Document:

Exhibit
10.8

 

REGISTRATION
RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of December    , 2003, by and
between EQUIFIN, INC., a Delaware corporation (the “Company”), and Laurus
Master Fund, Ltd. (the “Purchaser”).

 

This Agreement is made pursuant to the Securities
Purchase Agreement, dated as of the date hereof, by and among, the Purchaser,
Equinox Business Credit Corp. 
(“Equinox”) and the Company (the “Securities Purchase Agreement”), and
pursuant to the Note and the Warrants referred to therein.

 

The Company and the Purchaser hereby agree as follows:

 

1.                                       Definitions.  Capitalized terms used and not otherwise
defined herein that are defined in the Securities Purchase Agreement shall have
the meanings given such terms in the Securities Purchase Agreement.  As used in this Agreement, the following
terms shall have the following meanings:

 

“Commission” means the Securities and Exchange Commission.

 

“Common
Stock” means shares of the Company’s common stock, par value
$.01 per share.

 

“Delay Period” has the meaning set forth
in Section 2(d)

 

“Effectiveness Date” means the 90th day
following the applicable Filing Date; provided, however, that if the Company
has been notified (orally or in writing) by the Commission that a Registration
Statement is to be reviewed, then the “Effectiveness Date” shall mean the 120th
day following the Filing Date related thereto; provided, further, however, that
the Effectiveness Date with respect to each Registration Statement required to
be filed in accordance herewith shall be extended subject to the terms and
conditions set forth in this Agreement.

 

“Effectiveness Period” shall have the
meaning set forth in Section 2(a).

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended,
and any successor statute.

 

“Filing Date” means, with respect to (1)
the Registration Statement which is required to be filed with respect to the
Note and Warrants issued pursuant to the Securities Purchase Agreement, the
date which is forty five (45) days after the funding date with respect to said
Note, and (2) with respect to each $500,000 aggregate amounts funded after the
initial funding date, in accordance with the Subsequent Funding Letter
Agreement, the date which is thirty (30) days after funding of such additional
$500,000.

 

“Holder” or “Holders”
means the Purchaser or any of its affiliates or transferees to the extent any
of them hold Registrable Securities provided that the transfer or assignment to
such transferee or assignee is in accordance with applicable law and the
Securities Purchase Agreement and all other applicable agreements and that the
Company is given written notice at

 

 

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the time of such transfer or assignment, stating the name and address
of the transferee or assignee and identifying the Registrable Securities with
respect to which such registration rights are being transferred or assigned;
and, provided further, that the transferee or assignee of such rights assumes in
writing the obligations of such Holder under this Agreement.  If pursuant
to one or more transfers or assignments at any time there exists more than 10
Holders, the Company may, upon 30 days’ written notice to the Holders require
that the Holders appoint a single agent for purposes of all communications
between the Company and the Holders regarding registration rights, including,
without limitation, for purposes of Sections 3 and 8 hereof, and a single legal
counsel to such agent representing all of the Holders (the fees and expenses of
such agent and counsel to be borne by the Holders); provided that if such agent
and counsel are not appointed by a writing signed by the Holders of a majority
of the Registrable Securities (assuming full conversion of the Notes and
exercise in full of the Warrants) and delivered to the Company within 30 days
of such notice from the Company, the Company may limit thereafter its
communications with Holders under such Sections 3 and 8 to the Holders of the
three largest amounts of Registrable Securities (assuming full conversion of
the Notes and exercise in full of the Warrants)

 

”Indemnified Party”
shall have the meaning set forth in Section 5(c).

 

“Indemnifying Party”
shall have the meaning set forth in Section 5(c).

 

“Information Delay
Period” has the meaning set foth in Section 2(b).

 

“Note” means the
“Note” as defined in and issued pursuant to the Securities Purchase Agreement,
and all other convertible notes issued pursuant to the Subsequent Funding
Letter Agreement.”Proceeding” means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.

 

“Prospectus” means
the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or supplemented
by any prospectus supplement, with respect to the terms of the offering of any
portion of the Registrable Securities covered by such Registration Statement,
and all other amendments and supplements to the Prospectus, including
post-effective amendments, and all material incorporated by reference or deemed
to be incorporated by reference in such Prospectus.

 

“Registrable Securities”
means the shares of Common Stock issued upon the conversion of each Note and
issuable upon exercise of the Warrants until (i) the date on which such shares
have been registered under the Securities Act and disposed of in accordance
with a Registration Statement that has been declared effective by the
Commission, (ii) the date on which such shares may be immediately sold without
volume restrictions pursuant to Rule 144(k), as determined by counsel to the
Company pursuant to a written opinion letter to such effect, addressed and
acceptable to the Company’s transfer agent, or (iii) the date on which such
shares of Common Stock are distributed to the public pursuant to Rule 144 or
any other applicable exemption under the Securities Act without additional
restriction upon public resale.

 

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“Registration Statement”
means each registration statement required to be filed hereunder, including the
Prospectus, amendments and supplements to such registration statement or
Prospectus, including pre- and post-effective amendments, all exhibits thereto,
and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.

 

“Rule 144” means
Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

 

“Rule 415” means
Rule 415 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

 

“Rule 424” means
Rule 424 promulgated by the Commission pursuant to the Securities Act, as such
Rule may be amended from time to time, or any similar rule or regulation hereafter
adopted by the Commission having substantially the same effect as such Rule.

 

“Securities
Act” means the Securities Act of 1933, as amended, and any
successor statute.

 

“Subsequent Funding Letter Agreement”
means that certain letter agreement, dated, as of the date hereof, among
Purchaser, Equinox Business Credit Corp. 
and the Company, pursuant to which Purchaser has agreed, subject to the
terms and conditions set forth therein, to fund additional amounts of loans to
Equinox.

 

“Trading Market” means any of the NASD OTC Bulletin
Board, NASDAQ SmallCap Market, the Nasdaq National Market, the American Stock
Exchange or the New York Stock Exchange.

 

“Transaction Delay Period” has the
meaning set forth in Section 2(c).

 

“Warrants” means
the Common Stock purchase warrants issued pursuant to the Securities Purchase
Agreement and all subsequent common stock purchase warrants issued pursuant to
the Subsequent Funding Letter Agreement.

 

2.                                       Registration.

 

(a)                                  On
or prior to each Filing Date the Company shall prepare and file with the
Commission a Registration Statement covering the the resale of the Registrable
Securities, required to be included therein, by the Holders thereof from time
to time pursuant to Rule 415 under the Act and in accordance with the methods
of distribution set forth therein. The Registration Statement shall be on Form
S-3(except if the Company is not then eligible to register for resale the
Registrable Securities on Form S-3, in which case such registration shall be on
another appropriate form in accordance herewith). The Company shall use its
reasonable best efforts to cause each Registration Statement to become
effective and remain effective as provided herein. The Company shall use its
reasonable commercial efforts to cause each Registration Statement to be
declared effective under the Securities Act as promptly as possible after the
filing thereof, but in any event no later than the Effectiveness Date relating
thereto; provided, however,
subject to Section 2(e) hereof, that the Company may delay such filing or

 

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effectiveness under the circumstances and during the periods described
in Sections 2(b), (c) and (d) hereof. . 
The Company shall use its reasonable commercial efforts to keep each
Registration Statement continuously effective under the Securities Act until
the date which is the earliest date of when (i) all Registrable Securities
included therein have been sold,  (ii)
all Registrable Securities included therein may be sold immediately without
registration under the Securities Act and without volume restrictions pursuant
to Rule 144(k), as determined by the counsel to the Company pursuant to a
written opinion letter to such effect, addressed and acceptable to the
Company’s transfer agent, or (iii) December     , 2008 (the
“Effectiveness Period”).

 

(b)                                 If
at any time counsel to the Company has determined in good faith that the filing
of a Registration Statement or the compliance by the Company with its
disclosure obligations in connection with a Registration Statement would
require the disclosure of material information which the Company has a bona fide business purpose for preserving
as confidential, then the Company may delay the filing of any such Registration
Statement (if not then filed) and shall not be required to obtain or maintain
the effectiveness of any Registration Statement or amend or supplement any
Registration Statement for a period (an “Information Delay Period”) expiring
upon the earlier to occur of (i) the date on which such material information is
disclosed to the public or ceases to be material or the Company is able to so
comply with its disclosure obligations and the Commission requirements or (ii)
40 days after counsel to the Company makes such good faith determination.  There shall not be two or more Information
Delay Periods during any contiguous 180-day period.

 

(c)                                  If
at any time the Company is advised by a nationally or regionally recognized
investment banking firm selected by the Company that, in such firm’s written
reasonable opinion addressed to the Company, sales of Common Stock pursuant to
any Registration Statement at such time would materially adversely affect any
immediately planned underwritten public financing by the Company, the Company
shall not be required to maintain the effectiveness of such Registration
Statement or amend or supplement such Registration Statement for a period (a
“Transaction Delay Period”) commencing on the date of pricing of such equity
financing and expiring upon the earliest to occur of (i) the abandonment of
such financing or (ii) 120 days after the completion of such financing.  There shall not be more than one Transaction
Delay Period during any contiguous 12-month period.

 

(d)                                 A
Transaction Delay Period and an Information Delay Period are hereinafter
collectively referred to as “Delay Periods” or a “Delay Period.”  The Company will give prompt written notice,
in the manner prescribed herein, to each Holder of each Delay Period.  Such notice shall be given (i) in the case
of a Transaction Delay Period, at least 10 days in advance of the commencement
of such Delay Period, provided such notice need not state the precise date of
such commencement, as long as the Company provides such Holder with at least 3
days’ notice of such date and provided such date is within 45 days of the date
of the first notice given to such Holder and (ii) in the case of an Information
Delay Period, as soon as practicable after the circumstances giving rise
thereto are identified.  Such notice
shall state to the extent, if any, as is practicable, an estimate of the
duration of such Delay Period.  Each
Holder, by his acceptance of any Notes, Warrants or Registrable Securities,
agrees that (i) upon receipt of such notice of a Delay Period it will forthwith
discontinue disposition of Registrable Securities or any other securities
pursuant to any Registration Statement and (ii) will not deliver any Prospectus
forming a part of any Registration Statement in connection with any sale of
Registrable Securities until the expiration of such Delay Period.

 

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(e)                                  Except
as provided in Section2(f), if: (i) any Registration Statement is not filed on
or prior to the applicable Filing Date for such Regsitration Statement; (ii) a
Registration Statement required to be filed hereunder is not declared effective
by the Commission by the Effectiveness Date with respect to such Registration
Statement; (iii) after a Registration Statement is filed with and declared
effective by the Commission, such Registration Statement ceases to be effective
(by suspension or otherwise) as to all Registrable Securities to which it is
required to relate at any time prior to the expiration of the Effectiveness
Period applicable to such Registration Statement (without being succeeded
immediately by an additional Registration Statement filed and declared
effective) for a period of time which shall exceed 30 days in the aggregate per
year or more than 20 consecutive calendar days (defined as a period of 365 days
commencing on the date such Registration Statement is declared effective); or
(iv) after the commencement of the Effectiveness Period, the Common Stock is
not listed or quoted on any Trading Market, or is suspended from trading on all
Trading Markets for a period of five (5) consecutive Trading Days (provided the
Company shall not have been able to cure such trading suspension within 30 days
of the notice thereof or list or resume trading of the Common Stock on another
Trading Market within 90 days of such notice); (any such failure or breach
being referred to as an “Event,” and for purposes of clause (i) or (ii) the
date on which such Event occurs, or for purposes of clause (iii) the date which
such 30 day or 20 consecutive day period (as the case may be) is exceeded, or
for purposes of clause (iv) the date on which such five (5) Trading Day period
is exceeded ], being referred to as “Event Date”), then until the
applicable Event is cured, for each thirty (30) day period (prorated for
partial periods) that the Event continues, the Company shall pay:  (A) for any delay in filing or effectiveness
of any Registration Statement pursuant to Sections 2(b), 2(c) or 2(d) hereof,
or in the case of an Event pursuant to clauses (i), (ii) or (iii) of this
Section 2(e), an amount in cash, as liquidated damages, and not as a penalty,
equal to 1.0% of the then outstanding principal amount of the Notes, the
Registrable Securities underlying same were required to be, or were included
in, the Registration Statement with respect to which the Event occurred and is
continuing; and (B) in the case of an Event pursuant to clause (iv), an amount
in cash, as liquidated damages, and not as a penalty, equal to 1.0% of the then
outstanding principal amount of all Notes, the Registrable Securities
underlying same were required to be included in a then effective Registration
Statement in accordance with this Agreement. . 
While such Event continues, such liquidated damages shall be paid not less
often than each thirty (30) days.  Any
unpaid liquidated damages as of the date when an Event has been cured by the
Company shall be paid within three (3) business days following the date on
which such Event has been cured by the Company.   .  If the Events described in either of clauses (i) or (ii)
above arose solely because the applicable Holder or Holders failed to provide
the Company with certain information within 5 business days after request
therefor pursuant to Section 4, liquidated damages with respect thereto will
not begin to accrue until 20 business days after such information has been
provided to the Company.

