Document:

EXHIBIT 10.2
                                  ------------

                            PENN FEDERAL SAVINGS BANK
                    SUPPLEMENTAL EXECUTIVE DEATH BENEFIT PLAN

          RESTATED FROM THE SUPPLEMENTAL EXECUTIVE LIFE INSURANCE PLAN
                 AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005

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                            PENN FEDERAL SAVINGS BANK
                    SUPPLEMENTAL EXECUTIVE DEATH BENEFIT PLAN

                AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2005

                                     Purpose
                                     -------

     The  purpose of the Plan is to provide  supplemental  death  benefits  from
certain  life  insurance  policies  held  by  Penn  Federal  Savings  Bank  (the
"Company")  to a select  group of employees  who  contribute  materially  to the
continued  growth,  development  and future  business  success  of Penn  Federal
Savings Bank and its Affiliates. The following reflects the Plan as in effect as
of  January 1, 2005.  A  Participant  who dies prior to January 1, 2005 shall be
entitled to the benefit  available under the Plan (or a predecessor  plan) as in
effect on the date of his death.

                                    ARTICLE I
                                   Definitions
                                   -----------

     For  purposes  of the Plan,  unless  otherwise  clearly  apparent  from the
context,  the  following  phrases or terms  shall have the  following  indicated
meanings:

     "Affiliates"  shall mean any entity that,  directly or indirectly,  through
      ----------
     one or more intermediaries,  controls, is controlled by, or is under common
     control with the Company.

     "Beneficiary"  shall mean one or more persons,  estates or other  entities,
      -----------
     designated  in  accordance  with  Article 6, that are  entitled  to receive
     benefits under the Plan upon the death of a Participant.

     "Beneficiary  Designation  Form"  shall  mean the form  that a  Participant
      ------------------------------
     completes,  signs and returns to the  Committee  to  designate  one or more
     Beneficiaries.  A  policy  endorsement  form  may be used as a  Beneficiary
     Designation Form.

     "Board" shall mean the board of directors of the Company.
      -----

     "Change in Control"  shall have the same  meaning as under  Section 280G of
      -----------------
     the  Code and the  regulations  thereunder.  The time at which a Change  in
     Control occurs also shall be determined  under Section 280G of the Code and
     the regulations thereunder.

     "Claimant" shall have the meaning set forth in Section 9.1.
      --------

     "Code" shall mean the Internal Revenue Code 1986, as it may be amended from
      ----
     time to time.

     "Committee" shall mean the committee described in Article 8.
      ---------

     "Company" shall mean Penn Federal Savings Bank.
     --------

     "Compensation"  shall mean the annual salary relating to services performed
      ------------
     by a  Participant  for the Company and its  Affiliates  during the calendar
     year  preceding  the calendar year in which the  Participant  experiences a
     Termination  of Employment  (whether or not paid or included on the Federal
     Income Tax Form W-2 for such calendar year),  excluding bonuses of any type
     or nature, fringe benefits,  stock options, other stock based compensation,
     relocation   expenses,   non-monetary  awards,  and  automobile  and  other
     allowances paid to a Participant for employment  services rendered (whether

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     or not such  allowances  are included in the  Participant's  gross income).
     Compensation   shall  be  calculated   before  reduction  for  compensation
     voluntarily  deferred or  contributed  by the  Participant  pursuant to all
     qualified  or  non-qualified  plans of the Company and its  Affiliates  and
     shall be  calculated  to include  amounts  not  otherwise  included  in the
     Participant's gross income;  provided,  however, that all such amounts will
     be included in compensation only to the extent that, had there been no such
     plan, the amount would have been payable in cash to the Participant.

     "Death  Benefit"  shall mean the Primary Death  Benefit,  the  Supplemental
      --------------
     Death Benefit, or the SERP Death Benefit, as applicable.

     "Employee"  shall mean a person who is  classified  as an  employee  of the
      --------
     Company or its Affiliates.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
      -----
     it may be amended from time to time.

     "Insurer" shall mean the insurance  company issuing a Policy or Policies on
      -------
     the life of a Participant.

     "Participant" shall mean any Employee who is selected to participate in the
      -----------
     Plan by the Committee and who satisfies the provisions of Article II.

     "Plan" shall mean this  Supplemental  Executive  Death Benefit Plan,  which
      ----
     shall be evidenced by this instrument, as may be amended from time to time.

     "Plan Year" shall have the same meaning as the fiscal year of the Company.
      ---------

     "Policy  or  Policies"  shall  mean the  individual  insurance  policy  (or
      --------------------
     policies)  acquired by the Company for purposes of insuring a Participant's
     life under this Plan and for providing the benefits hereunder.

     "Primary Death  Benefit"  shall mean a death benefit  payable from a Policy
      ----------------------
     (or   Policies)  in  an  amount  equal  to  one  times  the   Participant's
     Compensation.

     "Qualified   Termination   of  Employment"   shall  mean  a   Participant's
      ----------------------------------------
     Termination  of  Employment,  other than on account  of a  Termination  for
     Cause, after the Participant has completed 10 Years of Service.

     "SERP Death Benefit"  shall mean a death benefit  payable from a Policy (or
      ------------------
     Policies) in an amount equal to one million dollars ($1,000,000).

     "Supplemental  Death  Benefit"  shall mean a death  benefit  payable from a
      ----------------------------
     Policy  (or  Policies)  in an amount  equal to two times the  Participant's
     Compensation.

     "Termination   for  Cause"  or  "Terminated   for  Cause"  shall  mean  the
      -------------------------       -----------------------
     involuntary   termination  of  service  of  a  Participant  on  account  of
     dishonesty,  incompetence,  willful misconduct,  breach of a fiduciary duty
     involving  personal profit,  intentional  failure to perform stated duties,
     willful  violation of any law,  rule, or regulation  (excluding  violations
     which  do not have a  material  adverse  affect  on the  Company)  or final
     cease-and-desist  order.  The  Committee  shall  have  sole  discretion  to
     determine whether a Termination for Cause has occurred.

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     "Termination of Employment"  shall mean the severing of employment with the
      -------------------------
     Company  and its  Affiliates  (including  on account  of the  Participant's
     death), other than on account of Termination for Cause.

     "Years of Service"  shall mean the total  number of Plan Years (or fraction
      ----------------
     thereof  determined  on a  months  basis)  that  the  Participant  has been
     employed  on a  full  time  basis  by the  Company  or an  Affiliate.  If a
     Participant  is authorized by the Company or its  Affiliates for any reason
     to  take a leave  of  absence  from  employment  with  the  Company  or its
     Affiliates,  such Participant  shall continue to be considered  employed by
     the  Company  during  such  leave of  absence  (and  therefore  not to have
     experienced a Termination  of  Employment)  and service during the leave of
     absence  shall be credited for purposes of  determining  the  Participant's
     Years of Service.

                                    ARTICLE 2
                       Selection, Enrollment, Eligibility
                       ----------------------------------

2.1  Selection  by  Committee.  Participation  in the Plan  shall be  limited to
     ------------------------
     Employees  who  are  within  a  select  group  of  management   and  highly
     compensated  Employees,   as  determined  by  the  Committee  in  its  sole
     discretion  from time to time.  Participants  shall be listed on  Exhibit A
     attached hereto, as in effect from time to time.

2.2  Enrollment  Requirements.  As a condition to  participation,  each selected
     ------------------------
     Employee shall complete, execute and return to the Committee such documents
     and  information  as  the  Committee  requires,   including  documents  and
     information required by the Insurer to issue the Policies. In addition, the
     Committee may prescribe such other enrollment requirements as it determines
     in its sole discretion are necessary or appropriate. A Participant shall at
     the request of the Company submit to medical  examinations  and supply such
     information and execute such documents as may be required by the Insurer to
     whom the Company has applied for insurance.

2.3  Termination  of  Participation.  If the Committee  determines in good faith
     ------------------------------
     that a  Participant  no longer  qualifies  as a member of a select group of
     management or highly compensated employees,  as membership in such group is
     determined in accordance with Sections  201(2),  301(a)(3) and 401(a)(1) of
     ERISA,  the  Committee  shall have the  right,  in its sole  discretion  to
     terminate the Participant's participation herein.

                                    ARTICLE 3
                                  Death Benefit
                                  -------------

     Subject to, and limited by, all of the provisions of this Plan:

3.1  The Beneficiary of a Participant  not described in Section 3.2 shall,  upon
     the death of such  Participant,  receive one of the following death benefit
     amounts, as applicable:

     (a)  if the Participant  experienced a Qualified Termination of Employment:
          the Participant's Primary Death Benefit;

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     (b)  if the Participant  experienced a Qualified  Termination of Employment
          and such termination of employment was caused by the death or regular,
          early or  disability  retirement  (as defined in any  benefit  plan in
          which the Employee participated) of the Participant: the Participant's
          Supplemental Death Benefit.

3.2  The Beneficiary of a Participant who also  participates in the Penn Federal
     Savings Bank Supplemental  Executive  Retirement Plan shall, upon the death
     of such  Participant,  receive  the SERP Death  Benefit and not any benefit
     under Section 3.1.

3.3  Death  Benefits  payable  under  this  Article  3  shall  be  paid  to  the
     Participant's  Beneficiary in a cash lump sum within 120 days following the
     date of the Participant's death.

                                    ARTICLE 4
                                Funding/Policies
                                ----------------

4.1  Informal Funding.  Except as otherwise  provided herein,  the Company's and
     ----------------
     its  Affiliate's  obligations  under  the  Plan  shall be an  unfunded  and
     unsecured  promise to pay.  The  Company  and its  Affiliates  shall not be
     obligated under any  circumstances to fund in advance its obligations under
     the Plan,  and when the benefit  amount is paid it shall be expensed out of
     the general assets of the Company and its Affiliates.  Notwithstanding  the
     foregoing,  the Company and its Affiliates  may, at its sole option,  or by
     agreement,  informally fund its  obligations  under the Plan in whole or in
     part,  provided,  however,  that in no event shall such informal funding be
     construed to create any trust fund,  escrow  account or other  security for
     any Participant  with respect to the payment of any benefit under the Plan,
     other than as permitted by Internal Revenue Service and Department of Labor
     rules and regulations for unfunded welfare benefit plans.

