Document:

SECURITIES
      PURCHASE AGREEMENT

     

    This
      Securities Purchase Agreement (this “Agreement”)
      is
      dated as of March 10, 2006 among Aprecia Inc., a Delaware corporation (the
      “Company”),
      and
      each purchaser identified on the signature pages hereto (each, including its
      successors and assigns, a “Purchaser”
and
      collectively the “Purchasers”).

     

    WHEREAS,
      subject to the terms and conditions set forth in this Agreement and pursuant
      to
      Section 4(2) of the Securities Act of 1933, as amended (the “Securities
      Act”)
      and
      Rule 506 promulgated thereunder, the Company desires to issue and sell to each
      Purchaser, and each Purchaser, severally and not jointly, desires to purchase
      from the Company, securities of the Company as more fully described in this
      Agreement.

     

    NOW,
      THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
      and for other good and valuable consideration the receipt and adequacy of which
      are hereby acknowledged, the Company and each Purchaser agree as
      follows:

     

     

    ARTICLE
      I.

    DEFINITIONS

     

    1.1  
Definitions.
      In
      addition to the terms defined elsewhere in this Agreement: (a) capitalized
      terms
      that are not otherwise defined herein have the meanings given to such terms
      in
      the Debentures (as defined herein), and (b) the following terms have the
      meanings indicated in this Section 1.1:

     

    “Action”
shall
      have the meaning ascribed to such term in Section 3.1(j).

     

    “Affiliate”
means
      any Person that, directly or indirectly through one or more intermediaries,
      controls or is controlled by or is under common control with a Person, as such
      terms are used in and construed under Rule 144 under the Securities
      Act.
      With
      respect to a Purchaser, any investment fund or managed account that is managed
      on a discretionary basis by the same investment manager as such Purchaser will
      be deemed to be an Affiliate of such Purchaser.

     

    “Business
      Day”
means
      any day except Saturday, Sunday and any day which shall be a federal legal
      holiday in the United States or a day on which banking institutions in the
      State
      of New York are authorized or required by law or other government action to
      close. 

     

    “Closing”
means
      the closing of the purchase and sale of the Securities pursuant to Section
      2.1.

     

    “Closing
      Date”
means
      the Business Day when all of the Transaction Documents have been executed and
      delivered by the applicable parties thereto, and all conditions precedent to
      (i)
      the Purchasers’ obligations to pay the Subscription Amount and (ii) the
      Company’s obligations to deliver the Securities have been satisfied or
      waived.

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    “Collateral
      Agent Agreement”
shall
      mean the Collateral Agent Agreement in substantially the form of Exhibit
      F
      hereto
      executed and delivered contemporaneously with this Agreement.

     

    “Commission”
means
      the Securities and Exchange Commission.

     

    “Common
      Stock”
means
      the common stock of the Company, par value $0.0001 per share, and any other
      class of securities into which such securities may hereafter have been
      reclassified or changed into.

     

    “Common
      Stock Equivalents”
means
      any securities of the Company or the Subsidiaries which would entitle the holder
      thereof to acquire at any time Common Stock, including without limitation,
      any
      debt, preferred stock, rights, options, warrants or other instrument that is
      at
      any time convertible into or exchangeable for, or otherwise entitles the holder
      thereof to receive, Common Stock.

     

    “Company
      Counsel”
means
      Sichenzia Ross Friedman Ference LLP.

     

    “Conversion
      Price”
shall
      have the meaning ascribed to such term in the Debentures.

     

    “Conversion
      Shares”
means
      the Underlying Shares.

     

    “Debentures”
means,
      the 7% Convertible Debentures due, subject to the terms therein, to be issued
      by
      the Company to the Purchasers hereunder, in the form of Exhibit
      A.

     

    “Disclosure
      Schedules”
shall
      have the meaning ascribed to such term in Section 3.1.

     

    “Effectiveness
      Date”
shall
      have the meaning set forth in the Registration Rights Agreement.

     

    “Escrow
      Agent”
shall
      have the meaning set forth in the Escrow Agreement.

    

    “Escrow
      Agreement”
shall
      mean the Escrow Agreement in substantially the form of Exhibit
      B
      hereto
      executed and delivered contemporaneously with this Agreement.

    

    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended, and the rules and regulations
      promulgated thereunder.

    

    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers
      or
      directors of the Company pursuant to any stock or option plan duly adopted
      by a
      majority of the Board of Directors of the Company or a majority of the members
      of a committee of directors established for such purpose, (b) securities upon
      the exercise of or conversion of any Securities issued hereunder, convertible
      securities, options or warrants issued and outstanding on the date of this
      Agreement, provided that such securities have not been amended since the date
      of
      this Agreement to increase the number of such securities or to decrease the
      exercise or conversion price of any such securities, (c) securities issued
      in
      connection with a proposed private placement of shares of common stock of the
      Company not to exceed $50,000 in gross proceeds at an issue price of not less
      than $0.12 per share, and (d) securities issued pursuant to acquisitions or
      strategic transactions, provided any such issuance shall only be to a Person
      which is, itself or through its subsidiaries, an operating company in a business
      synergistic with the business of the Company and in which the Company receives
      benefits in addition to the investment of funds, but shall not include a
      transaction in which the Company is issuing securities primarily for the purpose
      of raising capital or to an entity whose primary business is investing in
      securities; provided none of the foregoing at any time Debentures are
      outstanding, is registered with the Commission.

    

    
      
         

      

      
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    “Fully-Diluted
      Outstanding Capital Stock”
means
      the sum of (i) the total number of then issued and outstanding shares of Common
      Stock and all other classes of capital stock of the Company, plus (ii) the
      total
      number of shares of all Common Stock and all other classes of capital stock
      of
      the Company into which all then issued and outstanding and fully-vested Common
      Stock Equivalents and other securities convertible, exchangeable or otherwise
      into other classes of capital stock of the company may be converted,
      exchangeable or otherwise.

    

    “GAAP”
shall
      have the meaning ascribed to such term in Section 3.1(h).

     

    “GM”
means
      Grushko & Mittman, P.C., with offices located at 551 Fifth Avenue, Suite
      1601, New York, New York 10176.

     

    “Government
      Entity”
shall
      have the meaning ascribed to such term in Section 4.22.

     

    “Intellectual
      Property Rights”
shall
      have the meaning ascribed to such term in Section 3.1(o).

     

    “Legend
      Removal Date”
shall
      have the meaning ascribed to such term in Section 4.1(c). 

     

    “Liens”
means
      a
      lien, charge, security interest, encumbrance, right of first refusal, preemptive
      right or other restriction. 

     

    “Listing
      Date”
shall
      have the meaning ascribed to such term in Section 4.12(c).

     

    “Material
      Adverse Effect”
shall
      have the meaning assigned to such term in Section 3.1(b).

     

    “Material
      Permits”
shall
      have the meaning ascribed to such term in Section 3.1(m).

     

    “Maximum
      Rate”
shall
      have the meaning ascribed to such term in Section 5.17.

     

    
      
         

      

      
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    “Participation
      Maximum”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

    “Person”
means
      an individual or corporation, partnership, trust, incorporated or unincorporated
      association, joint venture, limited liability company, joint stock company,
      government (or an agency or subdivision thereof) or other entity of any
      kind.

     

    “Pre-Notice”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

    “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.

     

    “Purchaser
      Party”
shall
      have the meaning ascribed to such term in Section 4.11.

     

    “Records”
means
      all documents, books, records and other information (including, without
      limitation, computer programs, tapes, disks, punch cards, data processing
      software and related property and rights) maintained with respect to the
      Company’s business.

    

    “Registration
      Rights Agreement”
shall
      mean the Registration Rights Agreement in substantially the form of Exhibit
      E
      hereto
      executed and delivered contemporaneously with this Agreement.

    

    “Registrable
      Securities”
means
      (i) all of the shares of Common Stock issuable upon conversion in full of the
      Debentures, (ii) any securities issued or issuable upon any stock split,
      dividend or other distribution, recapitalization or similar event with respect
      to the shares identified in clause (i) above and (iii) any additional shares
      issuable in connection with any anti-dilution provisions in the Debentures
      (in
      each case, without giving effect to any limitations on conversion set forth
      in
      the Debenture).

    

    “Registration
      Statement”
means
      a
      registration statement covering the resale of the Registrable
      Securities.

     

    “Required
      Minimum”
means,
      as of any date, the maximum aggregate number of shares of Common Stock then
      issued or potentially issuable in the future pursuant to the Transaction
      Documents, including any Underlying Shares issuable upon conversion in full
      of
      all Debentures, ignoring any conversion or exercise limits set forth therein,
      and assuming that the Conversion Price is at all times on and after the date
      of
      determination 50% of the then Conversion Price on the Business Day immediately
      prior to the date of determination.

     

    “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.

     

    
      
         

      

      
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    “Securities”
means
      the Debentures and the Underlying Shares.

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, and the rules and regulations
      promulgated thereunder. 

     

    “Security
      Agreement”
means
      the Security Agreement, dated the date hereof, among the Company and the
      Purchasers, in the form of Exhibit
      D
      attached
      hereto.

     

    “Security
      Documents”
shall
      mean the Security Agreement and any other documents and filing required
      thereunder in order to grant the Purchasers a first priority security interest
      in all of the assets of the Company, including all UCC-1 filing
      receipts.

     

    “Subscription
      Amount”
means,
      as to each Purchaser, the aggregate amount
      to be
      paid for Debentures purchased hereunder as specified below such Purchaser’s name
      on the signature page of this Agreement and next to the heading “Subscription
      Amount”, in United States Dollars and in immediately available
      funds.

     

    “Subsequent
      Financing”
      shall have the meaning ascribed to such term in Section 4.13.

     

    “Subsequent
      Financing Notice”
shall
      have the meaning ascribed to such term in Section 4.13. 

     

    “Subsidiary”
means
      any subsidiary of the Company as set forth on Schedule
      3.1(a).

     

    “Trading
      Market”
means,
      as applicable, the following markets or exchanges on which the Common Stock
      is
      listed or quoted for trading on the date in question: the American Stock
      Exchange, the New York Stock Exchange, the Nasdaq National Market, the Nasdaq
      Capital Market or the OTC Bulletin Board.

     

    “Transaction
      Documents”
means
      this Agreement, the Debentures, the Security Agreement, and any other documents
      or agreements executed in connection with the transactions contemplated
      hereunder.

     

    “Underlying
      Shares”
means
      the shares of Common Stock issuable upon conversion of the Debentures.

     

    “VWAP”
means,
      for any date, the price determined by the first of the following clauses that
      applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
      the daily volume weighted average price of the Common Stock for such date (or
      the nearest preceding date) on the Trading Market on which the Common Stock
      is
      then listed or quoted as reported by Bloomberg Financial L.P. (based on a
      Business Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if
      the
      Common Stock is not then listed or quoted on a Trading Market and if prices
      for
      the Common Stock are then reported in the “Pink Sheets” published by the Pink
      Sheets LLC (or a similar organization or agency succeeding to its functions
      of
      reporting prices), the most recent bid price per share of the Common Stock
      so
      reported; or (c) in all other cases, the fair market value of a share of Common
      Stock as determined by an independent appraiser selected in good faith by the
      Purchasers and reasonably acceptable to the Company.

     

    
      
         

      

      
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    ARTICLE
      II.

    PURCHASE
      AND SALE

     

    2.1  Closing.
      On the
      Closing Date, upon the terms and subject to the conditions set forth herein,
      concurrent with the execution and delivery of this Agreement by the parties
      hereto, the Company agrees to sell, and each Purchaser agrees to purchase in
      the
      aggregate, severally and not jointly, up to $500,000 principal amount of the
      Debentures. Each Purchaser shall deliver to the Escrow Agent via wire transfer
      for immediately available funds equal to their Subscription Amount and the
      Company shall deliver to each Purchaser its Debenture as determined pursuant
      to
      Section 2.2(a) and the other items set forth in Section 2.2 issuable at the
      Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and
      2.3,
      the Closing shall occur at the offices of GM, or such other location as the
      parties shall mutually agree.

     

    2.2       Deliveries.

     

    	a)               
             	
            On
              the Closing Date, the Company shall deliver or cause to be delivered
              to
              each Purchaser the following:

          

     

    	(i)      	
            this
              Agreement duly executed by the Company;

          

     

    	(ii)      	
            a
              legal opinion of Company Counsel, in the form of Exhibit
              C
              attached hereto; 

          

     

    	(iii)      	
            a
              Debenture with a principal amount equal to such Purchaser’s Subscription
              Amount, registered in the name of such Purchaser;
              

          

     

    	(iv)      	
            the
              Registration Rights Agreement duly executed by the
              Company;

          

     

    	(v)      	
            the
              Security Agreement duly executed by the
              Company;

          

     

    
      	(vi)      	
              the
                Escrow Agreement duly executed by the Company;
                and

            

       

      
        	(vii)      	
                the
                  Collateral Agent Agreement duly executed by the
                  Company.

              

      

       

    

    	b)      	
            On
              the Closing Date, each Purchaser shall deliver or cause to be delivered
              to
              the Escrow Agent the following: 

          

     

    	(i)      	
            this
              Agreement duly executed by such
              Purchaser;

          

     

    	(ii)      	
            such
              Purchaser’s Subscription Amount by wire transfer to the accounts specified
              in the Escrow Agreement;

          

     

    
      	(iii)     	
              the
                Security Agreement, duly executed by such
                Purchaser;

            

      
         

        	(iv)     	
                the
                  Registration Rights Agreement duly executed by such
                  Purchaser;

              

        
           

          	(v)      	
                  the
                    Escrow Agreement duly executed by such Purchaser;
                    and

                

          
             

            	(vi)      	
                    the
                      Collateral Agent Agreement duly executed by such
                      Purchaser.

                  

          

           

          
            
               

            

            
              6

              
                

              

            

            
               

            

          

        

      

    

    2.3  Closing
      Conditions. 

     

    	a)      	
            The
              obligations of the Company hereunder in connection with the Closing
              are
              subject to the following conditions being
              met:

          

     

    	(i)      	
            the
              accuracy in all material respects when made and on the Closing Date
              of the
              representations and warranties of the Purchasers contained
              herein;

          

     

    	  
            (ii)      	
            all
              obligations, covenants and agreements of the Purchasers required to
              be
              performed at or prior to the Closing Date shall have been performed;
              and

          

     

    	 
            (iii)      	
            the
              delivery by the Purchasers of the items set forth in Section 2.2(b)
              of
              this Agreement.

          

     

    	b)      	
            The
              respective obligations of the Purchasers hereunder in connection with
              the
              Closing are subject to the following conditions being
              met:

          

     

    	(i)      	
            the
              accuracy in all material respects on the Closing Date of the
              representations and warranties of the Company contained
              herein;

          

     

    	 (ii)      	
            all
              obligations, covenants and agreements of the Company required to be
              performed at or prior to the Closing Date shall have been performed;
              

          

     

    	 
            (iii)      	
            the
              delivery by the Company of the items set forth in Section 2.2(a) of
              this
              Agreement; 

          

     

    	 
            (iv)      	
            there
              shall have been no Material Adverse Effect with respect to the Company
              since the date hereof; and

          

     

    	 
            (v)      	
            from
              the date hereof to the Closing Date, there shall not have been a banking
              moratorium declared either by the United States or New York State
              authorities nor shall there have occurred any material outbreak or
              escalation of hostilities or other national or international calamity
              of
              such magnitude in its effect on, or any material adverse change in,
              any
              financial market which, in each case, in the reasonable judgment of
              each
              Purchaser, makes it impracticable or inadvisable to purchase the
              Debentures at the Closing.

          

     

    
      
         

      

      
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    ARTICLE
      III.

    REPRESENTATIONS
      AND WARRANTIES

     

    3.1  Representations
      and Warranties of the Company.
      Except
      as set forth under the corresponding section of the disclosure schedules
      delivered to the Purchasers concurrently herewith (the “Disclosure
      Schedules”)
      which
      Disclosure Schedules shall be deemed a part hereof, the Company hereby makes
      the
      representations and warranties set forth below to each Purchaser.

     

    (a)  Subsidiaries.
      All of
      the direct subsidiaries of the Company are set forth on Schedule
      3.1(a).
      The
      Company owns all of the capital stock or other equity interests of each
      Subsidiary free and clear of any Liens, and all the issued and outstanding
      shares of capital stock of each Subsidiary are validly issued and are fully
      paid, non-assessable and free of preemptive and similar rights to subscribe
      for
      or purchase securities. If the Company has no subsidiaries, then references
      in
      the Transaction Documents to the Subsidiaries will be disregarded.

     

    (b)  Organization
      and Qualification.
      The
      Company and each of the Subsidiaries is an entity duly incorporated or otherwise
      organized, validly existing and in good standing under the laws of the
      jurisdiction of its incorporation or organization (as applicable), with the
      requisite power and authority to own and use its properties and assets and
      to
      carry on its business as currently conducted. Neither the Company nor any
      Subsidiary is in violation or default of any of the provisions of its respective
      certificate or articles of incorporation, bylaws or other organizational or
      charter documents. Each of the Company and the Subsidiaries is duly qualified
      to
      conduct business and is in good standing as a foreign corporation or other
      entity in each jurisdiction in which the nature of the business conducted or
      property owned by it makes such qualification necessary, except where the
      failure to be so qualified or in good standing, as the case may be, could not
      have or reasonably be expected to result in (i) a material adverse effect on
      the
      legality, validity or enforceability of any Transaction Document, (ii) a
      material adverse effect on the results of operations, assets, business,
      prospects or financial condition of the Company and the Subsidiaries, taken
      as a
      whole, or (iii) a material adverse effect on the Company’s ability to perform in
      any material respect on a timely basis its obligations under any Transaction
      Document (any of (i), (ii) or (iii), a “Material
      Adverse Effect”)
      and no
      Proceeding has been instituted in any such jurisdiction revoking, limiting
      or
      curtailing or seeking to revoke, limit or curtail such power and authority
      or
      qualification.

     

    (c)  Authorization;
      Enforcement.
      The
      Company has the requisite corporate power and authority to enter into and to
      consummate the transactions contemplated by each of the Transaction Documents
      and otherwise to carry out its obligations thereunder. The execution and
      delivery of each of the Transaction Documents by the Company and the
      consummation by it of the transactions contemplated thereby have been duly
      authorized by all necessary action on the part of the Company. Each Transaction
      Document has been (or upon delivery will have been) duly executed by the Company
      and, when delivered in accordance with the terms hereof, will constitute the
      valid and binding obligation of the Company enforceable against the Company
      in
      accordance with its terms except (i) as limited by applicable bankruptcy,
      insolvency, reorganization, moratorium and other laws of general application
      affecting enforcement of creditors’ rights generally and (ii) as limited by laws
      relating to the availability of specific performance, injunctive relief or
      other
      equitable remedies.

