Document:

SUBSCRIPTION AGREEMENT
    

    
      THIS SUBSCRIPTION AGREEMENT
      (this “Agreement”), dated as of June 21, 2005, by and among
      PERFECTDATA CORPORATION., a Delaware corporation (the “Company”), and
      the subscribers identified on the signature page hereto (each a
      “Subscriber” and collectively “Subscribers”).
    

    
      WHEREAS, the Company and the
      Subscribers are executing and delivering this Agreement in reliance upon an
      exemption from securities registration afforded by the provisions of Section
      4(2) and Rule 506 of Regulation D (“Regulation D”) as promulgated by
      the United States Securities and Exchange Commission (the
      “Commission”) under the Securities Act of 1933, as amended (the
      “1933 Act”);
    

    
      WHEREAS, the parties desire
      that, upon the terms and subject to the conditions contained herein, the
      Company shall issue and sell to the Subscribers, as provided herein, and the
      Subscribers shall purchase, in the aggregate, an amount not less than
      $3,500,000 and not more than $10,000,000 worth of shares of the Company’s
      Series B Convertible Preferred Stock, par value $.01 per share (the
      “Series B Shares”), and common stock purchase warrants (the
      “Warrants”) to purchase shares of the Company’s common stock,
      par value $.01 per share (the “Common Stock”) on the terms and
      conditions set forth herein and in the form of warrant certificate set forth as
      Exhibit A hereto; and
    

    
      WHEREAS, the Company has
      filed a Certificate of Designations, Preferences and Rights of Series A
      Convertible Preferred Stock with the Secretary of State of Delaware on April
      19, 2005, as corrected May 9, 2005 (“Series A Certificate of
      Designations”).
    

    
      NOW, THEREFORE, in
      consideration of the mutual covenants and other agreements contained in this
      Agreement the Company and the Subscribers hereby agree as follows:
    

    
      1.        Purchase and Sale of Series B Shares and
      Warrants.
    

    
      (a)      The purchase price
      for each Series B Share (the “Series B Share Purchase Price”) shall
      be an amount equal to the average closing price of the Common Stock on the OTC
      Bulletin Board for the ten trading days ended June 17, 2005 multiplied by
      1000.
    

    
      (b)      Subject to the
      satisfaction (or waiver) of the conditions to Closing (as defined in Section
      9(b) below) set forth in this Agreement, each Subscriber shall purchase such
      number of Series B Shares equal to the result obtained by dividing the Series B
      Share Purchase Price into the Investment Amount indicated on the signature page
      hereto and a Warrants to purchase such number of Warrant Shares (as defined
      below) as shall equal 25% of the Shares (as defined below), and the Company
      shall sell such Series B Shares and Warrants to the Subscriber. The Investment
      Amount shall be paid in cash, and shall be payable to the Company on the
      Closing Date (as defined in Section 9(b) below). Within 15 business days of the
      Closing Date, the Company shall deliver to the Subscriber (i) a stock
      certificate for the number of Series B Shares purchased hereunder, such Series
      B Shares to be registered in the name of the Subscriber and (ii) a warrant
      certificate, substantially in the form set forth on Exhibit A hereto,
      evidencing the Warrants purchased hereunder. The Company will not issue
      fractional Series B Shares that would result in the issuance of fractional
      shares of Common Stock upon conversion of the Series B Shares. The Investment
      Amount will be adjusted accordingly. The shares of Common Stock issuable upon
      exercise of the Warrants are herein referred to as the “Warrant
      Shares”. The shares of Common Stock underlying the Series B Shares are
      herein referred to as the “Shares”. The Series B Shares, the Shares,
      the Warrants and the Warrant Shares are collectively referred to herein as the
      “Securities”.
    

    
      2.        Warrants. The exercise price for each
      Warrant Share shall be 150% of the Series B Share Purchase Price divided by
      1000. The Warrants shall be exercisable for four years from the date of
      issuance.
    

    
       
    

    
       
    

    
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      3.        Subscriber’s Representations and Warranties. Each Subscriber hereby represents and warrants to and agrees with
      the Company only as to such Subscriber that:
    

    
      (a)      Information on Company. The Subscriber has
      been furnished with or has had access at the EDGAR Website of the Securities
      and Exchange Commission (the “Commission”) to review the
      Company’s Annual Report on Form 10-KSB for the fiscal years ended March
      31, 2005 and 2004 as filed with the Commission, the Company’s current
      report on Form 8-K filed on April 21, 2005 and the Company’s information
      statement filed under Rule 14f-1on March 31, 2005, and all other Company
      filings made with the Commission (collectively, the “SEC Reports”).
      The Subscriber has considered all factors the Subscriber deems material in
      deciding on the advisability of investing in the Securities.
    

    
      (b)      Information on Subscriber. At the time the
      Subscriber was offered the Securities it was, and as of the date hereof it is
      an “accredited investor”, as such term is defined in Regulation D
      promulgated by the Commission under the 1933 Act, is experienced in investments
      and business matters, has made investments of a speculative nature and has
      purchased securities of United States publicly-owned companies in private
      placements in the past and, with its representatives, has such knowledge and
      experience in financial, tax and other business matters as to enable the
      Subscriber to utilize the information made available by the Company to evaluate
      the merits and risks of and to make an informed investment decision with
      respect to the proposed purchase, which represents a speculative investment.
      The Subscriber has the authority to purchase and own the Securities. The
      Subscriber is able to bear the economic risk of such investment and at the
      present time, is able to afford a complete loss thereof. The information set
      forth on the signature page hereto regarding the Subscriber is accurate.
    

    
      (c)      Series B Shares.
      Attached hereto as Exhibit B is a copy of the Certificate of Designations,
      Preferences and Rights of Series B Convertible Preferred Stock of the Company
      (the “Series B Certificate of Designations”). The Subscriber has
      reviewed the Series B Certificate of Designations. In addition, the Subscriber
      acknowledges that at the time of execution of this agreement, the Company does
      not have available a sufficient number of shares of Common Stock as are
      issuable upon the conversion or exercise of the Series B Shares and the
      Warrants.
    

    
      (d)      Purchase of Series B Shares and Warrants.
      The Subscriber is purchasing the Series B Shares and the Warrants as principal
      for its own account and not with a view to any distribution thereof or
      otherwise in compliance with applicable federal and state securities
      laws).
    

    
      (e)      Compliance with 1933 Act. The Subscriber
      understands and agrees that the Securities have not been registered under the
      1933 Act or any applicable state securities laws, by reason of their issuance
      in a transaction that does not require registration under the 1933 Act (based
      in part on the accuracy of the representations and warranties of Subscriber
      contained herein), and that such Securities must be held indefinitely unless a
      subsequent disposition is registered under the 1933 Act or any applicable state
      securities laws or is exempt from such registration.
    