4.2  Policies.  Notwithstanding  anything  in Section 4.1 to the  contrary,  the
     --------
     Company may acquire  Policies to provide the Death  Benefits  provided  for
     hereunder, in such amounts and in such forms as it may choose. The Policies
     acquired  with  respect  to a  Participant  shall be used to  provide  that
     Participant's  Death Benefit.  The Company shall own the Policies and shall
     have  the  right  to  exercise  all  incidents  of  ownership  thereof.  No
     Participant  shall  have any  interest  whatsoever  in any such  Policy  or
     Policies  except as provided  for in this Plan.  The Company  shall pay all
     premiums due on the Policies from its general assets.  The Company shall be
     the direct beneficiary of all death benefit proceeds paid from the Policies
     in excess of that used to pay the Participant's Death Benefit.  The Company
     shall impute  income to the  Participants  to reflect the value of the term
     insurance  protection the  Participants are receiving with respect to their
     Death Benefit,  in accordance  with  applicable  Internal  Revenue  Service
     regulations or other guidance.

4.3  Insurers.  An  Insurer  shall be bound  only by the terms of the  Policy or
     --------
     Policies  that it has issued with  respect to this Plan.  Any  payments the
     Insurer makes or actions it takes in  accordance  with a Policy shall fully
     discharge it from all claims,  suits and demands of all persons  related to
     that Policy. The Insurer shall not be bound by the provisions of this Plan.
     The Insurer shall have the right to rely on the Company or the  Committee's
     representation  with regard to any definitions,  interpretations  or Policy
     interests as specified under this Plan.

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                                    ARTICLE 5
                              Regulatory Provisions
                              ---------------------

     The obligations of the Company to a Participant  under the Plan are subject
to the following restrictions:

5.1  Termination  for  Cause.  If a  Participant's  service  as an  Employee  is
     -----------------------
     Terminated for Cause, no benefits shall be paid to him or his Beneficiaries
     under the Plan. If after the Participant's  Termination of Employment it is
     subsequently  determined that he was Terminated for Cause, then he shall no
     longer be entitled to a Death Benefit.  If the Participant has died and the
     Death Benefit has been paid,  then the  recipient(s)  of the Death Benefits
     shall be  obligated to return to the Company the  cumulative  amount of the
     Death Benefit previously paid.

5.2  Temporary  Suspension or Prohibition.  If a Participant is suspended and/or
     ------------------------------------
     temporarily  prohibited from  participating in the conduct of the Company's
     affairs by a notice served under  Section  8(e)(3) or (g)(1) of the Federal
     Deposit Insurance Act ("FDIA"),  12 U.S.C.  ss.1818(e)(3)  and (g)(1),  the
     Company's obligations to such Participant under the Plan shall be suspended
     as of the date of  service of such  notice,  unless  stayed by  appropriate
     proceedings. If the charges in the notice are dismissed, the Company may in
     its discretion reinstate in whole or in part the Death Benefit.

5.3  Permanent  Suspension or  Prohibition.  If a Participant  is removed and/or
     -------------------------------------
     permanently  prohibited from  participating in the conduct of the Company's
     affairs by an order issued under Section  8(e)(4) or (g)(1) of the FDIA, 12
     U.S.C.  ss.1818(e)(4)  and (g)(1),  all  obligations of the Company to such
     Participant  under the Plan shall terminate as of the effective date of the
     order.

5.4  Default. If the Company is in default (as defined in Section 3(x)(1) of the
     ------
     FDIA),  all  obligations of the Company to Participants  and  Beneficiaries
     under the Plan shall terminate as of the date of default.

5.5  Termination by Regulators.  All  obligations of the Company to Participants
     -------------------------
     and Beneficiaries under the Plan shall be terminated,  except to the extent
     determined  that  continuation  of the Plan is necessary  for the continued
     operation  of the  Company:  (i) by the  Director  of the  Office of Thrift
     Supervision  (the "OTS Director") or his designee,  at the time the Federal
     Deposit  Insurance   Corporation   enters  into  an  agreement  to  provide
     assistance to or on behalf of the Company under the authority  contained in
     Section 13(c) of the FDIA; or (ii) by the OTS Director or his designee,  at
     the time the OTS Director or his designee approves a supervisory  merger to
     resolve problems related to operation of the Company or when the Company is
     determined by the OTS Director to be in an unsafe or unsound condition.

5.6  Other Regulatory Restrictions on Payment.  Notwithstanding  anything herein
     ----------------------------------------
     to the contrary,  (1) any payments made by the Company under the Plan shall
     be subject to and conditioned upon compliance with 12 U.S.C. ss.1828(k) and
     any regulations  promulgated thereunder and (2) payments contemplated to be
     made by the Company under the Plan shall not be immediately  payable to the
     extent such  payments are barred or prohibited by an action or order issued
     by the Federal Deposit Insurance Corporation.

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                                    ARTICLE 6
                             Beneficiary Designation
                             -----------------------

6.1  Beneficiary.  Each  Participant  shall  have the  right,  at any  time,  to
     -----------
     designate  his  Beneficiary(ies)  (both primary as well as  contingent)  to
     receive  any  benefits  payable  under  the  Plan  upon  the  death  of the
     Participant.  The Beneficiary  designated under the Plan may be the same as
     or different from the  Beneficiary  designated  under any other plan of the
     Company or its Affiliates in which the Participant participates;  provided,
     however,  that with respect to the SERP Death Benefit, if the Participant's
     Beneficiary   under  this  Plan  is  not  entirely   consistent   with  the
     Participant's  beneficiary  designation under the Penn Federal Savings Bank
     Supplemental  Executive  Retirement Plan, then the Beneficiary  designation
     under that Plan will  control with respect to the payment of the SERP Death
     Benefit payable hereunder.

6.2  Beneficiary   Designation:   Change.  A  Participant  shall  designate  his
     -----------------------------------
     Beneficiary by completing and signing the Beneficiary  Designation Form and
     returning it to the Committee (or where a policy  endorsement  form is used
     as a Beneficiary  Designation  Form,  the form is returned to, and accepted
     by,  the  Insurer).  A  Participant  shall  have  the  right  to  change  a
     Beneficiary by completing,  signing and otherwise  complying with the terms
     of  the  Beneficiary   Designation  Form  and  the  Committee's  rules  and
     procedures,  as in effect  from time to time.  Upon the  acceptance  by the
     Committee  of  a  new   Beneficiary   Designation   Form,  all  Beneficiary
     designations  previously  filed shall be canceled.  The Committee  shall be
     entitled  to rely on the last  Beneficiary  Designation  Form  filed by the
     Participant and accepted by the Committee prior to his death.

6.3  Acknowledgment.  No  designation  or change in designation of a Beneficiary
     --------------
     shall be  effective  until  received  and  acknowledged  in  writing by the
     Committee (or, where a policy  endorsement  form is used as the Beneficiary
     Designation Form, the form is received and accepted by the Insurer).

6.4  No  Beneficiary  Designation.   If  a  Participant  fails  to  designate  a
     ----------------------------
     Beneficiary  as  provided  in  Sections  6.1,  6.2 and 6.3 above or, if all
     designated  Beneficiaries predecease a Participant or die prior to complete
     distribution of the Participant's benefits, then a Participant's designated
     Beneficiary  shall be deemed to be his surviving  spouse.  If a Participant
     has no surviving spouse,  the benefits  remaining under the Plan to be paid
     to a Beneficiary shall be payable to the Participant's estate.

6.5  Doubt as to  Beneficiary.  If the  Committee has any doubt as to the proper
     ------------------------
     Beneficiary to receive  payments  pursuant to the Plan, the Committee shall
     have the right, exercisable in its discretion, to cause the Company and its
     Affiliates to withhold  such payments  until this matter is resolved to the
     Committee's satisfaction.

6.6  Discharge  of  Obligations.  The  payment of  benefits  under the Plan to a
     --------------------------
     Beneficiary  shall  fully and  completely  discharge  the  Company  and its
     Affiliates  and the Committee from all further  obligations  under the Plan
     with respect to the Participant.

                                    ARTICLE 7
                     Termination, Amendment or Modification
                     --------------------------------------

7.1  Termination. The Company reserves the right to terminate its sponsorship of
     -----------
     the Plan at any time  prior to  occurrence  of a Change  in  Control,  with

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     respect to any or all of its  Participants,  by action of the  Board.  Upon
     termination  of  sponsorship of the Plan by the Company prior to occurrence
     of a Change in Control, no further Death Benefits shall be provided,  other
     than  with  respect  to a  Participant  whose  death  occurs  prior  to the
     termination  of the Plan.  The Plan may not be  terminated  on or after the
     occurrence of a Change in Control.

7.2  Amendment.  The Company may, at any time, amend or modify the Plan in whole
     ---------
     or in part by action of the Board; provided, however, that the amendment of
     the Plan  shall not  adversely  affect the Death  Benefit of a  Participant
     whose  death  occurs  prior  to the  effective  date  of the  amendment  or
     modification.

                                    ARTICLE 8
                                 Administration
                                 --------------

8.1  Committee Duties. The Plan shall be administered by a Committee which shall
     ----------------
     consist of the Board, or such committee as the Board shall appoint. Members
     of the Committee may be  Participants  under the Plan. The Committee  shall
     also have the discretion and authority to (i) make, amend,  interpret,  and
     enforce all appropriate rules and regulations for the administration of the
     Plan  and  (ii)  decide  or  resolve  any  and  all   questions   including
     interpretations  of the Plan, as may arise in connection with the Plan. Any
     individual on the  Committee who is a Participant  shall not vote or act on
     any matter  relating  solely to  himself.  When making a  determination  or
     calculation,  the  Committee  shall  be  entitled  to rely  on  information
     furnished by a Participant or the Company.

8.2  Agents. In the  administration of the Plan, the Committee may, from time to
     ------
     time, employ agents and delegate to them such  administrative  duties as it
     sees fit (including acting through a duly appointed representative) and may
     from time to time  consult  with  counsel who may be counsel to the Company
     and its Affiliates.