 

(f)                                    Notwithstanding
the foregoing, the time periods specified in Section 2(e) shall be tolledduring
the pendency of any circumstances beyond the Company’s control that prevent
performance by the Company of its obligations hereunder despite the Company’s
best efforts.  Such matters include events affecting issuers generally,
such as the temporary closure of federal agencies, and events directly
affecting the Company,

 

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such as the Company’s
inability to obtain all information regarding an acquisition entity within a
time period that would permit independent auditors to prepare any required
audited financial information on a timely basis.

 

3.                                       Registration
Procedures.  If and whenever
the Company is required by the provisions hereof to effect the registration of
any Registrable Securities under the Securities Act, the Company will, as
expeditiously as possible:

 

(a)                                  prepare
and file with the Commission a Registration Statement with respect to such
Registrable Securities, respond as promptly as possible to any comments
received from the Commission, and use its reasonable best efforts to cause such
Registration Statement to become and remain effective for the Effectiveness
Period with respect thereto, and promptly provide to the Purchaser copies of
all filings and Commission letters of comment relating thereto;

 

(b)                                 subject
to Sections 2(b) and 2(c), prepare and file with the Commission such amendments
and supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
covered by such Registration Statement and to keep such Registration Statement
effective until the expiration of the Effectiveness Period;

 

(c)                                  furnish
to the Purchaser such number of copies of each Registration Statement and the
Prospectus included therein (including each preliminary Prospectus) as the
Purchaser reasonably may request to facilitate the public sale or disposition
of the Registrable Securities covered by such Registration Statement;

 

(d)                                 use
its commercially reasonable efforts to register or qualify the Purchaser’s
Registrable Securities covered by such Registration Statement under the
securities or “blue sky” laws of such jurisdictions within the United States as
the Purchaser may reasonably request, provided, however, that the
Company shall not for any such purpose be required to qualify generally to
transact business as a foreign corporation in any jurisdiction where it is not
so qualified or to consent to general service of process in any such
jurisdiction or take any action that would subject it to taxation in any
jurisdiction where it is not then subject;

 

(e)                                  list
the Registrable Securities covered by such Registration Statement with any
securities exchange on which the Common Stock of the Company is then listed;

 

(f)                                    immediately
notify the Purchaser at any time when a Prospectus relating thereto is required
to be delivered under the Securities Act, of the happening of any event of
which the Company has knowledge as a result of which the Prospectus contained
in such Registration Statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing; and

 

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(g)                                 make
available for inspection by the Purchaser and any attorney, accountant or other
agent retained by the Purchaser, all publicly available, non-confidential
financial and other records, pertinent corporate documents and properties of
the Company, and cause the Company’s officers, directors and employees to
supply all publicly available, non-confidential information reasonably
requested by the attorney, accountant or agent of the Purchaser.

 

4.                                       Information
to be provided by each Holder.     The Company may require each Holder to furnish
to the Company such information regarding such Holder and the distribution of
such Holder’s Registrable Securities as the Company may from time to time
reasonably required for inclusion in a Registration Statement.  In
addition, each Holder shall complete, execute and deliver all such other
documents and undertakings as the Company may deem necessary or desirable for
purposes of compliance with Federal and state securities laws.  The
Company may exclude from a Registration Statement the Registrable Securities of
any Holder that fails to furnish such information or complete, execute or
deliver to the Company such other documents and undertakings within a
reasonable time (which in any event shall not exceed ten (10)  business days) after receiving the Company’s
request for same and the Company shall thereafter not have any obligation to
include such Registrable Securities in any Registration Statement.

 

5.                                      Registration
Expenses.  All expenses relating to
the Company’s compliance with Sections 2 and 3 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel and independent public accountants for the Company,
fees and expenses (including reasonable fees of the Company’s counsel) incurred
in connection with complying with state securities or “blue sky” laws, and fees
of the Company’s transfer agents and registrars reasonable fees of, and
disbursements incurred by, one counsel for the Holders (which fees and
disbursements of counsel shall not exceed more than $5,000 in the aggregate for
any Registration Statement),  are called
“Registration Expenses”. All selling commissions applicable to the sale of
Registrable Securities, and any fees and disbursements of any counsel to the
Holders are called “Selling Expenses.”  
The Company shall only be responsible for Registration Expenses.

 

6.                                      Indemnification                                   (a)                                  In
the event of a registration of any Registrable Securities under the Securities
Act pursuant to this Agreement, the Company will indemnify and hold harmless
eachHolder, and its officers, directors and each other person, if any, who
controls such Holder within the meaning of the Securities Act, against any
losses, claims, damages or liabilities, joint or several, to which such Holder,
or such persons may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement under
which such Registrable Securities were registered under the Securities Act
pursuant to this Agreement, any preliminary Prospectus or final Prospectus contained
therein, or any amendment or supplement thereof, or 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, and will reimburse suchHolder, and each such other person for any
reasonable legal or other expenses incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action; provided,
however, that the Company will not be liable in any such case if and to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue

 

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statement or alleged untrue statement or omission or alleged omission
so made in conformity with information furnished by or on behalf of anyHolder
or any officer, director of any other person, if any, who controls a
Holder,  in writing specifically for use
in any such document.

 

(b)                                 In
the event of a registration of the Registrable Securities under the Securities
Act pursuant to this Agreement, eachHolder will indemnify and hold harmless the
Company, and its officers, directors and each other person, if any, who
controls the Company within the meaning of the Securities Act,  against all losses, claims, damages or
liabilities, joint or several, to which the Company or such persons may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact which was furnished in writing by such Holder to the Company expressly for
use in (and such information is contained in) the Registration Statement under
which such Registrable Securities were registered under the Securities Act
pursuant to this Agreement, any preliminary Prospectus or final Prospectus
contained therein, or any amendment or supplement thereof, or 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 that arise out of any failure of such Holder to comply with
applicable propspectus delivery requirements or its covenants and agreements
contained in this Agreement or the Securities Purchase Agreement, and will
reimburse the Company and each such other person for any reasonable legal or
other expenses incurred by them in connection with investigating or defending
any such loss, claim, damage, liability or action, provided, however,
that, other than with respect to such Holder’s failure to comply with
applicable prospectus delivery requirements or its covenants contained in the
Securities Purchase Agreement or this Agreement, such Holder will be liable in
any such case if and only to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission so made in conformity with
information furnished in writing to the Company by or on behalf ofsuch Holder
specifically for use in any such document. 
Notwithstanding the provisions of this paragraph, the Purchaser shall
not be required to indemnify any person or entity in excess of the amount of
the aggregate net proceeds received by the Purchaser in respect of Registrable
Securities in connection with such registration under the Securities Act.

 

(c)                                  Promptly
after receipt by a party entitled to claim indemnification hereunder (an “Indemnified
Party”) of notice of the commencement of any action, such Indemnified Party
shall, if a claim for indemnification in respect thereof is to be made against
a party hereto obligated to indemnify such Indemnified Party (an “Indemnifying
Party”), notify the Indemnifying Party in writing thereof, but the omission so
to notify the Indemnifying Party shall not relieve it from any liability which
it may have to such Indemnified Party under this Section 6 and shall only
relieve it from any liability which it may have to such Indemnified Party under
this Section 6 if and to the extent the Indemnifying Party is prejudiced by
such omission. In case any such action shall be brought against any Indemnified
Party and it shall notify the Indemnifying Party of the commencement thereof,
the Indemnifying Party shall be entitled to participate in and, to the extent
it shall wish, to assume and undertake the defense thereof with counsel
reasonably satisfactory to such Indemnified Party, and, after notice from the Indemnifying
Party to such Indemnified Party of its election so to assume and undertake the
defense thereof, the Indemnifying Party shall not be liable to such Indemnified
Party under this

 

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Section 6 for any legal expenses subsequently incurred by such
Indemnified Party in connection with the defense thereof; if the Indemnified
Party retains its own counsel, then the Indemnified Party shall pay all fees,
costs and expenses of such counsel, provided, however, that, if the
defendants in any such action include both the Indemnified Party and the
Indemnifying Party and the Indemnified Party shall havebeen advised by counsel
that a conflict of interest is likely to exist if the same counsel were to
represent both the Indemnified Party and the Indemnifying Party, the
Indemnified Party shall have the right to select one separate counsel and to
assume such legal defenses and otherwise to participate in the defense of such
action, with the reasonable expenses and fees of such separate counsel and
other expenses related to such participation to be reimbursed by the
Indemnifying Party as incurred (provided that the Indemnifying Party may
require such Indemnified Party to undertake to reimburse all such fees and
expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).  The Indemnifying Party shall not be liable
for any settlement of any such action effected without its written consent,
which consent shall not be unreasonably withheld.

 

(d)                                 In
order to provide for just and equitable contribution in the event of joint
liability under the Securities Act in any case in which either (i) aHolder, or
any officer, director or controlling person of such Holder, makes a claim for
indemnification pursuant to this Section 6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Section 6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of such
Holder or such officer, director or controlling person of suchHolder in
circumstances for which indemnification of such Holder is provided under this
Section 6; then, and in each such case, the Company and the Holder will
contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion so that
the Holder is responsible only for the portion represented by the percentage
that the public offering price of its securities offered by the Registration
Statement bears to the public offering price of all securities offered by such
Registration Statement, provided, however, that, in any such case, (A)
the Purchaser will not be required to contribute any amount in excess of the
public offering price of all such securities offered by it pursuant to such
Registration Statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.

 

7.                                      Representations
and Warranties.

 

(a)                                  The
Common Stock of the Company is registered pursuant to Section 12(b) of the
Exchange Act, and except with respect to certain matters which the Company has
disclosed to the Purchaser on Schedule 4.21 to the Securities Purchase
Agreement, the Company has timely filed all proxy statements, reports,
schedules, forms, statements and other documents required to be filed by it
under the Exchange Act.  The Company has
filed (i) its Annual Report on Form 10-KSB for the fiscal year ended December
31, 2002 and (ii) its Quarterly Reports on Form 10-QSB for the fiscal quarters
ended March 31, 2003,June 30, 2003 and September 30, 2003 (collectively, the
“SEC Reports”).  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

 

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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. 
The financial statements of the Company included in the SEC Reports
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles (“GAAP”) applied on a consistent basis during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto or (ii) in the case of unaudited interim statements, to the
extent they may not include footnotes or may be condensed) and fairly present
in all material respects the financial condition, the results of operations and
the cash flows of the Company and its subsidiaries, on a consolidated basis, as
of, and for, the periods presented in each such SEC Report.

 

(b)                                 The
Common Stock is listed for trading on the American Stock Exchange and, except
as described in Exchange Act Filings or the schedules to the Securities
Purchase Agreement,  satisfies all
requirements for the continuation of such listing. Except as described in
Exchange Act Filings or the schedules to the Securities Purchase Agreement, the
Company has not received any notice that its Common Stock will be delisted from
the American Stock Exchange or that the Common Stock does not meet all
requirements for the continuation of such listing.

 

(c)                                  Neither
the Company, nor any of its affiliates, nor any person acting on its or their
behalf, has directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that would cause
the offering of the Securities pursuant to the Securities Purchase Agreement to
be integrated with prior offerings by the Company for purposes of the
Securities Act which would prevent the Company from selling the Common Stock
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

 

(d)                                 The
Warrants, the Note and the shares of Common Stock which the Purchaser may
acquire pursuant to the Warrants and the Note are all restricted securities
under the Securities Act as of the date of this Agreement.  The Company will not issue any stop transfer
order or other order impeding the sale and delivery of any of the Registrable
Securities at such time as such Registrable Securities are registered for
public sale or an exemption from registration is available, except as required
by federal or state securities laws.

 

(e)                                  The
Company understands the nature of the Registrable Securities issuable upon the
conversion of the Note and the exercise of the Warrant and recognizes that the
issuance of such Registrable Securities may have a potential dilutive
effect.  The Company specifically
acknowledges that its obligation to issue the Registrable Securities 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.

 

10

 

(f)                                    Except
for agreements made in the ordinary course of business, there is no agreement
that has not been filed with the Commission as an exhibit to a registration
statement or to a form required to be filed by the Company under the Exchange
Act, the breach of which could reasonably be expected to have a material and
adverse effect on the Company and its subsidiaries, or would prohibit or
otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement in any material respect.

 

(g)                                 The
Company will at all times have authorized and reserved a sufficient number of
shares of Common Stock for the full conversion of each Note and exercise of the
Warrants.

 

8.                                      Miscellaneous.

 

(a)                                  Remedies.  In the event of a breach by the Company or
by a Holder, of any of their respective obligations under this Agreement, each
Holder or the Company, as the case may be, in addition to being entitled to
exercise all rights granted by law and under this Agreement, including recovery
of damages, will be entitled to specific performance of its rights under this
Agreement.