     

    
      
         

      

      
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    (d)  No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the other transactions contemplated
      thereby do not and will not: (i) conflict with or violate any provision of
      the
      Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws
      or other organizational or charter documents, or (ii) conflict with, or
      constitute a default (or an event that with notice or lapse of time or both
      would become a default) under, result in the creation of any Lien upon any
      of
      the properties or assets of the Company or any Subsidiary, or give to others
      any
      rights of termination, amendment, acceleration or cancellation (with or without
      notice, lapse of time or both) of, any agreement, credit facility, debt or
      other
      instrument (evidencing a Company or Subsidiary debt or otherwise) or other
      understanding to which the Company or any Subsidiary is a party or by which
      any
      property or asset of the Company or any Subsidiary is bound or affected, or
      (iii) conflict with or result in a violation of any law, rule, regulation,
      order, judgment, injunction, decree or other restriction of any court or
      governmental authority to which the Company or a Subsidiary is subject
      (including federal and state securities laws and regulations), or by which
      any
      property or asset of the Company or a Subsidiary is bound or affected; except
      in
      the case of each of clauses (ii) and (iii), such as could not have or reasonably
      be expected to result in a Material Adverse Effect.

     

    (e)  Filings,
      Consents and Approvals.
      The
      Company is not required to obtain any consent, waiver, authorization or order
      of, give any notice to, or make any filing or registration with, any court
      or
      other federal, state, local or other governmental authority or other Person
      in
      connection with the execution, delivery and performance by the Company of the
      Transaction Documents.

     

    (f)  Issuance
      of the Securities.
      The
      Securities are duly authorized and, when issued and paid for in accordance
      with
      the applicable Transaction Documents, will be duly and validly issued, fully
      paid and nonassessable, free and clear of all Liens imposed by the Company
      other
      than restrictions on transfer provided for in the Transaction Documents. The
      Underlying Shares, when issued in accordance with the terms of the Transaction
      Documents, will be validly issued, fully paid and nonassessable, free and clear
      of all Liens imposed by the Company. The Company has reserved from its duly
      authorized capital stock a number of shares of Common Stock for issuance of
      the
      Underlying Shares at least equal to the Required Minimum on the date hereof.
      

     

    (g)  Capitalization.
      The
      capitalization of the Company is as set forth on Schedule
      3.1(g).
      No
      Person has any right of first refusal, preemptive right, right of participation,
      or any similar right to participate in the transactions contemplated by the
      Transaction Documents. Except as a result of the purchase and sale of the
      Securities or as set forth on Schedule
      3.1(g),
      there
      are no outstanding options, warrants, script rights to subscribe to, calls
      or
      commitments of any character whatsoever relating to, or securities, rights
      or
      obligations convertible into or exchangeable for, or giving any Person any
      right
      to subscribe for or acquire, any shares of Common Stock, or contracts,
      commitments, understandings or arrangements by which the Company or any
      Subsidiary is or may become bound to issue additional shares of Common Stock
      or
      Common Stock Equivalents. The issuance and sale of the Securities will not
      obligate the Company to issue shares of Common Stock or other securities to
      any
      Person (other than the Purchasers) and will not result in a right of any holder
      of Company securities to adjust the exercise, conversion, exchange or reset
      price under such securities. All of the outstanding shares of capital stock
      of
      the Company are validly issued, fully paid and nonassessable, have been issued
      in compliance with all federal and state securities laws, and none of such
      outstanding shares was issued in violation of any preemptive rights or similar
      rights to subscribe for or purchase securities. No further approval or
      authorization of any stockholder, the Board of Directors of the Company or
      others is required for the issuance and sale of the Securities. Except as
      disclosed in Schedule
      3.1(g),
      there
      are no stockholders agreements, voting agreements or other similar agreements
      with respect to the Company’s capital stock to which the Company is a party or,
      to the knowledge of the Company, between or among any of the Company’s
      stockholders. A complete list of stockholders of record, with their
      shareholdings as of March 1, 2006, and the Closing Date, is included in
Schedule
      3.1(g).

     

    
      
         

      

      
        9

        
          

        

      

      
         

      

       

    

    (h)  Financial
      Statements.
      The
      unaudited financial statements of the Company for the fiscal year ended December
      31, 2005 and unaudited statements as of February 28, 2006, are attached hereto
      as Schedule
      3.1(h).
      Such
      financial statements fairly present in all material respects the financial
      position of the Company and its consolidated subsidiaries, if any, as of and
      for
      the dates thereof and the results of operations and cash flows for the periods
      then ended, subject to normal, immaterial adjustments.

     

    (i)  Material
      Changes.
      Since
      the date of the Company’s most recent financial statements, attached hereto as
Schedule
      3.1(h),
      (i)
      there has been no event, occurrence or development that has had or that could
      reasonably be expected to result in a Material Adverse Effect, (ii) the Company
      has not incurred any liabilities (contingent or otherwise) other than (A) trade
      payables and accrued expenses incurred in the ordinary course of business
      consistent with past practice and (B) liabilities not required to be reflected
      in the Company’s financial statements pursuant to GAAP, (iii) the Company has
      not altered its method of accounting, (iv) the Company has not declared or
      made
      any dividend or distribution of cash or other property to its stockholders
      or
      purchased, redeemed or made any agreements to purchase or redeem any shares
      of
      its capital stock and (v) the Company has not issued any equity securities
      to
      any officer, director or Affiliate, except pursuant to existing Company stock
      option plans. 

     

    (j)  Litigation.
      There
      is no action, suit, inquiry, notice of violation, proceeding or investigation
      pending or, to the knowledge of the Company, threatened against or affecting
      the
      Company, any Subsidiary or any of their respective properties before or by
      any
      court, arbitrator, governmental or administrative agency or regulatory authority
      (federal, state, county, local or foreign) (collectively, an “Action”)
      which
      (i) adversely affects or challenges the legality, validity or enforceability
      of
      any of the Transaction Documents or the Securities or (ii) could, if there
      were
      an unfavorable decision, have or reasonably be expected to result in a Material
      Adverse Effect. Neither the Company nor any Subsidiary, nor any director or
      officer thereof, is or has been the subject of any Action involving a claim
      of
      violation of or liability under federal or state securities laws or a claim
      of
      breach of fiduciary duty. There has not been, and to the knowledge of the
      Company, there is not pending or contemplated, any investigation by the
      Commission involving the Company or any current or former director or officer
      of
      the Company. 

     

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

     

    (k)  Labor
      Relations.
      No
      material labor dispute exists or, to the knowledge of the Company, is imminent
      with respect to any of the employees of the Company which could reasonably
      be
      expected to result in a Material Adverse Effect.

     

    (l)  Compliance.
      Neither
      the Company nor any Subsidiary (i) is in default under or in violation of (and
      no event has occurred that has not been waived that, with notice or lapse of
      time or both, would result in a default by the Company or any Subsidiary under),
      nor has the Company or any Subsidiary received notice of a claim that it is
      in
      default under or that it is in violation of, any indenture, loan or credit
      agreement or any other agreement or instrument to which it is a party or by
      which it or any of its properties is bound (whether or not such default or
      violation has been waived), (ii) is in violation of any order of any court,
      arbitrator or governmental body, or (iii) is or has been in violation of any
      statute, rule or regulation of any governmental authority, including without
      limitation all foreign, federal, state and local laws applicable to its business
      except in each case as could not have a Material Adverse Effect.

     

    (m)  Regulatory
      Permits.
      The
      Company and the Subsidiaries possess all certificates, authorizations and
      permits issued by the appropriate federal, state, local or foreign regulatory
      authorities necessary to conduct their respective businesses as listed on
Schedule
      3.1(m),
      except
      where the failure to possess such permits could not have or reasonably be
      expected to result in a Material Adverse Effect (“Material
      Permits”),
      and
      neither the Company nor any Subsidiary has received any notice of proceedings
      relating to the revocation or modification of any Material Permit.

     

    (n)  Title
      to Assets.
      The
      Company and the Subsidiaries have good and marketable title in fee simple to
      all
      real property owned by them that is material to the business of the Company
      and
      the Subsidiaries and good and marketable title in all personal property owned
      by
      them that is material to the business of the Company and the Subsidiaries,
      in
      each case free and clear of all Liens, except for Liens as do not materially
      affect the value of such property and do not materially interfere with the
      use
      made and proposed to be made of such property by the Company and the
      Subsidiaries and Liens for the payment of federal, state or other taxes, the
      payment of which is neither delinquent nor subject to penalties. Any real
      property and facilities held under lease by the Company and the Subsidiaries
      are
      held by them under valid, subsisting and enforceable leases of which the Company
      and the Subsidiaries are in compliance in all material respects.

     

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    (o)  Intellectual
      Property.

     

    (i)  The
      term
“Intellectual
      Property Rights”
      includes:

     

    	1.  	
            the
              name of the Company, all fictional business names, trading names,
              registered and unregistered trademarks, service marks, and applications
              (collectively, “Marks'');

          

     

    	2.  	
            all
              patents, patent applications, and inventions and discoveries that may
              be
              patentable (collectively, “Patents'');

          

     

    	3.  	
            all
              copyrights in both published works and published works (collectively,
              “Copyrights”);
              

          

     

    	4.  	
            all
              rights in mask works (collectively, “Rights
              in Mask Works'');
              and

          

     

    	5.  	
            all
              know-how, trade secrets, confidential information, customer lists,
              software, technical information, data, process technology, plans,
              drawings, and blue prints (collectively, “Trade
              Secrets'');
              owned, used, or licensed by the Company as licensee or
              licensor.

          

     

    (ii)  Agreements.
      Schedule
      3.1(o)
      contains
      a complete and accurate list and summary description including any royalties
      paid or received by the Company, of all contracts relating to the Intellectual
      Property Rights to which the Company is a party or by which the Company is
      bound, except for any license implied by the sale of a product and perpetual,
      paid-up licenses for commonly available software programs with a value of less
      than $10,000 under which the Company is the licensee. There are no outstanding
      and, to Company’s knowledge, no threatened disputes or disagreements with
      respect to any such agreement.

     

    (iii)  Know-How
      Necessary for the Business.
      The
      Intellectual Property Rights are all those necessary for the operation of the
      Company’s businesses as it is currently conducted or as reflected in the
      business plan given to the Purchaser. The Company is the owner of all right,
      title, and interest in and to each of the Intellectual Property Rights, free
      and
      clear of all liens, security interests, charges, encumbrances, equities, and
      other adverse claims, and has the right to use without payment to a third party
      all of the Intellectual Property Rights. Except as set forth in Schedule
      3.1(o),
      all
      former and current employees of the Company have executed written contracts
      with
      the Company that assign to the Company all rights to any inventions,
      improvements, discoveries, or information relating to the business of the
      Company. To the Company’s knowledge, no employee of the Company has entered into
      any contract that restricts or limits in any way the scope or type of work
      in
      which the employee may be engaged or requires the employee to transfer, assign,
      or disclose information concerning his work to anyone other than of the
      Company.

     

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

    (iv)  Know-How
      Necessary for the Business.
      Schedule
      3.1(o)
      contains
      a complete and accurate list and summary description of all Patents. The Company
      is the owner of all right, title and interest in and to each of the Patents,
      free and clear of all liens, security interests, charges, encumbrances,
      entities, and other adverse claims. All of the issued Patents are currently
      in
      compliance with formal legal requirements (including payment of filing,
      examination, and maintenance fees and proofs of working or use), are valid
      and
      enforceable, and are not subject to any maintenance fees or taxes or actions
      falling due within ninety days after the Closing Date. No patent has been or
      is
      now involved in any interference, reissue, reexamination, or opposition
      proceeding. To the Company’s knowledge, there is no potentially interfering
      patent or patent application of any third party. No Patent is infringed or,
      to
      the Company’s knowledge, has been challenged or threatened in any way. To the
      Company’s knowledge, none of the products manufactured and sold, nor any process
      or know-how used, by the Company infringes or is alleged to infringe any patent
      or other proprietary right of any other Person. All products made, used, or
      sold
      under the Patents have been marked with the proper patent notice.

     

    (v)  Trademarks.
      Schedule
      3.1(o)
      contains
      a complete and accurate list and summary description of all Marks. The Company
      is the owner of all right, title, and interest in and to each of the Marks,
      free
      and clear of all liens, security interests. charges, encumbrances, equities,
      and
      other adverse claims. All Marks that have been registered with the United States
      Patent and Trademark Office are currently in compliance with all formal legal
      requirements (including the timely post-registration tiling of affidavits of
      use
      and incontestability and renewal applications), are valid and enforceable,
      and
      are not subject to any maintenance fees or taxes or actions falling due within
      ninety days after the Closing Date. No Mark has been or is now involved in
      any
      opposition, invalidation, or cancellation and, to the Company’s knowledge, no
      such action is threatened with respect to any of the Marks. To the Company’s
      knowledge, there is no potentially interfering trademark or trademark
      application of any third party. No Mark is infringed or, to the Company’s
      knowledge, has been challenged or threatened in any way. To the Company’s
      knowledge, none of the Marks used by the Company infringes or is alleged to
      infringe any trade name, trademark, or service mark of any third party. All
      products and materials containing a Mark bear the proper federal registration
      notice where permitted by law.

     

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    (vi)  Copyrights.
      Schedule
      3.1(o)
      contains
      a complete and accurate list and summary description of all Copyrights. The
      Company is the owner of all right, title, and interest in and to each of the
      Copyrights, free and clear of all liens, security interests, charges,
      encumbrances, equities, and other adverse claims. All the Copyrights have been
      registered and are currently in compliance with formal requirements, are valid
      and enforceable, and are not subject to any maintenance fees or taxes or actions
      falling due within one year after the date of Closing. No Copyright is infringed
      or, to the Company’s knowledge, has been challenged or threatened in any way. To
      the Company’s knowledge, none of the subject matter of any of the Copyrights
      infringes or is alleged to infringe any copyright of any third party or is
      a
      derivative work based on the work of a third party. All works encompassed by
      the
      Copyrights have been marked with the proper copyright notice.

     

    (vii)  Trade
      Secrets.
      With
      respect to each Trade Secret, the documentation relating to such Trade Secret
      is
      current, accurate, and sufficient in detail and content to identify and explain
      it and to allow its full and proper use without reliance on the knowledge or
      memory of any individual. The Company has taken all reasonable precautions
      to
      protect the secrecy, confidentiality, and value of its Trade Secrets. The
      Company has good title and an absolute (but not necessarily exclusive) right
      to
      use the Trade Secrets. The Trade Secrets are not part of the public knowledge
      or
      literature, and, to the Company’s knowledge, have not been used, divulged, or
      appropriated either for the benefit of any Person (other the Company) or to
      the
      detriment of the Company. No Trade Secret is subject to any adverse claim or
      has
      been challenged or threatened in any way.

     

    (p)  [INTENTIONALLY
      OMITTED]

     

    (q)  Transactions
      With Affiliates and Employees.
      Except
      as set forth in Schedule
      3.1(q),
      none of
      the officers or directors of the Company and, to the knowledge of the Company,
      none of the employees of the Company are presently a party to any transaction
      with the Company or any Subsidiary (other than for services as employees,
      officers and directors), including any contract, agreement or other arrangement
      providing for the furnishing of services to or by, providing for rental of
      real
      or personal property to or from, or otherwise requiring payments to or from
      any
      officer, director or such employee or, to the knowledge of the Company, any
      entity in which any officer, director, or any such employee has a substantial
      interest or is an officer, director, trustee or partner, in each case in excess
      of $10,000.

     

    (r)  Internal
      Accounting Controls.
      The
      Company and the Subsidiaries maintain a system of internal accounting controls
      which the Company believes is sufficient 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 action is taken with respect to any
      differences..

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    (s)  Certain
      Fees.
      Except
      as set forth on Schedule
      3.1(s),
      no
      brokerage or finder’s fees or commissions are or will be payable by the Company
      to any broker, financial advisor or consultant, finder, placement agent,
      investment banker, bank or other Person with respect to the transactions
      contemplated by this Agreement. The Purchasers shall have no obligation with
      respect to any fees or with respect to any claims made by or on behalf of other
      Persons for fees of a type contemplated in this Section that may be due in
      connection with the transactions contemplated by this Agreement. 

     

    (t)  Private
      Placement.
      Assuming the accuracy of the Purchasers representations and warranties set
      forth
      in Section 3.2, no registration under the Securities Act is required for the
      offer and sale of the Securities by the Company to the Purchasers as
      contemplated hereby. 

     

    (u)  Investment
      Company.
      The
      Company is not, and is not an Affiliate of, and immediately after receipt of
      payment for the Securities, will not be or be an Affiliate of, an “investment
      company” within the meaning of the Investment Company Act of 1940, as amended.
      The Company shall conduct its business in a manner so that it will not become
      subject to the Investment Company Act.

     

    (v)  Registration
      Rights.
      Except
      for the Purchasers, and as set forth in Schedule 3.1(t) hereto, no Person has
      any right to cause the Company to effect the registration under the Securities
      Act of any securities of the Company.

     

    (w)  Application
      of Takeover Protections.
      The
      Company and its Board of Directors have taken all necessary action, if any,
      in
      order to render inapplicable any control share acquisition, business
      combination, poison pill (including any distribution under a rights agreement)
      or other similar anti-takeover provision under the Company’s Certificate of
      Incorporation (or similar charter documents) or the laws of its state of
      incorporation that is or could become applicable to the Purchasers as a result
      of the Purchasers and the Company fulfilling their obligations or exercising
      their rights under the Transaction Documents, including without limitation
      as a
      result of the Company’s issuance of the Securities and the Purchasers’ ownership
      of the Securities.

     

    (x)  Disclosure.
      The
      Company understands and confirms that the Purchasers will rely on the foregoing
      representations and covenants in effecting transactions in securities of the
      Company. All disclosure provided to the Purchasers regarding the Company, its
      business and the transactions contemplated hereby, including the Disclosure
      Schedules to this Agreement, furnished by or on behalf of the Company with
      respect to the representations and warranties made herein are true and correct
      with respect to such representations and warranties and do not contain any
      untrue statement of a material fact or omit to state any material fact necessary
      in order to make the statements made therein, in light of the circumstances
      under which they were made, not misleading. The Company acknowledges and agrees
      that no Purchaser makes or has made any representations or warranties with
      respect to the transactions contemplated hereby other than those specifically
      set forth in Section 3.2 hereof.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    (y)  No
      Integrated Offering.
      Assuming
      the accuracy of the Purchasers’ representations and warranties set forth in
      Section 3.2, 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 this offering of the Securities to be integrated
      with prior offerings by the Company for purposes of the Securities Act or any
      applicable shareholder approval provisions.