8.3  Binding  Effect of Decisions.  The decision or action of the Committee with
     ----------------------------
     respect  to  any  question  arising  out  of  or  in  connection  with  the
     administration,  interpretation  and  application of the Plan and the rules
     and  regulations  promulgated  hereunder  shall be final and conclusive and
     binding upon all persons having any interest in the Plan.

8.4  Indemnity of Committee.  The Company shall  indemnify and hold harmless the
     ----------------------
     members  of the  Committee,  and any  person  to  whom  the  duties  of the
     Committee may be delegated,  against any and all claims,  losses,  damages,
     expenses  or  liabilities  arising  from any  action or failure to act with
     respect  to the  Plan,  except  in the  case  of  gross  misconduct  by the
     Committee or any of its members or any such delegate.

8.5  Information.  To enable the Committee to perform its functions, the Company
     -----------
     and  its  Affiliates  shall  supply  full  and  timely  information  to the
     Committee as the Committee may reasonably request.

                                    ARTICLE 9
                                Claims Procedures
                                -----------------

9.1  Presentation of Claim.  Any Participant or Beneficiary  (referred to herein
     ---------------------
     as a  "Claimant")  may  deliver  to the  Committee  a  written  claim for a

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<PAGE>

     determination  with respect to the amounts  distributable  to such Claimant
     from the Plan. If such a claim relates to the contents of a notice received
     by the  Claimant,  the claim must be made  within 60 days after such notice
     was received by the Claimant. All other claims must be made within 180 days
     of the date on which the event that caused the claim to arise occurred. The
     claim  must  state  with  particularity  the  determination  desired by the
     Claimant.

9.2  Notification of Decision.  The Committee shall consider a Claimant's  claim
     ------------------------
     within a reasonable time, and shall notify the Claimant in writing:

     (a)  that the Claimant's  requested  determination  has been made, and that
          the claim has been allowed in full; or

     (b)  that the Committee has reached a conclusion  contrary,  in whole or in
          part, to the Claimant's requested determination,  and such notice must
          set forth in a manner calculated to be understood by the Claimant:

          (i)   the specific  reason(s) for the denial of the claim, or any part
                of it;

          (ii)  specific  reference(s) to pertinent  provisions of the Plan upon
                which such denial was based;

          (iii) a  description  of  any   additional   material  or  information
                necessary  for  the  Claimant to  perfect  the  claim,   and  an
                explanation of why such material or information is necessary;
                and

          (iv)  an explanation of the claim review procedure set forth in
                Section 9.3 below.

9.3  Review of a Denied  Claim.  With 60 days after  receiving a notice from the
     -------------------------
     Committee that a claim has been denied, in whole or in part, a Claimant (or
     the Claimant's duly authorized  representative) may file with the Committee
     a written request for a review of the denial of the claim. Thereafter,  but
     not later than 30 days after the review  procedure  began, the Claimant (or
     the Claimant's duly authorized representative):

     (a)  may review pertinent documents;

     (b)  may submit written comments or other documents; and/or

     (c)  may request a hearing,  which the Committee,  in its sole  discretion,
          may grant.

9.4  Decision  on Review.  The  Committee  shall  render its  decision on review
     -------------------
     promptly,  and not later than 60 days after the filing of a written request
     for  review  of the  denial,  unless a  hearing  is held or  other  special
     circumstances  require  additional  time,  in which  case  the  Committee's
     decision  must be rendered  within 120 days after such date.  Such decision
     must be written in a manner  calculated  to be  understood by the Claimant,
     and it must contain:

     (a)  specific reasons for the decision;

     (b)  specific  reference(s) to the pertinent Plan provisions upon which the
          decision was based; and

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<PAGE>

     (c)  such other matters as the Committee deems relevant.

9.5  Legal Action. A Claimant's compliance with the foregoing provisions of this
     ------------
     Article 9 is a mandatory prerequisite to a Claimant's right to commence any
     legal action with respect to any claim for benefits under the Plan.

                                   ARTICLE 10
                                  Miscellaneous
                                  -------------

10.1 Unsecured General Creditor.  Participants and their  beneficiaries,  heirs,
     --------------------------
     successors and assigns shall have no legal or equitable  rights,  interests
     or claims in any property or assets of the Company or its  Affiliates.  For
     purposes of the payment of benefits  under the Plan,  any and all assets of
     the Company or its Affiliates  shall be, and remain the general,  unpledged
     and unrestricted  assets of such entity.  The Company's and its Affiliates'
     obligation  under the Plan  shall be merely of an  unfunded  and  unsecured
     promise to pay money in the future.

10.2 Liability.  The Company's or its  Affiliates'  liability for the payment of
     ---------
     benefits  shall be defined only by the Plan.  The Company or its Affiliates
     shall have no obligation to any person except as expressly  provided in the
     Plan.

10.3 Nonassignability.  Neither a  Participant  nor any other person (other than
     ----------------
     the  Company)  shall have any right to  commute,  sell,  assign,  transfer,
     pledge, anticipate,  mortgage or otherwise encumber, transfer, hypothecate,
     alienate  or convey in  advance of actual  receipt,  the  amounts,  if any,
     payable hereunder,  or any part thereof, which are, and all rights to which
     are expressly declared to be, unassignable and non-transferable. No part of
     the amounts payable shall, prior to actual payment,  be subject to seizure,
     attachment,  garnishment  or  sequestration  for the  payment of any debts,
     judgments,  alimony or separate maintenance allowed by a Participant or any
     other  person,  be  transferable  by  operation  of law in the  event  of a
     Participant's  or  any  other  person's  bankruptcy  or  insolvency  or  be
     transferable to a spouse as a result of a property settlement or otherwise.

10.4 Not a Contract of  Employment.  The terms and  conditions of the Plan shall
     -----------------------------
     not be deemed to constitute a contract of employment between the Company or
     its Affiliates  and a  Participant.  Nothing in the Plan shall be deemed to
     give a  Participant  the right to be retained in the service of the Company
     or its  Affiliates  or to  interfere  with the right of the  Company or its
     Affiliates to discipline or discharge such Participant at any time.

10.5 Furnishing Information.  A Participant will cooperate with the Committee by
     ----------------------
     furnishing any and all information requested by the Committee and take such
     other actions as may be requested in order to facilitate the administration
     of the Plan and the  payments  of  benefits  hereunder,  including  but not
     limited to,  taking such  physical  examinations  as the Committee may deem
     necessary.

10.6 Terms.  Whenever any words are used herein in the masculine,  they shall be
     -----
     construed as though they were in the feminine in all cases where they would
     so apply;  and whenever any words are used herein in the singular or in the
     plural,  they shall be  construed as though they were used in the plural or
     the singular, as the case may be, in all cases where they would so apply.

                                        9

<PAGE>

10.7 Captions. The captions of the articles, sections and paragraphs of the Plan
     --------
     are for  convenience  only and shall not  control or affect the  meaning or
     construction of any of its provisions.

10.8 Governing  Law.  Subject  to ERISA,  the  provisions  of the Plan  shall be
     --------------
     construed  and  interpreted  according to the internal laws of the State of
     New Jersey without regard to its conflicts of laws and principles.

10.9 Notice.  Any  notice or filing  required  or  permitted  to be given to the
     ------
     Committee   under  the  Plan  shall  be   sufficient   if  in  writing  and
     hand-delivered,  or sent by  registered  or certified  mail, to the address
     below.

           Board of Directors
           Penn Federal Savings Bank
           622 Eagle Rock Avenue
           West Orange, New Jersey   07052-2989

     Such  notice  shall  be  deemed  given as of the date of  delivery  or,  if
     delivery  is made by mail,  as of the date  shown  on the  postmark  on the
     receipt for registration or certification. Any notice or filing required or
     permitted to be given to a  Participant  under the Plan shall be sufficient
     if in  writing  and  hand-delivered,  or sent by mail,  to the  last  known
     address of such Participant.

10.10 Successors.  The  provisions  of the Plan  shall bind and inure to the
      ----------
      benefit of the   Company or its   Affiliates,  and  their  successors  and
      assigns   and   the   Participant  and   the   Participant's    designated
      Beneficiaries.

10.11 Validity.  In  case any   provision  of the  Plan  shall  be   illegal  or
      --------
      invalid  for any reason, said  illegality or  invalidity  shall not affect
      the  remaining   parts  hereof,  but the Plan  shall  be  constructed  and
      enforced  as  if  such  illegal  or  invalid  provision  had  never   been
      inserted herein.

10.12 Incompetent.  If the  Committee  determines  in  its  discretion   that  a
      -----------
      benefit  under  the Plan  is to be paid  to  a  minor,  a person  declared
      incompetent  or to  a person  incapable  of handling  the  disposition  of
      that  person's   property,  the   Committee  may  direct  payment  of such
      benefit  to  the  guardian,  legal  representative  or person  having  the
      care and custody  of such  minor,  incompetent  or incapable  person.  The
      Committee  may  require  proof of  minority,  incompetence,  incapacity or
      guardianship,  as  it  may deem appropriate  prior to  distribution of the
      benefit.  Any  payment of a benefit   shall be a  payment for  the account
      of the Participant, and shall  be a complete  discharge of  any  liability
      under the Plan for such payment amount.

10.13 Court  Order. The Committee  is authorized to  make any  payments directed
      ------------
      by court  order  in any  action in which  the Plan  or the  Committee  has
      been named as a party.

                            [continued on next page]

                                       10

<PAGE>

     The Company has signed the Plan as of __________, 2005.

                                                     PENN FEDERAL SAVINGS BANK

                                                     By:   _____________________
                                                     Name: _____________________
                                                     Title:  ___________________

                                       11Exhibit 10.1

                            eLEC COMMUNICATIONS CORP.