 

(b)                                  No
Piggyback on Registrations.  Neither
the Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the Company in any
Registration Statement other than the Registrable Securities, and the Company
shall not after the date hereof enter into any agreement providing any such
right for inclusion of shares in the Registration Statement to any of its security
holders. Except as and to the extent specified in Schedule 7(b) hereto,
the Company has not previously entered into any agreement granting any
registration rights with respect to any of its securities to any Person that
have not been fully satisfied.

 

(c)                                  Compliance.  Each Holder covenants and agrees that it
will comply with the prospectus delivery requirements of the Securities Act as
applicable to it in connection with sales of Registrable Securities pursuant to
the Registration Statement.

 

(d)                                  Discontinued
Disposition.  Each Holder agrees by
its acquisition of such Registrable Securities that, upon receipt of a notice
from the Company of the occurrence of a Delay Period or a Discontinuation Event
(as defined below), such Holder will forthwith discontinue disposition of such
Registrable Securities under the applicable Registration Statement until such
Holder’s receipt of the copies of the supplemented Prospectus and/or amended
Registration Statement or until it is advised in writing (the “Advice”) 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. Any such notice of a Delay Period or a
Discontinuance Event shall be deemed, for purposes of the Securities Purchase
Agreement, the Notes and the Warrant and all other applicable agreements,
notice to the Purchaser (or other Holder) that the Prospectus contained in the
Registration Statement is not current. 
The Company may provide appropriate stop orders to enforce the
provisions of this paragraph.  For
purposes of

 

11

 

this Section 8(c), a “Discontinuation Event” shall mean (i) when the
Commission notifies the Company whether there will be a “review” of such
Registration Statement and whenever the Commission comments in writing on such
Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders); (ii) any
request by the Commission or any other Federal or state governmental authority
for amendments or supplements to such Registration Statement or Prospectus or
for additional information; (iii) the issuance by the Commission of any stop
order suspending the effectiveness of such Registration Statement covering any
or all of the Registrable Securities or the initiation of any Proceedings for
that purpose; (iv) 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 Securities for sale in any jurisdiction, or the initiation
or threatening of any Proceeding for such purpose; and/or (v) the occurrence of
any event or passage of time that makes the financial statements included in
such Registration Statement ineligible for inclusion therein or any statement
made in such Registration Statement or Prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect
or that requires any revisions to such Registration Statement, Prospectus or
other documents so that, in the case of such Registration Statement or
Prospectus, as the case may be, it will not contain any untrue statement of a
material fact or omit to state any 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.

 

(e)                                  Piggy-Back
Registrations.  If at any time
during any Effectiveness Period there is not an effective Registration
Statement or Registration Statements covering all of the Registrable Securities
required to be covered during such Effectiveness Period and the Company shall
determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form
S-8 (each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with stock option or other employee benefit plans, then the Company
shall send to each Holder of any such Registrable Securities that are required
to be included in a Registration Statement, that are not then included, written
notice of such determination and, if within fifteen days after receipt of such
notice, any such Holder shall so request in writing, the Company shall include
in such registration statement all or any part of such Registrable Securities
such holder requests to be registered to the extent the Company may do so
without violating registration rights of others which exist as of the date of
this Agreement, subject to customary underwriter cutbacks applicable to all
holders of registration rights and subject to obtaining any required the
consent of any selling stockholder(s) to such inclusion under such registration
statement.

 

(f)                                    Amendments
and Waivers.  The provisions of this
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the provisions
hereof may not be given, unless the same shall be in writing and signed by the
Company and the Holders of at least fifty percent (50%)  of the then outstanding Registrable
Securities. Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of certain Holders and that does not directly or indirectly affect the
rights of other Holders may be given by Holders of at least a majority of the
Registrable Securities to which such waiver or consent

 

12

 

relates; provided, however, that the provisions of this sentence
may not be amended, modified, or supplemented except in accordance with the
provisions of the immediately preceding sentence.

 

(g)                                 Notices.  Any notice or request hereunder may be given
to the Company or the Purchaser at the respective addresses set forth below or
as may hereafter be specified in a notice designated as a change of address
under this Section 8(f).  Any notice or
request hereunder shall be given by registered or certified mail, return
receipt requested, hand delivery, overnight mail or telecopy (confirmed by
mail).  Notices and requests shall be,
in the case of those by hand delivery, deemed to have been given when delivered
to any party to whom it is addressed, in the case of those by mail or overnight
mail, deemed to have been given three (3) business days after the date when
deposited in the mail or with the overnight mail carrier, and, in the case of a
telecopy, when confirmed.  The address
for such notices and communications shall be as follows:

 

	
  If to the Company:

  	
   

  	
  EQUIFIN, Inc.

  1011 Highway 71

  Spring Lake, New Jersey  07762

  Attention:  Walter M. Craig, Jr.,
  Chief Executive Officer

  Facsimile:732-282-1811

  

  With a copy to:

  Lee A. Albanese, Esq.

  St. John & Wayne, L.L.C.

  Two Penn Plaza East

  Newark, New Jersey 07105-2249

  

  Facsimile

  
	
   

  	
   

  	
   

  
	
  If to a Purchaser:

  	
   

  	
  To the address set
  forth under

  such Purchaser name on the

  signature pages hereto.

  
	
   

  	
   

  	
   

  
	
  If to any other Person
  who is then the registered Holder:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  To the address of such
  Holder as it

  appears in the stock transfer books

  of the Company

  

 

or such other address as
may be designated in writing hereafter in accordance with this Section 8(f) by
such Person.

 

(h)                                 Successors
and Assigns.  This Agreement
shall inure to the benefit of and be binding upon the successors and permitted
assigns of each of the parties and shall inure to the benefit of each Holder.
The Company may not assign its rights or obligations hereunder without the
prior written consent of each Holder. Each Holder may assign their respective
rights hereunder in the manner and to the Persons as permitted under the Notes
and the Securities

 

13

 

Purchase Agreement with the prior written consent of the Company, which
consent shall not be unreasonably withheld.

 

(i)                                    Execution
and Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and
effect as if such facsimile signature were the original thereof.

 

(j)                                    Governing
Law. All questions concerning the construction, validity,
enforcement and interpretation of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York, without regard to the principles of conflicts of law thereof. Each party
agrees that all Proceedings concerning the interpretations, enforcement and
defense of the transactions contemplated by this Agreement shall be commenced
exclusively in the state and federal courts sitting in the City of New York,
Borough of Manhattan. Each party hereto hereby irrevocably submits to the
exclusive jurisdiction of the state and federal courts sitting in the City of
New York, Borough of Manhattan for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any
Proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such Proceeding is improper.  Each party hereto hereby irrevocably waives personal service of
process and consents to process being served in any such Proceeding by mailing
a copy thereof via registered or certified mail or overnight delivery (with
evidence of delivery) to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any manner
permitted by law. Each party hereto hereby irrevocably waives, to the fullest
extent permitted by applicable law, any and all right to trial by jury in any
legal proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby. If either party shall commence a Proceeding
to enforce any provisions of a Transaction Document, then the prevailing party
in such Proceeding shall be reimbursed by the other party for its reasonable
attorneys fees and other costs and expenses incurred with the investigation,
preparation and prosecution of such Proceeding.

 

(k)                                Cumulative
Remedies. The remedies provided herein are cumulative and not
exclusive of any remedies provided by law.

 

(l)                                    Severability.  If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, illegal, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions set forth herein shall remain in full
force and effect and shall in no way be affected, impaired or invalidated, and
the parties hereto shall use their reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.

 

14

 

(m)                              Headings.
The headings in this Agreement are for convenience of reference only and shall
not limit or otherwise affect the meaning hereof.

 

[Balance of page
intentionally left blank; signature page follows.]

 

15

 

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

 

 

	
   

  	
  EQUIFIN, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  LAURUS MASTER FUND, LTD.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notices:

  
	
   

  	
   

  
	
   

  	
  825 Third Avenue, 14th
  Floor

  New York, New York 10022

  Attention:  David Grin

  Facsimile:  212-541-4434

  
						

 

16SECURITIES PURCHASE

                                    AGREEMENT

                          DATED AS OF DECEMBER 30, 2003

                                      AMONG

                                AXM PHARMA, INC.

                                       AND

                       THE PURCHASERS LISTED ON EXHIBIT A

<PAGE>

<TABLE>

<CAPTION>

                                TABLE OF CONTENTS

                                                                                            PAGE
                                                                                            ----
<S>                                                                             <C>         <C>

ARTICLE I        Purchase and Sale of Preferred Stock and Warrants............................1

         Section 1.1       Purchase and Sale of Preferred Stock and Warrants..................1
         Section 1.2       Purchase Price and Closing.........................................1
         Section 1.3       Warrants...........................................................2
         Section 1.4       Conversion Shares and Warrant Shares...............................2

ARTICLE II       Representations and Warranties...............................................2

         Section 2.1       Representations and Warranties of the Company......................2
         Section 2.2       Representations and Warranties of the Purchasers..................12

ARTICLE III      Covenants...................................................................14

         Section 3.1       Disclosure of Transactions and Other Material Information.........14
         Section 3.2       Registration and Listing..........................................15
         Section 3.3       Inspection Rights.................................................15
         Section 3.4       Complaince with Laws..............................................15
         Section 3.5       Keeping of Records and Books of Account...........................15
         Section 3.6       Other Agreements..................................................16
         Section 3.7       Reservation of Shares.............................................16
         Section 3.8       Non-public Information............................................16
         Section 3.9       Premptive Rights..................................................16
         Section 3.10      Lock-Up...........................................................18

ARTICLE IV       Conditions..................................................................18

         Section 4.1       Conditions Precedent to the Obligation of the Company to
                           Close and to Sell the Shares and Warrants.........................18
         Section 4.2       Conditions Precedent to the Obligation of the Purchasers to
                           Close and to Purchase the Shares and Warrants.....................19

ARTICLE V        Certificate of Legend.......................................................21

         Section 5.1       Legend............................................................21

ARTICLE VI       Termination.................................................................22

         Section 6.1       Termination by Mutual Consent.....................................22
         Section 6.2       Effect of Termination.............................................22

ARTICLE VII      Indemnification.............................................................23

         Section 7.1       General Indemnity.................................................23

                                      -i-
<PAGE>

                               Table of Contents
                               -----------------
                                   (continued)

         Section 7.2       Indemnification Procedure.........................................23

ARTICLE VIII     Miscellaneous...............................................................24

         Section 8.1       Fees and Expenses.................................................24
         Section 8.2       Specific Enforcement; Consent to Jurisdiction.....................24
         Section 8.3       Entire Agreement; Amendment.......................................25
         Section 8.4       Notices...........................................................25
         Section 8.5       Waivers...........................................................26
         Section 8.6       Headings..........................................................26
         Section 8.7       Successors and Assigns............................................26
         Section 8.8       No Third Party Beneficiaries......................................26
         Section 8.9       Governing Law.....................................................26
         Section 8.10      Survival..........................................................27
         Section 8.11      Counterparts......................................................27
         Section 8.12      Publicity.........................................................27
         Section 8.13      Severability......................................................27
         Section 8.14.     Further Assurances................................................27

</TABLE>

                                       ii
<PAGE>

                          SECURITIES PURCHASE AGREEMENT

         This  SECURITIES  PURCHASE  AGREEMENT this  ("Agreement"),  dated as of
December 30, 2003,  by and among AXM Pharma,  Inc.,  a Nevada  corporation  (the
"Company"),  and the entities listed on Exhibit A hereto (each a "Purchaser" and
collectively, the "Purchasers"),  for the purchase and sale to the Purchasers of
shares of the Company's  Series B Convertible  Preferred  Stock, par value $.001
per share (the  "Preferred  Stock"),  and  warrants  to  purchase  shares of the
Company's common stock, par value $.001 per share (the "Common Stock").

         The parties hereto agree as follows:

                                   ARTICLE I

                PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS

         Section 1.1 Purchase and Sale of Preferred Stock and Warrants. Upon the
following  terms  and  conditions,  the  Company  shall  issue  and  sell to the
Purchasers,  and the Purchasers shall purchase from the Company,  860,000 shares
of Preferred Stock (the "Shares") at a price per share of $2.25 for an aggregate
purchase price of $1,935,000  (the "Purchase  Price"),  and warrants to purchase
shares of Common Stock, in  substantially  the form attached hereto as Exhibit B
(the  "Warrants").  The Company and the  Purchasers are executing and delivering
this  Agreement  in  accordance  with and in reliance  upon the  exemption  from
securities  registration  afforded by Section 4(2) of the U.S. Securities Act of
1933, as amended,  and the rules and  regulations  promulgated  thereunder  (the
"Securities  Act"),  including  Regulation D ("Regulation  D"), and/or upon such
other exemption from the registration  requirements of the Securities Act as may
be available with respect to any or all of the investments to be made hereunder.
The  Preferred  Stock shall have such powers,  preferences  and rights,  and the
qualifications,  limitations  or  restrictions  thereof,  as  set  forth  in the
Certificate of Designation of Rights and Preferences of Series A Preferred Stock
attached hereto as Exhibit D, subject to the applicable  terms and conditions of
this Agreement and the Registration Rights Agreement (as defined below).

