television or radio, or (ii) any seminar or meeting to
which such Purchaser was invited by any of the foregoing means of
communications.

(h)               
Rule 144.  Such Purchaser understands that the Shares must be
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from registration is available.  Such Purchaser acknowledges that
such Purchaser is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule
144"), and that such person has been advised that Rule 144 permits resales only
under certain circumstances.  Such Purchaser understands that to the extent
that Rule 144 is not available, such Purchaser will be unable to sell any
Shares without either registration under the Securities Act or the existence of
another exemption from such registration requirement.

(i)                 
General.  Such Purchaser understands that the Shares are being
offered and sold in reliance on a transactional exemption from the registration
requirement of Federal and state securities laws and the Company is relying
upon the truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Purchaser set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Purchaser to acquire the Shares.

(j)                
Independent Investment.  No Purchaser has agreed to act with any
other Purchaser for the purpose of acquiring, holding, voting or disposing of
the Shares purchased hereunder for purposes of Section 13(d) under the Exchange
Act, and each Purchaser is acting independently with respect to its investment
in the Shares.

 

14

ARTICLE III

Covenants

The Company
covenants with each of the Purchasers as follows, which covenants are for the
benefit of the Purchasers and their permitted assignees (as defined herein):

Section
3.1             
Securities Compliance.  (a) The Company shall notify the
Commission in accordance with their rules and regulations, of the transactions
contemplated by any of the Transaction Documents, including filing a Form D
with respect to the Preferred Shares and Conversion Shares as required under
Regulation D, 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 Preferred Shares and the Conversion Shares to the Purchasers
or subsequent holders. 

(b)              
Unless waived by a Purchaser by means of providing sixty-one (61) days
notice to the Company, in connection with a Voluntary Conversion (as such term
is defined in the Certificate of Designation), the Company covenants and agrees
that upon receipt of a Conversion Notice pursuant to Section 5(b)(ii) of the
Certificate of Designation that it will not convert such number of shares that,
when aggregated with all other shares of Common Stock then owned by a Purchaser
beneficially or deemed beneficially owned by a Purchaser, would result in a
Purchaser owning more than 4.99% of all of such Common Stock as would be
outstanding on such date of conversion, as determined in accordance with
Section 16 of the Exchange Act and the regulations promulgated thereunder; provided,
however, that if pursuant to this Section the Company does not convert
or issue the number of shares requested under the applicable Conversion Notice
or Exercise Form, the Company will not be subject to Section 5(b)(v) of the
Certificate of Designation as a result of such failure to convert.

Section
3.2             
Registration and Listing.  The Company will cause its Common
Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under the Exchange Act, will comply with all requirements related
to any registration statement filed pursuant to this Agreement or the
Registration Rights Agreement, and will not take any action or file any
document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act or Securities Act, except as permitted herein.  The
Company will take all action necessary to continue the listing or trading of
its Common Stock on the over-the-counter electronic bulletin board.

Section
3.3             
Inspection Rights.  The Company shall permit, during normal
business hours and upon reasonable request and reasonable notice, each
Purchaser or any employees, agents or representatives thereof, so long as such
Purchaser shall be obligated hereunder to purchase the Preferred Shares or
shall beneficially own any Preferred Shares, or shall own Conversion Shares
which, in the aggregate, represent more than 2% of the total combined voting
power of all voting securities then outstanding, for purposes reasonably
related to such Purchaser's interests as a stockholder to examine and make
reasonable copies of and extracts from the records and books of account of, and
visit and inspect the properties, assets, operations and business of the
Company and any subsidiary, and to discuss the affairs, finances and accounts
of the Company and any subsidiary with any of its officers, consultants,
directors, and key employees.  

 

15

Section
3.4             
Compliance with Laws.  The Company shall comply, and cause each
subsidiary to comply, with all applicable laws, rules, regulations and orders,
noncompliance with which could have a Material Adverse Effect.

Section
3.5             
Keeping of Records and Books of Account.  The Company shall keep
and cause each subsidiary to keep adequate records and books of account, in
which complete entries will be made in accordance with GAAP consistently
applied, reflecting all financial transactions of the Company and its
subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.

Section
3.6             
Reporting Requirements.  If the Commission ceases making periodic
reports filed under Section 13 of the Exchange Act available via its Election
Data Gathering Retrieval and Analysis System, then at a Purchaser's request the
Company shall furnish the following to such Purchaser so long as such Purchaser
shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding:

(a)               
Quarterly Reports filed with the Commission on Form 10-QSB as soon as
practical after the document is filed with the Commission, and in any event
within fifty-five (55) days after the end of each of the first three fiscal
quarters of the Company;

(b)              
Annual Reports filed with the Commission on Form 10-KSB as soon as
practical after the document is filed with the Commission, and in any event
within one hundred (100) days after the end of each fiscal year of the Company;
and

(c)               
Copies of all notices and information, including without limitation
notices and proxy statements in connection with any meetings, that are provided
to holders of shares of Common Stock, contemporaneously with the delivery of
such notices or information to such holders of Common Stock.

Section 3.7             
Amendments.  The Company shall not amend or waive any provision
of the Certificate or Bylaws of the Company in any way that would adversely
affect the liquidation preferences, dividends rights, conversion rights, voting
rights or redemption rights of the Preferred Shares; provided, however,
that any creation and issuance of another series of Junior Stock (as defined in
the Certificate of Designation) or any other class or series of equity
securities which by its terms shall rank on parity with the Preferred Shares
shall not be deemed to materially and adversely affect such rights, preferences
or privileges.

 

16

Section 3.8             
Other Agreements.  The Company shall not enter into any agreement
in which the terms of such agreement would restrict or impair the right or
ability to perform of the Company or any subsidiary under any Transaction Document.