    
      (f)      Non-Public Information. The Subscriber
      confirms that it understands that it has been provided material non-public
      information with respect to the Company and that if the Subscriber trades on
      the basis of such information or provides such information to others such
      person may be subject to insider trading liability or liability for violation
      of Regulation FD.
    

    
      (g)      Correctness of Representations. Each
      Subscriber represents as to such Subscriber that the foregoing representations
      and warranties are true and correct as of the date hereof in all material
      respects and, unless a Subscriber otherwise notifies the Company prior to the
      Closing Date (as hereinafter defined), shall be true and correct in all
      material respects as of the Closing Date.
    

    
      4.        Representations of the Company. The Company
      hereby represents and warrants to the Investor as follows:
    

    
       
    

    
       
    

    
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      (a)      The Company is a
      corporation duly organized, validly existing, and in good standing under the
      laws of the State of Delaware, with full power and authority to own, lease,
      license and use its respective properties and assets, and to carry on its
      respective business as presently being conducted. The Company is duly licensed
      and qualified to do business and is in good standing in every jurisdiction in
      which the ownership, leasing, licensing or use of property and assets or the
      conduct of its respective business makes such licensing or qualification
      necessary, except where the failure to be so licensed or qualified would not
      have a material adverse effect on the business, property or financial condition
      of the Company (“Material Adverse Effect”).
    

    
      (b)      All corporate
      action on the part of the Company necessary for the authorization, execution
      and delivery of this Agreement, the performance of all obligations of the
      Company hereunder and the authorization, issuance, sale and delivery of the
      Securities has been taken, and this Agreement constitutes the valid and legally
      binding obligation of the Company, enforceable in accordance with its terms,
      subject to applicable bankruptcy, insolvency, moratorium and similar laws
      affecting the enforceability of creditors generally and to general principles
      of equity.
    

    
      (c)      The Securities,
      when issued and paid for as contemplated hereunder, shall be duly authorized,
      validly issued, fully paid and non-assessable.
    

    
      (d)      To the
      Company’s knowledge and assuming the accuracy of the representations made
      by the Subscriber in Section 3 of this Agreement, no consent, approval,
      qualification, order or authorization of, or filing with, any local, state, or
      Federal governmental authority is required on the part of the Company in
      connection with the Company’s execution, delivery, or performance of this
      Agreement or the offer, sale or issuance of the Securities, other than (i) the
      filing with the Commission of one or more registration statements in accordance
      with Section 6, (ii) any notices of sale required to be filed with the
      Commission under Regulation D promulgated under the Securities Act, and (iii)
      the filing of any applicable state securities law filings required under
      applicable state securities laws.
    

    
      (e)      Except as disclosed
      in the SEC Reports, there is no litigation, arbitration, governmental action,
      hearing or other proceeding (formal or informal) or claim or investigation
      pending against the Company or, to the best of the knowledge of the Company,
      threatened with respect to the Company, relating to any of its respective
      operations, business, properties or assets of a type required to be disclosed
      in the Company’s SEC Reports pursuant to Item 103 of Regulation S-B. To
      the Company’s knowledge, it is not in violation of any law, rule,
      regulation, order, judgment or decree, except for such violations which do not,
      individually or in the aggregate, have a Material Adverse Effect.
    

    
      (f)       The Company
      is not in violation or breach of or in default with respect to, complying with
      any provision of any material contract required to be filed as an exhibit to
      the Company’s Commission filings pursuant to Item 601 of Regulation S-B,
      and each such material contract is in full force and effect and is the legal,
      valid and binding obligation of the Company, enforceable as to the Company in
      accordance with its terms subject to applicable bankruptcy, insolvency,
      moratorium and other laws affecting the enforceability of creditors’
      rights generally and to general equitable principles, the violation or breach
      or default of which would have a Material Adverse Effect. The Company is not in
      violation or breach of, or in default with respect to, any provision of its
      Certificate of Incorporation or Bylaws.
    

    
      4A.     Agreements and Covenants of the Company. The
      Company agrees to use commercially reasonable efforts to, as soon as
      practicable, take all steps necessary and advisable to increase the number of
      its authorized shares of Common Stock to an amount sufficient to allow for the
      conversion of the Series B Shares and the exercise of the Warrants.
    

    
       
    

    
       
    

    
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      5.        Regulation D Offering. The offer and
      issuance of the Securities to the Subscribers is being made pursuant to the
      exemption from the registration provisions of the 1933 Act afforded by Section
      4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
      thereunder.
    

    	
          
            6.
          

        	
          
            Transfers; Legends.
          

        

    
      (a)      Transfers. The Securities may only be
      disposed of in compliance with state and federal securities laws. In connection
      with any transfer of Securities other than pursuant to an effective
      registration statement, to the Company or to an Affiliate of a Subscriber, the
      Company may require the transferor thereof to provide to the Company an opinion
      of counsel selected by the transferor, the form and substance of which opinion
      shall be reasonably satisfactory to the Company, to the effect that such
      transfer does not require registration of such transferred Securities under the
      1933 Act. As a condition of transfer, any such transferee shall agree in
      writing to be bound by the terms of this Agreement and shall have the rights of
      a Subscriber under this Agreement.
    

    
      (b)      Shares Legend. The Subscribers agree to the
      imprinting of a legend on the Series B Shares and the Shares, in substantially
      the following form:
    

    
      “THESE SHARES HAVE NOT BEEN REGISTERED UNDER THE
      SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE
      SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, TRANSFERRED,
      PLEDGED, HYPOTHECATED, ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN
      EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND IN COMPLIANCE WITH ANY
      APPLICABLE STATE SECURITIES LAW, OR IN A TRANSACTION WHICH IS EXEMPT FROM
      REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
      LAWS.”
    

    
      (c)      Warrant Legend. The Subscribers agree to the
      imprinting, so long as is required by this Section 6, of a legend on the
      Warrants, in substantially the following form:
    

    
      “NEITHER THIS WARRANT NOR THE COMMON STOCK WHICH MAY
      BE ACQUIRED UPON THE EXERCISE HEREOF (“WARRANT SHARES”), AS OF THE
      DATE OF ISSUANCE HEREOF, HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
      AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE AND
      MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED, ASSIGNED OR
      OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
      UNDER THE ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAW, OR IN
      A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE ACT AND ANY
      APPLICABLE STATE SECURITIES LAWS.”
    

    
      (d).     Lockup. Notwithstanding the provisions
      contained in Section 7 below, the Subscriber has agreed to execute and deliver
      to the Company a lockup agreement, substantially in the form attached hereto as
      Exhibit C, providing that the Subscriber shall not, without prior written
      consent from the Company, sell or engage in certain other transactions
      described therein with respect to 50% of the Registrable Shares (as defined in
      Section 7(a) below) for a period of six months from the effective date of a
      Registration Statement.
    