         Section 1.2 Purchase Price and Closing. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations,  warranties, covenants, terms and conditions of this Agreement,
the  Purchasers,  severally  but not  jointly,  agree to purchase  the number of
Shares and Warrants set forth opposite their  respective names on Exhibit A. The
closing of the  purchase  and sale of the Shares and  Warrants to be acquired by
the  Purchasers  from the Company under this  Agreement  shall take place at the
offices  of  the  Company  located  at  4695  Macarthur  Court,  Newport  Beach,
California  92660 (the  "Closing") at 10:00 a.m.,  Pacific Time (i) on or before
December 31, 2003, provided,  that all of the conditions set forth in Article IV
hereof and  applicable  to the Closing  shall have been  fulfilled  or waived in
accordance herewith, or (ii) at such other time and place or on such date as the
Purchasers and the Company may agree upon (the "Closing Date").

                                       1
<PAGE>

         Section 1.3  Warrants.  At the Closing,  the Company shall issue to the
Purchasers  Warrants to  purchase an  aggregate  of  1,000,000  shares of Common
Stock.  The Warrants  shall be  exercisable  for five (5) years from the date of
issuance and shall have an exercise price equal to $3.00 per share.

         Section  1.4  Conversion  Shares and  Warrant  Shares.  The Company has
authorized and reserved and covenants to continue to reserve, free of preemptive
rights  and  other  similar  contractual  rights  of  stockholders,  out  of its
authorized  but unissued  Common  Stock or its Common Stock held in treasury,  a
number  of shares of Common  Stock  equal to the  aggregate  number of shares of
Common Stock  necessary to effect the  conversion of the Shares and the exercise
of the Warrants.  The Company shall,  from time to time, in accordance  with the
Nevada Corporation Law, increase the authorized amount of its Common Stock if at
any time the authorized amount of its Common Stock remaining  unissued shall not
be  sufficient to permit the  conversion of all Shares at the time  outstanding,
subject,  however,  to  stockholder  approval.  If any  shares of  Common  Stock
required to be reserved for issuance  upon  conversion of the Shares or exercise
of  the  Warrants  hereunder  require  registration  with  or  approval  of  any
governmental  authority  under any federal or state law before the shares may be
issued, the Company will cause the shares to be so registered and approved.  All
shares of Common Stock  delivered  upon  conversion of the Shares or exercise of
the Warrants shall, upon delivery,  be duly authorized and validly issued, fully
paid and  nonassessable,  free from all taxes, liens and charges with respect to
the issue thereof.  Any shares of Common Stock  issuable upon  conversion of the
Shares (and such shares when issued) are herein  referred to as the  "Conversion
Shares".  Any shares of Common Stock issuable upon exercise of the Warrants (and
such shares when  issued) are herein  referred to as the "Warrant  Shares".  The
Shares, the Conversion Shares, the Warrants and the Warrant Shares are sometimes
collectively referred to herein as the "Securities".

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

         Section 2.1  Representations and Warranties of the Company. In order to
induce the  Purchasers  to enter into this  Agreement and to purchase the Shares
and  Warrants,  the  Company  hereby  makes the  following  representations  and
warranties to the Purchasers:

         (a) Organization, Good Standing and Power. The Company is a corporation
duly  incorporated,  validly existing and in good standing under the laws of the
State of Nevada and has the requisite  corporate power to own, lease and operate
its  properties  and  assets  and to  conduct  its  business  as it is now being
conducted.  The Company  does not have any  Subsidiaries  (as defined in Section
2.1(g)) or own  securities of any kind in any other entity,  except as set forth
on  Schedule  2.1(g)  hereto.  The  Company  and each  such  Subsidiary  is duly
qualified as a foreign  corporation  to do business  and is in good  standing in
every  jurisdiction  in which the nature of the  business  conducted or property
owned by it makes such qualification  necessary,  except for any jurisdiction(s)
(alone or in the  aggregate)  in which the failure to be so  qualified  will not
have a Material  Adverse Effect.  For the purposes of this Agreement,  "Material
Adverse  Effect" means any adverse effect on the business,  operations,  assets,
prospects or financial condition of the Company or its Subsidiaries and which is
material to such entity or other  entities  controlling  or  controlled  by such

                                       2
<PAGE>

entity or the Company or which is likely to materially hinder the performance by
the  Company  of its  obligations  hereunder  and under  the  other  Transaction
Documents (as defined in Section 2.1(b) hereof).

         (b) Authorization; Enforcement. The Company has the requisite corporate
power and authority to enter into and perform this Agreement,  the  Registration
Rights  Agreement,   the  Warrants,  and  the  other  agreements  and  documents
contemplated  hereby and  thereby  and  executed  by the Company or to which the
Company is party (collectively,  the "Transaction Documents"),  and to issue and
sell the  Shares and the  Warrants  in  accordance  with the terms  hereof.  The
execution,  delivery and performance of the Transaction Documents by the Company
and the  consummation by it of the transactions  contemplated  thereby have been
duly and validly  authorized by all necessary  corporate action,  and, except as
set forth in Schedule 2.1(b), no further consent or authorization of the Company
or its Board of Directors or stockholders  is required.  This Agreement has been
duly executed and delivered by the Company. The other Transaction Documents will
have been duly executed and delivered by the Company at the Closing. Each of the
Transaction  Documents  constitutes,  or  shall  constitute  when  executed  and
delivered, a valid and binding obligation of the Company enforceable against the
Company in  accordance  with its  terms,  except as such  enforceability  may be
limited  by  applicable  bankruptcy,  reorganization,  moratorium,  liquidation,
conservatorship,   receivership  or  similar  laws  relating  to,  or  affecting
generally the  enforcement  of,  creditor's  rights and remedies or by equitable
principles or remedies of general application.

         (c) Capitalization. The authorized capital stock of the Company and the
shares thereof  currently  issued and outstanding as of December 1, 2003 are set
forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the Company's
Common  Stock and any other  security of the Company  have been duly and validly
authorized. Except as set forth on Schedule 2.1(c), no shares of Common Stock or
any  other  security  of the  Company  are  entitled  to  preemptive  rights  or
registration  rights  and there are no  outstanding  options,  warrants,  scrip,
rights to subscribe to, call or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the
Company.  Furthermore,  except as set forth on Schedule  2.1(c) hereto or in any
Commission  Documents  (as defined in Section  2.1(f)  below) and except for the
Transaction Documents, there are no contracts,  commitments,  understandings, or
arrangements  by which the  Company is or may become  bound to issue  additional
shares of the  capital  stock of the Company or  options,  securities  or rights
convertible  into shares of capital  stock of the Company.  Except for customary
transfer  restrictions  contained in  agreements  entered into by the Company in
order to sell restricted securities or as provided on Schedule 2.1(c) hereto and
except as in any Commission Documents, the Company is not a party to or bound by
any agreement or understanding  granting registration or anti-dilution rights to
any person with respect to any of its equity or debt  securities.  Except as set
forth on Schedule 2.1(c) or disclosed in any Commission  Documents,  the Company
is not a party to, and it has no knowledge  of, any  agreement or  understanding
restricting  the voting or transfer  of any shares of the  capital  stock of the
Company.  Except as set forth on  Schedule  2.1(c)  hereto or  disclosed  in any
Commission  Documents,  the offer  and sale of all  capital  stock,  convertible
securities,  rights,  warrants,  or options of the Company  issued  prior to the
Closing  complied with all applicable  federal and state securities laws, and to
the best knowledge of the Company,  no holder of such  securities has a right of
rescission or has made or  threatened to make a claim for  rescission or damages

                                       3
<PAGE>

with respect thereto which could have a Material Adverse Effect. The Company has
furnished or made  available to the  Purchasers  true and correct  copies of the
Company's  Certificate  of  Incorporation  as in effect on the date  hereof (the
"Certificate"),  and the  Company's  Bylaws as in effect on the date hereof (the
"Bylaws").

         (d) Issuance of Securities. The Shares and the Warrants to be issued at
the Closing have been duly  authorized  by all necessary  corporate  action and,
when paid for or issued in accordance with the terms hereof, the Shares shall be
validly issued and outstanding,  fully paid and nonassessable and free and clear
of all  liens,  encumbrances  and  rights of first  refusal  of any kind and the
holders shall be entitled to all rights accorded to a holder of Preferred Stock.
When the  Conversion  Shares  are  issued  in  accordance  with the terms of the
Preferred Stock, such shares will be duly authorized by all necessary  corporate
action and validly issued and outstanding,  fully paid and  nonassessable,  free
and clear of all liens, encumbrances and rights of first refusal of any kind and
the  holders  shall be  entitled  to all rights  accorded  to a holder of Common
Stock.  When the Warrant  Shares are issued and paid for in accordance  with the
terms of this  Agreement and as set forth in the  Warrants,  such shares will be
duly  authorized  by all  necessary  corporate  action  and  validly  issued and
outstanding,  fully  paid  and  nonassessable,  free  and  clear  of all  liens,
encumbrances  and rights of first  refusal of any kind and the holders  shall be
entitled to all rights accorded to a holder of Common Stock.

         (e) No  Conflicts.  The  execution,  delivery  and  performance  of the
Transaction  Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) violate any
provision of the Certificate or Bylaws or any  Subsidiary's  comparable  charter
documents,  (ii) conflict  with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of  termination,  amendment,  acceleration  or  cancellation  of, any
agreement,  mortgage,  deed of trust,  indenture,  note,  bond,  license,  lease
agreement,  instrument  or  obligation  to  which  the  Company  or  any  of its
Subsidiaries  is a party or by which  the  Company  or any of its  Subsidiaries'
respective  properties  or  assets  are  bound,  (iii)  create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property
or asset of the Company or any of its  Subsidiaries  under any  agreement or any
commitment  to which the  Company  or any of its  Subsidiaries  is a party or by
which the Company or any of its  Subsidiaries  is bound or by which any of their
respective  properties or assets are bound, or (iv) result in a violation of any
federal,  state, local or foreign statute, rule, regulation,  order, judgment or
decree (including federal and state securities laws and regulations)  applicable
to the Company or any of its  Subsidiaries  or by which any property or asset of
the Company or any of its  Subsidiaries  is bound or  affected,  except,  in all
cases other than  violations  pursuant  to clauses (i) or (iv) (with  respect to
federal  and  state  securities  laws)  above,  for  such  conflicts,  defaults,
terminations,  amendments,  acceleration,  cancellations and violations as would
not,  individually  or in the aggregate,  have a Material  Adverse  Effect.  The
business of the Company and its Subsidiaries is not being conducted in violation
of any laws,  ordinances or regulations of any governmental  entity,  except for
possible  violations  which  singularly  or in the aggregate do not and will not
have a Material Adverse Effect.  Neither the Company nor any of its Subsidiaries
is required  under federal,  state,  foreign or local law, rule or regulation to
obtain  any  consent,   authorization  or  order  of,  or  make  any  filing  or
registration with, any court or governmental  agency in order for it to execute,
deliver or perform any of its  obligations  under the  Transaction  Documents or

                                       4
<PAGE>

issue and sell the Shares,  the Conversion  Shares,  the Warrants or the Warrant
Shares in  accordance  with the terms hereof or thereof  (other than any filings
which may be required to be made by the Company with the Securities and Exchange
Commission (the "Commission") or state securities  administrators  subsequent to
the Closing, or any registration statement which may be filed pursuant hereto or
thereto).

         (f) Commission Documents; Commission Filings; Financial Statements. The
Common Stock is not currently  registered  pursuant to Section 12(b) or 12(g) of
the  Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act"),  but,
except as disclosed on Schedule 2.1(f) hereto,  the Company has timely filed all
reports,  schedules,  forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing,  including filings incorporated by reference therein,
being  referred to herein as the  "Commission  Documents").  The Company has not
provided  to  the  Purchasers  any  material  non-public  information  or  other
information which, according to applicable law, rule or regulation,  should have
been  disclosed  publicly by the  Company  but which has not been so  disclosed,
other than with respect to the transactions  contemplated by this Agreement.  At
the time of its filing,  the Company's  Form 10-QSB for the fiscal quarter ended
September 30, 2003 (the "Form 10-Q") complied in all material  respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated  thereunder  and other  federal,  state and  local  laws,  rules and
regulations applicable to such documents,  and the Form 10-Q did not contain any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances  under which they were made, not misleading.  At the
time of its  filing,  the  Company's  Form  10-KSB/A  for the fiscal  year ended
September 30, 2002 (the "Form 10-K") complied in all material  respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated  thereunder  and other  federal,  state and  local  laws,  rules and
regulations applicable to such documents,  and the Form 10-K did not contain any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances  under which they were made, not  misleading.  As of
their respective dates, the financial  statements of the Company included in the
Commission  Documents  complied  as  to  form  in  all  material  respects  with
applicable  accounting  requirements  and the published rules and regulations of
the Commission or other  applicable  rules and regulations with respect thereto.
Such  financial  statements  have been  prepared in  accordance  with  generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods  involved  (except (i) as may be otherwise  indicated in such  financial
statements  or the  Notes  thereto,  or (ii) in the  case of  unaudited  interim
statements,  to the extent they may not include footnotes or may be condensed or
summary  statements),  and fairly present in all material respects the financial
position  of the Company and its  Subsidiaries  as of the dates  thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).