     

    (z)  Solvency.
      Based
      on the financial condition of the Company as of the Closing Date after giving
      effect to the receipt by the Company of the proceeds from the sale of the
      Securities hereunder, (i) the Company’s fair saleable value of its assets
      exceeds the amount that will be required to be paid on or in respect of the
      Company’s existing debts and other liabilities (including known contingent
      liabilities) as they mature; (ii) the Company’s assets do not constitute
      unreasonably small capital to carry on its business for the current fiscal
      year
      as now conducted and as proposed to be conducted including its capital needs
      taking into account the particular capital requirements of the business
      conducted by the Company, and projected capital requirements and capital
      availability thereof; and (iii) the current cash flow of the Company, together
      with the proceeds the Company would receive, were it to liquidate all of its
      assets, after taking into account all anticipated uses of the cash, would be
      sufficient to pay all amounts on or in respect of its debt when such amounts
      are
      required to be paid. The Company does not intend to incur debts beyond its
      ability to pay such debts as they mature (taking into account the timing and
      amounts of cash to be payable on or in respect of its debt). 

     

    (aa)  Tax
      Status.
      Except
      for matters that would not, individually or in the aggregate, have or reasonably
      be expected to result in a Material Adverse Effect, the Company and each
      Subsidiary has filed all necessary federal, state and foreign income and
      franchise tax returns and has paid or accrued all taxes shown as due thereon,
      and the Company has no knowledge of a tax deficiency which has been asserted
      or
      threatened against the Company or any Subsidiary.

     

    (bb)  No
      General Solicitation.
      Neither
      the Company nor any person acting on behalf of the Company has offered or sold
      any of the Securities by any form of general solicitation or general
      advertising. The Company has offered the Securities for sale only to the
      Purchasers and certain other “accredited investors” within the meaning of Rule
      501 under the Securities Act.

     

    (cc)  Foreign
      Corrupt Practices.
      Neither
      the Company, nor to the knowledge of the Company, any agent or other person
      acting on behalf of the Company, has (i) directly or indirectly, used any funds
      for unlawful contributions, gifts, entertainment or other unlawful expenses
      related to foreign or domestic political activity, (ii) made any unlawful
      payment to foreign or domestic government officials or employees or to any
      foreign or domestic political parties or campaigns from corporate funds, (iii)
      failed to disclose fully any contribution made by the Company (or made by any
      person acting on its behalf of which the Company is aware) which is in violation
      of law, or (iv) violated in any material respect any provision of the Foreign
      Corrupt Practices Act of 1977, as amended.

     

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    (dd)  Accountants.
      The
      Company’s accountants are set forth on Schedule
      3.1(dd)
      of the
      Disclosure Schedule. 

     

    (ee)  Indebtedness
      and Seniority.
      As of
      the date hereof, all indebtedness and liens of the Company are as set forth
      on
Schedule
      3.1(ee).
      As of
      the Closing Date, no indebtedness or other equity of the Company is senior
      to
      the Debentures in right of payment, whether with respect to interest or upon
      liquidation or dissolution, or otherwise, other than indebtedness secured by
      purchase money security interests (which is senior only as to underlying assets
      covered thereby) and capital lease obligations (which is senior only as to
      the
      property covered thereby).

     

    (ff)  No
      Disagreements with Accountants and Lawyers.
      There
      are no disagreements of any kind presently existing, or reasonably anticipated
      by the Company to arise, between the accountants and lawyers formerly or
      presently employed by the Company and the Company is current with respect to
      any
      fees owed to its accountants and lawyers.

     

    (gg)  Acknowledgment
      Regarding Purchasers’ Purchase of Securities.
      The
      Company acknowledges and agrees that each of the Purchasers is acting solely
      in
      the capacity of an arm’s length purchaser with respect to the Transaction
      Documents and the transactions contemplated hereby. The Company further
      acknowledges that no Purchaser is acting as a financial advisor or fiduciary
      of
      the Company (or in any similar capacity) with respect to this Agreement and
      the
      transactions contemplated hereby and any advice given by any Purchaser or any
      of
      their respective representatives or agents in connection with this Agreement
      and
      the transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities. The Company further represents to each Purchaser
      that the Company’s decision to enter into this Agreement has been based solely
      on the independent evaluation of the transactions contemplated hereby by the
      Company and its representatives.

     

    (hh)  Manufacturing
      and Marketing Rights.
      The
      Company has not granted rights to manufacture, produce, assemble, license,
      market, or sell its products to any other Person and is not bound by any
      agreement that affects the Company’s exclusive right to develop, manufacture,
      assemble, distribute, market or sell its products.

     

    (ii)  Employees.
      The
      Company has no collective bargaining agreements with any of its employees.
      There
      is no labor union organizing activity pending or, to the Company’s knowledge,
      threatened with respect to the Company. Except as set forth on Schedule
      3.1(ii),
      the
      Company is not a party to or bound by any currently effective employment
      contract, deferred compensation arrangement, bonus plan, incentive plan, profit
      sharing plan, retirement agreement or other employee compensation plan or
      agreement. To the Company’s knowledge, no employee of the Company, nor any
      consultant with whom the Company has contracted, is in violation of any term
      of
      any employment contract, proprietary information agreement or any other
      agreement relating to the right of any such individual to be employed by, or
      to
      contract with, the Company because of the nature of the business to be conducted
      by the Company; and to the Company’s knowledge the continued employment by the
      Company of its present employees, and the performance of the Company’s contracts
      with its independent contractors, will not result in any such violation. The
      Company has not received any notice alleging that any such violation has
      occurred. No employee of the Company has been granted the right to continued
      employment by the Company or to any material compensation following termination
      of employment with the Company. The Company is not aware that any officer,
      key
      employee or group of employees intends to terminate his, her or their employment
      with the Company nor does the Company have a present intention to terminate
      the
      employment of any officer, key employee or group of employees.

     

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    (jj)  Obligations
      of Management.
      The
      Company’s Chief Executive Officer, Isidore Sobkowski, is currently devoting
      substantially all of his business time to the conduct of business of the
      Company. The Company is not aware that Isidore Sobkowski is planning to work
      less than full time at the Company in the future. No officer or key employee
      is
      the currently working or, to the Company’s knowledge, plans to work for a
      competitive enterprise, whether or not such officer of key employee is or will
      be compensated by such enterprise.

     

    (kk)  Environmental
      and Safety Laws.
      Except
      as set forth in Schedule
      3.1(kk):

     

    (i)  The
      Company is, and at all times has been, in full compliance with, and has not
      been
      and is not in violation of or liable under, any Environmental Law. The Company
      has no basis to expect, nor has it or any other Person for whose conduct it
      is
      or may be held to be responsible received, any actual or threatened order,
      notice, or other communication from (i) any governmental body or private citizen
      acting in the public interest, or (ii) the current or prior owner or operator
      of
      any facilities, of any actual or potential violation or failure to comply with
      any Environmental Law, or of any actual or threatened obligation to undertake
      or
      bear the cost of any environmental, health, and safety liabilities with respect
      to any of the facilities or any other properties or assets (whether real,
      personal, or mixed) in which the Company has had an interest, or with respect
      to
      any property or facility at or to which Hazardous Materials were generated,
      manufactured, refined, transferred, imported, used, or processed by the Company,
      or any other Person for whose conduct it are or may be held responsible, or
      from
      which Hazardous Materials have been transported, treated, stored, handled,
      transferred, disposed, recycled, or received. 

     

    (ii)  There
      are
      no pending or, to the knowledge of the Company, threatened claims, encumbrances,
      or other restrictions of any nature, resulting from any environmental, health,
      and safety liabilities or arising under or pursuant to any Environmental Law,
      with respect to or affecting any of the facilities or any other properties
      and
      assets (whether real, personal, or mixed) in which the Company has or had an
      interest. 

     

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    (iii)  The
      Company has no knowledge of any basis to expect, nor has it or any other Person
      for whose conduct it is or may be held responsible, received, any citation,
      directive, inquiry, notice, order, summons, warning, or other communication
      that
      relates to Hazardous Materials, or any alleged, actual, or potential violation
      or failure to comply with any Environmental Law, or of any alleged, actual,
      or
      potential obligation to undertake or bear the cost of any environmental, health,
      and safety liabilities with respect to any of the facilities or any other
      properties or assets (whether real, personal, or mixed) in which the Company
      had
      an interest, or with respect to any property or facility to which Hazardous
      Materials generated, manufactured, refined, transferred, imported, used, or
      processed by the Company, or any other Person for whose conduct it is or may
      be
      held responsible, have been transported, treated, stored, handled, transferred,
      disposed, recycled, or received.

     

    (iv)  Neither
      the Company nor any other Person for whose conduct it is or may be held
      responsible, had any environmental, health, and safety liabilities with respect
      to the facilities or, to the knowledge of the Company, with respect to any
      other
      properties and assets (whether real, personal, or mixed) in which the Company
      (or any predecessor), has or had an interest, or at any property geologically
      or
      hydrologically adjoining the facilities or any such other property or
      assets.

     

    (v)  There
      are
      no Hazardous Materials present on or in the environment at the facilities or
      at
      any geologically or hydrologically adjoining property, including any Hazardous
      Materials contained in barrels, above or underground storage tanks, landfills,
      land deposits, dumps, equipment (whether moveable or fixed) or other containers,
      either temporary or permanent, and deposited or located in land, water, sumps,
      or any other part of the facilities or such adjoining property, or incorporated
      into any structure therein or thereon. Neither the Company nor any other Person
      for whose conduct it is or may be held responsible, or to the knowledge of
      the
      Company, any other Person, has permitted or conducted, or is aware of, any
      hazardous activity conducted with respect to the facilities or any other
      properties or assets (whether real, personal, or mixed) in which the Company
      has
      or had an interest except in full compliance with all applicable Environmental
      Laws. 

     

    (vi)  There
      has
      been no release or, to the knowledge of the Company, threat of release, of
      any
      Hazardous Materials at or from the facilities or at any other locations where
      any Hazardous Materials were generated, manufactured, refined, transferred,
      produced, imported, used, or processed from or by the facilities, or from or
      by
      any other properties and assets (whether real, personal, or mixed) in which
      the
      Company has or had an interest, or to the knowledge of the Company any
      geologically or hydrologically adjoining property, whether by the Company,
      or
      any other Person.

     

    
      
         

      

      
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    (vii)  The
      Company has delivered to the Purchasers true and complete copies and results
      of
      any reports, studies, analyses, tests, or monitoring possessed or initiated
      by
      the Company pertaining to Hazardous Materials in, on, or under the facilities,
      or concerning compliance by the Company, or any other Person for whose conduct
      they are or may be held responsible, with Environmental Laws.

     

    (viii)  For
      the
      purpose of this Section, Hazardous Material shall mean (i) materials which
      are
      listed or otherwise defined as “hazardous” or “toxic” under any applicable
      federal, local or stated and/or foreign laws and regulations that govern the
      existence and/or remedy of contamination on property, the protection of the
      environment from contamination, the control of the hazardous wastes, or other
      activities involving hazardous substances, including building materials or
      (b)
      petroleum products or nuclear materials.

     

    (ix)  For
      the
      purpose of this Section 3.1(kk), “Environmental Law” shall have the following
      meaning:

     

    	1.  	
            advising
              appropriate authorities, employees, and the public intended or actual
              releases of pollutants or hazardous substances or material, violations
              of
              discharge limits, or other prohibitions and of the commencements of
              activities, such as resource extraction or construction, that could
              have
              significant impact on the environment;

          

     

    	2.  	
            preventing
              or reducing to acceptable levels the release of pollutants or hazardous
              substances or materials into the
              environment;

          

     

    	3.  	
            reducing
              the quantities, preventing the release, or minimizing the hazardous
              characterics of waste that are generated;

          

     

    	4.  	
            assuring
              that products are designed, formulated, packaged, and used so that
              they do
              not present unreasonable risks to human health or the environment when
              used or disposed of;

          

     

    	5.  	
            protecting
              resources, species or ecological
              amenities;

          

     

    	6.  	
            reducing
              to acceptable levels the risk inherent in the transportation of hazardous
              substances, pollutants, oil or other potentially harmful
              substances;

          

     

    
      
         

      

      
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    	7.  	
            cleaning
              up pollutants that have been released, preventing the threat of release
              or
              paying the costs of such clean up or prevention;
              or

          

     

    	8.  	
            making
              responsible parties pay private parties, or groups of them, for damages
              done to their health or to the environment, or permitting self appointed
              representatives of the public interest to recover for injuries done
              to
              public assets.

          

     

    (ll)  Minute
      Books.
      The
      minute books of the Company made available to the Purchasers contain a complete
      summary of all meetings of directors and stockholders since the time of
      incorporation.

     

    (mm)  Elections.
      To the
      Company’s knowledge, all elections and notices permitted by Section 83(b) of the
      Code and any analogous provisions of applicable state tax laws have been timely
      filed by all employees who have purchased shares of the Common Stock under
      agreements that provide for the vesting of such shares of Common
      Stock.

     

    (nn)  Accounts
      Receivable.
      All
      accounts receivable of the Company and its Subsidiaries that are reflected
      on
      the Company’s balance sheet or interim balance sheet or on the accounting
      records of the Company and its Subsidiaries as of the Closing Date
      (collectively, the “Accounts
      Receivable”)
      represent or will represent valid obligations arising from sales actually made
      or services actually performed in the ordinary course of business. Unless paid
      prior to the Closing Date, the Accounts Receivable are or will be as of the
      Closing Date current and collectible net of the respective reserves shown on
      the
      balance sheet or interim balance sheet or on the accounting records of the
      Company and its Subsidiaries as of the Closing Date (which reserves are adequate
      and calculated consistent with past practice and, in the case of the reserve
      as
      of the Closing Date, will not represent a greater percentage of the Accounts
      Receivable as of the Closing Date than the reserve reflected in the interim
      balance sheet represented of the Accounts Receivable reflected therein and
      will
      not represent a material adverse change in the composition of such Accounts
      Receivable in terms of aging). Subject to such reserves, each of the Accounts
      Receivable either has been or will be collected in full without any set-off,
      within ninety days after the day on which it must becomes due and payable.
      There
      is no contest, claim, or right of set-off, other than returns in the ordinary
      course of business, under any agreement and/or contract with any obligor of
      an
      Accounts Receivable relating to the amount or validity of such Accounts
      Receivable. Schedule
      3.1(nn)
      contains
      a complete and accurate list of all Accounts Receivable as of the date of the
      interim balance sheet, which list sets forth the aging of such Accounts
      Receivable.

     

    (oo)  Inventory.
      All
      inventory of the Company and the Subsidiaries, whether or not reflected in
      the
      balance sheet or interim balance sheet, consists of a quality and quantity
      usable and salable in the ordinary course of business, except for obsolete
      items
      and items of below standard quality, all of which have been written off or
      written down to net realizable value in the balance sheet or interim balance
      sheet or on the accounting records of the Company and the Subsidiaries as of
      the
      Closing Date, as the case may be. All inventories not written off have been
      priced at the lower of cost or market on the last in, first out basis. The
      quantities of each item of inventory (whether raw materials, work-in-process,
      or
      finished goods) are not excessive, but are reasonable in the present
      circumstances of the Company and the Subsidiaries.

     

    
      
         

      

      
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    (pp)  Employee
      Benefits: 
      Except as set forth on Schedule
      3.1(pp),
      the
      Company has no plans which are subject to ERISA.   “ERISA”
means
      the Employee Retirement Income Security Act of 1974 or any successor law, and
      regulations and rules issued pursuant to that Act or any successor
      law.

     

    (qq)  Returns
      and Complaints.
      The
      Company has received no customer complaints concerning its products and/or
      services, nor has it had any of its products returned by a purchaser thereof,
      other than minor, nonrecurring warranty or similar problems. 

     

    (rr)  Material
      Agreements.
      Schedule
      3.1(rr)
      sets
      forth all agreements of the Company that would otherwise be required to be
      filed
      with the Commission pursuant to the Exchange Act, if the Company were subject
      to
      the reporting requirements of the Exchange Act.

     

    (ss)  Subsidiary
      Representations.
      All of
      the representations, warranties and disclosure described in Article III of
      this
      Agreement are hereby made by the Company with respect to each of the
      Subsidiaries. All such disclosure is made on the Schedules hereto with respect
      to the Subsidiaries.

     

    3.2  Representations
      and Warranties of the Purchasers.
      Each
      Purchaser hereby, for itself and for no other Purchaser, represents and warrants
      as of the date hereof and as of the Closing Date to the Company as
      follows:

     

    (a)  Organization;
      Authority.
      Such
      Purchaser is an entity duly organized, validly existing and in good standing
      under the laws of the jurisdiction of its organization with full right,
      corporate or partnership power and authority to enter into and to consummate
      the
      transactions contemplated by the Transaction Documents and otherwise to carry
      out its obligations thereunder. The execution, delivery and performance by
      such
      Purchaser of the transactions contemplated by this Agreement have been duly
      authorized by all necessary corporate or similar action on the part of such
      Purchaser. Each Transaction Document to which it is a party has been duly
      executed by such Purchaser, and when delivered by such Purchaser in accordance
      with the terms hereof, will constitute the valid and legally binding obligation
      of such Purchaser, enforceable against it in accordance with its terms, except
      (i) as limited by general equitable principles and applicable bankruptcy,
      insolvency, reorganization, moratorium and other laws of general application
      affecting enforcement of creditors’ rights generally, (ii) as limited by laws
      relating to the availability of specific performance, injunctive relief or
      other
      equitable remedies and (iii) insofar as indemnification and contribution
      provisions may be limited by applicable law.

     

    
      
         

      

      
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    (b)  Own
      Account.
      Such
      Purchaser understands that the Securities are “restricted securities” and have
      not been registered under the Securities Act or any applicable state securities
      law and is acquiring the Securities as principal for its own account and not
      with a view to or for distributing or reselling such Securities or any part
      thereof in violation of the Securities Act or any applicable state securities
      law, has no present intention of distributing any of such Securities in
      violation of the Securities Act or any applicable state securities law and
      has
      no arrangement or understanding with any other persons regarding the
      distribution of such Securities (this representation and warranty not limiting
      such Purchaser’s right to sell the Securities pursuant to the Registration
      Statement or otherwise in compliance with applicable federal and state
      securities laws) in violation of the Securities Act or any applicable state
      securities law. Such Purchaser is acquiring the Securities hereunder in the
      ordinary course of its business. Such Purchaser does not have any agreement
      or
      understanding, directly or indirectly, with any Person to distribute any of
      the
      Securities.

     

    (c)  Purchaser
      Status.
      At the
      time such Purchaser was offered the Securities, it was, and at the date hereof
      it is, and on each date on which it converts any Debentures it will be either:
      (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3),
      (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional
      buyer” as defined in Rule 144A(a) under the Securities Act. Such Purchaser is
      not required to be registered as a broker-dealer under Section 15 of the
      Exchange Act.

     

    (d)  Experience
      of Such Purchaser.
      Such
      Purchaser, either alone or together with its representatives, has such
      knowledge, sophistication and experience in business and financial matters
      so as
      to be capable of evaluating the merits and risks of the prospective investment
      in the Securities, and has so evaluated the merits and risks of such investment.
      Such Purchaser is able to bear the economic risk of an investment in the
      Securities and, at the present time, is able to afford a complete loss of such
      investment.