                          SECURITIES PURCHASE AGREEMENT

                                February 8, 2005

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

1.  Agreement to Sell and Purchase.............................................1

2.  Fees and Warrant...........................................................1

3.  Closing, Delivery and Payment..............................................2
    3.1        Closing.........................................................2
    3.2        Delivery........................................................2

4.  Representations and Warranties of the Company..............................2
    4.1        Organization, Good Standing and Qualification...................2
    4.2        Subsidiaries....................................................3
    4.3        Capitalization; Voting Rights...................................4
    4.4        Authorization; Binding Obligations..............................4
    4.5        Liabilities.....................................................5
    4.6        Agreements; Action..............................................5
    4.7        Obligations to Related Parties..................................6
    4.8        Changes.........................................................6
    4.9        Title to Properties and Assets; Liens, Etc......................8
    4.10       Intellectual Property...........................................8
    4.11       Compliance with Other Instruments...............................9
    4.12       Litigation......................................................9
    4.13       Tax Returns and Payments........................................9
    4.14       Employees......................................................10
    4.15       Registration Rights and Voting Rights..........................10
    4.16       Compliance with Laws; Permits..................................10
    4.17       Environmental and Safety Laws..................................11
    4.18       Valid Offering.................................................11
    4.19       Full Disclosure................................................11
    4.20       Insurance......................................................12
    4.21       SEC Reports....................................................12
    4.22       Listing........................................................12
    4.23       No Integrated Offering.........................................12
    4.24       Stop Transfer..................................................12
    4.25       Dilution.......................................................12

5.  Representations and Warranties of the Purchaser...........................13
    5.1        No Shorting....................................................13
    5.2        Requisite Power and Authority..................................13
    5.3        Investment Representations.....................................14
    5.4        Purchaser Bears Economic Risk..................................14
    5.5        Acquisition for Own Account....................................14
    5.6        Purchaser Can Protect Its Interest.............................14
    5.7        Accredited Investor............................................14
    5.8        Legends........................................................15

6.  Covenants of the Company..................................................16
    6.1        Stop-Orders....................................................16

                                       i
<PAGE>

    6.2        Trading........................................................16
    6.3        Market Regulations.............................................16
    6.4        Reporting Requirements.........................................16
    6.5        Use of Funds...................................................16
    6.6        Access to Facilities...........................................16
    6.7        Taxes..........................................................17
    6.8        Insurance......................................................17
    6.9        Intellectual Property..........................................18
    6.10       Properties.....................................................18
    6.11       Confidentiality................................................18
    6.12       Required Approvals.............................................19
    6.13       Reissuance of Securities.......................................20
    6.14       Opinion........................................................20
    6.15       Margin Stock...................................................20
    6.16       No Restrictions on Additional Financing........................20

7.  Covenants of the Purchaser................................................20
    7.1        Confidentiality................................................20
    7.2        Non-Public Information.........................................20

8.  Covenants of the Company and Purchaser Regarding Indemnification..........21
    8.1        Company Indemnification........................................21
    8.2        Purchaser's Indemnification....................................21

9.  Conversion of Convertible Note............................................22
    9.1        Mechanics of Conversion........................................22

10. Registration Rights.......................................................23
    10.1       Registration Rights Granted....................................23
    10.2       Offering Restrictions..........................................23

11. Miscellaneous.............................................................23
    11.1       Governing Law..................................................23
    11.2       Survival.......................................................24
    11.3       Successors.....................................................24
    11.4       Entire Agreement...............................................24
    11.5       Severability...................................................24
    11.6       Amendment and Waiver...........................................24
    11.7       Delays or Omissions............................................25
    11.8       Notices........................................................25
    11.9       Attorneys' Fees................................................26
    11.10      Titles and Subtitles...........................................26
    11.11      Facsimile Signatures; Counterparts.............................26
    11.12      Broker's Fees..................................................26
    11.13      Construction...................................................26

                                       ii

<PAGE>

                                LIST OF EXHIBITS
--------------------------------------------------------------------------------

Form of Convertible Term Note.......................................   Exhibit A

Form of Warrant.....................................................   Exhibit B

Form of Opinion.....................................................   Exhibit C

Form of Escrow Agreement............................................   Exhibit D

                                      iii
<PAGE>

                          SECURITIES PURCHASE AGREEMENT

      THIS SECURITIES  PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of February 8, 2005,  by and between eLEC  Communications  Corp.,  a New
York corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman Islands
company (the "Purchaser").

                                    RECITALS

      WHEREAS,  the  Company  has  authorized  the  sale to the  Purchaser  of a
Convertible  Term Note in the aggregate  principal amount of Two Million Dollars
($2,000,000)  (as  amended,  modified  or  supplemented  from time to time,  the
"Note"),  which Note is convertible  into shares of the Company's  common stock,
$0.10 par value per share (the "Common  Stock"),  at an initial fixed conversion
price of $ 0.63 per share of Common Stock ("Fixed Conversion Price");

      WHEREAS,  the  Company  wishes  to issue a  warrant  to the  Purchaser  to
purchase  up to  793,650  shares  of the  Company's  Common  Stock  (subject  to
adjustment as set forth therein) in connection with Purchaser's  purchase of the
Note;

      WHEREAS,  Purchaser  desires  to  purchase  the Note and the  Warrant  (as
defined in Section 2) on the terms and conditions set forth herein; and

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

                                    AGREEMENT

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

      1.  Agreement to Sell and Purchase.  Pursuant to the terms and  conditions
set forth in this Agreement,  on the Closing Date (as defined in Section 3), the
Company  agrees to sell to the  Purchaser,  and the  Purchaser  hereby agrees to
purchase  from  the  Company,  a  Note  in the  aggregate  principal  amount  of
$2,000,000  convertible in accordance  with the terms thereof into shares of the
Company's  Common  Stock  in  accordance  with  the  terms  of the Note and this
Agreement. The offering of the Note purchased on the Closing Date shall be known
as the  "Offering." A form of the Note is annexed  hereto as Exhibit A. The Note
will mature on the Maturity Date (as defined in the Note). The Note, the Warrant
and the shares of Common Stock issuable in payment of the Note,  upon conversion
of the Note and upon exercise of the Warrant are collectively referred to as the
"Securities."

      2. Fees and Warrant. On the Closing Date:

            (a) The Company will issue and deliver to the Purchaser a Warrant to
purchase up to 793,650  shares of Common Stock in  connection  with the Offering
(as amended, modified or supplemented from time to time, the "Warrant") pursuant
to Section 1 hereof.  The

<PAGE>

Warrant  must be  delivered  on the Closing  Date.  A form of Warrant is annexed
hereto  as  Exhibit   B.  All  the   representations,   covenants,   warranties,
undertakings,  and  indemnification,  and other rights made or granted to or for
the benefit of the Purchaser by the Company are hereby also made for the benefit
of the holder of the Warrant and the shares of Common Stock issuable  thereunder
and upon  conversion  of the Note.  The  shares of Common  Stock  issuable  upon
exercise of the Warrant are hereinafter referred to as the "Warrant Shares".

            (b) Subject to the terms of Section  2(d) below,  the Company  shall
pay to Laurus Capital Management,  LLC, the manager of the Purchaser,  a closing
payment  in an  amount  equal  to  three  and one half  percent  (3.50%)  of the
aggregate  principal amount of the Note. The foregoing fee is referred to herein
as the "Closing Payment."

            (c) The Company shall  reimburse  the  Purchaser for its  reasonable
expenses  (including  legal fees and expenses)  incurred in connection  with the
preparation  and  negotiation of this  Agreement and the Related  Agreements (as
hereinafter  defined),  and expenses incurred in connection with the Purchaser's
due diligence  review of the Company and its Subsidiaries (as defined in Section
4.2) and all related  matters.  Amounts  required to be paid under this  Section
2(c) will be paid on the  Closing  Date and shall not  exceed  $37,500  less any
deposit paid by the Company prior to closing.

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

      3. Closing, Delivery and Payment.
         ------------------------------

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

      3.2 Delivery.  Pursuant to the Escrow Agreement (as hereinafter  defined),
at the Closing on the Closing Date,  the Company will deliver to the  Purchaser,
among other  things,  a Note in the form  attached as Exhibit A in the principal
amount of  $2,000,000  and a Warrant  in the form  attached  as Exhibit B in the
Purchaser's  name  representing  793,650  Warrant  Shares and the Purchaser will
deliver  to the  Company,  among  other  things,  the  amounts  set forth in the
Disbursement  Letter by or wire transfer of immediately  available funds to such
account of the Company as the Company shall direct.

      4.  Representations  and  Warranties  of the Company.  The Company  hereby
represents and warrants to the Purchaser as follows (which  representations  and
warranties are supplemented  where indicated by the information set forth in the
Company's  filings under the  Securities  Exchange Act of 1934 made prior to the
date of this Agreement  (collectively,  the "Exchange Act  Filings"),  copies of
which have been provided to the Purchaser):

      4.1 Organization, Good Standing and Qualification. Each of the Company and
each of its  Subsidiaries  is a corporation,  partnership  or limited  liability
company, as the case may be,

                                       2
<PAGE>

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

      4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, each
Inactive  Subsidiary (as defined below), the direct owner of such Subsidiary and
Inactive  Subsidiary  and its  percentage  ownership  thereof,  is set  forth on
Schedule  4.2  hereto.  For the  purpose  of  this  Agreement  and  the  Related
Agreements,  a  "Subsidiary"  of any person or entity means (i) a corporation or
other entity whose shares of stock or other ownership  interests having ordinary
voting power (other than stock or other  ownership  interests  having such power
only by reason of the  happening  of a  contingency)  to elect a majority of the
directors of such corporation,  or other persons or entities  performing similar
functions for such person or entity, are owned, directly or indirectly,  by such
person or entity or (ii) a  corporation  or other entity in which such person or
entity owns,  directly or indirectly,  more than 50% of the equity  interests at
such time;  provided  that,  for so long as each of AVI Holding  Corp.,  a Texas
corporation  ("AVI  Holdings"),  Line One, Inc., a New York  corporation  ("Line
One") and TelcoSoftware.com  Corp., a Delaware corporation  ("TelcoSoftware" and
together with AVI Holdings and Line One, the "Inactive  Subsidiaries"  and each,
an "Inactive  Subsidiary") hold no significant assets or liabilities (other than
in respect of AVI Holdings, capitalized lease obligations not to exceed $35,000,
and in respect of Line One, liabilities not to exceed $50,000) and do not engage
in any  business

                                       3
<PAGE>

activities,  the defined term  "Subsidiary"  as used in this  Agreement  and the
Related  Agreements  shall  not  include  such  Inactive  Subsidiary;  provided,
further, that if any Inactive Subsidiary shall at any time after the date hereof
hold  significant  assets or liabilities  or engage in any business  activities,
such Inactive  Subsidiary shall thereafter be deemed a Subsidiary  hereunder and
shall otherwise be subject to all terms, agreements, representations, warranties
and covenants otherwise  applicable to Subsidiaries under this Agreement and the
Related Agreements.