         (g) Subsidiaries.  Schedule 2.1(g) hereto sets forth each Subsidiary of
the Company,  showing the jurisdiction of its  incorporation or organization and
showing the percentage of each person's  ownership of the  outstanding  stock or
other  interests  of such  Subsidiary.  For  the  purposes  of  this  Agreement,

                                       5
<PAGE>

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

         (h) No Material  Adverse Change.  Since September 30, 2003, the Company
has not experienced or suffered any Material Adverse Effect, except as disclosed
on Schedule 2.1(h) hereto.

         (i) No Undisclosed Liabilities.  Except as disclosed on Schedule 2.1(i)
hereto,  neither the Company nor any of its  Subsidiaries  has any  liabilities,
obligations,  claims or losses (whether  liquidated or unliquidated,  secured or
unsecured,  absolute,  accrued,  contingent or  otherwise)  other than those set
forth on the balance sheet included in the Form 10-Q or incurred in the ordinary
course  of  the  Company's  or  its  Subsidiaries  respective  businesses  since
September 30, 2003, and which, individually or in the aggregate, do not or would
not have a Material Adverse Effect on the Company or its Subsidiaries.

         (j) No Undisclosed  Events or Circumstances.  Since September 30, 2003,
except as disclosed on Schedule  2.1(j)  hereto,  no event or  circumstance  has
occurred or exists  with  respect to the  Company or its  Subsidiaries  or their
respective businesses, properties, prospects, operations or financial condition,
which,  under applicable law, rule or regulation,  requires public disclosure or
announcement  by the  Company but which has not been so  publicly  announced  or
disclosed.

         (k)  Indebtedness.  Schedule  2.1(k)  hereto  sets forth as of the date
hereof all outstanding secured and unsecured  Indebtedness of the Company or any
Subsidiary,  or for which the Company or any Subsidiary has  commitments,  which
Indebtedness is not disclosed in any Commission  Documents.  For the purposes of
this Agreement, "Indebtedness" shall mean (i) any liabilities for borrowed money
in excess of  $100,000  (other  than  trade  accounts  payable  incurred  in the
ordinary  course  of  business),  (ii) all  guaranties,  endorsements  and other
contingent  obligations  in  respect  of  Indebtedness  of  others  in excess of
$100,000,  whether or not the same are or should be reflected  in the  Company's
balance  sheet (or the Notes  thereto),  except  guaranties  by  endorsement  of
negotiable  instruments for deposit or collection or similar transactions in the
ordinary  course of business,  and (iii) the present value of any lease payments
in excess of $100,000 due under leases  required to be capitalized in accordance

                                       6
<PAGE>

with  GAAP.  Except  as  disclosed  on  Schedule  2.1(k)  or in  any  Commission
Documents,  neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.

         (l) Title to Assets.  Each of the Company and the Subsidiaries has good
and marketable title to all of its real and personal property, free and clear of
any mortgages, pledges, charges, liens, security interests or other encumbrances
of any nature  whatsoever,  except for those indicated on Schedule 2.1(l) hereto
or disclosed in any Commission  Documents or such that,  individually  or in the
aggregate,  do not have a Material  Adverse  Effect.  All material leases of the
Company and each of its  Subsidiaries are valid and subsisting and in full force
and effect.

         (m) Actions Pending. Except as set forth in the Commission Documents or
Schedule  2.1(m)  hereto,  there  is  no  action,  suit,  claim,  investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the  knowledge  of the  Company,  threatened  against  the Company or any
Subsidiary  which  questions the validity of this  Agreement or any of the other
Transaction Documents or any of the transactions  contemplated hereby or thereby
or any action  taken or to be taken  pursuant  hereto or thereto.  Except as set
forth in any Commission  Document or on Schedule 2.1(m) hereto:  (i) there is no
action, suit, claim,  investigation,  arbitration,  alternate dispute resolution
proceeding  or other  proceeding  pending or, to the  knowledge  of the Company,
threatened  against or involving  the Company,  any  Subsidiary  or any of their
respective  properties or assets, which individually or in the aggregate,  would
have a  Material  Adverse  Effect,  and (ii)  there are no  outstanding  orders,
judgments,   injunctions,   awards  or  decrees  of  any  court,  arbitrator  or
governmental  or  regulatory  body against the Company or any  Subsidiary or any
officers or directors of the Company or any  Subsidiary  in their  capacities as
such,  which  individually,  or in the aggregate,  would have a Material Adverse
Effect.

         (n)  Compliance   with  Law.  The  business  of  the  Company  and  the
Subsidiaries  has been and is presently  being  conducted in accordance with all
applicable  federal,  state and local governmental laws, rules,  regulations and
ordinances,  except  as set forth in the  Commission  Documents  or on  Schedule
2.1(n) hereto or such that, individually or in the aggregate,  the noncompliance
therewith would not have a Material Adverse Effect.  The Company and each of its
Subsidiaries  have  all  franchises,   permits,  licenses,  consents  and  other
governmental  or  regulatory  authorizations  and  approvals  necessary  for the
conduct of its  business  as now being  conducted  by it unless  the  failure to
possess such franchises,  permits, licenses,  consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.

         (o)  Taxes.  Except as set forth on  Schedule  2.1(o)  hereto or in the
Commission  Documents,  the Company and each of the  Subsidiaries has accurately
prepared and filed all federal,  state and other tax returns  required by law to
be filed by it, has paid or made  provisions  for the payment of all taxes shown
to be due and all additional assessments,  and adequate provisions have been and
are  reflected in the financial  statements of the Company and the  Subsidiaries
for all current taxes and other  charges to which the Company or any  Subsidiary
is subject and which are not currently  due and payable.  Except as disclosed on
Schedule 2.1(o) hereto, none of the federal income tax returns of the Company or
any  Subsidiary  have been audited by the Internal  Revenue  Service.  Except as
disclosed  in the  Commission  Documents,  the Company has no  knowledge  of any

                                       7
<PAGE>

additional assessments, adjustments or contingent tax liability (whether federal
or state) of any nature  whatsoever,  whether pending or threatened  against the
Company  or any  Subsidiary  for any  period,  nor of any  basis  for  any  such
assessment, adjustment or contingency.

         (p) Certain Fees.  Except as set forth on Schedule  2.1(p) hereto,  the
Company has not employed any broker or finder or incurred any  liability for any
brokerage or investment banking fees,  commissions,  finders'  structuring fees,
financial advisory fees or other similar fees in connection with the Transaction
Documents.

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

         (r)  Intellectual  Property.  Schedule  2.1(r)  contains a complete and
correct  list  of  all  patents,  trademarks,   domain  names  (whether  or  not
registered) and any patentable  improvements or  copyrightable  derivative works
thereof,  websites and intellectual  property rights relating  thereto,  service
marks, trade names, copyrights, licenses and authorizations, and all rights with
respect  to the  foregoing  held  by  the  Company  or  any of its  Subsidiaries
(collectively,   the  "Proprietary   Rights").  The  Company  and  each  of  the
Subsidiaries  owns or possesses all the  Proprietary  Rights which are necessary
for the conduct of its business as now  conducted  without any conflict with the
rights of others.  Except as disclosed in the  Commission  Documents or Schedule
2.1(r) hereto, (i) as of the date of this Agreement, neither the Company nor any
of its Subsidiaries has received any written notice that any Proprietary  Rights
have  been  declared   unenforceable  or  otherwise  invalid  by  any  court  or
governmental agency, and (ii) as of the date of this Agreement, there is, to the
knowledge  of  the  Company,  no  material  existing  infringement,   misuse  or
misappropriation  of any Proprietary Rights by others that could have a Material
Adverse Effect. From September 30, 2003, to the date of this Agreement,  neither
the Company nor any of its Subsidiaries has received any written notice alleging
that the  operation  of the  business of the Company or any of its  Subsidiaries
infringes  in any  material  respect upon the  intellectual  property  rights of
others.

         (s)  Environmental  Compliance.  Except as disclosed on Schedule 2.1(s)
hereto or the  Commission  Documents,  the Company and each of its  Subsidiaries
have obtained all material  approvals,  authorization,  certificates,  consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. Schedule 2.1(s) hereto sets forth all material permits, licenses and other
authorizations  issued  under  any  Environmental  Laws  to the  Company  or its
Subsidiaries.  "Environmental  Laws"  shall mean all U.S.  Federal or state laws
applicable to the Company or any of its Subsidiaries  relating to the protection
of the environment including, without limitation, all requirements pertaining to
reporting,  licensing,  permitting,  controlling,  investigating  or remediating
emissions,  discharges, releases or threatened releases of hazardous substances,
chemical substances, pollutants,  contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture,  processing,  distribution,
use,  treatment,   storage,   disposal,   transport  or  handling  of  hazardous
substances, chemical substances,  pollutants,  contaminants or toxic substances,

                                       8
<PAGE>

material or wastes,  whether solid,  liquid or gaseous in nature.  Except as set
forth on Schedule  2.1(s)  hereto,  the Company has all  necessary  governmental
approvals  required under all Environmental  Laws and used in its business or in
the business of any of its Subsidiaries,  except for such instances as would not
individually or in the aggregate have a Material Adverse Effect. The Company and
each of its  Subsidiaries  are also in  compliance  with all other  limitations,
restrictions,  conditions,  standards,  requirements,  schedules and  timetables
required or imposed under all Environmental Laws where non-compliance could have
a Material  Adverse Effect.  Except for such instances as would not individually
or in the  aggregate  have a  Material  Adverse  Effect or as  disclosed  in the
Commission  Documents,   there  are  no  past  or  present  events,  conditions,
circumstances,  incidents,  actions  or  omissions  relating  to or in  any  way
affecting  the  Company or its  Subsidiaries  that  violate or may  violate  any
Environmental  Law after the Closing or that may give rise to any  Environmental
Liabilities,  or otherwise form the basis of any claim,  action,  demand,  suit,
proceeding,  hearing, study or investigation (i) under any Environmental Law, or
(ii) based on or  related to the  manufacture,  processing,  distribution,  use,
treatment, storage (including,  without limitation,  underground storage tanks),
disposal,  transport  or  handling,  or  the  emission,  discharge,  release  or
threatened release of any hazardous substance. "Environmental Liabilities" means
all liabilities of a person (whether such liabilities are owed by such person to
governmental authorities,  third parties or otherwise) currently in existence or
arising hereafter and which arise under or relate to any Environmental Law.

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

         (u) Material Agreements. Except for the Transaction Documents or as set
forth on Schedule  2.1(u) hereto,  or those that are included as exhibits to the
Commission  Documents,  neither the Company nor any Subsidiary is a party to any
written or oral contract, instrument, agreement, commitment, obligation, plan or
arrangement,  a copy of which would be required to be filed with the  Commission
if  the  Company  or  any  Subsidiary  were  registering  securities  under  the
Securities Act (collectively, "Material Agreements"). Except as set forth in the
Commission  Documents  or on  Schedule  2.1(u)  hereto,  the  Company  and  each
Subsidiary has in all material respects  performed all the obligations  required
to be performed by them to date under the foregoing agreements, have received no

                                       9
<PAGE>

notice  of  default  and,  to the best of the  Company's  knowledge,  are not in
default under any Material  Agreement  now in effect,  the result of which could
cause a  Material  Adverse  Effect.  No written  or oral  contract,  instrument,
agreement  (other  than the  Certificate  of  Designation  with  respect  to the
Preferred  Stock,  this  Agreement  or  any  other   Transaction   Document(s)),
commitment, obligation (other than any obligation imposed by state law), plan or
arrangement  of the  Company  or of any  Subsidiary  limits  or shall  limit the
payment of dividends on its Common Stock.

         (v)  Transactions  with  Affiliates.  Except as set  forth on  Schedule
2.1(v)  hereto or disclosed  in any of the  Commission  Documents,  there are no
loans, leases, agreements,  contracts, royalty agreements,  management contracts
or arrangements or other continuing  transactions  between (i) the Company,  any
Subsidiary or any of their  respective  its  customers or suppliers,  on the one
hand, and (ii) on the other hand, any officer, employee,  consultant or director
of the Company,  or any of its  Subsidiaries,  or any person  owning any capital
stock of the Company or any Subsidiary or any member of the immediate  family of
such officer, employee,  consultant,  director or stockholder or any corporation
or other entity controlled by such officer,  employee,  consultant,  director or
stockholder.