    
       
    

    
       
    

    
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            7.
          

        	
          
            Registration Rights.
          

        	
          
             
          

        
	
          
            a.
          

        	
          
            Mandatory Registration Rights
          

        
					

    
      (i)       No later than
      the earlier of (A) ninety (90) days after the date on which the Company files
      an amendment to its Certificate of Incorporation increasing the number of its
      authorized shares of Common Stock and (B) December 19, 2005 (the earlier of
      such dates being hereafter referred to as the “Outside Filing Date”),
      the Company will file with the Commission a registration statement on Form SB-2
      (or, if Form SB-2 is not then available to the Company, on such form of
      registration statement that is then available to effect a registration of all
      the Shares and the Warrants Shares (collectively, the “Registrable
      Shares”)) for the purpose of registering under the 1933 Act all of the
      Registrable Shares for resale by, and for the account of, the Subscribers as
      selling stockholders thereunder (the “Registration Statement”). The
      Registration Statement shall permit the Subscribers to offer and sell, on a
      delayed or continuous basis pursuant to Rule 415 under the Securities Act, any
      or all of the Registrable Shares. The Registration Statement also shall cover,
      to the extent allowable under the 1933 Act and the rules promulgated thereunder
      (including Rule 416), such indeterminate number of additional shares of Common
      Stock resulting from stock splits, stock dividends or similar transactions with
      respect to the Registrable Shares. The offer and sale of the Registrable Shares
      pursuant to the Registration Statement shall not be underwritten.
    

    
      (ii)      The Company agrees
      to use commercially reasonable efforts to cause the Registration Statement to
      become effective within ninety (90) days after its filing (the “Outside
      Effective Date”).
    

    
      (iii)     The Company shall be
      required to keep the Registration Statement, as amended, effective until such
      date that is the earliest to occur of (i) the second anniversary of the Closing
      Date, (ii) the date when all of the Registrable Shares registered thereunder
      shall have been sold, and (iii) such time as all the Registrable Shares held by
      the Subscriber can be sold pursuant to Rule 144(k) under the 1933 Act and
      without compliance with the registration requirements of the 1933 Act (such
      date is referred to herein as the “Mandatory Registration Termination
      Date”). Thereafter, the Company shall be entitled to withdraw the
      Registration Statement and the Subscriber shall have no further right to offer
      or sell any of the Registrable Shares pursuant to the Registration Statement
      (or any prospectus relating thereto).
    

    
      (iv)     During the period
      beginning on the Closing Date and ending on the date of the effectiveness of
      the Registration Statement, the Company shall not grant any registration rights
      that are pari passu with or senior to the registration rights of the Investors
      under this Agreement if such registration rights would adversely affect the
      Investors’ ability to sell Registrable Shares pursuant to the Registration
      Statement. Except as set forth in the SEC Documents, the Company represents and
      warrants to the Subscribers that no stockholders other than the Subscribers
      have the right to sell any Common Stock or other securities of the Company
      pursuant to the Registration Statement other than stockholders holding an
      aggregate of approximately 2.0 million shares of Common Stock.
    

    
      (v)      If: (A) the Company
      fails to file preliminary proxy materials with the SEC seeking shareholder
      approval of an amendment to the Company’s Certificate of Incorporation
      increasing the number of the Company’s authorized shares of Common Stock
      by July 19, 2005, or (B) the Registration Statement is not filed on or prior to
      the Outside Filing Date, or (C) the Registration Statement is not declared
      effective by the Commission on or prior to the Outside Effective Date, or (D)
      if the Commission reviews the Registration Statement it is not declared
      effective on or prior to the one hundred twentieth (120) day following the
      Outside Filing Date, or (E) after the effective date thereof, such Registration
      Statement ceases to be effective and available to the Subscribers of the
      Registrable Shares in violation of
    

    
       
    

    
       
    

    
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      this Agreement (any such failure or breach being referred
      to as an “Event” and the date on which such Event occurs being
      referred to as “Event Date”), then, in addition to any other rights
      available to the Subscribers, on each such Event Date and on each monthly
      anniversary of each such Event Date (if the applicable Event shall not have
      been cured by such date) until the applicable Event is cured, the Company shall
      pay to each Subscriber an amount of warrants, as partial liquidated damages and
      not as a penalty, to purchase additional shares of Common Stock equal to 2% of
      the aggregate purchase price paid by such Subscriber to the Company with
      respect to the Registrable Shares then held by such Subscriber (“Penalty
      Warrants”). The Penalty Warrants pursuant to the terms hereof shall apply
      on a pro rata basis for any portion of a month prior to the cure of an Event.
      The terms of the Penalty Warrant shall be identical to the terms of the
      Warrants sold to the Subscribers pursuant to this Agreement.
    

    
      (b).     Obligations of the Company. In connection
      with the Company’s obligations under Section 7(a) above to file the
      Registration Statement with the Commission and to use its commercially
      reasonable efforts to cause the Registration Statement to become effective as
      soon as practicable after filing, the Company shall, as expeditiously and as
      reasonably as possible, subject to Section 7(g) hereof:
    

    
      (i)       Prepare and
      file with the Commission such amendments and supplements to the Registration
      Statement and the prospectus used in connection therewith as may be necessary
      to keep the Registration Statement effective until the Mandatory Registration
      Termination Date;
    

    
      (ii)      Furnish to the
      selling Subscribers such reasonable number of copies of the Registration
      Statement, prospectus and preliminary prospectus, in conformity with the
      requirements of the 1933 Act, and such other documents (including, without
      limitation, prospectus amendments and supplements as are prepared by the
      Company in accordance with Section 4(a) above) as the selling Subscribers may
      reasonably request, in order to facilitate the disposition of such selling
      Subscribers’ Registrable Shares pursuant to the Registration
      Statement;
    

    
      (iii)     use its commercially
      reasonable efforts to register or qualify or cooperate with the selling
      Subscribers in connection with the registration or qualification (or exemption
      from the registration or qualification) of such Registrable Securities for the
      resale by the Subscriber under the securities or Blue Sky laws of such
      jurisdictions within the United States as any selling Subscriber reasonably
      requests in writing, to keep each registration or qualification (or exemption
      therefrom) effective until the Mandatory Registration Termination Date and to
      do any and all other acts or things reasonably necessary to enable the
      disposition in such jurisdictions of the Registrable Securities covered by the
      Registration Statement; provided, that the Company shall not be required to
      qualify generally to do business in any jurisdiction where it is not then so
      qualified, subject the Company to any material tax in any such jurisdiction
      where it is not then so subject or file a general consent to service of process
      in any such jurisdiction; and
    

    
      (iv)     Use commercially
      reasonable efforts to cause all such Registrable Shares registered hereunder to
      be listed on each trading venue on which securities of the same class issued by
      the Company are then listed.
    