Section 3.9             
Distributions.  So long as any Preferred Shares remain
outstanding, the Company agrees that it shall not (i)  declare or pay any dividends or make any distributions to
any holder(s) of Common Stock or (ii) purchase or otherwise acquire for value, directly
or indirectly, any Common Stock or other equity security of the Company.

Section 3.10         
Status of Dividends.  The Company covenants and agrees that (i)
no Federal income tax return or claim for refund of Federal income tax or other
submission to the Internal Revenue Service will adversely affect the Preferred
Shares, any other series of its Preferred Stock, or the Common Stock, and any
deduction shall not operate to jeopardize the availability to Purchasers of the
dividends received deduction provided by Section 243(a)(1) of the Code or any
successor provision, (ii) in no report to shareholders or to any governmental
body having jurisdiction over the Company or otherwise will it treat the
Preferred Shares other than as equity capital or the dividends paid thereon other
than as dividends paid on equity capital unless required to do so by a
governmental body having jurisdiction over the accounts of the Company or by a
change in generally accepted accounting principles required as a result of
action by an authoritative accounting standards setting body, and (iii) other
than pursuant to this Agreement or the Certificate of Designation, it will take
no action which would result in the dividends paid by the Company on the
Preferred Shares out of the Company's current or accumulated earnings and
profits being ineligible for the dividends received deduction provided by
Section 243(a)(1) of the Code.  The preceding sentence shall not be deemed to
prevent the Company from designating the Preferred Stock as "Convertible Preferred
Stock" in its annual and quarterly financial statements in accordance with its
prior practice concerning other series of preferred stock of the Company. 
Notwithstanding the foregoing, the Company shall not be required to restate or
modify its tax returns for periods prior to the Closing Date.  In the event
that the Purchasers have reasonable cause to believe that dividends paid by the
Company on the Preferred Shares out of the Company's current or accumulated
earnings and profits will not be treated as eligible for the dividends received
deduction provided by Section 243(a)(1) of  the Code, or any successor
provision, the Company will, at the reasonable request of the Purchasers of 51%
of the outstanding Preferred Shares, join with the Purchasers in the submission
to the Service of a request for a ruling that dividends paid on the Shares will
be so eligible for Federal income tax purposes, at the Purchasers' expense.  In
addition, the Company will reasonably cooperate with the Purchasers (at Purchasers'
expense) in any litigation, appeal or other proceeding challenging or
contesting any ruling, technical advice, finding or determination that earnings
and profits are not eligible for the dividends received deduction provided by
Section  243(a)(1) of the Code, or any successor
provision to the extent that the position to be taken in any such litigation,
appeal, or other proceeding is not contrary to any provision of the Code or
incurred in connection with any such submission, litigation, appeal or other
proceeding.  Notwithstanding the foregoing, nothing herein contained shall be
deemed to preclude the Company from claiming a deduction with respect to such
dividends if (i) the Code shall hereafter be amended, or final Treasury
regulations thereunder are issued or modified, to provide that dividends on the
Preferred Shares or Conversion Shares should not be treated as dividends for
Federal income tax purposes or that a deduction with respect to all or a
portion of the dividends on the Shares is allowable for Federal income tax
purposes, or (ii) in the absence of such an amendment, issuance or modification
and after a submission of a request for ruling or technical advice, the service
shall rule or advise that dividends on the shares should not be treated as dividends
for Federal income tax purposes.  If the Service determines that the Preferred
Shares or Conversion Shares constitute debt, the Company may file protective
claims for refund.

 

17

Section
3.11         
Use of Proceeds.  The proceeds from the sale of the Preferred
Shares will be used by the Company for working capital and general corporate
purposes.  

Section
3.12         
Future Financings; Right of First Offer and Refusal.   (a) For purposes of this Agreement, a
"Subsequent Financing" shall be defined as any subsequent offer or sale to, or
exchange with (or other type of distribution to), any third party of Common
Stock or any securities convertible, exercisable or exchangeable into Common
Stock, including debt securities so convertible, in a private transaction
(collectively, the "Financing Securities") other than a Permitted Financing (as
defined hereinafter).  For purposes of this Agreement, "Permitted Financing"
shall mean any transaction involving (i) the Company's issuance of any
Financing Securities (other than for cash) in connection with a merger and/or
acquisition, consolidation, sale or disposition of all or substantially all of
the Company's assets, (ii) the Company's issuance of Financing Securities in
connection with strategic license agreements so long as such issuances are not
for the purpose of raising capital, (iii) the Company's issuance of Financing
Securities in connection with underwritten public offerings of its securities,
(iv) the Company's issuance of Common Stock or the issuance or grants of
options to purchase Common Stock pursuant to the Company's stock option plans
and employee stock purchase plans outstanding on the date hereof, or (v) as a
result of the exercise of options or warrants or conversion of convertible
notes or preferred stock which are granted or issued as of the date of this
Agreement.