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

         (x)  Governmental  Approvals.  Except as set forth on  Schedule  2.1(x)
hereto,  and  except for the filing of any  notice  prior or  subsequent  to the
Closing that may be required under  applicable  state and/or federal  securities
laws (which if required,  shall be filed on a timely basis),  no  authorization,
consent, approval,  license, exemption of, filing or registration with any court
or   governmental   department,    commission,    board,   bureau,   agency   or
instrumentality,  domestic  or  foreign,  is or will  be  necessary  for,  or in
connection  with, the execution or delivery of the Shares and the Warrants,  or,
except as set forth in this Agreement or any other Transaction Document, for the
performance by the Company of its obligations under the Transaction Documents.

         (y)  Employees.   Neither  the  Company  nor  any  Subsidiary  has  any
collective bargaining  arrangements or agreements covering any of its employees.
Except as set forth in the  Commission  Documents or on Schedule  2.1(y) hereto,
neither the Company nor any Subsidiary has any  employment  contract,  agreement
regarding proprietary information,  non-competition agreement,  non-solicitation
agreement,   confidentiality   agreement,  or  any  other  similar  contract  or

                                       10
<PAGE>

restrictive  covenant,  relating  to the  right  of  any  officer,  employee  or
consultant  to be employed or engaged by the Company or such  Subsidiary.  Since
September 30, 2003, no officer, consultant or key employee of the Company or any
Subsidiary whose  termination,  either  individually or in the aggregate,  could
have a Material  Adverse  Effect,  has  terminated  or, to the  knowledge of the
Company,  has any present  intention of  terminating  his or her  employment  or
engagement with the Company or any Subsidiary.

         (z)  Absence  of  Certain  Developments.  Except  as set  forth  in the
Commission  Documents or on Schedule  2.1(z) hereto,  since  September 30, 2003,
neither the Company nor any Subsidiary has:

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

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

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

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

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

             (vi) sold,  assigned or transferred any patent rights,  trademarks,
trade  names,   copyrights,   trade  secrets  or  other  intangible   assets  or
intellectual  property  rights,  which sale,  assignment  or transfer  has had a
Material Adverse Effect, or disclosed any proprietary  confidential  information
to any person except in the ordinary  course of business or to the Purchasers or
their representatives;

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

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

             (ix)  made  capital   expenditures  or  commitments  therefor  that
aggregate in excess of $25,000;

                                       11
<PAGE>

             (x) entered into any other  transaction  other than in the ordinary
course of business, or entered into any other material  transaction,  whether or
not in the ordinary course of business;  (xi) made charitable  contributions  or
pledges in excess of $25,000;

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

             (xiii)  experienced any material  problems with labor or management
in  connection  with the  terms and  conditions  of their  employment;  or (xiv)
entered into an agreement,  written or  otherwise,  to take any of the foregoing
actions.

         (aa) Use of  Proceeds.  Except as set forth on  Schedule  2.1(aa),  the
proceeds  from  the  sale of the  Shares  and the  Warrants  will be used by the
Company  for  working  capital  purposes  and,  except as set forth on  Schedule
2.1(aa), shall not be used to repay any outstanding Indebtedness or any loans to
any officer, director, affiliate or insider of the Company.

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

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

         Section 2.2  Representations and Warranties of the Purchasers.  Each of
the Purchasers hereby makes the following  representations and warranties to the
Company  with  respect  solely  to  itself  and not with  respect  to any  other
Purchaser:

                                       12
<PAGE>

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

         (b) Authorization and Power. Each Purchaser has the requisite power and
authority  to enter into and perform this  Agreement,  the  Registration  Rights
Agreement,  the Warrants,  and the other  agreements and documents  contemplated
hereby and thereby and executed by the  Purchaser  or to which the  Purchaser is
party (collectively,  the "Purchaser Transaction Documents") and to purchase the
Shares and Warrants  being sold to it  hereunder.  The  execution,  delivery and
performance  of the Purchaser  Transaction  Documents by each  Purchaser and the
consummation  by it of the  transactions  contemplated  hereby  have  been  duly
authorized  by all necessary  corporate or  partnership  action,  and no further
consent  or   authorization  of  such  Purchaser  or  its  Board  of  Directors,
stockholders,  or partners, as the case may be, is required.  This Agreement has
been duly  authorized,  executed and  delivered by each  Purchaser.  Each of the
Purchaser Transaction Documents  constitutes,  or shall constitute when executed
and  delivered,  valid and binding  obligations  of each  Purchaser  enforceable
against  such   Purchaser  in  accordance   with  its  terms,   except  as  such
enforceability   may  be   limited   by   applicable   bankruptcy,   insolvency,
reorganization,   moratorium,  liquidation,  conservatorship,   receivership  or
similar laws relating to, or affecting  generally the enforcement of, creditor's
rights  and  remedies  or  by  equitable   principles  or  remedies  of  general
application.

         (c) Acquisition for Investment. Each Purchaser is purchasing the Shares
and  acquiring  the  Warrants  solely  for its own  account  for the  purpose of
investment  and  not  with  a  view  to or  for  sale  in  connection  with  any
distribution  thereof.  Each Purchaser does not have a present intention to sell
any of  the  Securities,  nor a  present  arrangement  (whether  or not  legally
binding) or intention to effect any  distribution of any of the Securities to or
through  any  person  or  entity;   provided,   however,   that  by  making  the
representations  herein and subject to Section 2.2(e) below, each Purchaser does
not agree to hold any of the  Securities  for any minimum or other specific term
and  reserves  the  right to  dispose  of any of the  Securities  at any time in
accordance with federal and state securities laws applicable to such disposition
provided that the Company  receives an opinion of its counsel to the effect that
such disposition  complies with such laws. Each Purchaser  acknowledges  that it
(i) has such  knowledge and  experience  in financial and business  matters such
that such  Purchaser  is  capable  of  evaluating  the  merits  and risks of its
investment in the Company,  (ii) is able to bear the financial risks  associated
with an  investment in the  Securities,  and (iii) has been given full access to
such  records of the Company  and the  Subsidiaries  and to the  officers of the
Company  and the  Subsidiaries  as it has deemed  necessary  or  appropriate  to
conduct its due diligence investigation.

         (d)  Rule 144. Each Purchaser understands  that the Securities  must be
held indefinitely unless such Securities are registered under the Securities Act
or an exemption from registration is available. Each Purchaser acknowledges that
it is familiar with Rule 144 of the rules and regulations of the Commission,  as
amended,  promulgated pursuant to the Securities Act ("Rule 144"), and that such
Purchaser  has been  advised that Rule 144 permits  resales  only under  certain
circumstances.  Each Purchaser  understands  that to the extent that Rule 144 is

                                       13
<PAGE>

not available,  such  Purchaser  will be unable to sell any  Securities  without
either  registration  under  the  Securities  Act or the  existence  of  another
exemption from such registration requirement, provided that the Company receives
an opinion  of its  counsel  to the  effect  that such sale is exempt  from such
registration requirement.

         (e)  General.  Each Purchaser understands that the Securities are being
offered and sold in reliance on a transactional  exemption from the registration
requirements  of federal  and state  securities  laws and the Company is relying
upon the truth,  accuracy and completeness of the  representations,  warranties,
agreements,  acknowledgments  and  understandings  of such  Purchaser  set forth
herein and in the other  Purchaser  Transaction  Documents in order to determine
the  applicability  of such  exemptions and the suitability of such Purchaser to
acquire the Securities. Each Purchaser understands that no United States federal
or state agency or any government or governmental agency has passed upon or made
any recommendation or endorsement with respect to any of the Securities.

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

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

         (h) Accredited  Investor.  Each Purchaser is an accredited investor (as
defined in Rule 501 of Regulation D), and such Purchaser has such  experience in
business and financial  matters that it is capable of evaluating  the merits and
risks of an investment in the Securities.  Each Purchaser  acknowledges  that an
investment in the Securities is speculative  and involves a high degree of risk.

                                  ARTICLE III

                                    COVENANTS

         The parties  covenant with one another as follows,  which covenants are
for the  benefit of each  respective  covenantee  and its  respective  permitted
assignees.

              Section  3.1  Disclosure  of   Transactions   and  Other  Material
Information.  On or before 8:30 a.m.,  New York City time,  on the  business day
immediately  following the Closing Date, the Company shall file a Current Report
on Form  8-K with  the  Commission  describing  the  terms  of the  transactions

                                       14
<PAGE>

contemplated  by the  Transaction  Documents  and  including as exhibits to such
Current  Report on Form 8-K this  Agreement,  the Warrants and the  Registration
Rights  Agreement,  and the schedules hereto and thereto in the form required by
the Exchange Act (including  all  attachments,  the "8-K  Filing").  The Company
shall not,  and shall cause each of its  Subsidiaries  and its and each of their
respective  officers,  directors,  employees  and  agents  not to,  provide  the
Purchaser with any material,  nonpublic information regarding the Company or any
of its  Subsidiaries  from and  after  the  filing  of the 8-K  Filing  with the
Commission  without the express  written  consent of the Purchaser.  Neither the
Company nor the  Purchaser  shall issue any press  releases or any other  public
statements  with  respect to the  transactions  contemplated  hereby;  provided,
however,  that the Company shall be entitled,  without the prior approval of the
Purchaser,  to make any press release or other public disclosure with respect to
such  transactions  (i) in  substantial  conformity  with  the  8-K  Filing  and
contemporaneously  therewith,  and (ii) as is  required  by  applicable  law and
regulations  (provided that in the case of clause (i) above, the Purchaser shall
be consulted by the Company  (although the consent of the Purchaser shall not be
required) in connection  with any such press release or other public  disclosure
prior to its release).

              Section 3.2   Registration and  Listing.  The Company will use its
commercially reasonable efforts to cause its Common Stock to be registered under
Section 12(b) or 12(g) of the Exchange Act, will comply in all respects with its
reporting  and filing  obligations  under the Exchange Act, will comply with all
requirements  related  to any  registration  statement  filed  pursuant  to this
Agreement,  and will not take any action or file any  document  (whether  or not
permitted  by the  Securities  Act  or  the  rules  promulgated  thereunder)  to
terminate or suspend such  registration or to terminate or suspend its reporting
and filing  obligations  under the Exchange  Act or  Securities  Act,  except as
permitted herein. The Company will promptly file the "Listing  Application" for,
or in connection  with, the issuance and delivery of the  Conversion  Shares and
the Warrant Shares.

              Section  3.3  Inspection  Rights.  In the event  the  Registration
Statement (as defined in the  Registration  Rights  Agreement) is not effective,
has been  suspended  or is  otherwise  no longer  effective,  the Company  shall
permit,  during normal business hours and upon reasonable request and reasonable
notice, a Purchaser or any employees, agents or representatives thereof that are
parties  to  an  effective   confidentiality   agreement  with  the  Company  of
appropriate  scope,  so long as a  Purchaser  shall be  obligated  hereunder  to
purchase the Shares or shall  beneficially own the Shares or Conversion  Shares,
or shall own Warrant Shares or the Warrants which,  in the aggregate,  represent
more than two  percent  (2%) of the total  combined  voting  power of all voting
securities  then  outstanding,  to  examine  and make  reasonable  copies of and
extracts from the records and books of account of, and visit and inspect, during
the term of the Warrants, the properties, assets, operations and business of the
Company and any Subsidiary, and to discuss the affairs, finances and accounts of
the Company and any Subsidiary with any of its officers, consultants, directors,
and key employees.

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

                                       15
<PAGE>

              Section 3.5   Keeping of Records and Books of Account. The Company
shall keep and cause  each  Subsidiary  to keep  adequate  records  and books of
account,  in  which  complete  entries  will  be made in  accordance  with  GAAP
consistently applied.

              Section 3.6  Other Agreements.  The Company shall not  enter  into
any agreement containing any provision that would violate the terms of, or cause
a default under, any material term of any Transaction Document.

              Section 3.7   Reservation  of  Shares.  So long as the  Shares  or
Warrants remain  outstanding,  the Company shall take all action necessary to at
all times have authorized, and reserved for the purpose of issuance, the maximum
number of shares of Common Stock to effect the  conversion of the Shares and the
exercise of the Warrants.

              Section 3.8   Non-public Information.  Neither the Company nor any
of its officers or agents shall  disclose  any material  non-public  information
about the Company to the Purchasers, and neither the Purchasers nor any of their
affiliates,  officers or agents will solicit any material non-public information
from the Company.