    	
          
            (c)
          

        	
          
            Furnish Information.
          

        

    
      (i)       It shall be a
      condition precedent to the obligations of the Company to take any action
      pursuant to this Agreement that the selling Subscribers shall furnish to the
      Company such information regarding them and the securities held by them as the
      Company shall reasonably request and as shall be required in order to effect
      any registration by the Company pursuant to this Agreement.
    

    
       
    

    
       
    

    
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      (ii)      The Registration
      Statement will provide, at the request of the Subscribers, for a plan of
      distribution with respect to the Registrable Shares substantially as follows:
      “The Registrable Shares may be sold from time to time by the selling
      Investors. Such sales may be made on one or more exchanges or in the
      over-the-counter market, or otherwise at prices and at terms then prevailing or
      at prices related to the then-current market price, or in negotiated
      transactions. The Registrable Shares may be sold by selling Investors in one or
      more of the following types of transactions: (i) a block trade in which the
      broker or dealer so engaged will attempt to sell the shares as agent but may
      position and resell a portion of the block as principal to facilitate the
      transaction; (ii) purchases by a broker or dealer as principal and resale by
      such broker or dealer for its account pursuant to the resale registration
      statement; (iii) an exchange distribution in accordance with the rules of such
      exchange; (iv) ordinary brokerage transactions and transactions in which the
      broker solicits purchasers; and (v) transactions between sellers and purchasers
      without a broker/dealer. In addition, any securities covered by the
      Registration Statement which qualify for sale pursuant to Rule 144 may be sold
      under Rule 144 rather than pursuant to the Registration Statement. From time to
      time the selling Investors may engage in short sales, short sales versus the
      box, puts and calls and other transactions in securities of the issuer or
      derivatives thereof, and may sell and deliver the shares in connection
      therewith. In effecting sales, brokers or dealers engaged by the selling
      Investors may arrange for other brokers or dealers to participate. Brokers or
      dealers will receive commissions or discounts from selling Investors in amounts
      to be negotiated immediately prior to the sale.”
    

    
      (d)      Expenses of Registration. All expenses incurred by the Company in
      connection with the registration of the Registrable Shares pursuant to this
      Agreement (excluding underwriting, brokerage and other selling commissions and
      discounts) shall be borne by the Company. Such fees and expenses shall include,
      without limitation, all registration and qualification and filing fees,
      printing expenses, fees and disbursements of counsel for the Company, and the
      fees and expenses of a single counsel for all the sellers Subscribers, but only
      to the extent that the fees of such counsel do not exceed $10,000.
    

    	
          
            (e)
          

        	
          
            Indemnification.
          

        

    
      (i)       To the extent
      permitted by law, the Company will indemnify and hold harmless each selling
      Subscriber (including the partners or officers, directors and stockholders of
      such Subscriber), and each person, if any, who controls such selling Investor
      within the meaning of the 1933 Act, against any losses, claims, damages or
      liabilities, joint or several, to which they may become subject under the 1933
      Act, the Exchange Act, and other federal or state securities laws, or
      otherwise, insofar as such losses, claims, damages or liabilities (or actions
      in respect thereof) (A) arise out of or are based upon any untrue or alleged
      untrue statement of any material fact contained in the Registration Statement,
      in any preliminary prospectus or final prospectus relating thereto or in any
      amendments or supplements to the Registration Statement or any such preliminary
      prospectus or final prospectus, (B) arise out of or are based upon the omission
      or alleged omission to state therein a material fact required to be stated
      therein, or necessary to make the statements therein not misleading or (C)
      arise out of any violation or alleged violation by the Company of the 1933 Act,
      the Exchange Act, any other federal or state securities law or any rule or
      regulation promulgated under the 1933 Act, the Exchange Act or any other
      federal or state securities law; and the Company will reimburse such selling
      Subscriber (including the partners, officers, directors and stockholders of
      such Investor) or such controlling person for any legal or other expenses (but
      in no event for more than one law firm) reasonably incurred by them in
      connection with investigating or defending any such loss, claim, damage,
      liability or action; provided, however, that the
      indemnity agreement contained in this Section 7(e)(i) shall not apply to
      amounts paid in settlement of any such loss, claim, damage, liability or action
      if such settlement is effected without the consent of the Company, nor shall
      the Company be liable in any such case for any such loss, damage, liability or
      action to the extent that it arises out of or is based upon an untrue statement
      or alleged untrue statement or omission or alleged omission made in
    

    
       
    

    
       
    

    
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      connection with the Registration Statement, any
      preliminary prospectus or final prospectus relating thereto or any amendments
      or supplements to the Registration Statement or any such preliminary prospectus
      or final prospectus, (x) in reliance upon and in conformity with written
      information furnished expressly for use in connection with the Registration
      Statement or any such preliminary prospectus or final prospectus or any
      amendments or supplements to the Registration Statement, preliminary prospectus
      or final prospectus by the selling Subscriber, any broker/dealer acting on
      their behalf or controlling person with respect to them or (y) the plan of
      distribution described in Section 7(c)(ii).
    