(b)              
During the period commencing on the Closing Date and ending on the date
that is twelve (12) months following the Closing Date, the Company covenants
and agrees to promptly notify (in no event later than five (5) days after making
or receiving an applicable offer) in writing (a "Rights Notice") each Purchaser
of the terms and conditions of any proposed Subsequent Financing.  The Rights
Notice shall describe, in reasonable detail, the proposed Subsequent Financing,
the proposed closing date of the Subsequent Financing, which shall be within
thirty (30) calendar days from the date of the Rights Notice, including,
without limitation, all of the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith.  The Rights
Notice shall provide each Purchaser an option (the "Rights Option"), during the
fifteen (15) trading days following delivery of the Rights Notice (the "Option
Period") to inform the Company whether such Purchaser will purchase up to its
pro rata portion of the Purchase Price for the securities being offered in such
Subsequent Financing on the same, absolute terms and conditions as contemplated
by such Subsequent Financing (the "First Refusal Rights").  Delivery of any Rights
Notice constitutes a representation and warranty by the Company that there are
no other material terms and conditions, arrangements, agreements or otherwise
except for those disclosed in the Rights Notice, to provide additional
compensation to any party participating in any proposed Subsequent Financing,
including, but not limited to, additional compensation based on changes in the
Purchase Price or any type of reset or adjustment of a purchase or conversion
price or to issue additional securities at any time after the closing date of a
Subsequent Financing.  If the Company does not receive notice of exercise of
the Rights Option from the Purchasers within the Option Period, the Company
shall have the right to close the Subsequent Financing on the scheduled closing
date with a third party; provided that all of the material terms and
conditions of the closing are the same as those provided to the Purchasers in
the Rights Notice.  If the closing of the proposed Subsequent Financing does
not occur on that date, any closing of the contemplated Subsequent Financing or
any other Subsequent Financing shall be subject to all of the provisions of
this Section 3.12, including, without limitation, the delivery of a new Rights
Notice.  The provisions of this Section 3.12(b) shall not apply to issuances of
Financing Securities in a Permitted Financing.

 

18

(c)               
Notwithstanding anything to the contrary contained in this Section 3.12,
the First Refusal Rights of the Purchasers granted hereunder shall be
subordinate in full to any rights of first offer or first refusal granted by
the Company to (i) Laurus Master Fund, Ltd. pursuant to Section 38 of that
certain Security Agreement dated January 22, 2004 between the Company and
Laurus Master Fund, Ltd., and (ii) the holders of the Company's Series A
Convertible Preferred Stock on March 1, 2004.

Section
3.13         
Reservation of Shares.  So long as any of the Preferred Shares
remain outstanding, the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, no less than 120% of
the aggregate number of shares of Common Stock needed to provide for the
issuance of the Conversion Shares.

Section
3.14         
Transfer Agent Instructions.  The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates, registered in the name of each Purchaser or its respective
nominee(s), for the Conversion Shares in such amounts as specified from time to
time by each Purchaser to the Company upon conversion of the Preferred Shares
in the form of Exhibit D attached hereto (the "Irrevocable Transfer
Agent Instructions").  Prior to registration of the Conversion Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 6.1 of this Agreement.  The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.14 will be given by the Company to its transfer agent and
that the Shares shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement.  Nothing in this Section 3.14 shall affect in
any way each Purchaser's obligations and agreements set forth in Section 6.1 to
comply with all applicable prospectus delivery requirements, if any, upon
resale of the Shares.  If a Purchaser provides the Company with an opinion of
counsel, in a generally acceptable form, to the effect that a public sale,
assignment or transfer of the Shares may be made without registration under the Securities Act or the Purchaser
provides the Company with reasonable assurances that the Shares can be sold
pursuant to Rule 144 without any restriction as to the number of securities
acquired as of a particular date that can then be immediately sold, the Company
shall permit the transfer, and, in the case of the Conversion Shares, promptly
instruct its transfer agent to issue one or more certificates in such name and
in such denominations as specified by such Purchaser and without any
restrictive legend.  The Company acknowledges that a breach by it of its
obligations under this Section 3.14 will cause irreparable harm to the Purchasers
by vitiating the intent and purpose of the transaction contemplated hereby.  Accordingly,
the Company acknowledges that the remedy at law for a breach of its obligations
under this Section 3.14 will be inadequate and agrees, in the event of a
breach or threatened breach by the Company of the provisions of this Section
3.14, that the Purchasers shall be entitled, in addition to all other available
remedies, to an order and/or injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required.

 

19

Section 3.15         
Disposition of Assets.  So long as the Preferred Shares remain
outstanding, neither the Company nor any Subsidiary shall sell, transfer or
otherwise dispose of any of its properties, assets and rights including,
without limitation, its software and intellectual property, to any person
except for sales to customers in the ordinary course of business or with the
prior written consent of the holders of a majority of the Preferred Shares then
outstanding.

Section 3.16         
Reporting Status; Eligibility to Use Form S-3.  So long as
a Purchaser beneficially owns any of the Securities, the Company shall timely
file all reports required to be filed with the Commission pursuant to the Exchange
Act, and the Company shall not terminate its status as an issuer required to
file reports under the Exchange Act even if the Exchange Act or the rules and
regulations thereunder would permit such termination.  The Company currently
meets, and will take all necessary action to continue to meet, the
"registrant eligibility" requirements set forth in the general
instructions to Form S-3 applicable to "resale" registrations on
Form S-3 during the Effectiveness Period (as defined in the Registration
Rights Agreement).

Section 3.17         
Disclosure of Transaction.  The Company may, in its discretion, issue
a press release describing the material terms of the transactions contemplated
hereby (the "Press Release") after the Closing, and/or file with the Commission
a Current Report on Form 8-K (the "Form 8-K") describing the material terms of
the transactions contemplated hereby (and attaching as exhibits thereto this
Agreement and the Registration Rights Agreement) following the date of
execution of this Agreement.  

Section 3.18         
Disclosure of Material Information.  The Company covenants and
agrees that neither it nor any other person acting on its behalf has provided
or will provide any Purchaser or its agents or counsel with any information
that the Company believes constitutes material non-public information, unless
prior thereto such Purchaser shall have executed a written agreement regarding
the confidentiality and use of such information.  The Company understands
and confirms that each Purchaser shall be relying on the foregoing
representations in effecting transactions in securities of the Company.