      4.3 Capitalization; Voting Rights.

            (a) The  authorized  capital  stock of the  Company,  as of the date
      hereof consists of 51,000,000  shares,  of which  50,000,000 are shares of
      Common Stock,  par value $0.10 per share,  16,759,282  shares of which are
      issued and  outstanding,  and  1,000,000  of which are shares of Preferred
      Stock,  par value  $0.10 per  share,  no  shares of which are  issued  and
      outstanding.  The  authorized  capital  stock  of each  Subsidiary  of the
      Company is set forth on Schedule 4.3.

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

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

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

      4.4  Authorization;  Binding  Obligations.  All corporate,  partnership or
limited liability company, as the case may be, action on the part of the Company
and each of its Subsidiaries  (including the respective  officers and directors)
necessary for the  authorization  of this Agreement and the Related  Agreements,
the performance of all obligations of the Company and its Subsidiaries hereunder
and under the other Related Agreements at the Closing and, the

                                       4
<PAGE>

authorization,  sale,  issuance  and  delivery  of the Note and Warrant has been
taken or will be taken  prior to the  Closing.  This  Agreement  and the Related
Agreements, when executed and delivered and to the extent it is a party thereto,
will be valid and  binding  obligations  of each of the  Company and each of its
Subsidiaries,  enforceable  against  each such person in  accordance  with their
terms, except:

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

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

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

      4.5  Liabilities.  Neither the Company nor any of its Subsidiaries has any
contingent  liabilities  in excess of $10,000 in the  aggregate,  except current
liabilities  incurred  in  the  ordinary  course  of  business  and  liabilities
disclosed in any Exchange Act Filings.

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

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

            (b) Since  November  30,  2003,  neither  the Company nor any of its
      Subsidiaries  has: (i) declared or paid any  dividends,  or  authorized or
      made any  distribution  upon or with respect to any class or series of its
      capital stock;  (ii) incurred any  indebtedness  for money borrowed or any
      other liabilities (other than ordinary course obligations) individually in
      excess of  $50,000  or,  in the case of  indebtedness  and/or  liabilities
      individually  less than $50,000,  in excess of $100,000 in the  aggregate;
      (iii) made any loans or advances to any person not in excess, individually
      or in the aggregate, of $100,000,  other than ordinary course advances for
      travel expenses;  or (iv) sold,

                                       5
<PAGE>

      exchanged or otherwise disposed of any of its assets or rights, other than
      the sale of its inventory in the ordinary course of business.

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

      4.7 Obligations to Related  Parties.  Except as set forth on Schedule 4.7,
there are no obligations of the Company or any of its  Subsidiaries to officers,
directors, stockholders directly or indirectly holding more than 5% of any class
of the voting  securities or capital stock of or equity interests in the Company
or employees of the Company or any of its Subsidiaries other than:

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

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

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

            (d)  obligations  listed in the  Company's  financial  statements or
      disclosed in any of its Exchange Act Filings.

Except as described  above or set forth on Schedule  4.7,  none of the officers,
directors  or,  to the  best  of  the  Company's  knowledge,  key  employees  or
stockholders  of the Company or any  members of their  immediate  families,  are
indebted to the Company,  individually or in the aggregate, in excess of $50,000
or have any direct or indirect ownership interest  (representing more than a one
percent  (1%)  interest)  in any firm or  corporation  with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company,  other than passive  investments in
publicly  traded  companies  (representing  less than one  percent  (1%) of such
company)  which may compete with the  Company.  Except as  described  above,  no
officer,  director or stockholder directly or indirectly holding more than 5% of
any class of the voting  securities or capital  stock of or equity  interests in
the  Company,  or any  member  of their  immediate  families,  is,  directly  or
indirectly,  interested  in  any  material  contract  with  the  Company  and no
agreements, understandings or proposed transactions are contemplated between the
Company and any such person. Except as set forth on Schedule 4.7, the Company is
not a guarantor or indemnitor of any  indebtedness of any other person,  firm or
corporation.

      4.8 Changes.  Since November 30, 2003, except as disclosed in any Exchange
Act  Filing  or in any  Schedule  to  this  Agreement  or to any of the  Related
Agreements, there has not been:

                                       6
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       7
<PAGE>

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

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

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

            (b) minor liens and  encumbrances  which do not  materially  detract
      from the value of the property  subject  thereto or materially  impair the
      operations of the Company or any of its Subsidiaries; and

            (c) those  that have  otherwise  arisen  in the  ordinary  course of
      business.

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

      4.10 Intellectual Property.

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

            (b) Neither the Company nor any of its Subsidiaries has received any
      communications  alleging that the Company or any of its  Subsidiaries  has
      violated  any of the  patents,  trademarks,  service  marks,  trade names,
      copyrights  or trade  secrets  or other  proprietary  rights  of any other
      person or entity,  nor is the Company or any of its Subsidiaries  aware of
      any basis therefor.

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

                                       8
<PAGE>

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

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

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

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

                  (b) of any  deficiency in  assessment or proposed  judgment to
      its federal, state or other taxes.

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

                                       9
<PAGE>

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

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

      4.16  Compliance  with Laws;  Permits.  Neither the Company nor any of its
Subsidiaries is in violation of any applicable statute, rule, regulation,  order
or restriction of any domestic or foreign  government or any  instrumentality or
agency thereof in respect of the conduct of its business or the ownership of its
properties  which has had,  or could  reasonably  be  expected  to have,  either
individually or in the aggregate,  a Material  Adverse  Effect.  No governmental
orders,  permissions,  consents,  approvals or authorizations are required to be
obtained  and no  registrations  or  declarations  are  required  to be filed in
connection  with the  execution  and  delivery  of this  Agreement  or any other
Related Agreement and the issuance of any of the Securities,

                                       10
<PAGE>

except such as has been duly and validly  obtained or filed,  or with respect to
any filings  that must be made after the  Closing,  as will be filed in a timely
manner.  Each of the Company and its Subsidiaries  has all material  franchises,
permits,  licenses and any similar  authority  necessary  for the conduct of its
business  as now  being  conducted  by it,  the  lack  of  which  could,  either
individually  or in the  aggregate,  reasonably  be  expected to have a Material
Adverse Effect.

      4.17  Environmental  and Safety  Laws.  Neither the Company nor any of its
Subsidiaries  is in  violation  of any  applicable  statute,  law or  regulation
relating to the environment or occupational  health and safety which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect, and to its knowledge,  no material  expenditures are or
will be  required  in order to comply  with any such  existing  statute,  law or
regulation.  Except as set forth on Schedule  4.17,  no Hazardous  Materials (as
defined below) are used or have been used, stored, or disposed of by the Company
or any of its Subsidiaries or, to the Company's  knowledge,  by any other person
or entity on any  property  owned,  leased or used by the  Company or any of its
Subsidiaries.  For the purposes of the preceding sentence, "Hazardous Materials"
shall mean:

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

            (b) any petroleum products or nuclear materials.

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

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

                                       11
<PAGE>

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

      4.21 SEC Reports.  Except as set forth on Schedule  4.21,  the Company has
filed all proxy statements,  reports and other documents required to be filed by
it under the Securities  Exchange Act 1934, as amended (the "Exchange Act"). The
Company has  furnished the Purchaser  with, or otherwise  made  available to the
Purchaser,  copies of: (i) its Annual  Report on Form 10-KSB for its fiscal year
ended  November 30, 2003;  and (ii) its Quarterly  Report on Form 10-QSB for its
fiscal quarter ended August 31, 2004, and the Form 8-K filings which it has made
during the fiscal year 2004 to date (collectively, the "SEC Reports"). Except as
set forth on Schedule 4.21,  each SEC Report was, at the time of its filing,  in
substantial  compliance with the requirements of its respective form and none of
the SEC Reports,  nor the financial  statements (and the notes thereto) included
in the SEC Reports,  as of their respective  filing dates,  contained any untrue
statement of a material  fact or omitted to state a material fact required to be
stated  therein or necessary  to make the  statements  therein,  in light of the
circumstances under which they were made, not misleading.

      4.22 Listing. The Company's Common Stock is listed for trading on the NASD
OTC  Bulletin  Board  ("OTC  BB")  and  satisfies  all   requirements   for  the
continuation  of such listing.  The Company has not received any notice that its
Common Stock will be delisted  from the OTC BB or that its Common Stock does not
meet all requirements for listing.

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

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

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

                                       12
<PAGE>

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

      5.  Representations and Warranties of the Purchaser.  The Purchaser hereby
represents  and  warrants to the Company as follows  (such  representations  and
warranties do not lessen or obviate the  representations  and  warranties of the
Company set forth in this Agreement):

      5.1 No Shorting.  The Purchaser or any of its  affiliates  and  investment
partners has not, will not and will not cause any person or entity,  directly or
indirectly,  to engage in "short  sales" of the Company's  Common Stock,  or any
other hedging  strategies  utilizing the Company's  Common Stock, as long as the
Note shall be outstanding.