    
      (ii)      To the extent
      permitted by law, each selling Subscriber will severally and not jointly
      indemnify and hold harmless the Company, its “Affiliates” (as defined
      under the rules and regulations of the Commission), each of their respective
      directors, officers, partners, members and stockholders, each person, if any,
      who controls the Company within the meaning of the 1933 Act, any broker/dealer,
      any underwriter and all other selling Investors, against any losses, claims,
      damages or liabilities to which the Company or any such Affiliate, director,
      officer, partner, member, stockholder, controlling person, broker/dealer,
      underwriter or such other selling Subscriber may become subject to, under the
      1933 Act, the Exchange Act, any other Federal securities laws, Blue Sky Laws,
      or otherwise, insofar as such losses, claims, damages or liabilities (or
      actions in respect thereof) (A) arise out of or are based upon any untrue or
      alleged untrue statement of any material fact contained in the Registration
      Statement or any preliminary prospectus or final prospectus relating thereto or
      in any amendments or supplements to the Registration Statement or any such
      preliminary prospectus or final prospectus, (B) arise out of or are based upon
      the omission or alleged omission to state therein a material fact required to
      be stated therein or necessary to make the statements therein not misleading,
      or (C) arise out of any violation or alleged violation by the Company of the
      1933 Act, the Exchange Act, any other federal or state securities law or any
      rule or regulation promulgated under the 1933 Act, the Exchange Act or any
      other federal or state securities law, in each case to the extent and only to
      the extent (x) that such untrue statement or alleged untrue statement or
      omission or alleged omission was made in the Registration Statement, in any
      preliminary prospectus or final prospectus relating thereto or in any
      amendments or supplements to the Registration Statement or any such preliminary
      prospectus or final prospectus, in reliance upon and in conformity with (I)
      written information furnished by the selling Subscriber expressly for use in
      connection with the Registration Statement, or any preliminary prospectus or
      final prospectus or any such amendment or supplement, or (II) the plan of
      distribution described in Section 7(c)(ii), or (y) such Subscriber fails to
      comply with the prospectus delivery requirements of the 1933 Act as applicable
      to it in connection with sales of Registrable Shares pursuant to the
      Registration Statement; and such selling Investor will reimburse any legal or
      other expenses reasonably incurred by the Company or any such Affiliate,
      director, officer, partner, member, stockholder, controlling person,
      broker/dealer, underwriter or other selling Investor in connection with
      investigating or defending any such loss, claim, damage, liability or action,
      provided, however, that the liability of each selling
      subscriber hereunder (when aggregated with amounts contributed, if any,
      pursuant to Section 7(e)(iv)) shall be limited to the proceeds received by such
      Subscriber from the sale of the Registrable Securities pursuant to the
      Registration Statement (the “Gross Proceeds”), and provided further, however, that the indemnity agreement
      contained in this Section 7(e)(ii) shall not apply to amounts paid in
      settlement of any such loss, claim, damage, liability or action if such
      settlement is effected without the consent of those selling Subscriber(s)
      against which the request for indemnity is being made (which consent shall not
      be unreasonably withheld or delayed).
    

    
      (iii)     Promptly after receipt
      by an indemnified party under this Section 7(e) of notice of the commencement
      of any action, such indemnified party will, if a claim in respect thereof is to
      be made against any indemnifying party under this Section 7(e), notify the
      indemnifying party in writing of the commencement thereof and the indemnifying
      party shall have the right to participate in and, to the extent the
      indemnifying party desires, jointly with any other indemnifying party similarly
      noticed, to assume at its
    

    
       
    

    
       
    

    
      8
    

    
       
    

    

    
    

    
    
      expense the defense thereof with counsel mutually
      satisfactory to the indemnifying parties with the consent of the indemnified
      party which consent will not be unreasonably withheld, conditioned or delayed.
      In the event that the indemnifying party assumes any such defense, the
      indemnified party may participate in such defense with its own counsel and at
      its own expense; provided,
      however, that the counsel
      for the indemnifying party shall act as lead counsel in all matters pertaining
      to such defense or settlement of such claim and the indemnifying party shall
      only pay for such indemnified party’s reasonable legal fees and expenses
      for the period prior to the date of its participation in such defense;
      provided further, however, that the indemnified party
      (together with all indemnified parties which may be represented without
      conflict by one counsel) shall have the right to retain one separate counsel,
      with the fees and expenses to be paid by the indemnifying party, if the
      representation of the indemnified party by the counsel retained by the
      indemnifying party would be inappropriate due to actual differing interests
      between the indemnified party and any other party represented by such counsel
      in such proceeding. Notwithstanding the foregoing, the indemnifying party shall
      not be obligated to pay the fees of more than one separate counsel. The failure
      to notify an indemnifying party of the commencement of any such action will not
      relieve such indemnifying party of any liability to the indemnified party under
      this Section 7 (except to the extent that such failure materially prejudiced
      the indemnifying party’s ability to defend such action), nor shall the
      omission so to notify an indemnifying party relieve such indemnifying party of
      any liability which it may have to any indemnified party otherwise other than
      under this Section 7(e). No indemnifying party shall, without the consent of
      the indemnified party, consent to entry of any judgment or enter into any
      settlement which does not include as an unconditional term thereof the giving
      by the claimant or plaintiff to such indemnified party of a general release
      from all liability in respect to such claim or litigation and otherwise in form
      and substance reasonably satisfactory to the indemnified party.
    

    
      (iv)     If the indemnification
      provided in this Section 7(e) is held by a court of competent jurisdiction to
      be unavailable to an indemnified party with respect to any loss, liability,
      claim, damage or expense referred to herein, then the indemnifying party, in
      lieu of indemnifying such indemnified party hereunder, shall contribute to the
      amount paid or payable by such indemnified party as a result of such loss,
      liability, claim, damage or expense in such proportion as is appropriate to
      reflect the relative fault of the indemnifying party on the one hand and of the
      indemnified party on the other in connection with the statements or omissions
      that shall have resulted in such loss, liability, claim, damage or expense, as
      well as any other relevant equitable considerations; provided that in no event
      shall any contribution by an Investor under this Section 7(e)(iv), when
      aggregated with amounts paid, if any, pursuant to Section 7(e)(ii), exceed the
      Gross Proceeds. The relative fault of the indemnifying party and of the
      indemnified party shall be determined by reference to, among other things,
      whether the untrue or alleged untrue statement of a material fact or the
      omission to state a material fact relates to information supplied by the
      indemnifying party or by the indemnified party and the parties’ relative
      intent, knowledge, access to information, and opportunity to correct or prevent
      such statement or omission.
    

    
      (vi)     The obligations of the
      Company and Subscribers under this Section 7(e) shall survive the completion of
      any offering of Registrable Shares pursuant to the Registration Statement under
      Section 7(a).
    

    
      (f)      Reports Under the Exchange Act. With a view
      to making available to the Subscriber the benefits of Rule 144 and any other
      rule or regulation of the Commission that may at any time permit the Investors
      to sell the Registrable Shares to the public without registration, the Company
      agrees to use commercially reasonable efforts: (i) to make and keep public
      information available, as those terms are understood and defined in the General
      Instructions to Form SB-2, or any successor or substitute form, and in Rule
      144; (ii) to file with the Commission in a timely manner all reports and other
      documents required to be filed by an issuer of securities registered under the
      1933 Act or the Exchange Act; and (iii) undertake
    

    
       
    

    
       
    

    
      9
    

    
       
    

    

    
    

    
    
      any additional actions reasonably necessary to maintain
      the availability of the Registration Statement or the use of Rule 144.
    

    
      (g)      Selling Procedures. Any sale of Registrable
      Shares pursuant to the Registration Statement filed in accordance with Section
      7(a) hereof shall be subject to the following conditions and procedures:
    

    	
          
            (i)
          

        	
          
            Updating the Prospectus.
          

        

    
      (A)     If the Company informs
      the selling Investor that the Registration Statement or final prospectus then
      on file with the Commission is not current or otherwise does not comply with
      the 1933 Act, the Company shall use commercially reasonable efforts to provide
      to the selling Subscriber a current prospectus that complies with the 1933 Act
      as soon as practicable, but in no event later than ten (10) business days after
      delivery of such notice.
    