              Section  3.9  Lock-Up.  Each  Purchaser  agrees  to sell,  in each
calendar  month during the one-year  period  beginning on the Closing Date,  not
more than 1/12 of the aggregate  number of Conversion  Shares and Warrant Shares
issuable to such  Purchaser  pursuant to the  Transaction  Documents;  provided,
however,  that the number of such Conversion  Shares and Warrant Shares that can
be sold shall be  cumulative  and shall begin to accumulate on the day following
the Closing  Date;  and,  provided  further  that the number of such  Conversion
Shares and Warrant  Shares that may be sold in any calendar month shall increase
to 1/6 of such aggregate number of Conversion Shares and Warrant Shares issuable
to the  undersigned  in the event that the average daily  trading  volume in the
Common Stock is equal to or greater than 200,000  shares per day in the previous
20 trading days. The Company shall use its  commercially  reasonable  efforts to
cause each of its officers,  directors and affiliates to enter into an agreement
containing  covenants  substantially  similar to those set forth in this Section
3.10.

                                   ARTICLE IV

                                   CONDITIONS

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

              (a) Accuracy of the  Purchasers'  Representations  and Warranties.
The representations and warranties of each Purchaser Transaction Documents shall
be true and correct in all material  respects as of the date when made and as of

                                       16
<PAGE>

the Closing  Date as though made at that time,  except for  representations  and
warranties that are expressly made as of a particular  date, which shall be true
and correct in all material respects as of such date.

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

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

              (d) Delivery of Purchase Price.  The Purchase Price for the Shares
and Warrants shall have been delivered to the Company at the Closing.

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

              Section  4.2  Conditions   Precedent  to  the  Obligation  of  the
Purchasers  to Close and to Purchase  the Shares and  Warrants.  The  obligation
hereunder of the  Purchasers to purchase the Shares and Warrants and  consummate
the  transactions  contemplated by this Agreement is subject to the satisfaction
or waiver, at or before the Closing,  of each of the conditions set forth below.
These  conditions are for the Purchasers'  sole benefit and may be waived by the
Purchasers at any time in their sole discretion.

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

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

              (c) No  Suspension,  Etc.  Trading in the  Company's  Common Stock
shall not have been  suspended by the  Commission  (except for any suspension of
trading of limited duration agreed to by the Company,  which suspension shall be
terminated  prior to the  Closing),  and, at any time prior to the Closing Date,
trading in  securities  generally  as reported by  Bloomberg  Financial  Markets
("Bloomberg")  shall not have been suspended or limited, or minimum prices shall
not have been  established on securities whose trades are reported by Bloomberg,
nor shall a banking moratorium have been declared either by the United States or
Nevada  State  authorities,  nor shall  there  have  occurred  any  national  or
international  calamity  or  crisis  of  such  magnitude  in its  effect  on any

                                       17
<PAGE>

financial  market  which,  in  each  case,  in the  reasonable  judgment  of the
Purchasers, makes it impracticable or inadvisable to purchase the Shares.

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

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

              (f) Opinion of Counsel, Etc. The Purchasers shall have received an
opinion of counsel to the Company, dated the Closing Date,  substantially in the
form of  Exhibit C hereto,  and such other  certificates  and  documents  as the
Purchasers or their counsel shall reasonably require incident to the Closing.

              (g) Warrants and Shares.  The Company shall have  delivered to the
Purchasers  the  originally  executed  Warrants (in such  denominations  as each
Purchaser  may  request but in no event in  denominations  of less than 100) and
shall have delivered certificates representing the Shares (in such denominations
as each Purchaser may request) being acquired by the Purchasers at the Closing.

              (h) Resolutions.  The Board of Directors of the Company shall have
adopted  resolutions  consistent with Section 2.1(b) hereof in a form reasonably
acceptable to the Purchasers (the "Resolutions").

              (i)  Certificate  of  Designations.  As of the Closing  Date,  the
Company  shall have filed with the Nevada  Secretary of State a  Certificate  of
Designation authorizing the Preferred Stock in substantially the Form of Exhibit
D attached hereto.

              (j)  Reservation  of Shares.  As of the Closing Date,  the Company
shall have reserved out of its authorized and unissued  Preferred Stock,  solely
for the purpose of effecting  the issuance of the Shares,  a number of shares of
Preferred Stock equal to the aggregate  number of the Shares.  As of the Closing
Date, the Company shall have reserved out of its authorized and unissued  Common
Stock,  solely for the purpose of effecting the conversion of the Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to the number
of Conversion  Shares and the number of Warrant Shares  issuable upon conversion
of the Preferred Stock and the exercise of the Warrants, respectively,  assuming
the  Warrants  are  exercised  and the Shares are  converted on the Closing Date
(assuming the Warrants are fully exercisable and the Shares fully convertible on
such date  regardless of any limitation on the timing or amount of such exercise
or conversion).

                                       18
<PAGE>

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

              (l) Officer's Certificate.  On the Closing Date, the Company shall
have delivered to the  Purchasers a certificate  of an executive  officer of the
Company,  dated as of the Closing Date, confirming the accuracy of the Company's
representations,  warranties and covenants  contained  herein and in each of the
other Transaction Documents as of the Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section 4.2 as of
the Closing Date.

              (m)  Fees  and  Expenses.  As of the  Closing  Date,  all fees and
expenses  required to be paid by the Company in connection with the transactions
contemplated by this Agreement shall have been, or authorized to be, paid by the
Company.

              (n)  Registration  Rights  Agreement.  As of the Closing Date, the
parties shall have entered into the Registration Rights Agreement in the Form of
Exhibit E attached hereto.

              (o) Material Adverse Effect. No Material Adverse Effect shall have
occurred.

                                   ARTICLE V

                               CERTIFICATE LEGEND

              Section 5.1 Legend. Each certificate  representing the Shares, the
Conversion  Shares,  the  Warrants  and the Warrant  Shares  shall be stamped or
otherwise  imprinted  with a  legend  substantially  in the  following  form (in
addition to any legend  required by  applicable  state  securities or "blue sky"
laws):

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

         Each  certificate  representing  any  Shares  shall  also be stamped or
otherwise imprinted with a legend substantially in the following form:

                                       19
<PAGE>

         AXM  PHARMA,  INC.  WILL  FURNISH  TO  EACH  HOLDER  OF  ITS  SERIES  A
         CONVERTIBLE  PREFERRED  STOCK WHO SO REQUESTS  WITHOUT CHARGE A COPY OF
         THE CERTIFICATE OF DESIGNATION SETTING FORTH THE POWERS,  DESIGNATIONS,
         PREFERENCES  AND  RELATIVE,  PARTICIPATING,  OPTIONAL OR OTHER  SPECIAL
         RIGHTS  OF SUCH  STOCK AND ANY OTHER  CLASS OR SERIES  THEREOF  AND THE
         QUALIFICATIONS,  LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
         RIGHTS.

         The  Company  agrees to reissue  certificates  representing  any of the
Securities, without the legend set forth above, if at such time, prior to making
any  transfer of any such  Securities,  such holder  thereof  shall give written
notice to the  Company  describing  the  manner and terms of such  transfer  and
removal as the Company may reasonably  request.  Such proposed transfer will not
be effected  until:  (a) the Company has notified such holder that either (i) in
the opinion of Company counsel,  the registration of the Shares,  the Conversion
Shares,  Warrants or Warrant  Shares under the Securities Act is not required in
connection with such proposed transfer,  or (ii) a registration  statement under
the  Securities  Act covering  such proposed  disposition  has been filed by the
Company with the Commission and has become  effective  under the Securities Act;
and (b) the Company has  notified  such holder that either (i) in the opinion of
Company counsel, the registration or qualification under the securities or "blue
sky"  laws of any  state  is not  required  in  connection  with  such  proposed
disposition,  or (ii) compliance with applicable  state securities or "blue sky"
laws has been effected.  The Company will use its best efforts to respond to any
such notice  from a holder  within  five (5) days.  In the case of any  proposed
transfer  under this Section 5.1,  the Company  will use  reasonable  efforts to
comply with any such applicable  state  securities or "blue sky" laws, but shall
in no event be required, in connection  therewith,  to qualify to do business in
any  state  where it is not then  qualified  or to take any  action  that  would
subject it to tax or to the general  service of process in any state where it is
not then subject.  The  restrictions  on transfer  contained in this Section 5.1
shall be in addition to, and not by way of limitation of, any other restrictions
on transfer contained in any other section of this Agreement.

                                   ARTICLE VI

                                   TERMINATION

              Section 6.1  Termination by Mutual Consent.  This Agreement may be
terminated at any time prior to the Closing Date by the mutual  written  consent
of the Company and the Purchasers.

              Section 6.2  Effect of Termination. In the event of termination by
the Company or the  Purchasers,  written notice thereof shall forthwith be given
to the other party and the transactions  contemplated by this Agreement shall be
terminated  without further action by any party. If this Agreement is terminated
as provided in Section 6.1 herein,  this  Agreement  shall become void and of no
further  force and  effect,  except for  Sections  8.1 and 8.2,  and Article VII
herein.  Nothing in this  Section  6.2 shall be deemed to release the Company or
any  Purchaser  from any liability  for any breach under this  Agreement,  or to

                                       20
<PAGE>

impair  the  rights  of  the  Company  or  such  Purchaser  to  compel  specific
performance by the other party of its obligations under this Agreement.

                                  ARTICLE VII

                                 INDEMNIFICATION

              Section 7.1  General Indemnity.  The Company  agrees to  indemnify
and hold  harmless  each  Purchaser  (and its  respective  directors,  officers,
employees,  affiliates, agents, successors and assigns) from and against any and
all losses, liabilities,  deficiencies,  costs, damages and expenses (including,
without  limitation,  reasonable  attorneys'  fees,  charges and  disbursements)
incurred by each  Purchaser or any such person as a result of any  inaccuracy in
or breach of the  representations,  warranties or covenants  made by the Company
herein.  The  Purchasers  severally  but not jointly agree to indemnify and hold
harmless the Company and its directors, officers, employees, affiliates, agents,
successors  and  assigns  from  and  against  any and all  losses,  liabilities,
deficiencies,  costs,  damages  and  expenses  (including,  without  limitation,
reasonable  attorneys' fees, charges and disbursements)  incurred by the Company
as result of any inaccuracy in or breach of the  representations,  warranties or
covenants made by the Purchasers herein.

              Section  7.2  Indemnification  Procedure.  Any party  entitled  to
indemnification  under  this  Article  VII (an  "indemnified  party")  will give
written notice to the  indemnifying  party of any matters giving rise to a claim
for  indemnification;  provided,  that the  failure  of any  party  entitled  to
indemnification  hereunder  to give notice as provided  herein shall not relieve
the indemnifying  party of its obligations  under this Article VII except to the
extent that the  indemnifying  party is actually  prejudiced  by such failure to
give  notice.  In case any  action,  proceeding  or claim is brought  against an
indemnified party in respect of which  indemnification is sought hereunder,  the
indemnifying  party  shall be  entitled  to  participate  in and,  unless in the
reasonable  judgment of the indemnified  party a conflict of interest between it
and the indemnifying party may exist with respect to such action,  proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified  party.  In  the  event  that  the  indemnifying  party  advises  an
indemnified  party  that  it  will  contest  such a  claim  for  indemnification
hereunder,  or fails,  within thirty (30) days of receipt of any indemnification
notice to notify such person in writing of the indemnifying  party's election to
defend,  settle  or  compromise,  at its sole  cost  and  expense,  any  action,
proceeding or claim (or  discontinues its defense at any time after it commences
such defense),  then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the  indemnifying  party  elects in  writing  to assume  and does so assume  the
defense of any such claim,  proceeding or action, the indemnified  party's costs
and expenses  arising out of the defense,  settlement  or compromise of any such
action,   claim  or  proceeding  shall  be  losses  subject  to  indemnification
hereunder.  The indemnified  party shall  cooperate fully with the  indemnifying
party in connection  with any negotiation or defense of any such action or claim
by the  indemnifying  party  and shall  furnish  to the  indemnifying  party all
information  reasonably available to the indemnified party which relates to such
action or claim. The indemnifying  party shall keep the indemnified  party fully
apprised  at  all  times  as to the  status  of the  defense  or any  settlement
negotiations  with respect thereto.  If the indemnifying  party elects to defend

                                       21
<PAGE>

any such  action or claim,  then the  indemnified  party  shall be  entitled  to
participate  in such  defense  with  counsel  of its choice at its sole cost and
expense.  The  indemnifying  party shall not be liable for any settlement of any
action,  claim  or  proceeding  effected  without  its  prior  written  consent.
Notwithstanding  anything in this Article VII to the contrary,  the indemnifying
party shall not, without the indemnified  party's prior written  consent,  which
consent may not be  unreasonably  withheld,  settle or  compromise  any claim or
consent to entry of any  judgment in respect  thereof  which  imposes any future
obligation  on  the  indemnified  party  or  which  does  not  include,   as  an
unconditional  term thereof,  the giving by the claimant or the plaintiff to the
indemnified  party of a release from all liability in respect of such claim.  If
the  indemnifying  party fails or refuses to promptly  assume the defense of any
such claim,  proceeding  or action,  then the  indemnification  required by this
Article VII shall be made by periodic  payments of the amount thereof during the
course of investigation  or defense,  as and when bills are received or expense,
loss,  damage  or  liability  is  incurred,  so  long as the  indemnified  party
irrevocably  agrees to refund such moneys if it is  ultimately  determined  by a
court  of   competent   jurisdiction   that  such  party  was  not  entitled  to
indemnification.  The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar  rights of the  indemnified  party against
the indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to applicable law.