     

    (e)  General
      Solicitation.
      Such
      Purchaser is not purchasing the Securities as a result of any advertisement,
      article, notice or other communication regarding the Securities published in
      any
      newspaper, magazine or similar media or broadcast over television or radio
      or
      presented at any seminar or any other general solicitation or general
      advertisement.

     

    The
      Purchasers acknowledge that the Company will be relying on the foregoing
      representations and warranties in making a determination as to the availability
      of federal and state securities laws exemptions. The Company acknowledges and
      agrees that each Purchaser does not make or has not made any representations
      or
      warranties with respect to the transactions contemplated hereby other than
      those
      specifically set forth in this Section 3.2.

    

    
      
         

      

      
        23

        
          

        

      

      
         

      

    

     

    ARTICLE
      IV.

    OTHER
      AGREEMENTS OF THE PARTIES

     

    4.1  Transfer
      Restrictions.

     

    (a)  The
      Securities may only be disposed of in compliance with state and federal
      securities laws. In connection with any transfer of Securities other than
      pursuant to an effective registration statement or Rule 144, to the Company
      or
      to an affiliate of a Purchaser or in connection with a pledge as contemplated
      in
      Section 4.1(b), the Company may require the transferor thereof to provide to
      the
      Company an opinion of counsel selected by the transferor and reasonably
      acceptable to the Company, the form and substance of which opinion shall be
      reasonably satisfactory to the Company, to the effect that such transfer does
      not require registration of such transferred Securities under the Securities
      Act. As a condition of transfer, any such transferee shall agree in writing
      to
      be bound by the terms of this Agreement and shall have the rights of a Purchaser
      under this Agreement.

     

    (b)  The
      Purchasers agree to the imprinting, so long as is required by this Section
      4.1(b), of a legend on any of the Securities in the following form:

     

    [NEITHER]
      THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
      CONVERTIBLE] HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
      OR
      THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
      REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
      EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
      AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
      REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
      SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
      TO
      SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
      COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE
      SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR
      OTHER
      LOAN SECURED BY SUCH SECURITIES.

     

    The
      Company acknowledges and agrees that a Purchaser may from time to time pledge
      pursuant to a bona fide margin agreement with a registered broker-dealer or
      grant a security interest in some or all of the Securities to a financial
      institution that is an “accredited investor” as defined in Rule 501(a) under the
      Securities Act and who agrees to be bound by the provisions of this Agreement
      and, if required under the terms of such arrangement, such Purchaser may
      transfer pledged or secured Securities to the pledgees or secured parties.
      Such
      a pledge or transfer would not be subject to approval of the Company and no
      legal opinion of legal counsel of the pledgee, secured party or pledgor shall
      be
      required in connection therewith. Further, no notice shall be required of such
      pledge. At the appropriate Purchaser’s expense, the Company will execute and
      deliver such reasonable documentation as a pledgee or secured party of
      Securities may reasonably request in connection with a pledge or transfer of
      the
      Securities.

     

    
      
         

      

      
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    (c)  Certificates
      evidencing the Underlying Shares shall not contain any legend (including the
      legend set forth in Section 4.1(b) hereof): (i) while a registration statement
      (including the Registration Statement) covering the resale of such security
      is
      effective under the Securities Act, or (ii) following any sale of such
      Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares
      are
      eligible for sale under Rule 144(k), or (iv) if such legend is not required
      under applicable requirements of the Securities Act (including judicial
      interpretations and pronouncements issued by the staff of the Commission).
      The
      Company shall cause its counsel to issue a legal opinion to the Company’s
      transfer agent promptly after the Effectiveness Date if required by the
      Company’s transfer agent to effect the removal of the legend hereunder. If all
      or any portion of a Debenture is converted at a time when there is an effective
      registration statement to cover the resale of the Underlying Shares, or if
      such
      Underlying Shares may be sold under Rule 144(k) or if such legend is not
      otherwise required under applicable requirements of the Securities Act
      (including judicial interpretations thereof) then such Underlying Shares shall
      be issued free of all legends. The Company agrees that following the
      Effectiveness Date or at such time as such legend is no longer required under
      this Section 4.1(c), it will, no later than three Business Days following the
      delivery by a Purchaser to the Company or the Company’s transfer agent of a
      certificate representing Underlying Shares, as applicable, issued with a
      restrictive legend (such third Business Day, the “Legend
      Removal Date”),
      deliver or cause to be delivered to such Purchaser a certificate representing
      such shares that is free from all restrictive and other legends. The Company
      may
      not make any notation on its records or give instructions to any transfer agent
      of the Company that enlarge the restrictions on transfer set forth in this
      Section. Certificates for Securities subject to legend removal hereunder shall
      be transmitted by the transfer agent of the Company to the Purchasers by
      crediting the account of the Purchaser’s prime broker with the Depository Trust
      Company System.

    

    (d)  If
      after
      the date hereof the Company becomes subject to the reporting requirements of
      the
      Exchange Act, in addition to such Purchaser’s other available remedies, the
      Company shall pay to a Purchaser, in cash, as partial liquidated damages and
      not
      as a penalty, for each $1,000 of Underlying Shares (based on the VWAP of the
      Common Stock on the date such Securities are submitted to the Company’s transfer
      agent) delivered for removal of the restrictive legend and subject to Section
      4.1(c), $10 per Business Day (increasing to $20 per Business Day 5 Business
      Days
      after such damages have begun to accrue) for each Business Day after the Legend
      Removal Date until such certificate is delivered without a legend. Nothing
      herein shall limit such Purchaser’s right to pursue actual damages for the
      Company’s failure to deliver certificates representing any Securities as
      required by the Transaction Documents, and such Purchaser shall have the right
      to pursue all remedies available to it at law or in equity including, without
      limitation, a decree of specific performance and/or injunctive
      relief.

     

    
      
         

      

      
        25

        
          

        

      

      
         

      

    

    (e)  Each
      Purchaser, severally and not jointly with the other Purchasers, agrees that
      the
      removal of the restrictive legend from certificates representing Securities
      as
      set forth in this Section 4.1 is predicated upon the Company’s reliance that the
      Purchaser has sold or will imminently sell any Securities pursuant to either
      the
      registration requirements of the Securities Act, including compliance with
      any
      applicable prospectus delivery requirements, or an exemption
      therefrom.

     

    4.2  Acknowledgment
      of Dilution.
      The
      Company acknowledges that the issuance of the Securities may result in dilution
      of the outstanding shares of Common Stock, which dilution may be substantial
      under certain market conditions. The Company further acknowledges that its
      obligations under the Transaction Documents, including without limitation its
      obligation to issue the Underlying Shares pursuant to the Transaction Documents,
      are unconditional and absolute and not subject to any right of set off,
      counterclaim, delay or reduction, regardless of the effect of any such dilution
      or any claim the Company may have against any Purchaser and regardless of the
      dilutive effect that such issuance may have on the ownership of the other
      stockholders of the Company.

     

    4.3  Furnishing
      of Information.
      If
      after the date hereof the Company becomes subject to the reporting requirements
      of the Exchange Act and as long as any Purchaser owns Securities, the Company
      covenants to timely file (or obtain extensions in respect thereof and file
      within the applicable grace period) all reports required to be filed by the
      Company after the date hereof pursuant to the Exchange Act. As long as any
      Purchaser owns Securities and the Company is subject to the reporting
      requirement of the Exchange Act, it will prepare and furnish to the Purchasers
      and make publicly available in accordance with Rule 144(c) such information
      as
      is required for the Purchasers to sell the Securities under Rule 144. As long
      as
      any Purchaser owns Securities and the Company is subject to the reporting
      requirement of the Exchange Act, the Company further covenants that it will
      take
      such further action as any holder of Securities may reasonably request, all
      to
      the extent required from time to time to enable such Person to sell such
      Securities without registration under the Securities Act within the limitation
      of the exemptions provided by Rule 144.

     

    4.4  Integration.
      The
      Company shall not sell, offer for sale or solicit offers to buy or otherwise
      negotiate in respect of any security (as defined in Section 2 of the Securities
      Act) that would be integrated with the offer or sale of the Securities in a
      manner that would require the registration under the Securities Act of the
      sale
      of the Securities to the Purchasers or that would be integrated with the offer
      or sale of the Securities for purposes of the rules and regulations of any
      Trading Market.

     

    4.5  Conversion
      and Exercise Procedures.
      The
      form of Notice of Conversion included in the Debentures set
      forth
      the totality of the procedures required of the Purchasers in order to convert
      the Debentures. No additional legal opinion or other information or instructions
      shall be required of the Purchasers to convert their Debentures. The Company
      shall honor conversions of the Debentures and shall deliver Underlying Shares
      in
      accordance with the terms, conditions and time periods set forth in the
      Transaction Documents.

     

    
      
         

      

      
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    4.6  Securities
      Laws Disclosure; Publicity.
      The
      Company and each Purchaser shall consult with each other in issuing any other
      press releases with respect to the transactions contemplated hereby, and neither
      the Company nor any Purchaser shall issue any such press release or otherwise
      make any such public statement without the prior consent of the Company, with
      respect to any press release of any Purchaser, or without the prior consent
      of
      each Purchaser, with respect to any press release of the Company, which consent
      shall not unreasonably be withheld, except if such disclosure is required by
      law, in which case the disclosing party shall promptly provide the other party
      with prior notice of such public statement or communication. Notwithstanding
      the
      foregoing, the Company shall not publicly disclose the name of any Purchaser,
      or
      include the name of any Purchaser in any filing with the Commission or any
      regulatory agency or Trading Market, without the prior written consent of such
      Purchaser, except (i) as required by federal securities law in connection with
      the registration statement contemplated by a Registration Statement and (ii)
      to
      the extent such disclosure is required by law or Trading Market regulations,
      in
      which case the Company shall provide the Purchasers with prior notice of such
      disclosure permitted under subclause (i) or (ii).

     

    4.7  Shareholder
      Rights Plan.
      No
      claim will be made or enforced by the Company or, to the knowledge of the
      Company, any other Person that any Purchaser is an “Acquiring Person” under any
      shareholder rights plan or similar plan or arrangement in effect or hereafter
      adopted by the Company, or that any Purchaser could be deemed to trigger the
      provisions of any such plan or arrangement, by virtue of receiving Securities
      under the Transaction Documents or under any other agreement between the Company
      and the Purchasers. The Company shall conduct its business in a manner so that
      it will not become subject to the Investment Company Act.

     

    4.8  Non-Public
      Information.
      If at
      any time the Company becomes subject to the reporting provisions of the Exchange
      Act, the Company covenants and agrees that neither it nor any other Person
      acting on its behalf will provide any Purchaser or its agents or counsel with
      any information that the Company believes constitutes material non-public
      information, unless prior thereto such Purchaser shall have executed a written
      agreement regarding the confidentiality and use of such information. The Company
      understands and confirms that each Purchaser shall be relying on the foregoing
      representations in effecting transactions in securities of the
      Company.

     

    4.9  Use
      of
      Proceeds.
      Except
      as set forth on Schedule
      4.9
      attached
      hereto, the Company shall use the net proceeds from the sale of the Securities
      hereunder for working capital purposes and not for the satisfaction of any
      portion of the Company’s debt (other than payment of trade payables in the
      ordinary course of the Company’s business, consistent with prior practices) nor
      to redeem any Common Stock or Common Stock Equivalents or to settle any
      outstanding litigation.

     

    4.10  Reimbursement.
      If any
      Purchaser becomes involved in any capacity in any Proceeding by or against
      any
      Person who is a stockholder of the Company (except as a result of sales,
      pledges, margin sales and similar transactions by such Purchaser to or with
      any
      current stockholder), solely as a result of such Purchaser’s acquisition of the
      Securities under this Agreement, the Company will reimburse such Purchaser
      for
      its reasonable legal and other expenses (including the cost of any investigation
      preparation and travel in connection therewith) incurred in connection
      therewith, as such expenses are incurred. The reimbursement obligations of
      the
      Company under this paragraph shall be in addition to any liability which the
      Company may otherwise have, shall extend upon the same terms and conditions
      to
      any Affiliates of the Purchasers who are actually named in such action,
      proceeding or investigation, and partners, directors, agents, employees and
      controlling persons (if any), as the case may be, of the Purchasers and any
      such
      Affiliate, and shall be binding upon and inure to the benefit of any successors,
      assigns, heirs and personal representatives of the Company, the Purchasers
      and
      any such Affiliate and any such Person. The Company also agrees that neither
      the
      Purchasers nor any such Affiliates, partners, directors, agents, employees
      or
      controlling persons shall have any liability to the Company or any Person
      asserting claims on behalf of or in right of the Company solely as a result
      of
      acquiring the Securities under this Agreement.

     

    
      
         

      

      
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    4.11  Indemnification
      of Purchasers.
      Subject
      to the provisions of this Section 4.11, the Company will indemnify and hold
      the
      Purchasers and their directors, officers, shareholders, partners, employees
      and
      agents (each, a “Purchaser
      Party”)
      harmless from any and all losses, liabilities, obligations, claims,
      contingencies, damages, costs and expenses, including all judgments, amounts
      paid in settlements, court costs and reasonable attorneys’ fees and costs of
      investigation that any such Purchaser Party may suffer or incur as a result
      of
      or relating to (a) any breach of any of the representations, warranties,
      covenants or agreements made by the Company in this Agreement or in the other
      Transaction Documents or (b) any action instituted against a Purchaser, or
      any
      of them or their respective Affiliates, by any stockholder of the Company who
      is
      not an Affiliate of such Purchaser, with respect to any of the transactions
      contemplated by the Transaction Documents (unless such action is based upon
      a
      breach of such Purchaser’s representations, warranties or covenants under the
      Transaction Documents or any agreements or understandings such Purchaser may
      have with any such stockholder or any violations by the Purchaser of state
      or
      federal securities laws or any conduct by such Purchaser which constitutes
      fraud, gross negligence, willful misconduct or malfeasance). If any action
      shall
      be brought against any Purchaser Party in respect of which indemnity may be
      sought pursuant to this Agreement, such Purchaser Party shall promptly notify
      the Company in writing, and the Company shall have the right to assume the
      defense thereof with counsel of its own choosing. Any Purchaser Party shall
      have
      the right to employ separate counsel in any such action and participate in
      the
      defense thereof, but the fees and expenses of such counsel shall be at the
      expense of such Purchaser Party except to the extent that (i) the employment
      thereof has been specifically authorized by the Company in writing, (ii) the
      Company has failed after a reasonable period of time to assume such defense
      and
      to employ counsel or (iii) in such action there is, in the reasonable opinion
      of
      such separate counsel, a material conflict on any material issue between the
      position of the Company and the position of such Purchaser Party. The Company
      will not be liable to any Purchaser Party under this Agreement (i) for any
      settlement by a Purchaser Party effected without the Company’s prior written
      consent, which shall not be unreasonably withheld or delayed; or (ii) to the
      extent, but only to the extent that a loss, claim, damage or liability is
      attributable to any Purchaser Party’s breach of any of the representations,
      warranties, covenants or agreements made by the Purchasers in this Agreement
      or
      in the other Transaction Documents.

     

    4.12  Reservation
      and Listing of Securities.

     

    
      
         

      

      
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    (a)  The
      Company shall maintain a reserve from its duly authorized shares of Common
      Stock
      for issuance pursuant to the Transaction Documents in such amount as may be
      required to fulfill its obligations in full under the Transaction
      Documents.

     

    (b)  If,
      on
      any date, the number of authorized but unissued (and otherwise unreserved)
      shares of Common Stock is less than the Required Minimum on such date, then
      the
      Board of Directors of the Company shall use commercially reasonable efforts
      to
      amend the Company’s certificate or articles of incorporation to increase the
      number of authorized but unissued shares of Common Stock to at least the
      Required Minimum at such time, as soon as possible and in any event not later
      than the 60th day after such date.

     

    (c)  The
      Company shall, promptly after the sooner of the Effectiveness Date or the date
      the Company has a class of shares registered with the Commission: (i) in the
      time and manner required by a Trading Market, prepare and file with such Trading
      Market an additional shares listing application covering a number of shares
      of
      Common Stock at least equal to the Registrable Securities on the date of such
      application, (ii) take all steps necessary to cause such Registrable Securities
      to be approved for listing and actually listed on the Trading Market as soon
      as
      possible thereafter but in no event later than sixty days after the
      Effectiveness Date or the date the Company has a class of shares registered
      with
      the Commission (“Listing Date”), (iii) provide to the Purchasers evidence of
      such listing, and (iv) maintain the listing of such Registrable Securities
      on
      any date at least equal to the Required Minimum on such date on such Trading
      Market or another Trading Market. In the event the shares of Common Stock
      described above are not timely listed by the Listing Date, or if the listing
      is
      not continuously maintained for two years after the Listing Date (each a
“Listing Default”), then in addition to any other rights the Purchasers may have
      hereunder or under applicable law, on the first day of a Listing Default and
      on
      each monthly anniversary of each such Listing Default date (if the applicable
      Listing Default shall not have been cured by such date) until the applicable
      Listing Default is cured, the Company shall pay to each Purchaser an amount
      in
      cash, as partial liquidated damages and not as a penalty, equal to 1.5% of
      the
      aggregate purchase price paid by such Purchaser pursuant to this Agreement
      for
      any Debenture and Registrable Securities then held by such Purchaser. If the
      Company fails to pay any partial liquidated damages pursuant to this Section
      in
      full within seven days after the date payable, the Company will pay interest
      thereon at a rate of 18% per annum (or such lesser maximum amount that is
      permitted to be paid by applicable law) to the Purchaser, accruing daily from
      the date such partial liquidated damages are due until such amounts, plus all
      such interest thereon, are paid in full. The partial liquidated damages pursuant
      to the terms hereof shall apply on a daily pro-rata basis for any portion of
      a
      month prior to the cure of a Listing Default. 

     

    4.13  Participation
      in Future Financing.
      

     

    (a)  From
      the
      date hereof until the date that is the 24 month anniversary of the date hereof,
      upon any financing by the Company or any of its Subsidiaries of Common Stock
      or
      Common Stock Equivalents (a “Subsequent
      Financing”),
      each
      Purchaser shall have the right to participate in up to an amount of the
      Subsequent Financing equal to 100% of the Subsequent Financing (the
“Participation
      Maximum”).
      

     

    
      
         

      

      
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    (b)  At
      least
      5 Business Days prior to the closing of the Subsequent Financing, the Company
      shall deliver to each Purchaser a written notice of its intention to effect
      a
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Purchaser if it wants to review the details of such
      financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of a Purchaser, and only upon a request by such Purchaser, for
      a
      Subsequent Financing Notice, the Company shall promptly, but no later than
      1
      Business Day after such request, deliver a Subsequent Financing Notice to such
      Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
      the proposed terms of such Subsequent Financing, the amount of proceeds intended
      to be raised thereunder, the Person with whom such Subsequent Financing is
      proposed to be effected, and attached to which shall be a term sheet or similar
      document relating thereto. 