    
      (B)     If the Company requires
      more than ten (10) business days to update the prospectus under Section
      7(g)(i)(A) above, the Company shall have the right to delay the preparation of
      a current prospectus that complies with the 1933 Act without explanation to
      such Investor, subject to the limitations set forth in Section 7(g)(ii) below,
      for a period of not more than sixty (60) days (or two periods which total not
      more than ninety (90) days in the aggregate) during any twelve-month
      period.
    

    
      (ii)      General. Notwithstanding anything in this
      Agreement that may be to the contrary, upon (A) any request by the Commission
      or any other federal or state governmental authority during the period of
      effectiveness of the Registration Statement for amendments or supplements to
      the Registration Statement or related prospectus or for additional information
      relating to the Registration Statement, (B) the issuance by the Commission or
      any other federal or state governmental authority of any stop order suspending
      the effectiveness of the Registration Statement or the initiation of any
      proceedings for that purpose, (C) the receipt by the Company of any
      notification with respect to the suspension of the qualification or exemption
      from qualification of any of the Registrable Shares for sale in any
      jurisdiction or the initiation or threatening of any proceeding for such
      purpose, (D) the happening of any event which makes any statement made in the
      Registration Statement or related prospectus or any document incorporated or
      deemed to be incorporated therein by reference untrue in any material respect
      or which requires the making of any changes in the Registration Statement or
      prospectus so that, in the case of the Registration Statement, it will not
      contain an untrue statement of a material fact or omit to state a material fact
      required to be stated therein or necessary to make the statements therein not
      misleading, and that in the case of the prospectus, it will not contain an
      untrue statement of a material fact or omit to state a material fact necessary
      in order to make the statements therein, in the light of the circumstances
      under which they were made, not misleading or (E) the determination of the
      Company’s Board of Directors that it is advisable to suspend use of the
      prospectus for a discrete period of time due to pending corporate developments,
      public filings with the Commission or that there exists material nonpublic
      information about the Company that the Board of Directors, acting in good
      faith, determines not to disclose in a registration statement, the Company, in
      each such case, may suspend use of the related prospectus (each a
      “Suspension”), in which case the Company shall promptly so notify
      each Investor and each Investor shall not dispose of Registrable Shares covered
      by the Registration Statement or prospectus until copies of a supplemented or
      amended prospectus are distributed to the selling Subscribers or until the
      selling Subscribers are advised in writing by the Company that the use of the
      applicable prospectus may be resumed; provided, however, that, notwithstanding the
      foregoing, the Company may suspend use of the prospectus pursuant to Sections
      7(g)(i)(B), 7(g)(ii)(D) and 7(g)(ii)(E), and a selling Subscriber may be
      prohibited from selling or otherwise disposing of the Registrable Shares
      covered by the Registration
    

    
       
    

    
       
    

    
      10
    

    
       
    

    

    
    

    
    
      Statement or prospectus, on not more than two occasions in
      total during any twelve-month period and for no more than ninety (90) days in
      the aggregate during any such twelve-month period. The Company shall use
      commercially reasonable best efforts to ensure the use of the prospectus may be
      resumed as soon as practicable. The Company shall use commercially reasonable
      best efforts to obtain the withdrawal of any order suspending the effectiveness
      of the Registration Statement, or the lifting of any suspension of the
      qualification (or exemption from qualification) of any of the securities for
      sale in any jurisdiction, at the earliest practicable moment. The Company
      shall, upon the occurrence of any event contemplated by clause (D), prepare a
      supplement or post-effective amendment to the Registration Statement or a
      supplement to the related prospectus or any document incorporated therein by
      reference or file any other required document so that, as thereafter delivered
      to the purchasers of the Registrable Shares being sold thereunder, such
      prospectus will not contain an untrue statement of a material fact or omit to
      state a material fact necessary to make the statements therein, in light of the
      circumstances under which they were made, not misleading.
    

    
      (iii)     Each Subscriber agrees
      that it will comply with the prospectus delivery requirements of the 1933 Act
      as applicable to it in connection with sales of Registrable Shares pursuant to
      the Registration Statement. Each Subscriber further agrees that, upon receipt
      of a notice from the Company of the occurrence of any event of the kind
      described in Section 7(g)(i) or 7(g)(ii), such Subscriber will discontinue
      disposition of such Registrable Shares under the Registration Statement until
      such Investor’s receipt of the copies of the supplemented prospectus or
      amended Registration Statement, or until it is advised in writing by the
      Company that the use of the applicable prospectus may be resumed, and, in
      either case, has received copies of any additional or supplemental filings that
      are incorporated or deemed to be incorporated by reference in such prospectus
      or Registration Statement. The Company may provide appropriate stop orders to
      enforce the provisions of this Section 7(g).
    

    
      8.        Conditions Precedent to Obligations of the Company. The obligations of the Company are subject to the fulfillment prior
      to or on the Closing Date (as defined in Section 10 (b) below) of the following
      conditions any of which may be waived by the Company in writing:
    

    
      (a)      all representations
      and warranties of the Subscribers contained in this Agreement shall be true and
      correct in all respects as of the Closing Date with the same effect as though
      such representations and warranties had been made on or as of such date; and
      
    

    
      (b)      all agreements and
      covenants of the Subscribers to be performed or complied with on or prior to
      the Closing Date have in all material respects been so performed or complied
      with.
    

    
      9.        Conditions Precedent to Obligations of the Subscribers. The obligations of the Subscribers are subject to the fulfillment
      prior to or on the Closing Date of the following conditions any of which may be
      waived by the Subscribers in writing:
    

    
      (a)      all representations
      and warranties of the Company contained in this Agreement shall be true and
      correct in all respects as of the Closing Date with the same effect as though
      such representations and warranties had been made on or as of such date;
      and
    

    
      (b)      all obligations,
      agreements and covenants of the Company to be performed or complied with on or
      prior to the Closing Date shall have, in all respects been so performed or
      complied with.
    

    	
          
            10.
          

        	
          
            Miscellaneous.
          