Section 3.19         
Pledge of Securities.  The Company acknowledges and agrees that
the Securities may be pledged by a Purchaser in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the Common
Stock.  The pledge of Common Stock shall not be deemed to be a transfer, sale
or assignment of the Common Stock hereunder, and no Purchaser effecting a
pledge of Common Stock shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this
Agreement or any other Transaction Document; provided that a Purchaser and its
pledgee shall be required to comply with the provisions of Article V hereof in
order to effect a sale, transfer or assignment of Common Stock to such pledgee.
At the Purchasers' expense, the Company hereby agrees to execute and deliver
such documentation as a pledgee of the Common Stock may reasonably request in
connection with a pledge of the Common Stock to such pledgee by a Purchaser.

 

20

ARTICLE IV 

CONDITIONS

Section 4.1             
Conditions Precedent to the Obligation of the Company to Sell the
Shares.  The obligation hereunder of the Company to issue and sell the
Preferred Shares to the Purchasers is subject to the satisfaction or waiver, at
or before the Closing, of each of the conditions set forth below.  These
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion.

(a)               
Accuracy of Each Purchaser's Representations and Warranties.  The
representations and warranties of each Purchaser shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.

(b)              
Performance by the Purchasers.  Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Purchaser at or prior to the Closing.

(c)               
No Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement. 

(d)              
Delivery of Purchase Price.  The Purchase Price for the Preferred
Shares has been delivered to the Company at the Closing Date.

(e)               
Delivery of Transaction Documents.  The Transaction Documents
have been duly executed and delivered by the Purchasers to the Company. 

Section
4.2             
Conditions Precedent to the Obligation of the Purchasers to Purchase
the Shares.  The obligation hereunder of each Purchaser to acquire and pay
for the Preferred Shares is subject to the satisfaction or waiver, at or before
the Closing, of each of the conditions set forth below.  These conditions are
for each Purchaser's sole benefit and may be waived by such Purchaser at any
time in its sole discretion.

(a)               
Accuracy of the Company's Representations and Warranties.  Each
of the representations and warranties of the Company shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that are
expressly made as of a particular date), which shall be true and correct in all
material respects as of such date.

 

21

(b)              
Performance by the Company.  The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.

(c)               
No Suspension, Etc.  From the date hereof to the Closing Date,
trading in the Company's Common Stock shall not have been suspended by the
Commission or the American Stock Exchange (except for any suspension of trading
of limited duration agreed to by the Company, which suspension shall be
terminated prior to the applicable Closing), and, at any time prior to the Closing,
trading in securities generally as reported by Bloomberg Financial Markets
("Bloomberg") shall not have been suspended or limited, or minimum prices shall
not have been established on securities whose trades are reported by Bloomberg,
or on the New York Stock Exchange, nor shall a banking moratorium have been
declared either by the United States or New York State authorities, nor shall
there have occurred any material outbreak or escalation of hostilities or other
national or international calamity or crisis of such magnitude in its effect
on, or any material adverse change in any financial market which, in each case,
in the judgment of such Purchaser, makes it impracticable or inadvisable to
purchase the Preferred Shares.

(d)              
No Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.

(e)               
No Proceedings or Litigation.  No action, suit or proceeding
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company or any subsidiary, or any of the officers, directors or
affiliates of the Company or any subsidiary seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.

(f)                
Certificate of Designation of Rights and Preferences.  Prior to
the Closing, the Certificate of Designation in the form of Exhibit B
attached hereto shall have been filed with the Secretary of State of Delaware.

(g)               
Opinion of Counsel, Etc. At the Closing, the Purchasers shall
have received an opinion of counsel to the Company, dated the date of the
Closing, in the form of Exhibit E hereto, and such other certificates
and documents as the Purchasers or its counsel shall reasonably require incident
to the Closing.

(h)               
Registration Rights Agreement.  At the Closing, the Company shall
have executed and delivered the Registration Rights Agreement to each
Purchaser.

(i)                 
Certificates.  The Company shall have executed and delivered to
the Purchasers the certificates (in such denominations as such Purchaser shall
request) for the Preferred Shares being acquired by such Purchaser at the Closing.

 

22

(j)                
Resolutions.  The Board of Directors of the Company shall have
adopted resolutions consistent with Section 2.1(b) above in a form reasonably
acceptable to such Purchaser (the "Resolutions").

(k)              
Reservation of Shares.  As of the Closing Date, the Company shall
have reserved out of its authorized and unissued Common Stock, solely for the
purpose of effecting the conversion of the Preferred Shares, a number of shares
of Common Stock equal to at least 120% of the aggregate number of Conversion
Shares issuable upon conversion of the Preferred Shares outstanding on the
Closing Date (after giving effect to the Preferred Shares to be issued on the
Closing Date and assuming all such Preferred Shares were fully convertible on
such date regardless of any limitation on the timing or amount of such
conversion).

(l)                 
Transfer Agent Instructions.  The Irrevocable Transfer Agent
Instructions, in the form of Exhibit D attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.

(m)             
Secretary's Certificate.  The Company shall have delivered to
such Purchaser a secretary's certificate, dated as of the Closing Date, as to
(i) the Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the
Certificate of Designation, each as in effect at the Closing, and (iv) the
authority and incumbency of the officers of the Company executing the
Transaction Documents and any other documents required to be executed or
delivered in connection therewith.

(n)               
Officer's Certificate.  The Company shall have delivered to the Purchasers
a certificate of an executive officer of the Company, dated as of the Closing
Date, confirming the accuracy of the Company's representations, warranties and
covenants as of such Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.2 as of the Closing
Date.

(o)              
Material Adverse Effect.  No Material Adverse Effect shall have
occurred at or before the Closing Date. 

ARTICLE V

Intentionally Omitted

ARTICLE VI

Stock Certificate Legend

Section
6.1             
Legend.  Each certificate representing the Preferred Shares and
securities issued upon conversion thereof, shall be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any legend
required by applicable state securities or "blue sky" laws):

 

23

THESE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT")
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR HOME SOLUTIONS OF AMERICA, INC. SHALL HAVE RECEIVED AN
OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE
SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS
NOT REQUIRED.