     

    (c)  Any
      Purchaser desiring to participate in such Subsequent Financing must provide
      written notice to the Company by not later than 5:30 p.m. (New York City time)
      on the 5th
      Business
      Day after all of the Purchasers have received the Pre-Notice that the Purchaser
      is willing to participate in the Subsequent Financing, the amount of the
      Purchaser’s participation, and that the Purchaser has such funds ready, willing,
      and available for investment on the terms set forth in the Subsequent Financing
      Notice. If the Company receives no notice from a Purchaser as of such
      5th
      Business
      Day, such Purchaser shall be deemed to have notified the Company that it does
      not elect to participate. 

     

    (d)  If
      by
      5:30 p.m. (New York City time) on the 5th
      Business
      Day after all of the Purchasers have received the Pre-Notice, notifications
      by
      the Purchasers of their willingness to participate in the Subsequent Financing
      (or to cause their designees to participate) is, in the aggregate, less than
      the
      total amount of the Subsequent Financing, then the Company may effect the
      remaining portion of such Subsequent Financing on the terms and to the Persons
      set forth in the Subsequent Financing Notice. 

     

    (e)  If
      by
      5:30 p.m. (New York City time) on the 5th
      Business
      Day after all of the Purchasers have received the Pre-Notice, the Company
      receives responses to a Subsequent Financing Notice from Purchasers seeking
      to
      purchase more than the aggregate amount of the Participation Maximum, each
      such
      Purchaser shall have the right to purchase the greater of (a) their Pro Rata
      Portion (as defined below) of the Participation Maximum and (b) the difference
      between the Participation Maximum and the aggregate amount of participation
      by
      all other Purchasers.  “Pro
      Rata Portion”
is
      the
      ratio of (x) the Subscription Amount of Securities purchased on the Closing
      Date
      by a Purchaser participating under this Section 4.13 and (y) the sum of the
      aggregate Subscription Amounts of Securities purchased on the Closing Date
      by
      all Purchasers participating under this Section 4.13.

     

    (f)  The
      Company must provide the Purchasers with a second Subsequent Financing Notice,
      and the Purchasers will again have the right of participation set forth above
      in
      this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on substantially the same
      terms as set forth in such Subsequent Financing Notice within 60 Business Days
      after the date of the initial Subsequent Financing Notice. 

     

    
      
         

      

      
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    (g)  Notwithstanding
      the foregoing, this Section 4.13 shall not apply in respect of an Exempt
      Issuance.

     

    4.14  [INTENTIONALLY
      OMITTED]

     

    4.15  Equal
      Treatment of Purchasers.
      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. Further, the Company shall not make any payment of
      principal or interest on the Debentures in amounts which are disproportionate
      to
      the respective principal amounts outstanding on the Debentures at any applicable
      time. For clarification purposes, this provision constitutes a separate right
      granted to each Purchaser by the Company and negotiated separately by each
      Purchaser, and is intended to treat for the Company the Debenture holders as
      a
      class and shall not in any way be construed as the Purchasers acting in concert
      or as a group with respect to the purchase, disposition or voting of Securities
      or otherwise.

     

    4.16  Priority
      of Investment.
      Except
      as set forth on Schedule
      4.9,
      the
      Company shall subordinate all loans from shareholders and other beneficial
      owners of Common Stock and Common Stock Equivalents to the
      Debentures.

     

    4.17  Reporting
      Requirements.
      Until
      the time the Company becomes subject to the reporting provisions of the Exchange
      Act, the Company shall furnish to each Purchaser that holds at least $100,000
      of
      shares of Common Stock (on an as converted basis) the following: 

     

    (a)  As
      soon
      as available and in any event within ninety (90) days after the end of each
      fiscal year of the Company, audited financial statements of the Company as
      at
      the end of such fiscal year and related statements of income and expenses for
      such fiscal year, all in reasonable detail and in scope to the Purchaser,
      prepared in accordance with GAAP, with the opinion of an independent certified
      public accountant reasonably acceptable to the Purchaser as evidenced by the
      prior written consent of the Purchaser;

     

    (b)  As
      soon
      as available and in any event within forth-five (45) days after the end of
      the
      sixth (6th)
      month
      of the Company’s fiscal year, reviewed financial statements of the Company as at
      the end of such six month period and related statements of income and expenses
      for such period, all in reasonable detail and scope to Purchaser, prepared
      in
      accordance with GAAP, and prepared by an independent certified public accountant
      reasonably acceptable to the Purchaser as evidenced by the prior written consent
      of the Purchaser; 

     

    
      
         

      

      
        31

        
          

        

      

      
         

      

    

    (c)  As
      soon
      as available and in any event within thirty (30) days after the end of each
      fiscal quarter, quarterly financial statements prepared by the Company and
      other
      information reasonably requested by the Purchaser;

     

    (d)  As
      soon
      as available and in any event within fifteen (15) days after the end of each
      month, monthly reports containing information on the Company's sales and other
      information reasonably requested by the Purchaser;

     

    (e)  As
      soon
      as available and in any event not less than thirty (30) days prior to the
      commencement of each fiscal year, a detailed annual budget and strategic plan
      for the Company's business for such fiscal year, which shall have been approved
      by the Company's Board of Directors;

     

    (f)  As
      soon
      as possible and in any event within five (5) days after the Purchasers notify
      the Company of the occurrence of each Event of Default, a statement of an
      authorized officer of the Company setting forth the nature and period of
      existence of such Event of Default and the action which the Company has taken
      and proposes to take with respect thereto;

     

    (g)  Promptly
      after the sending or filing thereof, copies of all reports, if any, which the
      Company sends to any of its shareholders, and copies of all reports and
      registration statements, if any, which the Company files with the Commission
      or
      any Trading Market;

     

    (h)  Promptly
      after the filing or receiving thereof, copies of all reports and notices, if
      any, which the Company files under ERISA, with the Internal Revenue Service
      or
      the Pension Benefit Guaranty Corporation or the U.S. Department of Labor or
      which the Company receives from any of such Persons;

     

    (i)  Promptly
      upon determination of the need for the Company to obtain additional financing,
      all information concerning such determination if, as and when available;

     

    (j)  Information
      concerning offers or solicitations, and the terms and conditions thereof, for
      additional equity financing, given to the Purchaser not less than 30 days prior
      to the entering into of such financial arrangement; and

     

    (k)  Such
      other information respecting the condition or operations, financial or
      otherwise, of the Company as the Purchasers may from time to time reasonably
      request.

     

    4.18  
      [INTENTIONALLY OMITTED]

     

    4.19  Access
      to Records.
      Until
      the time the Company becomes subject to the reporting provisions of the Exchange
      Act, the Company shall provide each Purchaser that holds at least $100,000
      of
      shares of Common Stock (on an as converted basis) and/or any of its duly
      authorized representatives, attorneys or accountants access to any and all
      records at the premises of the Company where such records are kept, such access
      being afforded without charge, but only upon reasonable request and during
      normal business hours.

     

    
      
         

      

      
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    4.20  Board
      of Directors.
      The
      Company shall have elected and in place a duly elected Board of Directors
      consisting of at least three directors and provide each Purchaser that holds
      at
      least $100,000 of shares of Common Stock (on an as converted basis) with
“observer” status and the right to attend all meetings of the Board of Directors
      of the Company and to obtain copies of all minutes from and notices regarding
      such meetings, as well as copies of all correspondence to members of the Board
      of Directors, subject to reasonable limitations in order to maintain the
      attorney-client privilege and confidentiality, including with respect to
      transactions involving such Purchaser. If requested by the Purchasers, the
      Company will use its best efforts to cause one representative of the Purchasers
      to be elected to its Board of Directors. 

     

    4.21  Maintenance
      of Property.
      The
      Company shall keep all of its property, which is necessary or useful to the
      conduct of its business, in good working order and condition, ordinary wear
      and
      tear excepted.

     

    4.22  Litigation.
      The
      Company shall promptly give the Purchasers notice in writing of all litigation
      and of all proceedings before any court, tribunal or Government Entity (as
      defined below) affecting the Company or any Subsidiary, except litigation
      proceedings which, if adversely determined, would not have a Material Adverse
      Effect. A “Government
      Entity”
means
      the United States of America, any state, any political subdivision of a state
      and any agency or instrumentality of the United States of America or any state
      or political subdivision thereof and any entity exercising executive,
      legislative, judicial, regulatory or administrative functions of or pertaining
      to government.

     

    4.23  Preservation
      of Corporate Existence.
      The
      Company shall preserve and maintain its corporate existence, rights, privileges
      and franchises in the jurisdiction of its incorporation, and qualify and remain
      qualified, as a foreign corporation in each jurisdiction in which such
      qualification is necessary in view of its business or operations and where
      the
      failure to qualify or remain qualified might reasonably have a Material Adverse
      Effect upon the financial condition, business or operations of the Company
      and
      its Subsidiaries taken as a whole.

     

    4.24  Accountants.
      The
      Company shall promptly give the Purchaser notice of any change in the firm
      of
      independent certified public accountants utilized by the Company, provided
      that
      any new firm shall be reasonably acceptable to the Purchasers.

     

    4.25  Other
      Registration Statements.
      Until
      the Registration Statement has been effective for ninety days or until
      Debentures are no longer outstanding, whichever is sooner, the Company will
      not
      file any registration statement with any Government Entity nor allow any such
      other registration statement to become effective for the resale of any Common
      Stock or Common Stock Equivalent.

     

     

    ARTICLE
      V.

    MISCELLANEOUS

     

    5.1  Termination. 
      This Agreement may be terminated by any Purchaser, as to such Purchaser’s
      obligations hereunder only and without any effect whatsoever on the obligations
      between the Company and the other Purchasers, by written notice to the other
      parties, if the Closing has not been consummated on or before March 28, 2006;
      provided,
      however,
      that no
      such termination will affect the right of any party to sue for any breach by
      the
      other party (or parties).

     

    
      
         

      

      
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    5.2  Fees
      and Expenses.
      The
      Company shall deliver, prior to the Closing, a completed and executed copy
      of
      the Closing Statement, attached hereto as Annex
      A.
      Except
      as expressly set forth in the Transaction Documents to the contrary, each party
      shall pay the fees and expenses of its advisers, 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.
      The Company shall pay all transfer agent fees, stamp taxes and other taxes
      and
      duties levied in connection with the delivery of any Securities.

     

    5.3  Entire
      Agreement.
      The
      Transaction Documents, together with the exhibits and schedules thereto, contain
      the entire understanding of the parties with respect to the subject matter
      hereof and supersede all prior agreements and understandings, oral or written,
      with respect to such matters, which the parties acknowledge have been merged
      into such documents, exhibits and schedules.

     

    5.4  Notices.
      Any and
      all notices or other communications or deliveries required or permitted to
      be
      provided hereunder shall be in writing and shall be deemed given and effective
      on the earliest of (a) the date of transmission, if such notice or communication
      is delivered via facsimile at the facsimile number set forth on the signature
      pages attached hereto prior to 5:30 p.m. (New York City time) on a Business
      Day,
      (b) the next Business Day after the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto on a day that is not a Business Day or
      later
      than 5:30 p.m. (New York City time) on any Business Day, (c) the second Business
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

     

    5.5  Amendments;
      Waivers.
      No
      provision of this Agreement may be waived or amended except in a written
      instrument signed, in the case of an amendment, by the Company and each
      Purchaser or, in the case of a waiver, by the party against whom enforcement
      of
      any such waiver is sought. No waiver 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 subsequent default or a
      waiver of any other provision, condition or requirement hereof, nor shall any
      delay or omission of either party to exercise any right hereunder in any manner
      impair the exercise of any such right.

     

    5.6  Headings.
      The
      headings herein are for convenience only, do not constitute a part of this
      Agreement and shall not be deemed to limit or affect any of the provisions
      hereof. The language used in this Agreement will be deemed to be the language
      chosen by the parties to express their mutual intent, and no rules of strict
      construction will be applied against any party.

     

    5.7  Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and permitted assigns. The Company may not assign this
      Agreement or any rights or obligations hereunder without the prior written
      consent of each Purchaser. Any Purchaser may assign any or all of its rights
      under this Agreement to any Person to whom such Purchaser assigns or transfers
      any Securities, provided such transferee agrees in writing to be bound, with
      respect to the transferred Securities, by the provisions hereof that apply
      to
      the “Purchasers” and
      provided, further, that until the Effectiveness Date, no Purchaser shall
      transfer Securities representing less than $50,000 of shares of Common Stock
      (unless such Purchaser is transferring all of the Securities owned by such
      Purchaser).

     

    
      
         

      

      
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    5.8  No
      Third-Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      successors and permitted assigns and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person, except as otherwise set
      forth
      in Section 4.11.

     

    5.9  Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of the Transaction Documents 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 legal
      proceedings concerning the interpretations, enforcement and defense of the
      transactions contemplated by this Agreement and any other Transaction Documents
      (whether brought against a party hereto or its respective affiliates, directors,
      officers, shareholders, employees or agents) shall be commenced exclusively
      in
      the state and federal courts sitting in the City of New York. Each party 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 (including with respect
      to
      the enforcement of any of the Transaction Documents), and hereby irrevocably
      waives, and agrees not to assert in any suit, action or proceeding, any claim
      that it is not personally subject to the jurisdiction of any such court, that
      such suit, action or proceeding is improper or inconvenient venue for such
      proceeding. Each party hereby irrevocably waives personal service of process
      and
      consents to process being served in any such suit, action or 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. The parties hereby waive all rights to a trial by jury. If
      either party shall commence an action or proceeding to enforce any provisions
      of
      the Transaction Documents, then the prevailing party in such action or
      proceeding shall be reimbursed by the other party for its attorneys’ fees and
      other costs and expenses incurred with the investigation, preparation and
      prosecution of such action or proceeding.

     

    5.10  Survival.
      The
      representations and warranties contained herein shall survive the Closing and
      the delivery, exercise and/or conversion of the Securities, as applicable for
      the applicable statue of limitations.

     

    5.11  Execution.
      This
      Agreement may be executed in two or more counterparts, all of which when taken
      together shall be considered one and the same agreement and shall become
      effective when counterparts have been signed by each party and delivered to
      the
      other party, it being understood that both parties need not sign the same
      counterpart. In the event that any signature is delivered by facsimile
      transmission, such signature shall create a valid and binding obligation of
      the
      party executing (or on whose behalf such signature is executed) with the same
      force and effect as if such facsimile signature page were an original
      thereof.

     

    
      
         

      

      
        35

        
          

        

      

      
         

      

    

    5.12  Severability.
      If any
      provision of this Agreement is held to be invalid or unenforceable in any
      respect, the validity and enforceability of the remaining terms and provisions
      of this Agreement shall not in any way be affected or impaired thereby and
      the
      parties will attempt to agree upon a valid and enforceable provision that is
      a
      reasonable substitute therefore, and upon so agreeing, shall incorporate such
      substitute provision in this Agreement.

     

    5.13  Rescission
      and Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) the Transaction Documents, whenever any Purchaser
      exercises a right, election, demand or option under a Transaction Document
      and
      the Company does not timely perform its related obligations within the periods
      therein provided, then such Purchaser may rescind or withdraw, in its sole
      discretion from time to time upon written notice to the Company, any relevant
      notice, demand or election in whole or in part without prejudice to its future
      actions and rights; provided,
      however,
      in the
      case of a rescission of a conversion of a Debenture, the Purchaser shall be
      required to return any shares of Common Stock subject to any such rescinded
      conversion or exercise notice.

     

    5.14  Replacement
      of Securities.
      If any
      certificate or instrument evidencing any Securities is mutilated, lost, stolen
      or destroyed, the Company shall issue or cause to be issued in exchange and
      substitution for and upon cancellation thereof, or in lieu of and substitution
      therefore, a new certificate or instrument, but only upon receipt of evidence
      reasonably satisfactory to the Company of such loss, theft or destruction and
      customary and reasonable indemnity, if requested. The applicants for a new
      certificate or instrument under such circumstances shall also pay any reasonable
      third-party costs associated with the issuance of such replacement
      Securities.

     

    5.15  Remedies.
      In
      addition to being entitled to exercise all rights provided herein or granted
      by
      law, including recovery of damages, each of the Purchasers and the Company
      will
      be entitled to specific performance under the Transaction Documents. The parties
      agree that monetary damages may not be adequate compensation for any loss
      incurred by reason of any breach of obligations described in the foregoing
      sentence and hereby agrees to waive in any action for specific performance
      of
      any such obligation the defense that a remedy at law would be adequate.

     

    5.16  Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to any Purchaser pursuant
      to
      any Transaction Document or a Purchaser enforces or exercises its rights
      thereunder, and such payment or payments or the proceeds of such enforcement
      or
      exercise or any part thereof are subsequently invalidated, declared to be
      fraudulent or preferential, set aside, recovered from, disgorged by or are
      required to be refunded, repaid or otherwise restored to the Company, a trustee,
      receiver or any other person under any law (including, without limitation,
      any
      bankruptcy law, state or federal law, common law or equitable cause of action),
      then to the extent of any such restoration the obligation or part thereof
      originally intended to be satisfied shall be revived and continued in full
      force
      and effect as if such payment had not been made or such enforcement or setoff
      had not occurred.

     

    
      
         

      

      
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    5.17  Usury.
      To the
      extent it may lawfully do so, the Company hereby agrees not to insist upon
      or
      plead or in any manner whatsoever claim, and will resist any and all efforts
      to
      be compelled to take the benefit or advantage of, usury laws wherever enacted,
      now or at any time hereafter in force, in connection with any claim, action
      or
      proceeding that may be brought by any Purchaser in order to enforce any right
      or
      remedy under any Transaction Document. Notwithstanding any provision to the
      contrary contained in any Transaction Document, it is expressly agreed and
      provided that the total liability of the Company under the Transaction Documents
      for payments in the nature of interest shall not exceed the maximum lawful
      rate
      authorized under applicable law (the “Maximum
      Rate”),
      and,
      without limiting the foregoing, in no event shall any rate of interest or
      default interest, or both of them, when aggregated with any other sums in the
      nature of interest that the Company may be obligated to pay under the
      Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
      contract rate of interest allowed by law and applicable to the Transaction
      Documents is increased or decreased by statute or any official governmental
      action subsequent to the date hereof, the new maximum contract rate of interest
      allowed by law will be the Maximum Rate applicable to the Transaction Documents
      from the Effectiveness Date forward, unless such application is precluded by
      applicable law. If under any circumstances whatsoever, interest in excess of
      the
      Maximum Rate is paid by the Company to any Purchaser with respect to
      indebtedness evidenced by the Transaction Documents, such excess shall be
      applied by such Purchaser to the unpaid principal balance of any such
      indebtedness or be refunded to the Company, the manner of handling such excess
      to be at such Purchaser’s election.