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

                                       13
<PAGE>

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

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

      5.3 Investment Representations.  Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration  contained
in the Securities Act based in part upon Purchaser's  representations  contained
in the  Agreement,  including,  without  limitation,  that the  Purchaser  is an
"accredited  investor"  within the meaning of Regulation D under the  Securities
Act of 1933, as amended (the "Securities  Act"). The Purchaser  confirms that it
has  received  or has had  full  access  to all  the  information  it  considers
necessary or appropriate to make an informed investment decision with respect to
the Note and the Warrant to be purchased by it under this Agreement and the Note
Shares and the Warrant Shares acquired by it upon the conversion of the Note and
the exercise of the Warrant,  respectively.  The Purchaser further confirms that
it has had an opportunity to ask questions and receive  answers from the Company
regarding the Company's and its Subsidiaries' business, management and financial
affairs and the terms and conditions of the Offering,  the Note, the Warrant and
the Securities and to obtain  additional  information (to the extent the Company
possessed such  information or could acquire it without  unreasonable  effort or
expense)  necessary to verify any  information  furnished to the Purchaser or to
which the Purchaser had access.

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

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

      5.6 Purchaser Can Protect Its Interest.  The Purchaser  represents that by
reason of its, or of its management's,  business and financial  experience,  the
Purchaser has the capacity to evaluate the merits and risks of its investment in
the Note,  the Warrant and the  Securities  and to protect its own  interests in
connection with the transactions  contemplated in this Agreement and the Related
Agreements.  Further,  Purchaser is aware of no publication of any advertisement
in connection with the transactions contemplated in the Agreement or the Related
Agreements.

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

                                       14
<PAGE>

      5.8 Legends.
          --------

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

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

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

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

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

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

                                       15
<PAGE>

            COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED."

      6.  Covenants of the Company.  The Company  covenants  and agrees with the
Purchaser  that,  so long as the Note and, in respect of the covenants set forth
in Sections 6.1, 6.2, 6.3,  6.4(a),  6.13,  6.14 and 6.16,  the Warrant  remains
outstanding:

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

      6.2 Trading.  The Company shall promptly  secure the trading of the shares
of Common Stock  issuable  upon  conversion of the Note and upon the exercise of
the Warrant on the OTC BB (the  "Principal  Market") upon which shares of Common
Stock are traded and shall  maintain such trading so long as any other shares of
Common Stock shall be so traded.  The Company  will  maintain the listing of its
Common Stock on the  Principal  Market or on Nasdaq or any  securities  exchange
(not  including the "pink sheets"  electronic  quotations  system),  and, to the
extent applicable to the Company,  will comply in all material respects with the
Company's  reporting,  filing and other obligations under the bylaws or rules of
the National  Association of Securities Dealers ("NASD") and such exchanges,  as
applicable.

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

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

            (b) The Company  shall  provide to the  Purchaser  no later than the
15th of each month,  an electronic file containing a list of the legal names and
mailing addresses of all customers of the Company and its Subsidiaries as of the
last day of the prior month, as well as the respective aggregate billing amounts
for such customers for such prior month.

      6.5 Use of Funds.  The Company agrees that it will use the proceeds of the
sale of the Note and the Warrant only for marketing, general working capital and
general business purposes.

      6.6 Access to Facilities. Each of the Company and each of its Subsidiaries
will permit any representatives designated by the Purchaser (or any successor of
the Purchaser), upon reasonable notice and during normal business hours, at such
person's expense and accompanied by a representative of the Company, to:

                                       16
<PAGE>

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

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

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

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

      6.7 Taxes.  Each of the Company and each of its Subsidiaries will promptly
pay and discharge, or cause to be paid and discharged, when due and payable, all
lawful taxes,  assessments and  governmental  charges or levies imposed upon the
income,  profits,  property or  business  of the  Company and its  Subsidiaries;
provided,  however,  that any such tax,  assessment,  charge or levy need not be
paid if the  validity  thereof  shall  currently  be  contested in good faith by
appropriate proceedings and if the Company and/or such Subsidiary shall have set
aside on its  books  adequate  reserves  with  respect  thereto,  and  provided,
further,  that  the  Company  and its  Subsidiaries  will  pay all  such  taxes,
assessments, charges or levies forthwith upon the commencement of proceedings to
foreclose any lien which may have attached as security therefor.

      6.8  Insurance.  Each of the  Company and its  Subsidiaries  will keep its
assets  which are of an insurable  character  insured by  financially  sound and
reputable  insurers  against loss or damage by fire,  explosion  and other risks
customarily  insured against by companies in similar business similarly situated
as the Company and its  Subsidiaries;  and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner  which the Company  reasonably  believes is  customary  for  companies in
similar business  similarly  situated as the Company and its Subsidiaries and to
the extent available on commercially  reasonable terms. The Company, and each of
its Subsidiaries  will jointly and severally bear the full risk of loss from any
loss  of any  nature  whatsoever  with  respect  to the  assets  pledged  to the
Purchaser  as  security  for its  obligations  hereunder  and under the  Related
Agreements.  At the  Company's and each of its  Subsidiaries'  joint and several
cost  and  expense  in  amounts  and  with  carriers  reasonably  acceptable  to
Purchaser,  the  Company  and each of its  Subsidiaries  shall  (i) keep all its
insurable  properties and properties in which it has an interest insured against
the hazards of fire, flood, sprinkler leakage, those hazards covered by extended
coverage insurance and such other hazards, and for such amounts, as is customary
in the case of companies  engaged in businesses  similar to the Company's or the
respective Subsidiary's including business interruption insurance; (ii) maintain
a bond in such  amounts  as is  customary  in the case of  companies  engaged in
businesses  similar to the  Company's or the  respective  Subsidiary's  insuring
against larceny,  embezzlement or other criminal  misappropriation  of insured's
officers and  employees who may either singly or jointly with others at any time
have access to the assets or funds of the

                                       17
<PAGE>

Company or any of its  Subsidiaries  either  directly  or  through  governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal  injury,  death or property damage suffered by others,  in each case in
such amounts as is consistent  and in accordance  with industry  practice;  (iv)
maintain all such worker's  compensation or similar insurance as may be required
under  the  laws of any  state  or  jurisdiction  in which  the  Company  or the
respective Subsidiary is engaged in business; and (v) furnish Purchaser with (x)
copies of all policies and evidence of the maintenance of such policies at least
thirty  (30) days  before any  expiration  date,  (y)  excepting  the  Company's
workers' compensation policy,  endorsements to such policies naming Purchaser as
"co-insured" or "additional  insured" and appropriate loss payable  endorsements
in form and substance satisfactory to Purchaser, naming Purchaser as loss payee,
and (z)  evidence  that as to  Purchaser  the  insurance  coverage  shall not be
impaired or  invalidated  by any act or neglect of the Company or any Subsidiary
and the insurer  will  provide  Purchaser  with at least thirty (30) days notice
prior to  cancellation.  The  Company and each  Subsidiary  shall  instruct  the
insurance carriers that in the event of any loss thereunder,  the carriers shall
make payment for such loss to the Company  and/or the  Subsidiary  and Purchaser
jointly.  In the event that as of the date of receipt of each loss recovery upon
any such  insurance,  the  Purchaser  has not  declared an event of default with
respect to this  Agreement  or any of the Related  Agreements,  then the Company
and/or such Subsidiary shall be permitted to direct the application of such loss
recovery proceeds toward investment in property,  plant and equipment that would
comprise  "Collateral"  secured by Purchaser's security interest pursuant to its
security  agreement,  with any surplus funds to be applied toward payment of the
obligations  of the  Company  to  Purchaser.  In the event  that  Purchaser  has
properly  declared an event of default with respect to this  Agreement or any of
the Related Agreements,  then all loss recoveries received by Purchaser upon any
such  insurance  thereafter  may be applied to the  obligations  of the  Company
hereunder and under the Related  Agreements,  in such order as the Purchaser may
determine.  Any surplus  (following  satisfaction of all Company  obligations to
Purchaser)  shall be paid by  Purchaser  to the  Company  or  applied  as may be
otherwise  required by law. Any deficiency  thereon shall be paid by the Company
or the Subsidiary, as applicable, to Purchaser, on demand.

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

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

      6.11  Confidentiality.  The Company agrees that it will not disclose,  and
will not include in any public announcement,  the name of the Purchaser,  unless
expressly  agreed to by the  Purchaser  or unless and until such  disclosure  is
required by law or  applicable  regulation,  and then only to the extent of such
requirement. Notwithstanding the foregoing, the Company may

                                       18
<PAGE>

disclose Purchaser's identity and the terms of this Agreement to its current and
prospective debt and equity financing sources.

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

            (a) (i) directly or indirectly  declare or pay any dividends,  other
      than dividends paid to the Parent or any of its wholly-owned Subsidiaries,
      (ii) issue any preferred  stock that is  manditorily  redeemable  prior to
      February  8,  2009 or (iii)  redeem  any of its  preferred  stock or other
      equity interests;

            (b)  liquidate,  dissolve  or effect a material  reorganization  (it
      being understood that in no event shall the Company dissolve, liquidate or
      merge with any other person or entity (unless the Company is the surviving
      entity);

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

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

            (e) (i) create,  incur,  assume or suffer to exist any  indebtedness
      (exclusive  of trade debt and debt  incurred  to finance  the  purchase of
      equipment  (not in excess of five percent (5%) of the fair market value of
      the Company's and its Subsidiaries'  assets)) whether secured or unsecured
      other  than  (x)  the  Company's   indebtedness  to  the  Purchaser,   (y)
      indebtedness set forth on Schedule 6.12(e) attached hereto and made a part
      hereof  and any  refinancings  or  replacements  thereof  on terms no less
      favorable to the  Purchaser  than the  indebtedness  being  refinanced  or
      replaced,  and (z) any debt  incurred in  connection  with the purchase of
      assets  in  the  ordinary  course  of  business,  or any  refinancings  or
      replacements  thereof on terms no less favorable to the Purchaser than the
      indebtedness  being  refinanced  or replaced;  (ii) cancel any debt (other
      than uncollectible  customer receivables) owing to it in excess of $50,000
      in the  aggregate  during any 12 month period;  (iii)  assume,  guarantee,
      endorse or otherwise become directly or contingently  liable in connection
      with any  obligations  of any other  Person,  except  the  endorsement  of
      negotiable instruments by the Company for deposit or collection or similar
      transactions   in  the  ordinary  course  of  business  or  guarantees  of
      indebtedness otherwise permitted to be outstanding pursuant to this clause
      (e); and

            (f) create or acquire any  Subsidiary  after the date hereof  unless
      (i) such  Subsidiary is a wholly-owned  Subsidiary of the Company and (ii)
      such Subsidiary becomes party to the Master Security Agreement,  the Stock
      Pledge  Agreement  and the  Subsidiary  Guaranty  (either by  executing  a
      counterpart  thereof  or an  assumption  or joinder  agreement  in respect
      thereof)  and, to the extent  required by the  Purchaser,

                                       19
<PAGE>

      satisfies each  condition of this Agreement and the Related  Agreements as
      if such Subsidiary were a Subsidiary on the Closing Date.