The Company agrees to reissue certificates
representing the Shares without the legend set forth above if at such time,
prior to making any transfer of any Shares or Shares, such holder thereof shall
give written notice to the Company describing the manner and terms of such
transfer and removal as the Company may reasonably request, and (x) the Shares
have been registered for sale under the Securities Act and the holder is
selling such shares and is complying with its prospectus delivery requirement
under the Securities Act, (y) the holder is selling such Shares in compliance
with the provisions of Rule 144 or (z) the provisions of paragraph (k) of Rule
144 apply to such Shares.  Whenever a certificate
representing the Conversion Shares is required to be issued to a Purchaser
without a legend, in lieu of delivering physical certificates representing the
Conversion Shares, provided the Company's transfer agent is participating in
the Depository Trust Company ("DTC") Fast Automated
Securities Transfer program, the Company shall use its reasonable best efforts
to cause its transfer agent to electronically transmit the Conversion Shares to
a Purchaser by crediting the account of such Purchaser's Prime Broker with DTC
through its Deposit Withdrawal Agent Commission ("DWAC")
system (to the extent not inconsistent with any provisions of this Agreement).

ARTICLE VII

Intentionally Omitted.

ARTICLE VIII

Indemnification

Section
8.1             
General Indemnity.  The Company agrees to indemnify and hold
harmless the Purchasers and any finder (and their respective directors,
officers, affiliates, agents, successors and assigns) from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys' fees, charges and disbursements)
incurred by the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein.  Each
Purchaser severally but not jointly agrees to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees,
charges and disbursements) incurred by the Company as result of any inaccuracy
in or breach of the representations, warranties or covenants made by such
Purchaser herein.  The maximum aggregate liability of each Purchaser
pursuant to its indemnification obligations under this Article 8 shall not
exceed the portion of the Purchase Price paid by such Purchaser hereunder.

 

24

Section
8.2             
Indemnification Procedure.  Any party entitled to indemnification
under this Article VIII (an "indemnified party") will give written notice to
the indemnifying party of any matters giving rise to a claim for
indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VIII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice.  In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect of such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to
the indemnified party.  In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim.  In any event, unless and until the indemnifying
party elects in writing to assume and does so assume the defense of any such
claim, proceeding or action, the indemnified party's costs and expenses arising
out of the defense, settlement or compromise of any such action, claim or
proceeding shall be losses subject to indemnification hereunder.  The
indemnified party shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the indemnified party which relates to such action or
claim.  The indemnifying party shall keep the indemnified party fully apprised
at all times as to the status of the defense or any settlement negotiations
with respect thereto.  If the indemnifying party elects to defend any such action or claim, then the indemnified party shall be
entitled to participate in such defense with counsel of its choice at its sole
cost and expense.  The indemnifying party shall not be liable for any
settlement of any action, claim or proceeding effected without its prior
written consent.  Notwithstanding anything in this Article VIII to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of
any judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof, the
giving by the claimant or the plaintiff to the indemnified party of a release
from all liability in respect of such claim.  The indemnification required by
this Article VIII shall be made by periodic payments of the amount thereof
during the course of investigation or defense, as and when bills are received
or expense, loss, damage or liability is incurred, so long as the indemnified
party irrevocably agrees to refund such moneys if it is ultimately determined
by a court of competent jurisdiction that such party was not entitled to
indemnification.  The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the indemnifying
party may be subject to pursuant to the law.

 

25

ARTICLE IX

Miscellaneous

Section
9.1             
Fees and Expenses.  Except as otherwise set forth in this
Agreement, the Registration Rights Agreement or the Certificate of Designation,
each party shall pay the fees and expenses of its advisors, counsel,
accountants and other experts, if any, and all other expenses, incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement, provided that the Company shall pay, at
the Closing (i) all actual attorneys' fees and expenses (exclusive of
disbursements and out-of-pocket expenses) incurred by the Purchasers up to
$25,000 in connection with the preparation, negotiation, execution and delivery
of this Agreement, the Registration Rights Agreement and the transactions
contemplated thereunder, and (ii) in connection with the filing and declaration
of effectiveness by the Commission of the Registration Statement (as defined in
the Registration Rights Agreement) and any amendments, modifications or waivers
of this Agreement or any of the other Transaction Documents.  In addition, the
Company shall pay all reasonable fees and expenses incurred by the Purchasers
in connection with the enforcement of this Agreement or any of the other
Transaction Documents, including, without limitation, all reasonable attorneys'
fees and expenses.  The Company shall pay all stamp or other similar taxes and
duties levied in connection with issuance of the Preferred Shares pursuant
hereto.

Section
9.2             
Specific Enforcement, Consent to Jurisdiction.  

(a)               
The Company and the Purchasers acknowledge and agree that irreparable
damage would occur in the event that any of the provisions of this Agreement,
the Certificate of Designation or the Registration Rights Agreement were not
performed in accordance with their specific terms or were otherwise breached. 
It is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement or
the Registration Rights Agreement and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.

(b)              
Each of the Company and the Purchasers (i) hereby irrevocably submits to
the jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New
York county for the purposes of any suit, action or proceeding arising out of
or relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and agrees
not to assert in any such suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper.  Each of the Company and the Purchasers
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing in this Section 9.2
shall affect or limit any right to serve process in any other manner permitted
by law.