     

    5.18  Independent
      Nature of Purchasers’ Obligations and Rights.
      The
      obligations of each Purchaser under any Transaction Document are several and
      not
      joint with the obligations of any other Purchaser, and no Purchaser shall be
      responsible in any way for the performance of the obligations of any other
      Purchaser under any Transaction Document. Nothing contained herein or in any
      Transaction Document, and no action taken by any Purchaser pursuant thereto,
      shall be deemed to constitute the Purchasers as a partnership, an association,
      a
      joint venture or any other kind of entity, or create a presumption that the
      Purchasers are in any way acting in concert or as a group with respect to such
      obligations or the transactions contemplated by the Transaction Documents.
      Each
      Purchaser shall be entitled to independently protect and enforce its rights,
      including without limitation the rights arising out of this Agreement or out
      of
      the other Transaction Documents, and it shall not be necessary for any other
      Purchaser to be joined as an additional party in any proceeding for such
      purpose. Each Purchaser has been represented by its own separate legal counsel
      in their review and negotiation of the Transaction Documents. GM does not
      represent all of the Purchasers but only Platinum. The Company has elected
      to
      provide all Purchasers with the same terms and Transaction Documents for the
      convenience of the Company and not because it was required or requested to
      do so
      by the Purchasers.

     

    5.19  Liquidated
      Damages.
      The
      Company’s obligations to pay any partial liquidated damages or other amounts
      owing under the Transaction Documents is a continuing obligation of the Company
      and shall not terminate until all unpaid partial liquidated damages and other
      amounts have been paid notwithstanding the fact that the instrument or security
      pursuant to which such partial liquidated damages or other amounts are due
      and
      payable shall have been canceled.

     

    
      
         

      

      
        37

        
          

        

      

      
         

      

    

    5.20  Construction.
      The
      parties agree that each of them and/or their respective counsel has reviewed
      and
      had an opportunity to revise the Transaction Documents and, therefore, the
      normal rule of construction to the effect that any ambiguities are to be
      resolved against the drafting party shall not be employed in the interpretation
      of the Transaction Documents or any amendments hereto.

     

    (Signature
      Pages Follow)

     

    
      
         

      

      
        38

        
          

        

      

      
         

      

    

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

     

    
      	
              APRECIA
                INC.

               

            	
              Address
                for Notice:

            
	
              By:__________________________________________

              Name:

              Title:

            	
              1065
                Avenue of Americas

              New
                York, NY 10018

              Fax:
                (212) 930-9725

              Attn:
                Marc Ross, Esq.

            
	 	 
	 	 
	
              As
                to Section 4.18 only:

            	 
	
              10%
                SHAREHOLDERS

               

            	 
	
              __________________________________________

            	 
	
               

              __________________________________________

            	 

    

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR PURCHASER FOLLOWS]

     

    
      
         

      

      
        39

        
          

        

      

      
         

      

    

    [PURCHASER
      SIGNATURE PAGES TO APRECIA INC. 

    SECURITIES
      PURCHASE AGREEMENT]

    

    IN
      WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    Name
      of
      Purchaser: ALPHA CAPITAL AKTIENGESELLSCHAFT

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

    Name
      of
      Authorized Signatory:
      ____________________________________________________

    Title
      of
      Authorized Signatory:
      _____________________________________________________

    Email
      Address of
      Purchaser:________________________________________________

    

    Address
      for Notice of Purchaser:

    

    Pradafant
      7

    9490
      Furstentums

    Vaduz,
      Lichtenstein

    Fax:
      011-42-32323196

    

    Address
      for Delivery of Securities for Purchaser (if not same as above):

    

    

    

    

    

    Subscription
      Amount: $250,000.00

    

    

    

    

    

    

    

    [SIGNATURE
      PAGES CONTINUE]

    

    

    
      
         

      

      
        40

        
          

        

      

      
         

      

    

    [PURCHASER
      SIGNATURE PAGES TO APRECIA INC. 

    SECURITIES
      PURCHASE AGREEMENT]

    

    IN
      WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    Name
      of
      Purchaser: DOUBLE U MASTER FUND L.P.

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

    Name
      of
      Authorized Signatory:
      ____________________________________________________

    Title
      of
      Authorized Signatory:
      _____________________________________________________

    Email
      Address of
      Purchaser:________________________________________________

    

    Address
      for Notice of Purchaser:

    

    C/o
      Navigator Management Ltd.

    Harbor
      House, Waterfront Drive

    P.O.
      Box
      972

    Road
      Town, Tortola

    British
      Virgin Islands

    Attn:
      Murray Todd

    Fax:
      (284) 494-4771

    

    Address
      for Delivery of Securities for Purchaser (if not same as above):

    

    

    

    

    

    Subscription
      Amount: $100,000.00

    

    

    

    

    

    

    

    [SIGNATURE
      PAGES CONTINUE]

    

    
      
         

      

      
        41

        
          

        

      

      
         

      

    

    [PURCHASER
      SIGNATURE PAGES TO APRECIA INC. 

    SECURITIES
      PURCHASE AGREEMENT]

    

    IN
      WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    Name
      of
      Purchaser: TOBANNA ENTERPRISES CORP.

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

    Name
      of
      Authorized Signatory:
      ____________________________________________________

    Title
      of
      Authorized Signatory:
      _____________________________________________________

    Email
      Address of
      Purchaser:________________________________________________

    

    Address
      for Notice of Purchaser:

    

    24
      Hazanchanim Street, Apt. #26

    Tel
      Aviv,
      Israel 69270

    Fax:
      011-972-3-648-6948

    

    Address
      for Delivery of Securities for Purchaser (if not same as above):

    

    

    

    

    

    Subscription
      Amount: $125,000.00

    

    

    

    

    

    

    

    [SIGNATURE
      PAGES CONTINUE]

    

    
      
         

      

      
        42

        
          

        

      

      
         

      

    

    [PURCHASER
      SIGNATURE PAGES TO APRECIA INC. 

    SECURITIES
      PURCHASE AGREEMENT]

    

    IN
      WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    Name
      of
      Purchaser: CMS CAPITAL

    Signature
      of Authorized Signatory of Purchaser:
      __________________________________

    Name
      of
      Authorized Signatory:
      ____________________________________________________

    Title
      of
      Authorized Signatory:
      _____________________________________________________

    Email
      Address of
      Purchaser:________________________________________________

    

    Address
      for Notice of Purchaser:

    

    9612
      Ventura Blvd., Suite 108

    Panorama
      City, CA 91402

    Attn:
      Judah Zavdi

    Fax:
      (818) 907-3372

    

    Address
      for Delivery of Securities for Purchaser (if not same as above):

    

    

    

    

    

    Subscription
      Amount: $25,000.00

    

    

    

    

    

    

    

    [SIGNATURE
      PAGES CONTINUE]

    

    

    
      
         

      

      
        43

        
          

        

      

      
         

      

    

    Annex
      A 

    CLOSING
      STATEMENT

    

    Pursuant
      to the attached Securities Purchase Agreement, dated as of the date hereof,
      the
      purchasers shall purchase up to $500,000 of Debentures from Aprecia Inc., a
      Delaware corporation (the “Company”).
      Grushko & Mittman, P.C., as Escrow Agent, is hereby instructed to disburse
      the proceeds in accordance with this Closing Statement to the addresses or
      pursuant to the wire transfer instructions attached hereto. 

    

    Disbursement
      Date: March
      __,
      2006

     

    

    
      	
              I.
                PURCHASE
                PRICE

            	 
	
              Gross
                Proceeds 

            	
              $500,000

            
	 	 
	
              II. DISBURSEMENTS
                *

            	 
	
              GM
                (Legal Fees)

            	
              $20,000

            
	
              Palladium
                Capital

            	
              $

            
	
              Sichenzia
                Ross Friedman Ference LLP

            	
              $

            
	
              Company

            	
              $

            
	 	 
	
              Total
                Amount Disbursed:

            	
              $500,000

            
	 	 
	
              *
                In the aggregate, these sums represent the entire Subscription
                Amount.

            	 
	 	 
	
              (1)
                Funds to be disbursed to the Company shall be delivered by wire transfer
                to:

               

              [COMPANY
                WIRE INSTRUCTIONS]

               

               

               

               

               

            	 

    

    
      
         

      

      
        44

        
          

        

      

      
         

      

    

    

    
      	
              (2)
                Funds to be disbursed to Palladium Capital shall be delivered by
                wire
                transfer to:

               

               

               

               

               

            	 
	
              (3)
                Funds to be disbursed to Sichenzia Ross Friedman Ference LLP shall
                be
                delivered by wire transfer to:

               

               

               

               

               

            	 
	
              (4)
                Funds to be disbursed to GM shall be delivered by wire transfer
                to:

               

              Citibank,
                N.A.

              ABA
                Number: 0210-00089

              For
                Credit to: Grushko & Mittman, Operating Account

              Account
                Number: 17347668

            	 

    

    

    The
      Company hereby authorizes the distribution of the proceeds as set forth in
      this
      Closing Statement. 

     

    
      	
              APRECIA
                INC.

               

            	 
	
              By:__________________________________________

              Name:

              Title:

            	 

    

    

    

    

    
      
         

      

      
        45

        
          

        

      

      
         

      

    

    

    

    

    

    

    SCHEDULE
      3.1(t)

     

    

     

    REGISTRABLE
      SECURITIES

     

    

     

    	·  	
            __
              shares issuable to the Purchasers;

          

     

    	·  	
            __
              shares issuable to Palladium Capital;

          

     

    	·  	
            __
              shares issuable in connection with a proposed private placement of
              shares
              of common stock of the Company not to exceed $50,000 in gross proceeds
              at
              an issue price of not more than $___ per
              share.

          

     

     

     

    
      
         

      

      
        46EXHIBIT
      A

    

    NEITHER
      THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE
      BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES
      COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER
      THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY,
      MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
      STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
      OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
      SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS
      EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE
      SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY
      AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED
      IN
      CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH
      SECURITIES.

    

    Original
      Issue Date: March 10, 2006

    

    $250,000.00

    

    

    7%
      CONVERTIBLE DEBENTURE

    DUE
      MARCH 10, 2008

    

    THIS
      7%
      CONVERTIBLE DEBENTURE is one of a series of duly authorized and issued 7%
      Convertible Debentures of Aprecia Inc., a Delaware corporation, having a
      principal place of business at c/o 1065
      Avenue of Americas, New York, NY 10018, Fax:
      (212) 930-9725 (the “Company”),
      designated as its 7% Convertible Debenture, due March ___, 2008 (the
“Debenture(s)”).

    

    FOR
      VALUE
      RECEIVED, the Company promises to pay to ALPHA CAPITAL AKTIENGESELLSCHAFT,
      or
      its registered assigns (the “Holder”),
      or
      shall have paid pursuant to the terms hereunder, the principal sum of
      $250,000.00 by March ___, 2008, or such earlier date as the Debentures are
      required or permitted to be repaid as provided hereunder (the “Maturity
      Date”),
      and
      to pay interest to the Holder on the aggregate unconverted and then outstanding
      principal amount of this Debenture in accordance with the provisions hereof.
      All
      payments shall be made by certified check to the address of the Holder as
      provided in Section 9(a) or by wire transfer of immediately available funds
      pursuant to instructions as may be provided from time to time by Holder. This
      Debenture is subject to the following additional provisions:

    

    Section
      1. Definitions.
      For the
      purposes hereof, in addition to the terms defined elsewhere in this Debenture:
      (a) capitalized terms not otherwise defined herein have the meanings given
      to
      such terms in the Purchase Agreement, and (b) the following terms shall have
      the
      following meanings:

    

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    “Alternate
      Consideration”
shall
      have the meaning set forth in Section 5(d).

    

    “Base
      Conversion Price”
shall
      have the meaning set forth in Section 5(b).

    

    “Buy-In”
shall
      have the meaning set forth in Section 4(d)(v).

    

    “Change
      of Control Transaction”
means
      the occurrence after the date hereof of any of (i) an acquisition after the
      date
      hereof by an individual or legal entity or “group” (as described in Rule
      13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
      through legal or beneficial ownership of capital stock of the Company, by
      contract or otherwise) of in excess of 40% of the voting securities of the
      Company, or (ii) the Company merges into or consolidates with any other Person,
      or any Person merges into or consolidates with the Company and, after giving
      effect to such transaction, the stockholders of the Company immediately prior
      to
      such transaction own less than 40% of the aggregate voting power of the Company
      or the successor entity of such transaction, or (iii) the Company sells or
      transfers its assets, as an entirety or substantially as an entirety, to another
      Person and the stockholders of the Company immediately prior to such transaction
      own less than 40% of the aggregate voting power of the acquiring entity
      immediately after the transaction, (iv) a replacement at one time or within
      a
      three year period of more than one-half of the members of the Company’s board of
      directors which is not approved by a majority of those individuals who are
      members of the board of directors on the date hereof (or by those individuals
      who are serving as members of the board of directors on any date whose
      nomination to the board of directors was approved by a majority of the members
      of the board of directors who are members on the date hereof), or (v) the
      execution by the Company of an agreement to which the Company is a party or
      by
      which it is bound, providing for any of the events set forth above in (i) or
      (iv).

    

    “Conversion
      Date”
shall
      have the meaning set forth in Section 4(a).

    

    “Conversion
      Price”
shall
      have the meaning set forth in Section 4(b).

    

    “Conversion
      Shares”
means
      the shares of Common Stock issuable upon conversion of Debentures, sometimes
      referred to as the Underlying Shares, as defined in the Purchase
      Agreement.

    

    “Debenture
      Register”
shall
      have the meaning set forth in Section 2(c).

    

    “Dilutive
      Issuance”
shall
      have the meaning set forth in Section 5(b).

    

    “Dilutive
      Issuance Notice”
shall
      have the meaning set forth in Section 5(b).

    

    “Equity
      Conditions”
shall
      mean, during the period in question, (i)
      the Company shall have duly honored all conversions and redemptions scheduled
      to
      occur or occurring by virtue of one or more Notice of Conversions of the Holder,
      if any, (ii) all liquidated damages and other amounts owing to the Holder in
      respect of the Debentures shall have been paid; (iii)
      there is a sufficient number of authorized but unissued and otherwise unreserved
      shares of Common Stock for the issuance of all of the shares issuable pursuant
      to the Transaction Documents, (iv) there is then existing no Event of Default
      or
      event which, with the passage of time or the giving of notice, would constitute
      an Event of Default, (v) if after the date hereof the Company becomes subject
      to
      the reporting requirements of the Exchange Act, the issuance of the shares
      in
      question (or, in the case of a redemption, the shares issuable upon conversion
      in full of the redemption amount) to the Holder would not violate the
      limitations set forth in Section 4(c) and (vi) no public announcement of a
      pending or proposed Fundamental Transaction, Change of Control Transaction
      or
      acquisition transaction has occurred, which transaction has not been
      consummated, excluding transaction which have been publicly announced and
      subsequently abandoned.

    

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    “Event
      of Default”
      shall have the meaning set forth in Section 8.

    

    “Fundamental
      Transaction”
shall
      have the meaning set forth in Section 5(d).

     

    “Interest
      Payment Date”
shall
      have the meaning set forth in Section 2(a).

    

    “Late
      Fees”
shall
      have the meaning set forth in Section 2(d).

    

    “Mandatory
      Prepayment Amount”
for
      any
      Debentures shall equal the sum of (i) the greater of: (A) 120% of the principal
      amount of Debentures to be prepaid, plus all accrued and unpaid interest
      thereon, or (B) the principal amount of Debentures to be prepaid, plus all
      other
      accrued and unpaid interest hereon, divided by the Conversion Price on (x)
      the
      date the Mandatory Prepayment Amount is demanded or otherwise due or (y) the
      date the Mandatory Prepayment Amount is paid in full, whichever is less,
      multiplied by the VWAP on (x) the date the Mandatory Prepayment Amount is
      demanded or otherwise due or (y) the date the Mandatory Prepayment Amount is
      paid in full, whichever is greater, and (ii) all other amounts, costs, expenses
      and liquidated damages due in respect of such Debentures.

    

    “New
      York Courts”
shall
      have the meaning set forth in Section 9(d).

    

    “Notice
      of Conversion”
shall
      have the meaning set forth in Section 4(a).

    

    “Optional
      Redemption Amount”
shall
      mean the sum of (i) 100% of the principal amount of the Debenture then
      outstanding, (ii) accrued but unpaid interest and (iii) all liquidated damages
      and other amounts due in respect of the Debenture.

    

    “Original
      Issue Date”
shall
      mean the date of the first issuance of the Debentures regardless of the number
      of transfers of any Debenture and regardless of the number of instruments which
      may be issued to evidence such Debenture.

    

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    “Permitted
      Debt”
means
      trade payables and indebtedness consisting of capitalized lease obligations
      and
      purchase money indebtedness incurred in connection with acquisition of capital
      assets and obligations under sale-leaseback arrangements with respect to newly
      acquired or leased assets.

     

    “Permitted
      Lien”
mean
      (a) Liens with respect to the payment of taxes or governmental charges in all
      cases which are not yet due or which are subject to a good faith contest; (b)
      any Liens incurred in connection with Permitted Debt provided that such liens
      are not secured by assets of the Company or its Subsidiaries other than the
      assets so acquired or leased; and (c) statutory Liens of landlords or equipment
      lessors against any property of the Company or its Subsidiaries existing as
      of
      the date of the Purchase Agreement in favor of suppliers, mechanics, carriers,
      materialmen, warehousemen or workmen.

     

    “Purchase
      Agreement”
means
      the Securities Purchase Agreement, dated at or about March ___, 2006, to which
      the Company and the original Holder are parties, as amended, modified or
      supplemented from time to time in accordance with its terms.

    

    “Trading
      Market”
means,
      as applicable, the following markets or exchanges on which the Common Stock
      is
      listed or quoted for trading on the date in question: the American Stock
      Exchange, the New York Stock Exchange, the Nasdaq National Market, the Nasdaq
      SmallCap Market or the OTC Bulletin Board.

     

    Section
      2. Interest.

     

    a)  Payment
      of Interest.
      The
      Company shall pay interest to the Holder on the aggregate unconverted and then
      outstanding principal amount of this Debenture at the rate of 7% per annum,
      payable semi-annually on June 30, and December 31, beginning on the first such
      date after the Original Issue Date, on each Conversion Date (as to that
      principal amount then being converted), on each Optional Redemption Date (as
      to
      that principal amount being redeemed) and on the Maturity Date (except that,
      if
      any such date is not a Business Day, then such payment shall be due on the
      next
      succeeding Business Day) (each such date, an “Interest
      Payment Date”),
      in
      cash.

     

    b)  Interest
      Calculations.
      Interest shall be calculated on the basis of a 360-day year and shall accrue
      daily commencing on the Original Issue Date until payment in full of the
      principal sum, together with all accrued and unpaid interest and other amounts
      which may become due hereunder, has been made. Interest shall cease to accrue
      with respect to any principal amount converted, provided that the Company in
      fact delivers the Conversion Shares within the time period required by Section
      4(d)(ii). Interest hereunder will be paid to the Person in whose name this
      Debenture is registered on the records of the Company regarding registration
      and
      transfers of Debentures (the “Debenture
      Register”).
      