                                  ARTICLE VIII
                                  MISCELLANEOUS

              Section 8.1  Fees and Expenses.  Each party shall pay the fees and
expenses of its advisors,  counsel,  accountants and other experts,  if any, and
all  other  expenses,  incurred  by  such  party  incident  to the  negotiation,
preparation,  execution,  delivery and performance of this Agreement;  provided,
however,  that the Company  shall pay $10,000 to Gryphon  Master  Fund,  L.P. to
reimburse it for the fees and expenses (including  attorneys' fees and expenses)
incurred by it in connection  with its due  diligence  review of the Company and
the  preparation,  negotiation,  execution,  delivery  and  performance  of this
Agreement and the other Transaction Documents and the transactions  contemplated
thereunder (including its counsel's review of the Registration  Statement),  the
full amount of which  shall be due and  payable in cash at Closing  (but only if
the Closing occurs). In addition,  the Company shall pay all reasonable fees and
expenses   incurred  by  each  Purchaser  in  connection  with  any  amendments,
modifications  or  waivers  of this  Agreement  or any of the other  Transaction
Documents or incurred in connection  with the  enforcement of this Agreement and
any of the other  Transaction  Documents,  including,  without  limitation,  all
reasonable attorneys' fees, disbursements and expenses.

              Section 8.2  Specific Enforcement; Consent to Jurisdiction.

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

                                       22
<PAGE>

              (b) The Company and each Purchaser (i) hereby  irrevocably  submit
to the exclusive jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York County for the purposes of any suit,  action or proceeding  arising out
of or relating to this  Agreement or any of the other  Transaction  Documents or
the  transactions  contemplated  hereby or thereby,  and (ii) hereby waive,  and
agree not to assert in any such suit, action or proceeding, any claim that it is
not personally  subject to the  jurisdiction of each such court,  that the suit,
action or  proceeding is brought in an  inconvenient  forum or that the venue of
the suit,  action or  proceeding  is  improper.  The Company and each  Purchaser
consent  to  process  being  served in any such suit,  action or  proceeding  by
mailing a copy  thereof to such party at the address in effect for notices to it
under this  Agreement  and agrees that such service  shall  constitute  good and
sufficient  service of process and notice  thereof.  Nothing in this Section 8.2
shall affect or limit any right to serve  process in any other manner  permitted
by law. The Company and the Purchasers hereby agree that the prevailing party in
any suit,  action or proceeding  arising out of or relating to the Shares,  this
Agreement,  the Registration Rights Agreement or the Warrants, shall be entitled
to reimbursement for reasonable legal fees from the non-prevailing party.

              Section 8.3  Entire Agreement;  Amendment.  This  Agreement,  the
Transaction Documents and the Purchaser Transaction Documents contain the entire
understanding  and agreement of the parties with respect to the matters  covered
hereby and, except as specifically set forth herein or in any of the Transaction
Documents  or  Purchaser  Transaction  Documents,  neither  the  Company nor any
Purchaser  make any  representation,  warranty,  covenant  or  undertaking  with
respect to such  matters.  This  Agreement,  the  Transaction  Documents and the
Purchaser   Transaction   Documents  supersede  all  prior   understandings  and
agreements with respect to said subject matter,  all of which are merged herein.
No provision of this  Agreement may be waived or amended other than by a written
instrument  signed by the Company and the Purchasers and their permitted assigns
owning of record at least a majority in interest of the then-outstanding Shares,
and no provision hereof may be waived other than by a written  instrument signed
by the party against whom enforcement of any such waiver is sought. No amendment
to this Agreement  shall be effective to the extent that it applies to less than
all of the holders of the Shares then  outstanding  or violates any provision of
the Nevada  Corporation  Law. No  consideration  shall be offered or paid to any
person to amend or consent to a waiver or  modification  of any provision of any
of the Transaction  Documents  unless the same  consideration is also offered to
all of the parties to the  Transaction  Documents  or holders of Shares,  as the
case may be.

              Section 8.4  Notices.  Any  notice,  demand,  request,  waiver  or
other  communication  required or  permitted to be given  hereunder  shall be in
writing  and  shall be deemed  given and  received  (a) upon  hand  delivery  or
delivery by telecopy or facsimile at the address or number  designated below (if
delivered on a business day during normal business hours where such notice is to
be received),  or the first  business day following  such delivery (if delivered
other than on a business day during normal  business  hours where such notice is
to be received), or (b) on the second business day following the date of mailing
by express courier service,  fully prepaid,  addressed to such address,  or upon
actual receipt of such mailing,  whichever shall first occur.  The addresses for
such communications shall be:

                                       23
<PAGE>

If to the Company:                  AXM Pharma, Inc.
                                    4695 Macarthur Court, 11th Floor
                                    Newport Beach, California  92660
                                    Attention:  Peter Cunningham, President
                                    Telecopier:  (949) 798-5501
                                    Telephone:  (949) 798-5587

with copies (which copies
shall not constitute notice
to the Company) to:                 Law Offices of Louis E. Taubman, P.C.
                                    225 Broadway, Suite 1200
                                    New York, New York  10007
                                    Attention:  Louis E. Taubman, Esq.
                                    Telecopier: (212) 202-6380
                                    Telephone:  (212) 732-7184

If to any Purchaser:                At the address of such Purchaser set forth
                                    on Exhibit A to this Agreement.

         Any party  hereto may from time to time  change its address for notices
by giving at least ten (10) days written  notice of such changed  address to the
other party or parties hereto in accordance  with the provisions of this Section
8.4.

              Section 8.5  Waivers.  No waiver by any party of any default  with
respect to any provision,  condition or  requirement of this Agreement  shall be
deemed  to be a  continuing  waiver  in the  future  or a  waiver  of any  other
provision,  condition or requirement  hereof, nor shall any delay or omission of
any party to exercise any right  hereunder in any manner  impair the exercise of
any such right accruing to it thereafter.

              Section 8.6 Headings. The article, section and subsection headings
in this  Agreement are for  convenience  only and shall not constitute a part of
this  Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.

              Section  8.7  Successors  and  Assigns.  This  Agreement  shall be
binding  upon and inure to the benefit of the parties and their  successors  and
permitted  assigns.  After  the  Closing,  the  assignment  by a  party  to this
Agreement of any rights hereunder shall not affect the obligations of such party
under this Agreement.

              Section  8.8 No  Third  Party  Beneficiaries.  This  Agreement  is
intended for the benefit of the parties  hereto and their  respective  permitted
successors  and assigns  and is not for the  benefit  of, nor may any  provision
hereof be enforced  by, any other person  (other than  indemnified  parties,  as
contemplated by Article VII).

              Section 8.9 Governing Law. This Agreement shall be governed by and
construed in accordance  with the internal laws of the State of Nevada,  without

                                       24
<PAGE>

giving  effect to the  choice of law  provisions.  This  Agreement  shall not be
interpreted  or construed  with any  presumption  against the party causing this
Agreement to be drafted.

              Section 8.10  Survival.  The representations and warranties of the
Company  contained  in  Sections  2.1(o)  and  2.1(s)  shall  survive  until the
expiration of the applicable  statutes of  limitations,  and those  contained in
Article II, with the exception of Sections 2.1(o) and 2.1(s),  shall survive the
execution and delivery  hereof and the Closing until the date two (2) years from
the Closing Date, and the agreements and covenants set forth in Articles I, III,
V, VII and VIII of this  Agreement  shall  survive the  execution  and  delivery
hereof and the Closing hereunder.

              Section 8.11  Counterparts.  This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto,  it being  understood that
all parties need not sign the same counterpart.

              Section  8.12  Publicity.  The  Company  agrees  that it will  not
disclose,  and will not  include  in any public  announcement,  the names of the
Purchasers without the consent of the Purchasers in accordance with Section 8.3,
which consent shall not be unreasonably withheld or delayed, or unless and until
such disclosure is required by law, rule or applicable regulation, and then only
to the extent of such requirement.

              Section 8.13  Severability.  The  provisions of this Agreement are
severable  and,  in the event  that any court of  competent  jurisdiction  shall
determine  that  any  one or more of the  provisions  or part of the  provisions
contained  in this  Agreement  shall,  for any  reason,  be held to be  invalid,
illegal  or  unenforceable  in  any  respect,  such  invalidity,  illegality  or
unenforceability  shall not affect any other provision or part of a provision of
this  Agreement  and this  Agreement  shall be reformed and construed as if such
invalid or illegal or unenforceable  provision,  or part of such provision,  had
never been contained herein,  so that such provisions would be valid,  legal and
enforceable to the maximum extent possible.

              Section 8.14  Further Assurances.  From and after the date of this
Agreement,  upon the request of the  Purchasers or the Company,  the Company and
each Purchaser shall execute and deliver such  instruments,  documents and other
writings as may be  reasonably  necessary  or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement,  the Warrants
and the Registration Rights Agreement.

                  [Remainder of page intentionally left blank.]

                                       25
<PAGE>

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

                                            AXM PHARMA, INC.

                                            By:
                                                -------------------------------
                                                      Name:  Peter Cunningham
                                                      Title: President

                                            BANYAN ASIA LIMITED

                                            By:  BANYAN FUND MANAGEMENT, LLC,
                                                      its  General Partner

                                            By:
                                                -------------------------------
                                                      S.P. Wijegoonaratna,
                                                      Managing Member

                                            BANYAN MAC 24, LTD.

                                            By:  BANYAN FUND MANAGEMENT, LLC,
                                                      its  General Partner

                                            By:
                                                -------------------------------
                                                      S.P. Wijegoonaratna,
                                                      Managing Member

                                       26
<PAGE>

<TABLE>

<CAPTION>

                                    EXHIBIT A
                               LIST OF PURCHASERS

NAMES AND ADDRESSES OF       NUMBER OF SHARES   NUMBER OF WARRANTS   DOLLAR AMOUNT
PURCHASERS                     PURCHASED          PURCHASED          OF INVESTMENT
 ---------                     ---------          ---------          -------------
<S>                            <C>                <C>                <C>

Banyan Asia Limited                 378,400             440,000      $  851,400
780 Third Avenue, 44th Floor
New York, NY 10017
Attn: Stephen J. Lemanski

Banyan Mac 24, Ltd.                 481,600            560,000       $1,083,600
780 Third Avenue, 44th Floor
New York, NY 10017
Attn: Stephen J. Lemanski

</TABLE>

                                      A-1
<PAGE>

                                    EXHIBIT B
                                    ---------
                                 FORM OF WARRANT

                                      B-1
<PAGE>

                                    EXHIBIT C
                                 FORM OF OPINION

         1. The Company is a corporation duly incorporated, validly existing and
in good  standing  under the laws of the State of Nevada  and has the  requisite
corporate  power to own,  lease and operate its  properties  and assets,  and to
carry on its business as presently conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the failure to so qualify would have a Material Adverse Effect.

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

         3. The Shares have been duly  authorized  and, when  delivered  against
payment in full as provided in the Purchase  Agreement,  will be validly issued,
fully paid and nonassessable.  The Conversion Shares,  have been duly authorized
and reserved for issuance,  and, when delivered  upon  conversion of the Shares,
will be validly issued,  fully paid and nonassessable.  The Warrant Shares, have
been duly  authorized  and reserved  for  issuance,  and,  when  delivered  upon
exercise or against payment in full as provided in the Warrants, will be validly
issued, fully paid and nonassessable.

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

                                      C-1
<PAGE>

         5. No consent, approval or authorization of or designation, declaration
or filing with any governmental authority on the part of the Company is required
under  Federal,  state or local law, rule or  regulation in connection  with the
valid execution,  delivery and performance of the Transaction Documents,  or the
offer, sale or issuance of the Shares,  the Conversion  Shares,  the Warrants or
the Warrant  Shares other than filings as may be required by applicable  Federal
and state securities laws and regulations.

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

         7. The offer,  issuance and sale of the Shares and the Warrants and the
offer,  issuance  and  sale of the  Conversion  Shares  and the  Warrant  Shares
pursuant to the Agreement and the Warrants,  as applicable,  are exempt from the
registration requirements of the Securities Act of 1933, as amended.

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

                                      C-2
<PAGE>

                                    EXHIBIT D
                                    ---------
                       FORM OF CERTIFICATE OF DESIGNATIONS

                                       D-1
<PAGE>

                                    EXHIBIT E
                                    ---------
                      FORM OF REGISTRATION RIGHTS AGREEMENT

                                       E-1

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