 

26

Section
9.3             
Entire Agreement; Amendment.  This Agreement contains the entire
understanding of the parties with respect to the matters covered hereby and,
except as specifically set forth herein or in the Transaction Documents or the
Certificate of Designation,  neither the Company nor any of the Purchasers
makes any representations, warranty, covenant or undertaking with respect to
such matters and they supersede all prior understandings and agreements with
respect to said subject matter, all of which are merged herein.  No provision
of this Agreement may be waived or amended other than by a written instrument
signed by the Company and the holders of at least 75% of the Preferred Shares
then outstanding, and no provision hereof may be waived other than by an a
written instrument signed by the party against whom enforcement of any such
amendment or waiver is sought.  No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding.  No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents or the Certificate of Designation unless the same
consideration is also offered to all of the parties to the Transaction
Documents or holders of Preferred Shares, as the case may be.

Section
9.4             
Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer
back received), telecopy or facsimile at the address or number designated below
(if delivered on a business day during normal business hours where such notice
is to be received), or the first business day following such delivery (if
delivered other than on a business day during normal business hours where such
notice is to be received) or (b) on the second business day following the date
of mailing by express courier service, fully prepaid, addressed to such
address, or upon actual receipt of such mailing, whichever shall first occur. 
The addresses for such communications shall be:

	
  If to the Company:

  	
  Home Solutions of America, Inc.  

  5565 Red Bird Center Drive

  Dallas, TX 75237

  Attention: Rick J. O'Brien, CFO

  Tel. No.: (214) 623-8446

  Fax No.:  (214) 333-9435

  
	

  	

   

  
	
  with copies to:

  	
  J. Paul Caver

  Attorney at Law

  2724 Routh Street

  Dallas, Texas 75201

  Tel. No.: (214) 468-8868

  Fax No.: (214) 468-8867

  
	

  	

   

  
	
  If to any Purchaser:

  	
  At the address of such Purchaser set forth on Exhibit A to
  this Agreement, with copies to Purchaser's counsel as set forth on Exhibit A
  or as specified in writing by such Purchaser.

  

 

27

Any party hereto may from time to time change
its address for notices by giving at least ten (10) days written notice of such
changed address to the other party hereto.

Section 9.5             
Waivers.  No waiver by either party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provisions,
condition or requirement hereof, nor shall any delay or omission of any party
to exercise any right hereunder in any manner impair the exercise of any  such
right accruing to it thereafter.

Section
9.6             
Headings.  The article, section and subsection headings in this
Agreement are for convenience only and shall not constitute a part of this
Agreement for any other purpose and shall not be deemed to limit or affect any
of the provisions hereof.

Section
9.7             
Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of the parties and their successors and assigns.  

Section
9.8             
No Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.

Section
9.9             
Governing Law.  This Agreement shall be governed by and construed
in accordance with the internal laws of the State of New York, without giving
effect to the choice of law provisions.  This Agreement shall not interpreted
or construed with any presumption against the party causing this Agreement to
be drafted.

Section
9.10         
Survival.  The representations and warranties of the Company and
the Purchasers contained in Sections 2.1(o) and (s) should survive indefinitely
and those contained in Article II, with the exception of Sections 2.1(o) and
(s), shall survive the execution and delivery hereof and the Closing until the
date three (3) years from the Closing Date, and the agreements and covenants
set forth in Articles I, III, VIII and IX of this Agreement shall survive the
execution and delivery hereof and the Closing hereunder until the Purchasers in
the aggregate beneficially own (determined in accordance with Rule 13d-3 under
the Exchange Act) less than 10% of the total combined voting power of all
voting securities then outstanding, provided, that Sections 3.1, 3.2, 3.4, 3.5,
3.7, 3.8, 3.9, 3.10, 3.12, 3.13 and 3.14 shall not expire until the
Registration Statement required by Section 2 of the Registration Rights
Agreement is no longer required to be effective under the terms and conditions
of Registration Rights Agreement.

Section
9.11         
Counterparts.  This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.  In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five days of the execution and delivery hereof.

Section
9.12         
Publicity.  The Company agrees that it will not disclose, and
will not include in any public announcement, the name of the Purchasers without
the consent of the Purchasers unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such requirement.

 

28

Section
9.13         
Severability.  The provisions of this Agreement, the Certificate
of Designation and the Registration Rights Agreement are severable and, in the
event that any court of competent jurisdiction shall determine that any one or
more of the provisions or part of the provisions contained in this Agreement,
the Certificate of Designation or the Registration Rights Agreement shall, for
any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement, the Certificate of
Designation or the Registration Rights Agreement shall be reformed and
construed as if such invalid or illegal or unenforceable provision, or part of
such provision, had never been contained herein, so that such provisions would
be valid, legal and enforceable to the maximum extent possible.

Section
9.14         
Further Assurances.  From and after the date of this Agreement,
upon the request of any Purchaser or the Company, each of the Company and the Purchasers
shall execute and deliver such instrument, documents and other writings as may
be reasonably necessary or desirable to confirm and
carry out and to effectuate fully the intent and purposes of this Agreement,
the Preferred Shares, the Conversion Shares, the Certificate of Designation,
and the Registration Rights Agreement.

[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK]

 

 

29

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officer as of the date first above
written.

	

  	
  HOME SOLUTIONS OF AMERICA, INC.

  
	

  	

  
	

  	

  
	

  	
  By:                                                                      

  
	

  	
            Rick J. O'Brien

            Chief Financial Officer

  
	

   	
   

  

	

  	
  PURCHASER

  
	

  	

  
	

  	
  VICTUS CAPITAL, L.P.

  
	

  	

  
	

  	

  
	

  	
  By:                                                                      

            Name: 

            Title:   

  
	

  	

   

  
	

  	

  
	

  	
  PURCHASER

  
	

   	
   
  
	

  	
  VICIS CAPITAL MASTER FUND

  
	

  	

   

  
	

  	
  By: VICIS CAPITAL, LLC

  
	

  	

  
	

  	

  
	

  	
  By:                                                                      

            Name: 

            Title:   

  

 

 

 EXHIBIT A to the

SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE
AGREEMENT FOR 

HOME SOLUTIONS OF AMERICA, INC.