     

    c)  Late
      Fee.
      All
      overdue accrued and unpaid principal and interest to be paid hereunder shall
      entail a late fee at the rate of 18% per annum (or such lower maximum amount
      of
      interest permitted to be charged under applicable law) (“Late
      Fees”)
      which
      will accrue daily, from the date such principal and interest are due hereunder
      through and including the date of payment. 

     

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

    d)  Prepayment.
      Except
      as otherwise set forth in this Debenture, the Company may not prepay any portion
      of the principal amount of this Debenture without the prior written consent
      of
      the Holder. 

    

    Section
      3.  Registration
      of Transfers and Exchanges.
      

     

    a)  Different
      Denominations.
      This
      Debenture is exchangeable for an equal aggregate principal amount of Debentures
      of different authorized denominations, as requested by the Holder surrendering
      the same. No service charge will be made for such registration of transfer
      or
      exchange.

     

    b)  Investment
      Representations.
      This
      Debenture has been issued subject to certain investment representations of
      the
      original Holder set forth in the Purchase Agreement and may be transferred
      or
      exchanged only in compliance with the Purchase Agreement and applicable federal
      and state securities laws and regulations. 

    

    c)  Reliance
      on Debenture Register.
      Prior
      to due presentment to the Company for transfer of this Debenture, the Company
      and any agent of the Company may treat the Person in whose name this Debenture
      is duly registered on the Debenture Register as the owner hereof for the purpose
      of receiving payment as herein provided and for all other purposes, whether
      or
      not this Debenture is overdue, and neither the Company nor any such agent shall
      be affected by notice to the contrary.

    

    Section
      4.  Conversion.

     

    a)  Voluntary
      Conversion.
      At any
      time after the Original Issue Date until this Debenture is no longer
      outstanding, this Debenture shall be convertible into shares of Common Stock
      at
      the option of the Holder, in whole or in part at any time and from time to
      time
      (subject to the limitations on conversion set forth in Section 4(c)
      hereof). The Holder shall effect conversions by delivering to the Company the
      form of Notice of Conversion attached hereto as Annex
      A
      (a
“Notice
      of Conversion”),
      specifying therein the principal amount of Debentures to be converted and the
      date on which such conversion is to be effected (a “Conversion
      Date”).
      If no
      Conversion Date is specified in a Notice of Conversion, the Conversion Date
      shall be the date that such Notice of Conversion is provided hereunder. To
      effect conversions hereunder, the Holder shall not be required to physically
      surrender Debentures to the Company unless the entire principal amount of this
      Debenture plus all accrued and unpaid interest thereon has been so converted.
      Conversions hereunder shall have the effect of lowering the outstanding
      principal amount of this Debenture in an amount equal to the applicable
      conversion. The Holder and the Company shall maintain records showing the
      principal amount converted and the date of such conversions. The Company shall
      deliver any objection to any Notice of Conversion within 2 Business Days of
      receipt of such notice. In the event of any dispute or discrepancy, the records
      of the Holder shall be controlling and determinative in the absence of manifest
      error. The Holder and any assignee, by acceptance of this Debenture, acknowledge
      and agree that, by reason of the provisions of this paragraph, following
      conversion of a portion of this Debenture, the unpaid and unconverted principal
      amount of this Debenture may be less than the amount stated on the face
      hereof.

     

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

    b)  Conversion
      Price.
      The
      conversion price (the “Conversion
      Price”)
      in
      effect on any Conversion Date shall be equal to $0.12, as same may be adjusted
      as described in the Transaction Documents.

    

    c)  Conversion
      Limitations;
      Holder’s
      Restriction on Conversion.
      At any
      time after the Common Stock is registered under Section 12 of the Exchange
      Act,
      the Company shall not effect any conversion of this Debenture, and the Holder
      shall not have the right to convert any portion of this Debenture, pursuant
      to
      Section 4(a) or otherwise, to the extent that after giving effect to such
      conversion, the Holder (together with the Holder’s affiliates), as set forth on
      the applicable Notice of Conversion, would beneficially own in excess of 4.99%
      of the number of shares of the Common Stock outstanding immediately after giving
      effect to such conversion.  For purposes of the foregoing sentence, the
      number of shares of Common Stock beneficially owned by the Holder and its
      affiliates shall include the number of shares of Common Stock issuable upon
      conversion of this Debenture with respect to which the determination of such
      sentence is being made, but shall exclude the number of shares of Common Stock
      which would be issuable upon (A) conversion of the remaining, nonconverted
      portion of this Debenture beneficially owned by the Holder or any of its
      affiliates and (B) exercise or conversion of the unexercised or nonconverted
      portion of any other securities of the Company (including, without limitation,
      any other Debentures or the Warrants) subject to a limitation on conversion
      or
      exercise analogous to the limitation contained herein beneficially owned by
      the
      Holder or any of its affiliates.  Except as set forth in the preceding
      sentence, for purposes of this Section 4(c), beneficial ownership shall be
      calculated in accordance with Section 13(d) of the Exchange Act. To the extent
      that the limitation contained in this section applies, the determination of
      whether this Debenture is convertible (in relation to other securities owned
      by
      the Holder) and of which a portion of this Debenture is convertible shall be
      in
      the sole discretion of such Holder. To ensure compliance with this restriction,
      the Holder will be deemed to represent to the Company each time it delivers
      a
      Notice of Conversion that such Notice of Conversion has not violated the
      restrictions set forth in this paragraph and the Company shall have no
      obligation to verify or confirm the accuracy of such determination. For purposes
      of this Section 4(c), in determining the number of outstanding shares of Common
      Stock, the Holder may rely on the number of outstanding shares of Common Stock
      as reflected in (x) Schedule
      3.1(g)
      to the
      Purchase Agreement, (y) a more recent public announcement by the Company or
      (z)
      any other notice by the Company or the Company’s Transfer Agent setting forth
      the number of shares of Common Stock outstanding.  Upon the written or oral
      request of the Holder, the Company shall within two Business Days confirm orally
      and in writing to the Holder the number of shares of Common Stock then
      outstanding.  In any case, the number of outstanding shares of Common Stock
      shall be determined after giving effect to the conversion or exercise of
      securities of the Company, including this Debenture, by the Holder or its
      affiliates since the date as of which such number of outstanding shares of
      Common Stock was reported. The provisions of this Section 4(c) may be waived
      by
      the Holder, at the election of the Holder, upon not less than 61 days’ prior
      notice to the Company, and the provisions of this Section 4(c) shall continue
      to
      apply until such 61st day (or such later date, as determined by the Holder,
      as
      may be specified in such notice of waiver).

     

    
      
         

      

      
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    d)  Mechanics
      of Conversion

     

    i.  Conversion
      Shares Issuable Upon Conversion of Principal Amount.
      The
      number of shares of Common Stock issuable upon a conversion hereunder shall
      be
      determined by the quotient obtained by dividing (x) the outstanding principal
      amount of this Debenture to be converted by (y) the Conversion
      Price.

    

    ii.  Delivery
      of Certificate Upon Conversion.
      Not
      later than three Business Days after any Conversion Date, the Company will
      deliver or cause to be delivered to the Holder (A) a certificate or certificates
      representing the Conversion Shares which shall be free of restrictive legends
      and trading restrictions (other than those required by the Purchase Agreement)
      representing the number of shares of Common Stock being acquired upon the
      conversion of Debentures and (B) a bank check in the amount of accrued and
      unpaid interest. The Company shall, if available and if allowed under applicable
      securities laws, use its best efforts to deliver any certificate or certificates
      required to be delivered by the Company under this Section electronically
      through the Depository Trust Corporation or another established clearing
      corporation performing similar functions. 

     

    iii.  Failure
      to Deliver Certificates.
      If in
      the case of any Notice of Conversion such certificate or certificates are not
      delivered to or as directed by the applicable Holder by the third Business
      Day
      after a Conversion Date, the Holder shall be entitled by written notice to
      the
      Company at any time on or before its receipt of such certificate or certificates
      thereafter, to rescind such conversion, in which event the Company shall
      immediately return the certificates representing the principal amount of
      Debentures tendered for conversion. 

     

    
      
         

      

      
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    iv.  Obligation
      Absolute; Partial Liquidated Damages.
      If the
      Company fails for any reason to deliver to the Holder such certificate or
      certificates pursuant to Section 4(d)(ii) by the third Business Day after the
      Conversion Date, the Company shall pay to such Holder, in cash, as liquidated
      damages and not as a penalty, for each $1000 of principal amount being
      converted, $10 per Business Day (increasing to $20 per Business Day after 10
      Business Days after such damages begin to accrue) for each Business Day after
      such fifth Business Day until such certificates are delivered. The Company’s
      obligations to issue and deliver the Conversion Shares upon conversion of this
      Debenture in accordance with the terms hereof are absolute and unconditional,
      irrespective of any action or inaction by the Holder to enforce the same, any
      waiver or consent with respect to any provision hereof, the recovery of any
      judgment against any Person or any action to enforce the same, or any setoff,
      counterclaim, recoupment, limitation or termination, or any breach or alleged
      breach by the Holder or any other Person of any obligation to the Company or
      any
      violation or alleged violation of law by the Holder or any other person, and
      irrespective of any other circumstance which might otherwise limit such
      obligation of the Company to the Holder in connection with the issuance of
      such
      Conversion Shares; provided,
      however,
      such
      delivery shall not operate as a waiver by the Company of any such action the
      Company may have against the Holder. In the event a Holder of this Debenture
      shall elect to convert any or all of the outstanding principal amount hereof,
      the Company may not refuse conversion based on any claim that the Holder or
      any
      one associated or affiliated with the Holder has been engaged in any violation
      of law, agreement or for any other reason, unless, an injunction from a court,
      on notice, restraining and or enjoining conversion of all or part of this
      Debenture shall have been sought and obtained and the Company posts a surety
      bond for the benefit of the Holder in the amount of 150% of the principal amount
      of this Debenture outstanding, which is subject to the injunction, which bond
      shall remain in effect until the completion of arbitration/litigation of the
      dispute and the proceeds of which shall be payable to such Holder to the extent
      it obtains judgment. In the absence of an injunction precluding the same, the
      Company shall issue Conversion Shares or, if applicable, cash, upon a properly
      noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual
      damages or declare an Event of Default pursuant to Section 8 herein for the
      Company’s failure to deliver Conversion Shares within the period specified
      herein and such Holder shall have the right to pursue all remedies available
      to
      it at law or in equity including, without limitation, a decree of specific
      performance and/or injunctive relief. The exercise of any such rights shall
      not
      prohibit the Holder from seeking to enforce damages pursuant to any other
      Section hereof or under applicable law.

     

    v.  Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Conversion.
      In
      addition to any other rights available to the Holder and only if after the
      Original Issue Date the Company becomes subject to the reporting requirements
      of
      the Exchange Act, if the Company fails for any reason to deliver to the Holder
      such certificate or certificates pursuant to Section 4(d)(ii) by the third
      Business Day after the Conversion Date, and if after such third Business Day
      the
      Holder is required by its brokerage firm to purchase (in an open market
      transaction or otherwise) Common Stock to deliver in satisfaction of a sale
      by
      such Holder of the Conversion Shares which the Holder anticipated receiving
      upon
      such conversion (a “Buy-In”),
      then
      the Company shall (A) pay in cash to the Holder (in addition to any remedies
      available to or elected by the Holder) the amount by which (x) the Holder’s
      total purchase price (including brokerage commissions, if any) for the Common
      Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
      of Common Stock that such Holder anticipated receiving from the conversion
      at
      issue multiplied by (2) the actual sale price of the Common Stock at the time
      of
      the sale (including brokerage commissions, if any) giving rise to such purchase
      obligation and (B) at the option of the Holder, either reissue Debentures in
      principal amount equal to the principal amount of the attempted conversion
      or
      deliver to the Holder the number of shares of Common Stock that would have
      been
      issued had the Company timely complied with its delivery requirements under
      Section 4(d)(ii). For example, if the Holder purchases Common Stock having
      a
      total purchase price of $11,000 to cover a Buy-In with respect to an attempted
      conversion of Debentures with respect to which the actual sale price of the
      Conversion Shares at the time of the sale (including brokerage commissions,
      if
      any) giving rise to such purchase obligation was a total of $10,000 under clause
      (A) of the immediately preceding sentence, the Company shall be required to
      pay
      the Holder $1,000. The Holder shall provide the Company written notice
      indicating the amounts payable to the Holder in respect of the Buy-In.
      Notwithstanding anything contained herein to the contrary, if a Holder requires
      the Company to make payment in respect of a Buy-In for the failure to timely
      deliver certificates hereunder and the Company timely pays in full such payment,
      the Company shall not be required to pay such Holder liquidated damages under
      Section 4(d)(iv) in respect of the certificates resulting in such
      Buy-In.

     

    vi.  Reservation
      of Shares Issuable Upon Conversion.
      The
      Company covenants that it will at all times reserve and keep available out
      of
      its authorized and unissued shares of Common Stock solely for the purpose of
      issuance upon conversion of the Debentures, as herein provided, free from
      preemptive rights or any other actual contingent purchase rights of persons
      other than the Holder (and the other Holders of the Debentures), not less than
      such number of shares of the Common Stock as shall (subject to any additional
      requirements of the Company as to reservation of such shares set forth in the
      Purchase Agreement) be issuable (taking into account the adjustments and
      restrictions of Section 5) upon the conversion of the outstanding principal
      amount of the Debentures. The Company covenants that all shares of Common Stock
      that shall be so issuable shall, upon issue, be duly and validly authorized,
      issued and fully paid, nonassessable and, if the Registration Statement is
      then
      effective under the Securities Act, registered for public sale in accordance
      with such Registration Statement.

    

    vii.  Fractional
      Shares.
      Upon a
      conversion hereunder the Company shall not be required to issue stock
      certificates representing fractions of shares of the Common Stock, but may
      if
      otherwise permitted, make a cash payment in respect of any final fraction of
      a
      share based on the VWAP at such time. If the Company elects not, or is unable,
      to make such a cash payment, the Holder shall be entitled to receive, in lieu
      of
      the final fraction of a share, one whole share of Common Stock.

    

    viii.  Transfer
      Taxes.
      The
      issuance of certificates for shares of the Common Stock on conversion of this
      Debenture shall be made without charge to the Holder hereof for any documentary
      stamp or similar taxes that may be payable in respect of the issue or delivery
      of such certificate, provided that the Company shall not be required to pay
      any
      tax that may be payable in respect of any transfer involved in the issuance
      and
      delivery of any such certificate upon conversion in a name other than that
      of
      the Holder of such Debentures so converted and the Company shall not be required
      to issue or deliver such certificates unless or until the person or persons
      requesting the issuance thereof shall have paid to the Company the amount of
      such tax or shall have established to the satisfaction of the Company that
      such
      tax has been paid.

    

    
      
         

      

      
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    Section
      5. Certain
      Adjustments.

    

    a)  Stock
      Dividends And Stock Splits.
      If the
      Company, at any time while this Debenture is outstanding: (A) pays a stock
      dividend or otherwise makes a distribution or distributions on shares of its
      Common Stock or any other equity or equity equivalent securities payable in
      shares of Common Stock (which, for avoidance of doubt, shall not include any
      shares of Common Stock issued by the Company pursuant to this Debenture,
      including as interest thereon), (B) subdivides outstanding shares of Common
      Stock into a larger number of shares, (C) combines (including by way of reverse
      stock split) outstanding shares of Common Stock into a smaller number of shares,
      or (D) issues by reclassification of shares of the Common Stock any shares
      of
      capital stock of the Company, then the Conversion Price shall be multiplied
      by a
      fraction of which the numerator shall be the number of shares of Common Stock
      (excluding treasury shares, if any) outstanding immediately before such event
      and of which the denominator shall be the number of shares of Common Stock
      outstanding immediately after such event. Any adjustment made pursuant to this
      Section shall become effective immediately after the record date for the
      determination of stockholders entitled to receive such dividend or distribution
      and shall become effective immediately after the effective date in the case
      of a
      subdivision, combination or re-classification. 

    

    b)  Subsequent
      Equity Sales.
      If the
      Company or any Subsidiary thereof, as applicable, at any time while this
      Debenture is outstanding, shall sell, grant any option to purchase or offer,
      sell or grant any right to reprice its securities, or otherwise dispose of
      or
      issue any Common Stock or Common Stock Equivalents entitling any Person to
      acquire shares of Common Stock, at an effective price per share less than the
      then Conversion Price (such lower price, the "BASE CONVERSION PRICE" and such
      issuances collectively, a "DILUTIVE ISSUANCE"), as adjusted hereunder (if the
      holder of the Common Stock or Common Stock Equivalents so issued shall at any
      time, whether by operation of purchase price adjustments, reset provisions,
      floating conversion, exercise or exchange prices or otherwise, or due to
      warrants, options or rights per share which is issued in connection with such
      issuance, be entitled to receive shares of Common Stock at an effective price
      per share which is less than the Conversion Price, such issuance shall be deemed
      to have occurred for less than the Conversion Price on such date of the Dilutive
      Issuance), then the Conversion Price shall be reduced to equal the Base
      Conversion Price. Such adjustment shall be made whenever such Common Stock
      or
      Common Stock Equivalents are issued. Notwithstanding the foregoing, no
      adjustment will be made under this Section 5(b) in respect of an Exempt
      Issuance. The Company shall notify the Holder in writing, no later than the
      Business Day following the issuance of any Common Stock or Common Stock
      Equivalents subject to this section, indicating therein the applicable issuance
      price, or of applicable reset price, exchange price, conversion price and other
      pricing terms (such notice the DILUTIVE ISSUANCE NOTICE"). For purposes of
      clarification, whether or not the Company provides a Dilutive Issuance Notice
      pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance,
      after the date of such Dilutive Issuance the Holder is entitled to receive
      a
      number of Conversion Shares based upon the Base Conversion Price regardless
      of
      whether the Holder accurately refers to the Base Conversion Price in the Notice
      of Conversion.

    

    
      
         

      

      
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    c) Pro
      Rata Distributions.
      If the
      Company, at any time while this Debenture is outstanding, shall distribute
      to
      all holders of Common Stock (and not to the holders of the Debenture) evidences
      of its indebtedness or assets (including cash and cash dividends) or rights
      or
      warrants to subscribe for or purchase any security, then in each such case
      the
      Conversion Price shall be adjusted by multiplying such Conversion Price in
      effect immediately prior to the record date fixed for determination of
      stockholders entitled to receive such distribution by a fraction of which the
      denominator shall be the VWAP determined as of the record date mentioned above,
      and of which the numerator shall be such VWAP on such record date less the
      then
      fair market value at such record date of the portion of such assets or evidence
      of indebtedness so distributed applicable to one outstanding share of the Common
      Stock as determined by the Board of Directors in good faith. In either case
      the
      adjustments shall be described in a statement provided to the Holder of the
      portion of assets or evidences of indebtedness so distributed or such
      subscription rights applicable to one share of Common Stock. Such adjustment
      shall be made whenever any such distribution is made and shall become effective
      immediately after the record date mentioned above.