        

    
      (a)      Notices. All notices, demands, requests,
      consents, approvals, and other communications required or permitted hereunder
      shall be in writing and, unless otherwise specified herein, shall be (i)
      personally served, (ii) deposited in the mail, registered or certified, return
      receipt requested, postage
    

    
       
    

    
       
    

    
      11
    

    
       
    

    

    
    

    
    
      prepaid, (iii) delivered by reputable air courier service
      with charges prepaid, or (iv) transmitted by hand delivery, telegram, or
      facsimile, addressed as set forth below or to such other address as such party
      shall have specified most recently by written notice. Any notice or other
      communication required or permitted to be given hereunder shall be deemed
      effective (a) upon hand delivery or delivery by facsimile, with accurate
      confirmation generated by the transmitting facsimile machine, at the address or
      number designated below (if delivered on a business day during normal business
      hours where such notice is to be received), or the first business day following
      such delivery (if delivered other than on a business day during normal business
      hours where such notice is to be received) or (b) on the second business day
      following the date of mailing by express courier service, fully prepaid,
      addressed to such address, or upon actual receipt of such mailing, whichever
      shall first occur. The addresses for such communications shall be: (i) if to
      the Company, to: PerfectData Corporation, c/o Sona Mobile, Inc., 825 Third
      Avenue, 32nd Floor, New
      York, New York 10128 Attention: Mr. John Bush, President and CEO, fax:
      (212) 486-4469, with a copy to: Morse, Zelnick, Rose & Lander, LLP, 405
      Park Avenue, Suite 1401, New York, New York 10022, Attention: Joel J.
      Goldschmidt, Esq., telecopier: (212) 838-9190, and (ii) if to the Subscriber,
      to: the one or more addresses and telecopier numbers indicated on the signature
      pages hereto.
    

    
      (b)      Closing. The consummation of the
      transactions contemplated herein (the “Closing”) shall take place at
      the offices of Morse, Zelnick, Rose & Lander, LLP, upon receipt of good
      funds at its escrow account,
    

    
      The Chase Manhattan Bank,
    

    
      1211 Avenue of the Americas
    

    
      New York, New York 10036
    

    
      Account Name: Morse, Zelnick, Rose & Lander,
      LLP,
    

    	
          
             Attorney Trust Account
          

        

    
      Account Number: 967086639
    

    
      ABA Number: 021000021
    

    
      and upon the satisfaction of all conditions set forth in
      Sections 7 and 8 of this Agreement, on such date as shall be determined by the
      Company (the “Closing Date”).
    

    
      (c)      Expenses. The Company and the Subscribers
      shall each pay their own fees and expenses in connection with this transaction,
      including, but not limited to, the cost of all due diligence investigation and
      all legal and accounting fees.
    

    
      (d)      Entire Agreement; Assignment. This Agreement
      represents the entire agreement between the parties hereto with respect to the
      subject matter hereof and may be amended only by a writing executed by the
      Company and each Subscriber. Neither the Company nor the Subscribers have
      relied on any representations not contained or referred to in this Agreement
      and the documents delivered herewith. No right or obligation of the Company
      shall be assigned without prior notice to and the written consent of the
      Subscribers. Any Subscriber may assign any or all of its rights hereunder to
      any person in connection with a transfer of any Security to such person,
      provided such transferee agrees in writing to be bound, with respect to the
      transferred Securities, by the provisions hereof that apply to the
      Subscribers.
    

    
      (e)      Counterparts/Execution. This Agreement may
      be executed in any number of counterparts and by the different signatories
      hereto on separate counterparts, each of which, when so executed, shall be
      deemed an original, but all such counterparts shall constitute but one and the
      same instrument. This Agreement may be executed by facsimile signature and
      delivered by facsimile transmission.
    

    
      (f)      Law Governing this Agreement. This Agreement
      shall be governed by and construed in accordance with the laws of the State of
      New York without regard to principles of conflicts of laws. Any action brought
      by either party against the other concerning the transactions contemplated by
      this
    

    
       
    

    
       
    

    
      12
    

    
       
    

    

    
    

    
    
      Agreement shall be brought only in the state courts of New
      York or in the federal courts located in the state of New York. The parties and the individuals executing this Agreement and other
      agreements referred to herein or delivered in connection herewith on behalf of
      the Company agree to submit to the jurisdiction of such courts and waive trial
      by jury. The prevailing party shall be entitled to
      recover from the other party its reasonable attorney’s fees and costs. In
      the event that any provision of this Agreement or any other 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 any agreement.
    

    
      (g)      Independent Nature of Subscribers’ Obligations and Rights.
      The obligations of each Subscriber hereunder are
      several and not joint with the obligations of any other Subscriber hereunder,
      and no such Subscriber shall be responsible in any way for the performance of
      the obligations of any other hereunder.
    

    
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      SIGNATURE PAGE TO SUBSCRIPTION
      AGREEMENT
    

    
      Please acknowledge your acceptance of the foregoing
      Subscription Agreement by signing and returning a copy to the undersigned
      whereupon it shall become a binding agreement between us.
    

    
      Dated: June __, 2005
    

    
       
    

    	
          
             
          

        	
          
             
          

        	
          
            The Company
 
 PERFECTDATA CORPORATION
 a Delaware
            corporation
          

        
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
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            Name:
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            Subscriber
          

        
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
            
 

          

        
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
          

          
 
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
            Print Name
          

        

    
       
    

    	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
            By: 
          

        	
          
            
 

          

        
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
          

          
 
	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
             
          

        	
          
            Name:
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      Dated: June __ 2005
    

    
       
    

    
       
    

    	
          
            SUBSCRIBER’S NAME, ADDRESS

            AND TELECOPIER NUMBER
          

        	
          
             
          

        	
          
            INVESTMENT
 AMOUNT
          

        

 
 

    
       
    

    
       
    

    
       
    

    
       
    

    
      Tax ID Number:
    

    
       
    

    
       
    

    

    
    

    
    
      EXHIBIT A
    

    
      [Form of Warrant]
    

    
       
    

    
       
    

    

    
    

    
    
      EXHIBIT B
    

    
      [Certificate of Designations]
    

    
       
    

    
       
    

    

    
    

    
    
      EXHIBIT C
    

    
      [Lock-Up Agreement]As of June 16, 2005

Mr. Joseph M. Melvin
133 Stephen Mather Road
Darien, CT 06820

Dear Mr. Melvin:

         We write to set forth our agreement with respect to your continued
employment by Finlay Fine Jewelry Corporation (the "Company").

         1. The Company hereby agrees to continue to employ you, and you agree
to continue to be employed by the Company, on the terms and conditions
hereinafter set forth. You will serve as President and Chief Operating Officer
of the Company and shall be responsible for the finance, operations, information
technology and human resources areas of the business, and you will hold such
other offices in the Company and its parent company, subsidiaries and divisions
to which you may from time to time be appointed or elected. You agree to serve
the Company faithfully and to the best of your ability, to promote the Company's
best interests and to devote your full working time, energy and skills to the
Company's business.