 

 

  	

Names
and Addresses 

of Purchaser

      	Number of Preferred Shares

      Purchased 	Dollar
Amount of

      Investment
	Victus Capital, L.P.	20  	$500,000
	25 East 78th Street	 	 
	New York, NY 10021	 	 
	  	 	 
	Vicis Capital Master Fund 	20 	$500,000
	c/o Vicis Capital, LLC	 	 
	25 East 78th Street	 	 
	New York, NY 10021	 	 

 

EXHIBIT B to the 

SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT FOR 

HOME SOLUTIONS OF AMERICA, INC.

 

FORM OF CERTIFICATE OF DESIGNATION

 

 

EXHIBIT C to the 

SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT FOR 

HOME SOLUTIONS OF AMERICA, INC.

 

 

FORM OF REGISTRATION RIGHTS AGREEMENT

 

 

EXHIBIT D to the 

SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT FOR 

HOME SOLUTIONS OF AMERICA, INC.

 FORM OF IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS

 HOME SOLUTIONS OF AMERICA, INC.

as of July 19, 2004

[Name and address of Transfer
Agent]

Attn:  _____________

 

Ladies
and Gentlemen:

Reference is made to that certain Series B
Convertible Preferred Stock Purchase Agreement (the "Purchase Agreement"),
dated as of July 19, 2004, by and among Home Solutions of America, Inc., a Delaware
corporation (the "Company"), and the purchasers named therein
(collectively, the "Purchasers") pursuant to which the Company is
issuing to the Purchasers shares of its Series B Convertible Preferred Stock,
par value $.001 per share, (the "Preferred Shares") , which are
convertible into shares of the Company's common stock, par value $.001 per
share (the "Common Stock").  This letter shall serve as our irrevocable
authorization and direction to you (subject to Section 3.1(a) of the Purchase
Agreement and provided that you are the transfer agent of the Company at such
time) to issue shares of Common Stock upon conversion of the Preferred Shares
(the "Conversion Shares") to or upon the order of a Purchaser from time
to time upon (i) surrender to you of a properly completed and duly executed
Conversion Notice, in the form attached hereto as Exhibit I, (ii) a copy of the
certificates (with the original certificates delivered to the Company)
representing Preferred Shares being converted (or an indemnification
undertaking with respect to such share certificates in the case of their loss,
theft or destruction), and (iii) delivery of a treasury order or other
appropriate order duly executed by a duly authorized officer of the Company. 
So long as you have previously received (x) written confirmation from counsel
to the Company that a registration statement covering resales of the Conversion
Shares has been declared effective by the Securities and Exchange Commission
(the "SEC") under the Securities Act of 1933, as amended (the "1933
Act"), and no subsequent notice by the Company or its counsel of the
suspension or termination of its effectiveness and (y) a copy of such
registration statement, and if the Purchaser represents in writing that the
Conversion Shares were sold pursuant to the Registration Statement, then
certificates representing the Conversion Shares shall not bear any legend
restricting transfer of the Conversion Shares thereby and should not be subject
to any stop-transfer restriction.  Provided, however, that if you have not
previously received (i) written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares has been
declared effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement, then the certificates for the Conversion Shares shall
bear the following legend:

     "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT"), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT OR
APPLICABLE STATE SECURITIES LAWS, OR HOME SOLUTIONS OF AMERICA, INC. SHALL HAVE
RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER
THE SECURITIES ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS
IS NOT REQUIRED."

 

and, provided further, that the Company may from time
to time notify you to place stop-transfer restrictions on the certificates for
the Conversion Shares in the event a registration statement covering the
Conversion Shares is subject to amendment for events then current.

A form of written confirmation from counsel
to the Company that a registration statement covering resales of the Conversion
Shares has been declared effective by the SEC under the 1933 Act is attached
hereto as Exhibit II.

Please be advised that the Purchasers are
relying upon this letter as an inducement to enter into the Securities Purchase
Agreement and, accordingly, each Purchaser is a third party beneficiary to
these instructions.

Please execute this letter in the space
indicated to acknowledge your agreement to act in accordance with these instructions. 
Should you have any questions concerning this matter, please contact me at
___________.

Very truly yours,

HOME SOLUTIONS OF AMERICA,
INC. 

By:                                                                   

Name:                                                      

                                                                                            Title:                                                         

ACKNOWLEDGED AND AGREED:

[TRANSFER AGENT]

By:
                                                                             

Name:                                                                         

Title:                                                                            

Date:                            

EXHIBIT I

HOME SOLUTIONS OF AMERICA, INC.

CONVERSION NOTICE

Reference
is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series B Preferred Stock of Home Solutions of America, Inc. (the
"Certificate of Designation").  In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series B Preferred Stock, par value $.001 per share (the
"Preferred Shares"), of Home Solutions of America, Inc., a Delaware corporation
(the "Company"), indicated below into shares of Common Stock, par value $.001
per share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.

Date of Conversion:                                                                                                                   

Number of Preferred Shares to be converted:                 

Stock certificate no(s). of Preferred Shares to be
converted:                    

The Common Stock have been sold pursuant to the
Registration Statement (as defined in the Registration Rights Agreement): YES
____                                                 NO____

Please
confirm the following information:

Conversion Price:                                                                                                                      

Number of shares of Common Stock

to be issued:                                                                                                                              

Number of shares of Common Stock beneficially owned or
deemed beneficially owned by the Holder on the Date of Conversion:
_________________________

Please
issue the Common Stock into which the Preferred Shares are being converted and,
if applicable, any check drawn on an account of the Company in the following
name and to the following address:

Issue to:                                                                                                                                   

                                                                                                                                                    

Facsimile Number:                                                                                                                     

Authorization:                                                                                                                            

By:                                                                  

                                                                                    Title:                                                                 

Dated:

 

EXHIBIT II

FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT

[Name and address of Transfer
Agent]

Attn:  _____________

Re:       Home Solutions of
America, Inc. 