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

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

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

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

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

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

      6.16 No  Restrictions on Additional  Financing.  The Company will not, and
will not permit its  Subsidiaries  to,  agree,  directly or  indirectly,  to any
restriction  with any person or entity which limits the ability of the Purchaser
to extend any additional  indebtedness to the Company or any of its Subsidiaries
and/or the  ability of the Company or any of its  Subsidiaries  to sell or issue
any equity interests of the Company or any of its Subsidiaries to the Purchaser.

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

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

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

                                       20
<PAGE>

            7.3  Limitation  on  Acquisition  of  Common  Stock of the  Company.
Notwithstanding  anything  to the  contrary  contained  in this  Agreement,  any
Related  Agreement,  any  document,  instrument  or  agreement  entered  into in
connection with the transactions contemplated hereby or any document, instrument
or agreement entered into in connection with any other transaction  entered into
by and between the Purchaser and the Company (and/or  subsidiaries or affiliates
of  the  Company),  the  Purchaser  shall  not  acquire  stock  in  the  Company
(including,  without  limitation,   pursuant  to  a  contract  to  purchase,  by
exercising an option or warrant, by converting any other security or instrument,
by acquiring or exercising any other right to acquire,  shares of stock or other
security convertible into shares of stock in the Company, or otherwise, and such
options,  warrants,  conversion or other rights shall not be exercisable) to the
extent such stock acquisition  would cause any interest  (including any original
issue  discount)  payable  by the  Company  to the  Purchaser  not to qualify as
portfolio  interest,  within the meaning of Section  881(c)(2)  of the  Internal
Revenue Code of 1986, as amended (the "Code"), by reason of Section 881(c)(3) of
the Code,  taking into account the  constructive  ownership  rules under Section
871(h)(3)(C)  of the  Code  (the  "Stock  Acquisition  Limitation").  The  Stock
Acquisition  Limitation  shall  automatically  become null and void  without any
notice to the  Company  upon the  earlier to occur of either  (a) the  Company's
delivery to the Purchaser of a Notice of Redemption  (as defined in the Note) or
(b) an Event of Default  under,  and as defined in, the Note, so long as, at the
time of the  occurrence of such Event of Default,  the average  closing price of
Company's  Common Stock as reported by Bloomberg,  L.P. on the Principal  Market
for the immediately  preceding five (5) trading days is greater than or equal to
150% of the Fixed Conversion Price (as defined in the Note) at such time.

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

      8.1  Company  Indemnification.  The  Company  agrees  to  indemnify,  hold
harmless,  reimburse and defend the Purchaser, each of the Purchaser's officers,
directors,  agents,  affiliates,  control persons,  and principal  shareholders,
against  any  claim,  cost,  expense,  liability,  obligation,  loss  or  damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the
Purchaser   which   results,   arises  out  of  or  is  based   upon:   (i)  any
misrepresentation  by the  Company or any of its  Subsidiaries  or breach of any
warranty by the Company or any of its Subsidiaries in this Agreement,  any other
Related Agreement or in any exhibits or schedules attached hereto or thereto; or
(ii) any breach or default in performance by Company or any of its  Subsidiaries
of any  covenant or  undertaking  to be  performed  by the Company or any of its
Subsidiaries hereunder, under any other Related Agreement or any other agreement
entered  into  by the  Company  and/or  any of its  Subsidiaries  and  Purchaser
relating hereto or thereto.

      8.2  Purchaser's  Indemnification.  Purchaser  agrees to  indemnify,  hold
harmless,  reimburse and defend the Company and each of the Company's  officers,
directors,  agents, affiliates,  control persons and principal shareholders,  at
all times  against any claim,  cost,  expense,  liability,  obligation,  loss or
damage (including  reasonable legal fees) of any nature,  incurred by or imposed
upon  the  Company  which  results,  arises  out of or is  based  upon:  (i) any
misrepresentation  by  Purchaser  or breach of any warranty by Purchaser in this
Agreement or any Related  Agreement  or in any  exhibits or  schedules  attached
hereto thereto; or (ii) any breach or default in performance by Purchaser of any
covenant or  undertaking  to be  performed  by  Purchaser  hereunder,  under any
Related  Agreement  or any  other  agreement  entered  into by the  Company  and
Purchaser relating hereto.

                                       21
<PAGE>

      9. Conversion of Convertible Note.
         -------------------------------

      9.1 Mechanics of Conversion.
         -------------------------

            (a)  Provided the  Purchaser  has notified the Company in writing of
      the Purchaser's  intention to sell the Note Shares and the Note Shares are
      included in an effective  registration  statement or are otherwise  exempt
      from  registration  when sold: (i) upon the conversion of the Note or part
      thereof,  the  Company  shall,  at its own  cost  and  expense,  take  all
      necessary  action  (including  the  issuance  of  an  opinion  of  counsel
      reasonably  acceptable  to  the  Purchaser  following  a  request  by  the
      Purchaser) to assure that the Company's  transfer agent shall issue shares
      of the  Company's  Common  Stock  in the  name  of the  Purchaser  (or its
      nominee)  or  such  other  persons  as  designated  by  the  Purchaser  in
      accordance  with Section  9.1(b)  hereof and in such  denominations  to be
      specified  representing  the  number  of Note  Shares  issuable  upon such
      conversion;  and (ii) the Company warrants that no instructions other than
      these instructions have been or will be given to the transfer agent of the
      Company's  Common  Stock  and  that,   subject  to  Section  7(d)  of  the
      Registration Rights Agreement, after the Effectiveness Date (as defined in
      the Registration  Rights  Agreement) the Note Shares issued will be freely
      transferable  subject  to  the  prospectus  delivery  requirements  of the
      Securities Act and the provisions of this Agreement,  and will not contain
      a legend restricting the resale or transferability of the Note Shares.

            (b) Purchaser will give notice of its decision to exercise its right
      to convert the Note or part thereof by telecopying or otherwise delivering
      an executed and  completed  notice of the number of shares to be converted
      to the Company (the "Notice of  Conversion").  The  Purchaser  will not be
      required to surrender  the Note until the  Purchaser  receives a credit to
      the account of the  Purchaser's  prime broker  through the DWAC system (as
      defined  below),  representing  the Note Shares or until the Note has been
      fully  satisfied.  Each date on which a Notice of Conversion is telecopied
      or delivered to the Company in accordance with the provisions hereof shall
      be deemed a  "Conversion  Date."  Pursuant  to the terms of the  Notice of
      Conversion,  the Company will issue  instructions  to the  transfer  agent
      accompanied by an opinion of counsel (if required) within two (2) business
      days  of the  date  of  the  delivery  to the  Company  of the  Notice  of
      Conversion and shall cause the transfer agent to transmit the certificates
      representing the Conversion  Shares to the Holder by crediting the account
      of the Purchaser's  prime broker with the Depository Trust Company ("DTC")
      through its Deposit  Withdrawal  Agent  Commission  ("DWAC") system within
      three (3)  business  days after  receipt  by the  Company of the Notice of
      Conversion (the "Delivery Date").

            (c) The Company understands that a delay in the delivery of the Note
      Shares  in the form  required  pursuant  to  Section 9 hereof  beyond  the
      Delivery Date could result in economic loss to the Purchaser. In the event
      that the Company  fails to direct its  transfer  agent to deliver the Note
      Shares to the  Purchaser  via the DWAC  system  within  the time frame set
      forth in Section 9.1(b) above and the Note Shares are not delivered to the
      Purchaser by the Delivery Date, as  compensation to the Purchaser for such
      loss,  the Company  agrees to pay late  payments to the Purchaser for late
      issuance  of the Note  Shares in the form  required  pursuant to Section 9
      hereof upon  conversion of the Note in

                                       22
<PAGE>

      the amount  equal to the greater of: (i) $500 per  business  day after the
      Delivery  Date; or (ii) the  Purchaser's  actual damages from such delayed
      delivery.  Notwithstanding  the  foregoing,  the Company  will not owe the
      Purchaser  any late  payments  if the  delay in the  delivery  of the Note
      Shares  beyond  the  Delivery  Date is solely  out of the  control  of the
      Company and the Company is actively trying to cure the cause of the delay.
      The  Company  shall  pay any  payments  incurred  under  this  Section  in
      immediately  available  funds  upon  demand  and,  in the  case of  actual
      damages,  accompanied  by reasonable  documentation  of the amount of such
      damages.  Such  documentation  shall  show the  number of shares of Common
      Stock the Purchaser is forced to purchase (in an open market  transaction)
      which the Purchaser anticipated receiving upon such conversion,  and shall
      be calculated as the amount by which (A) the  Purchaser's  total  purchase
      price (including customary brokerage  commissions,  if any) for the shares
      of Common Stock so purchased  exceeds (B) the aggregate  principal  and/or
      interest  amount of the Note,  for which  such  Conversion  Notice was not
      timely honored.

Nothing  contained herein or in any document  referred to herein or delivered in
connection  herewith  shall be deemed to  establish  or require the payment of a
rate of  interest  or other  charges  in  excess  of the  maximum  permitted  by
applicable law. In the event that the rate of interest or dividends  required to
be paid or other charges  hereunder  exceed the maximum amount permitted by such
law, any payments in excess of such maximum  shall be credited  against  amounts
owed by the Company to a Purchaser and thus refunded to the Company.

      10. Registration Rights.
          --------------------

      10.1 Registration  Rights Granted.  The Company hereby grants registration
rights to the Purchaser pursuant to a Registration  Rights Agreement dated as of
even date herewith between the Company and the Purchaser.