         2. (a) As full compensation for your services hereunder (including
services, if any, as an officer of the Company and an officer and director of
its subsidiaries and divisions), you shall receive base salary ("Base Salary")
at the rate of $452,056 per annum, payable in equal monthly installments and an
annual bonus payable on or about April 25th during each year of the term hereof
based on the attainment of financial goals as set by the Company's Compensation
Committee ("Annual Bonus"), less all applicable withholding taxes and lawful
deductions. The Company shall include you in any employee benefit plans and
other fringe benefit programs that it maintains for senior executives. The
Company shall reimburse you for your ordinary and necessary business expenses
incurred in the course of your performance of services hereunder, subject to
submission of adequate substantiation thereof and to conformance with the
Company's regular policies from time to time in effect with respect to
reimbursement of expenses.

                  (b) Nothing in this Agreement shall prevent the Company from
increasing the compensation to be paid to you if the Company shall determine it
advisable to do so in order to compensate you fairly for services rendered.

Mr. Joseph M. Melvin
Page 2
As of June 16, 2005

                  (c) Notwithstanding anything herein to the contrary, in the
event that you are employed by the Company on June 30, 2008, you shall receive,
with the Company's regular July 2008 payroll cycle, in addition to your Base
Salary and Annual Bonus, a special bonus equal to 50% of your then current Base
Salary.

         3.       (a) The term of your employment hereunder shall continue until
the earliest of the following dates: (a) June 30, 2008 (b) the day on which you
die; (c) such date as the Company terminates your employment for "good cause";
(d) if you become "Totally Disabled" or (e) the day on which you voluntarily
resign. For purposes of this Agreement, you shall be Totally Disabled if, based
upon appropriate medical evidence, you are physically or mentally incapacitated
so as to render you incapable of performing the essential functions of your job
duties and such incapacity cannot be reasonably accommodated by the Company
without undue hardship. In the event your employment continues after the
expiration of the term without a superceding employment agreement, you will be
deemed to be an employee at-will of the Company whose employment may be
terminated by either the Company or you at any time, with or without notice or
cause.

                  (b) The Company shall have "good cause" to terminate your
employment (i) if you have substantially failed to perform your job duties, (ii)
in the event of your willful misconduct in connection with your employment or
intentional breach of any of the Company's policies, (iii) if you have been
convicted of, or plead nolo contendere to, any crime constituting a felony under
the laws of The United States or any State thereof, or any crime constituting a
misdemeanor under any such law involving moral turpitude, or (iv) if you breach
any provision of this Agreement which you have failed to cure within ten
business days after written notice to you of such breach.

         4.       (a) If the Company terminates your employment at any time for
any reason whatsoever, without "good cause", following your execution of a
release and waiver of all claims against the Company, you shall be entitled to
receive, as severance pay, in a lump sum, an amount equal to the greater of (i)
your Base Salary at your then current rate up to and including June 30, 2008 or
(ii) one year's Base Salary at your then current rate plus one year's bonus
calculated by averaging the Annual Bonus

Mr. Joseph M. Melvin
Page 3
As of June 16, 2005

amounts paid or payable to you over the course of the prior three fiscal years.

                  (b) In the event your employment is terminated by reason of
your death, Total Disability, by you voluntarily or by the Company with or
without "good cause", you shall receive (i) any accrued but unpaid salary for
services rendered through and including the date of your death, Total
Disability, resignation or termination, as the case may be, (ii) any accrued but
unpaid expenses and (iii) any benefits to which you may be entitled pursuant to
the Company's employee benefits plans then in effect.

                  (c) This Agreement supercedes and is in lieu of any other
severance payments to which you may be entitled under any other severance plans
or arrangements maintained by the Company, whether now existing or hereafter
implemented.

         5.       (a) During the period commencing on the date hereof and ending
on the later to occur of (i) one year following the termination of your
employment, or (ii) June 30, 2008, you shall not (1) directly or indirectly,
engage or be interested in any fine jewelry business or (2) on behalf of
yourself or any business in which you may, directly or indirectly, be engaged or
interested, employ or otherwise engage, or seek to employ or engage, any
individual employed by the Company at any time during your employment hereunder.
You will be considered to be engaged or interested in a business if you engage
or are interested in such business as a stockholder, director, officer,
employee, agent, broker, partner, individual proprietor, lender, consultant or
in any capacity, except that nothing herein contained will prevent you from
owning less than 1% of any class of equity or debt securities listed on a
national securities exchange or traded in any established over-the-counter
securities market.

                  (b) During the term of your employment hereunder and for a
period of two years thereafter, or as otherwise required by law, whichever is
longer, you will not knowingly divulge, furnish or make accessible to any third
person or organization, other than in the regular course of the Company's
business, any confidential information concerning the Company, its parent,
subsidiaries or affiliates or its or their business or affairs, including
without limitation, confidential methods of operation and organization, employee
information including salaries and qualifications, confidential sources of
supply and customer

Mr. Joseph M. Melvin
Page 4
As of June 16, 2005

lists, and you shall not disparage the Company, its business or affairs or any
individual connected with the Company.

                  (c) In the event of any breach or threatened or attempted
breach of this paragraph 5, the Company shall be entitled to a decree of
specific performance and to a temporary and permanent injunction enforcing such
provisions without being required to prove actual damage or to post bond or
furnish other security. In any proceeding brought to enforce the provisions of
this paragraph 5, the party who prevails shall be entitled to recover its
reasonable costs, including attorneys' fees, from the losing party.

         6.       This letter sets forth our final and entire agreement with
respect to its subject matter, cannot be changed, waived or terminated orally
and shall be governed by the internal law of the State of New York (without
reference to its rules as to conflicts of laws). The parties agree that any
action or proceeding with respect to this Agreement shall be brought in a court
of competent jurisdiction in the City, County and State of New York and that all
claims with respect to an inconvenient forum are irrevocably waived. This
Agreement shall bind and benefit the parties and their respective successors and
assigns, but no right or obligation hereunder may be assigned without the other
party's written consent, except by the Company to an enterprise that succeeds to
a substantial portion of its business or assets by purchase, merger,
consolidation or otherwise.

         7.       If any provision of this Agreement shall be held to be invalid
or unenforceable, such invalidity or unenforceability shall attach only to such
provisions and shall not affect or render invalid or unenforceable any other
provision of this Agreement and this Agreement shall be construed as if such
provision had been drawn so as not to be invalid or unenforceable. The language
in this Agreement shall be construed according to its fair meaning and not
strictly for or against either party because that party drafted it.

Mr. Joseph M. Melvin
Page 5
As of June 16, 2005

         If the forgoing correctly sets forth your understanding of our
agreement, please so indicate by signing and returning to us a copy of this
letter.

                                          FINLAY FINE JEWELRY CORPORATION

                                          By /s/ Arthur E. Reiner
                                             -------------------------
                                            Arthur E. Reiner
                                            Chairman & CEO

ACCEPTED AND AGREED TO:

/s/ Joseph M. Melvin
-----------------------
Joseph M. Melvin

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