Ladies and Gentlemen:

We are counsel to Home Solutions of
America, Inc., a Delaware corporation (the "Company"), and have
represented the Company in connection with that certain Series B Convertible
Preferred Stock Purchase Agreement (the "Purchase Agreement"), dated as
of July 19, 2004, by and among the Company and the purchasers named therein
(collectively, the "Purchasers") pursuant to which the Company issued to
the Purchasers shares of its Series B Convertible Preferred Stock, par value
$.001 per share, (the "Preferred Shares"), which are convertible into
shares of the Company's common stock, par value $.001 per share (the "Common
Stock").  Pursuant to the Purchase Agreement, the Company has also entered
into a Registration Rights Agreement with the Purchasers (the "Registration
Rights Agreement"), dated as of July 19, 2004, pursuant to which the
Company agreed, among other things, to register the Registrable Securities (as
defined in the Registration Rights Agreement), including the shares of Common
Stock issuable upon conversion of the Preferred Shares, under the Securities
Act of 1933, as amended (the "1933 Act").  In connection with the
Company's obligations under the Registration Rights Agreement, on
________________, 2004, the Company filed a Registration Statement on Form S-3
(File No. 333-________) (the "Registration Statement") with the
Securities and Exchange Commission (the "SEC") relating to the resale of
the Registrable Securities which names each of the present Purchasers as a
selling stockholder thereunder.

In connection with the foregoing, we
advise you that a member of the SEC's staff has advised us by telephone that
the SEC has entered an order declaring the Registration Statement effective
under the 1933 Act at [ENTER TIME OF EFFECTIVENESS] on [ENTER DATE OF
EFFECTIVENESS] and we have no knowledge, after telephonic inquiry of a
member of the SEC's staff, that any stop order suspending its effectiveness has
been issued or that any proceedings for that purpose are pending before, or threatened
by, the SEC and accordingly, the Registrable Securities are available for
resale under the 1933 Act pursuant to the Registration Statement.

Very truly yours,

[COMPANY COUNSEL]

By:                                                                  

cc:        [LIST
NAMES OF PURCHASERS]

EXHIBIT E to the 

SERIES B CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT FOR 

HOME SOLUTIONS OF AMERICA, INC.

 FORM OF OPINION OF COUNSEL

 

1.                  
The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the state
of Delaware and has the requisite corporate power to own, lease and operate its
properties and assets, and to carry on its business as presently conducted. 
The company is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary.

2.                  
The Company has the requisite
corporate power and authority to enter into and perform its obligations under
the Transaction Documents and to issue the Preferred Stock and the Common Stock
issuable upon conversion of the Preferred Stock.  The execution, delivery and
performance of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly and
validly authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required.  Each of the Transaction Documents has been duly executed and
delivered, and the Preferred Stock has been duly issued and delivered by the
Company and each of the Transaction Documents constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its respective terms.  The Common Stock issuable upon conversion of the
Preferred Stock is not subject to any preemptive rights under the Certificate of
Incorporation or the Bylaws.

3.                  
The Preferred Stock has been duly
authorized and, when delivered against payment in full as provided in the
Purchase Agreement, will be validly issued, fully paid and nonassessable.  The
shares of Common Stock issuable upon conversion of the Preferred Stock has been
duly authorized and reserved for issuance, and, when delivered upon conversion
or against payment in full as provided in the Certificate of Designation, will
be validly issued, fully paid and nonassessable.

4.                  
The execution, delivery and
performance of and compliance with the terms of the Transaction Documents and
the issuance of the Preferred Stock and the Common Stock issuable upon
conversion of the Preferred Stock do not (i) violate any provision of the Certificate
of Incorporation or Bylaws, (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Company is a party, (iii) create or impose a lien, charge or encumbrance on any
property of the Company under any agreement or any commitment to which the
Company is a party or by which the Company is bound or by which any of its
respective properties or assets are bound, or (iv) (a) result in a violation of
any federal, state, local or foreign statute, rule, regulation, order,
judgment, injunction or decree (including Federal and state securities laws and
regulations) applicable to the Company or by which any property or asset of the
Company is bound or affected, except, in all cases other than violations
pursuant to clause (i) above, for such conflicts, default, terminations,
amendments, acceleration, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect.

5.                  
No consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required under Federal, state or local
law, rule or regulation in connection with the valid execution and delivery of
the Transaction Documents, or the offer, sale or issuance of the Preferred
Stock or the Common Stock issuable upon conversion of the Preferred Stock other
than the Certificate of Designation and the Registration Statement.

 

6.                  
There is no action, suit, claim,
investigation or proceeding pending or threatened against the Company which
questions the validity of this Agreement or the transactions contemplated
hereby or any action taken or to be taken pursuant hereto or thereto.  There is
no action, suit, claim, investigation or proceeding pending, or to our
knowledge, threatened, against or involving the Company or any of its
properties or assets and which, if adversely determined, is reasonably likely
to result in a Material Adverse Effect.  There are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any officers or
directors of the Company in their capacities as such.

7.                  
The offer, issuance and sale of
the Preferred Stock and the offer, issuance and sale of the shares of Common
Stock issuable upon conversion of the Preferred Stock pursuant to the Purchase
Agreement and the Certificate of Designation are exempt from the registration
requirements of the Securities Act.

8.                  
The Company is not, and as a
result of and immediately upon Closing will not be, an "investment
company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.

                        Very truly yours,

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