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

      11. Miscellaneous.
          --------------

      11.1  Governing Law. THIS  AGREEMENT AND EACH RELATED  AGREEMENT  SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE  WITH THE LAWS OF THE STATE OF NEW YORK,
WITHOUT  REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER
PARTY  AGAINST  THE  OTHER  CONCERNING  THE  TRANSACTIONS  CONTEMPLATED  BY THIS
AGREEMENT AND EACH RELATED  AGREEMENT  SHALL BE BROUGHT ONLY IN THE STATE COURTS
OF NEW YORK OR IN THE  FEDERAL  COURTS  LOCATED  IN THE STATE OF NEW

                                       23
<PAGE>

YORK. BOTH PARTIES AND THE INDIVIDUALS  EXECUTING THIS AGREEMENT AND THE RELATED
AGREEMENTS ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE  JURISDICTION OF SUCH
COURTS  AND  WAIVE  TRIAL BY JURY.  IN THE  EVENT  THAT  ANY  PROVISION  OF THIS
AGREEMENT OR ANY RELATED AGREEMENT  DELIVERED IN CONNECTION  HEREWITH IS INVALID
OR  UNENFORCEABLE  UNDER  ANY  APPLICABLE  STATUTE  OR RULE OF  LAW,  THEN  SUCH
PROVISION  SHALL  BE  DEEMED  INOPERATIVE  TO THE  EXTENT  THAT IT MAY  CONFLICT
THEREWITH  AND SHALL BE DEEMED  MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF
LAW. ANY SUCH PROVISION WHICH MAY PROVE INVALID OR  UNENFORCEABLE  UNDER ANY LAW
SHALL NOT AFFECT THE VALIDITY OR  ENFORCEABILITY  OF ANY OTHER PROVISION OF THIS
AGREEMENT OR ANY RELATED AGREEMENT.

      11.2 Survival. The representations,  warranties,  covenants and agreements
made  herein  shall  survive any  investigation  made by the  Purchaser  and the
closing of the transactions  contemplated hereby to the extent provided therein.
All  statements  as to factual  matters  contained in any  certificate  or other
instrument  delivered  by or  on  behalf  of  the  Company  pursuant  hereto  in
connection  with the  transactions  contemplated  hereby  shall be  deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument.

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

      11.4  Entire  Agreement.  This  Agreement,  the  Related  Agreements,  the
exhibits  and  schedules  hereto and thereto and the other  documents  delivered
pursuant  hereto  constitute  the full and entire  understanding  and  agreement
between the parties  with  regard to the  subjects  hereof and no party shall be
liable or bound to any other in any manner by any  representations,  warranties,
covenants and agreements except as specifically set forth herein and therein.

      11.5  Severability.  In case  any  provision  of the  Agreement  shall  be
invalid, illegal or unenforceable,  the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.

      11.6 Amendment and Waiver.
           ---------------------

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

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

                                       24
<PAGE>

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

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

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

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

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

            (c) three (3) business  days after having been sent by registered or
      certified mail, return receipt requested, postage prepaid; or

            (d) one (1) day after deposit with a nationally recognized overnight
      courier,  specifying  next day  delivery,  with  written  verification  of
      receipt.

All communications shall be sent as follows:

         If to the Company, to:    eLEC Communications Corp.
                                   75 South Broadway, Suite 302
                                   White Plains, NY 10601

                                   Attention: Chief Executive Officer
                                   Facsimile: 914-682-0820

         with a copy to:           Pryor Cashman Sherman & Flynn LLP
                                   410 Park Avenue
                                   New York, NY 10022

                                   Attention: Eric M. Hellige, Esq.
                                   Facsimile: 212-798-6380

                                       25
<PAGE>

         If to the Purchaser, to:  Laurus Master Fund, Ltd.
                                   c/o M&C Corporate Services Limited
                                   P.O. Box 309 GT
                                   Ugland House
                                   George Town
                                   South Church Street
                                   Grand Cayman, Cayman Islands
                                   Facsimile: 345-949-8080

         with a copy to:           John E. Tucker, Esq.
                                   825 Third Avenue 14th Floor
                                   New York, NY 10022
                                   Facsimile: 212-541-4434

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

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

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

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

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

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

                                       26
<PAGE>

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

COMPANY:                                     PURCHASER:

eLEC COMMUNICATIONS CORP.                    LAURUS MASTER FUND, LTD.

By:    /s/Paul H. Riss                       By:     /s/Eugene Grin
       ----------------------------                  ---------------------------
Name:  Paul H. Riss                          Name:   Eugene Grin
       ----------------------------                  ---------------------------
Title: Chief Executive Officer               Title:  Director
       ----------------------------                  ---------------------------

                                       27
<PAGE>

                                    EXHIBIT A

                            FORM OF CONVERTIBLE NOTE

                                      A-1
<PAGE>

                                    EXHIBIT B

                                 FORM OF WARRANT

                                      B-1
<PAGE>

                                    EXHIBIT C

                                 FORM OF OPINION

      1. Each of the Company and each of its  Subsidiaries is a corporation duly
incorporated, validly existing and in good standing under the laws of the [State
of New  York],  [State  of  Delaware],  [State  of  Texas]  [break  out for each
jurisdiction]  and has all  requisite  corporate  power  and  authority  to own,
operate and lease its properties and to carry on its business as it is now being
conducted.

      2. Each of the  Company  and each of its  Subsidiaries  has the  requisite
corporate  power and authority to execute,  deliver and perform its  obligations
under the Agreement and the Related Agreements. All corporate action on the part
of the Company and each of its  Subsidiaries  and its  officers,  directors  and
stockholders  necessary  has  been  taken  for:  (i)  the  authorization  of the
Agreement and the Related  Agreements and the  performance of all obligations of
the Company and each of its Subsidiaries thereunder; and (ii) the authorization,
sale,  issuance and delivery of the Securities pursuant to the Agreement and the
Related Agreements. The Note Shares and the Warrant Shares, when issued pursuant
to and in accordance with the terms of the Agreement and the Related  Agreements
and upon delivery  shall be validly issued and  outstanding,  fully paid and non
assessable.

      3. The execution, delivery and performance by each of the Company and each
of its Subsidiaries of the Agreement and the Related Agreements to which it is a
party and the consummation of the  transactions on its part  contemplated by any
thereof,  will not,  with or without the giving of notice or the passage of time
or both:

            (a) Violate the provisions of their respective Charter or bylaws; or

            (b)  Violate  any  judgment,  decree,  order or  award of any  court
      binding upon the Company or any of its Subsidiaries; or

            (c) Violate any [insert jurisdictions in which counsel is qualified]
      or federal law

      4. The Agreement and the Related  Agreements  will  constitute,  valid and
legally binding  obligations of each of the Company and each of its Subsidiaries
(to the extent such person is a party thereto), and are enforceable against each
of the Company and each of its  Subsidiaries in accordance with their respective
terms, except:

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

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

      5. To such  counsel's  knowledge,  the sale of the Note and the subsequent
conversion of the Note into Note Shares are not subject to any preemptive rights
or rights of first refusal that have not been properly  waived or complied with.
To such counsel's knowledge, the sale of the

                                      C-1
<PAGE>

Warrant and the  subsequent  exercise of the Warrant for Warrant  Shares are not
subject to any  preemptive  rights or, to such  counsel's  knowledge,  rights of
first refusal that have not been properly waived or complied with.

      6.  Assuming the accuracy of the  representations  and  warranties  of the
Purchaser  contained  in the  Agreement,  the offer,  sale and  issuance  of the
Securities on the Closing Date will be exempt from the registration requirements
of the Securities Act. To such counsel's knowledge, 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 and  security  under  circumstances  that would  cause the  offering  of the
Securities  pursuant to the Agreement or any Related  Agreement to be integrated
with prior  offerings  by the Company for purposes of the  Securities  Act which
would prevent the Company from selling the Securities pursuant to Rule 506 under
the Securities  Act, or any  applicable  exchange-related  stockholder  approval
provisions.

      7. There is no action,  suit,  proceeding or investigation  pending or, to
such counsel's knowledge, currently threatened against the Company or any of its
Subsidiaries  that prevents the right of the Company or any of its  Subsidiaries
to enter into this Agreement or any of the Related Agreements,  or to consummate
the transactions  contemplated thereby. To such counsel's knowledge, the Company
is not a party or subject to the  provisions  of any  order,  writ,  injunction,
judgment or decree of any court or government agency or instrumentality;  nor is
there any action,  suit,  proceeding or investigation  by the Company  currently
pending or which the Company intends to initiate.

      8. The terms and provisions of the Master Security Agreement and the Stock
Pledge  Agreement  create a valid security  interest in favor of Laurus,  in the
respective  rights,  title and interests of the Company and its  Subsidiaries in
and to the Collateral (as defined in each of the Master  Security  Agreement and
the Stock Pledge Agreement).  Each UCC-1 Financing  Statement naming the Company
or any  Subsidiary  thereof as debtor and Laurus as secured  party are in proper
form for filing and  assuming  that such UCC-1  Financing  Statements  have been
filed  with the  Secretary  of  State of New  York,  the  Secretary  of State of
Delaware and the  Secretary of State of Texas,  as the case may be, the security
interest created under the Master Security Agreement will constitute a perfected
security  interest  under  the  Uniform  Commercial  Code in favor of  Laurus in
respect of the Collateral that can be perfected by filing a financing statement.
After  giving  effect  to the  delivery  to  Laurus  of the  stock  certificates
representing the ownership interests of each Subsidiary of the Company (together
with effective  endorsements) and assuming the continued possession by Laurus of
such stock  certificates in the State of New York, the security interest created
in favor of Laurus  under the Stock  Pledge  Agreement  constitutes  a valid and
enforceable first perfected  security interest in such ownership  interests (and
the proceeds thereof) in favor of Laurus, subject to no other security interest.
No filings,  registrations  or  recordings  are required in order to perfect (or
maintain the perfection or priority of) the security  interest created under the
Stock Pledge Agreement in respect of such ownership interests.

                                      C-2
<PAGE>

                                    EXHIBIT D

                            FORM OF ESCROW AGREEMENT

                                      D-1

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