    

    d) Fundamental
      Transaction.
      If, at
      any time while this Debenture is outstanding, (A) the Company effects any merger
      or consolidation of the Company with or into another Person, (B) the Company
      effects any sale of all or substantially all of its assets in one or a series
      of
      related transactions, (C) any tender offer or exchange offer (whether by the
      Company or another Person) is completed pursuant to which holders of Common
      Stock are permitted to tender or exchange their shares for other securities,
      cash or property, or (D) the Company effects any reclassification of the Common
      Stock or any compulsory share exchange pursuant to which the Common Stock is
      effectively converted into or exchanged for other securities, cash or property
      (in any such case, a "FUNDAMENTAL TRANSACTION"), then upon any subsequent
      conversion of this Debenture, the Holder shall have the right to receive, for
      each Conversion Share that would have been issuable upon such conversion
      immediately prior to the occurrence of such Fundamental Transaction, the same
      kind and amount of securities, cash or property as it would have been entitled
      to receive upon the occurrence of such Fundamental Transaction if it had been,
      immediately prior to such Fundamental Transaction, the holder of one share
      of
      Common Stock (the "ALTERNATE CONSIDERATION"). For purposes of any such
      conversion, the determination of the Conversion Price shall be appropriately
      adjusted to apply to such Alternate consideration based on the amount of
      Alternate Consideration issuable in respect of one share of Common Stock in
      such
      Fundamental Transaction, and the Company shall apportion the Conversion Price
      among the Alternate Consideration in a reasonable manner reflecting the relative
      value of any different components of the Alternate Consideration. If holders
      of
      Common Stock are given any choice as to the securities, cash or property to
      be
      received in a Fundamental Transaction, then the Holder shall be given the same
      choice as to the Alternate Consideration it receives upon any conversion of
      this
      Debenture following such Fundamental Transaction. To the extent necessary to
      effectuate he foregoing provisions, any successor to the Company or surviving
      entity in such Fundamental Transaction shall (i) assume in writing all of the
      obligations of the Company under thisDebenture and the other Transaction
      Documents pursuant to written agreements in form and substance satisfactory
      to
      the Holder (such approval not to be unreasonably withheld or delayed) prior
      to
      such Fundamental Transaction and (ii) to issue to the Holder a new debenture
      of
      such successor entity evidenced by a written instrument substantially similar
      in
      form and substance to this Debenture, including, without limitation, having
      a
      principal amount and interest rate equal to the principal amounts and the
      interest rates of the Debentures held by the Holder and having similar ranking
      to the Debenture, and satisfactory to the Holder (any such approval not to
      be
      unreasonably withheld or delayed). The provisions of this Section shall apply
      similarly and equally to successive Fundamental Transactions and shall be
      applied without regard to any limitations on the conversion or redemption of
      this Debenture. 

    

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

    e) Calculations.
      All
      calculations under this Section 5 shall be made to the nearest cent or the
      nearest 1/100th of a share, as the case may be. For purposes of this Section
      5,
      the number of shares of Common Stock deemed to be issued and outstanding as
      of a
      given date shall be the sum of the number of shares of Common Stock (excluding
      treasury shares, if any) issued and outstanding.

    

    Section
      6. Notice
      To The Holder.

    

    i.     
      Adjustment
      To Conversion Price.
      Whenever the Conversion Price is adjusted pursuant to Section 5, the Company
      shall promptly mail to each Holder a notice setting forth the Conversion Price
      after such adjustment and setting forth a brief statement of the facts requiring
      such adjustment. If the Company issues a variable rate security, despite the
      prohibition thereon in the Purchase Agreement, the Company shall be deemed
      to
      have issued Common Stock or Common Stock Equivalents at the lowest possible
      conversion or exercise price at which such securities may be converted or
      exercised in the case of a Variable Rate Transaction (as defined in the Purchase
      Agreement).

    

    ii. Notice
      To Allow Conversion By Holder.
      If (A)
      the Company shall declare a dividend (or any other distribution) on the Common
      Stock; (B) the Company shall declare a special nonrecurring cash dividend on
      or
      a redemption of the Common Stock; (C) the Company shall authorize the granting
      to all holders of the Common Stock rights or warrants to subscribe for or
      purchase any shares of capital stock of any class or of any rights; (D) the
      approval of any stockholders of the Company shall be required in connection
      with
      any reclassification of the Common Stock, any consolidation or merger to which
      the Company is a party, any sale or transfer of all or substantially all of
      the
      assets of the Company, of any compulsory share exchange whereby the Common
      Stock
      is converted into other securities, cash or property; (E) the Company shall
      authorize the voluntary or involuntary dissolution, liquidation or winding
      up of
      the affairs of the Company; then, in each case, the Company shall cause to
      be
      filed at each office or agency maintained for the purpose of conversion of
      this
      Debenture, and shall cause to be mailed to the Holder at its last addresses
      as
      it shall appear upon the stock books of the Company, at least 10 calendar days
      prior to the applicable record or effective date hereinafter specified, a notice
      stating (x) the date on which a record is to be taken for the purpose of such
      dividend, distribution, redemption, rights or warrants, or if a record is not
      to
      be taken, the date as of which the holders of the Common Stock of record to
      be
      entitled to such dividend, distributions, redemption, rights or warrants are
      to
      be determined or (y) the date on which such reclassification, consolidation,
      merger, sale, transfer or share exchange is expected to become effective or
      close, and the date as of which it is expected that holders of the Common Stock
      of record shall be entitled to exchange their shares of the Common Stock for
      securities, cash or other property deliverable upon such reclassification,
      consolidation, merger, sale, transfer or share exchange; PROVIDED, that the
      failure to mail such notice or any defect therein or in the mailing thereof
      shall not affect the validity of the corporate action required to be specified
      in such notice. The Holder is entitled to convert this Debenture during the
      10-day period commencing the date of such notice to the effective date of the
      event triggering such notice.

    

    
      
         

      

      
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    Section
      7. Negative
      Covenants.
      So long
      as any portion of this Debenture is outstanding, the Company will not and will
      not permit any of its Subsidiaries to directly or indirectly:

    a)  except
      with the prior written consent of the Holder, enter into, create, incur, assume,
      guarantee or suffer to exist any indebtedness for borrowed money of any kind,
      including but not limited to, a guarantee, on or with respect to any of its
      property or assets now owned or hereafter acquired or any interest therein
      or
      any income or profits therefrom that is senior to, or pari passu
      with, in any respect, the Company’s obligations hereunder;

     

    b)  enter
      into, create, incur, assume or suffer to exist any liens of any kind, on or
      with
      respect to any of its property or assets now owned or hereafter acquired or
      any
      interest therein or any income or profits therefrom, other than Permitted
      Liens;

    

    c)      
      amend its certificate of incorporation, bylaws or other charter documents so
      as
      to adversely affect any rights of the Holder;

    

    d)  repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
de
      minimis
      number
      of shares of its Common Stock or Common Stock Equivalents other than as to
      the
      Conversion Shares to the extent permitted or required under the Transaction
      Documents or as otherwise permitted by the Transaction Documents; 

    

    e)     
      enter into any agreement with respect to any of the foregoing; or

    

    f)      
      pay cash dividends on any equity securities of the Company.

     

    Section
      8. Events
      of Default.
      

    

    a)  “Event
      of Default”,
      wherever used herein, means any one of the following events (whatever the reason
      and whether it shall be voluntary or involuntary or effected by operation of
      law
      or pursuant to any judgment, decree or order of any court, or any order, rule
      or
      regulation of any administrative or governmental body):

    

    i.  any
      default in the payment of (A) the principal amount of any Debenture, or (B)
      interest (including Late Fees) on, or liquidated damages in respect of, any
      Debenture, as and when the same shall become due and payable (whether on a
      Conversion Date or the Maturity Date or by acceleration or otherwise) which
      default, solely in the case of an interest payment or other default under clause
      (B) above, is not cured, within 3 Business Days;

     

    ii.  the
      Company shall fail to observe or perform any other covenant or agreement
      contained in this Debenture (other than a breach by the Company of its
      obligations to deliver shares of Common Stock to the Holder upon conversion
      which breach is addressed in clause (viii) below) which failure is not cured,
      if
      possible to cure, within the earlier to occur of (A) 10 Business Days after
      notice of such default sent by the Holder or by any other Holder and (B)15
      Business Days after the Company shall become or should have become aware of
      such
      failure;

    

    
      
         

      

      
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    iii.  a
      default
      or event of default (subject to any grace or cure period provided for in the
      applicable agreement, document or instrument) shall occur under (A) any of
      the
      Transaction Documents other than the Debentures, or (B) any other material
      agreement, lease, document or instrument to which the Company or any Subsidiary
      is bound;

    

    iv.  any
      representation or warranty made herein,
      in any other Transaction Documents, in any written statement pursuant hereto
      or
      thereto, or in any other report, financial statement or certificate made or
      delivered to the Holder or any other holder of Debentures shall
      be untrue or incorrect in any material respect as of the date when made or
      deemed made;

    

    v.  (i)
      the
      Company or any of its Subsidiaries shall commence, or there shall be commenced
      against the Company or any such Subsidiary, a case under any applicable
      bankruptcy or insolvency laws as now or hereafter in effect or any successor
      thereto, or the Company or any Subsidiary commences any other proceeding under
      any reorganization, arrangement, adjustment of debt, relief of debtors,
      dissolution, insolvency or liquidation or similar law of any jurisdiction
      whether now or hereafter in effect relating to the Company or any Subsidiary
      thereof or (ii) there is commenced against the Company or any Subsidiary thereof
      any such bankruptcy, insolvency or other proceeding which remains undismissed
      for a period of 45 days; or (iii) the Company or any Subsidiary thereof is
      adjudicated by a court of competent jurisdiction insolvent or bankrupt; or
      any
      order of relief or other order approving any such case or proceeding is entered;
      or (iv) the Company or any Subsidiary thereof suffers any appointment of any
      custodian or the like for it or any substantial part of its property which
      continues undischarged or unstayed for a period of 45 days; or (v) the Company
      or any Subsidiary thereof makes a general assignment for the benefit of
      creditors; or (vi) the Company shall fail to pay, or shall state that it is
      unable to pay, or shall be unable to pay, its debts generally as they become
      due; or (vii) the Company or any Subsidiary thereof shall call a meeting of
      its
      creditors with a view to arranging a composition, adjustment or restructuring
      of
      its debts; or (viii) the Company or any Subsidiary thereof shall by any act
      or
      failure to act expressly indicate its consent to, approval of or acquiescence
      in
      any of the foregoing; or (ix) any corporate or other action is taken by the
      Company or any Subsidiary thereof for the purpose of effecting any of the
      foregoing;

     

    vi.  the
      Company or any Subsidiary shall default in any of its obligations under any
      mortgage, credit agreement or other facility, indenture agreement, factoring
      agreement or other instrument under which there may be issued, or by which
      there
      may be secured or evidenced any indebtedness for borrowed money or money due
      under any long term leasing or factoring arrangement of the Company in an amount
      exceeding $50,000, whether such indebtedness now exists or shall hereafter
      be
      created and such default shall result in such indebtedness becoming or being
      declared due and payable prior to the date on which it would otherwise become
      due and payable; 

    

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    vii.  the
      Company shall be a party to any Change of Control Transaction or Fundamental
      Transaction, shall agree to sell or dispose of all or in excess of 45% of its
      assets in one or more transactions (whether or not such sale would constitute
      a
      Change of Control Transaction) or shall redeem or repurchase more than a de
      minimis number of its outstanding shares of Common Stock or other equity
      securities of the Company (other than redemptions of Conversion Shares and
      repurchases of shares of Common Stock or other equity securities of departing
      officers and directors of the Company; provided such repurchases shall not
      exceed $50,000, in the aggregate, for all officers and directors during the
      term
      of this Debenture); or

    

    viii.  the
      Company shall fail for any reason to deliver certificates to a Holder prior
      to
      the 7th
      Business
      Day after a Conversion Date pursuant to and in accordance with Section 4(d)
      or
      the Company shall provide notice to the Holder, including by way of public
      announcement, at any time, of its intention not to comply with requests for
      conversions of any Debentures in accordance with the terms hereof.

    

    

    b)  Remedies
      Upon Event of Default.
      If any
      Event of Default occurs, the full principal amount of this Debenture, together
      with interest and other amounts owing in respect thereof, to the date of
      acceleration shall become, at the Holder’s election, immediately due and payable
      in cash. The aggregate amount payable upon an Event of Default shall be equal
      to
      the Mandatory Prepayment Amount. Commencing 15 days after the occurrence of
      any
      Event of Default that results in the eventual acceleration of this Debenture,
      the interest rate on this Debenture shall accrue at the rate of 18% per annum,
      or such lower maximum amount of interest permitted to be charged under
      applicable law. All Debentures for which the full Mandatory Prepayment Amount
      hereunder shall have been paid in accordance herewith shall promptly be
      surrendered to or as directed by the Company. The Holder need not provide and
      the Company hereby waives any presentment, demand, protest or other notice
      of
      any kind, and the Holder may immediately and without expiration of any grace
      period enforce any and all of its rights and remedies hereunder and all other
      remedies available to it under applicable law. Such declaration may be rescinded
      and annulled by Holder at any time prior to payment hereunder and the Holder
      shall have all rights as a Debenture holder until such time, if any, as the
      full
      payment under this Section shall have been received by it. No such rescission
      or
      annulment shall affect any subsequent Event of Default or impair any right
      consequent thereon.

     

    Section
      9. Miscellaneous.
      

     

    
      
         

      

      
        14

        
          

        

      

      
         

      

    

    a)  Notices.
      Any and
      all notices or other communications or deliveries to be provided by the Holder
      hereunder, including, without limitation, any Notice of Conversion, shall be
      in
      writing and delivered personally, by facsimile, sent by a nationally recognized
      overnight courier service, addressed to the Company, at the address set forth
      above, facsimile number: (212) 930-9725,
      Attn:
      Marc Ross, Esq., or such other address or facsimile number as the Company may
      specify for such purposes by notice to the Holders delivered in accordance
      with
      this Section. Any and all notices or other communications or deliveries to
      be
      provided by the Company hereunder shall be in writing and delivered personally,
      by facsimile, sent by a nationally recognized overnight courier service
      addressed to each Holder at the facsimile telephone number or address of such
      Holder appearing on the books of the Company, or if no such facsimile telephone
      number or address appears, at the principal place of business of the Holder.
      Any
      notice or other communication or deliveries hereunder shall be deemed given
      and
      effective on the earliest of (i) the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile telephone number
      specified in this Section prior to 5:30 p.m. (New York City time), (ii) the
      date
      after the date of transmission, if such notice or communication is delivered
      via
      facsimile at the facsimile telephone number specified in this Section later
      than
      5:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New
      York
      City time) on such date, (iii) the second Business Day following the date of
      mailing, if sent by nationally recognized overnight courier service, or (iv)
      upon actual receipt by the party to whom such notice is required to be
      given.

     

    b)  Absolute
      Obligation.
      Except
      as expressly provided herein, no provision of this Debenture shall alter or
      impair the obligation of the Company, which is absolute and unconditional,
      to
      pay the principal of, interest and liquidated damages (if any) on, this
      Debenture at the time, place, and rate, and in the coin or currency, herein
      prescribed. This Debenture is a direct debt obligation of the Company. This
      Debenture ranks pari passu
      with all
      other Debentures now or hereafter issued under the terms set forth
      herein. 

     

    c)  Lost
      or Mutilated Debenture.
      If this
      Debenture shall be mutilated, lost, stolen or destroyed, the Company shall
      execute and deliver, in exchange and substitution for and upon cancellation
      of a
      mutilated Debenture, or in lieu of or in substitution for a lost, stolen or
      destroyed Debenture, a new Debenture for the principal amount of this Debenture
      so mutilated, lost, stolen or destroyed but only upon receipt of evidence of
      such loss, theft or destruction of such Debenture, and of the ownership hereof,
      and indemnity, if requested, all reasonably satisfactory to the
      Company.

    

    d)  Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Debenture 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 legal
      proceedings concerning the interpretations, enforcement and defense of the
      transactions contemplated by any of the Transaction Documents (whether brought
      against a party hereto or its respective affiliates, directors, officers,
      shareholders, employees or agents) shall be commenced in the state and federal
      courts sitting in the City of New York, Borough of Manhattan (the “New
      York Courts”).
      Each
      party hereto hereby irrevocably submits to the exclusive jurisdiction of the
      New
      York Courts for the adjudication of any dispute hereunder or in connection
      herewith or with any transaction contemplated hereby or discussed herein
      (including with respect to the enforcement of any of the Transaction Documents),
      and hereby irrevocably waives, and agrees not to assert in any suit, action
      or
      proceeding, any claim that it is not personally subject to the jurisdiction
      of
      any such court, or such New York Courts are improper or inconvenient venue
      for
      such proceeding. Each party hereby irrevocably waives personal service of
      process and consents to process being served in any such suit, action or
      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 Debenture 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 Debenture or
      the
      transactions contemplated hereby. If either party shall commence an action
      or
      proceeding to enforce any provisions of this Debenture, then the prevailing
      party in such action or proceeding shall be reimbursed by the other party for
      its attorneys fees and other costs and expenses incurred with the investigation,
      preparation and prosecution of such action or proceeding.

     

    
      
         

      

      
        15

        
          

        

      

      
         

      

    

    e)  Waiver.
      Any
      waiver by the Company or the Holder of a breach of any provision of this
      Debenture shall not operate as or be construed to be a waiver of any other
      breach of such provision or of any breach of any other provision of this
      Debenture. The failure of the Company or the Holder to insist upon strict
      adherence to any term of this Debenture on one or more occasions shall not
      be
      considered a waiver or deprive that party of the right thereafter to insist
      upon
      strict adherence to that term or any other term of this Debenture. Any waiver
      must be in writing.

     

    f)  Severability.
      If any
      provision of this Debenture is invalid, illegal or unenforceable, the balance
      of
      this Debenture shall remain in effect, and if any provision is inapplicable
      to
      any person or circumstance, it shall nevertheless remain applicable to all
      other
      persons and circumstances. If it shall be found that any interest or other
      amount deemed interest due hereunder violates applicable laws governing usury,
      the applicable rate of interest due hereunder shall automatically be lowered
      to
      equal the maximum permitted rate of interest. The Company covenants (to the
      extent that it may lawfully do so) that it shall not at any time insist upon,
      plead, or in any manner whatsoever claim or take the benefit or advantage of,
      any stay, extension or usury law or other law which would prohibit or forgive
      the Company from paying all or any portion of the principal of or interest
      on
      this Debenture as contemplated herein, wherever enacted, now or at any time
      hereafter in force, or which may affect the covenants or the performance of
      this
      indenture, and the Company (to the extent it may lawfully do so) hereby
      expressly waives all benefits or advantage of any such law, and covenants that
      it will not, by resort to any such law, hinder, delay or impeded the execution
      of any power herein granted to the Holder, but will suffer and permit the
      execution of every such as though no such law has been enacted.

     

    g)  Next
      Business Day.
      Whenever any payment or other obligation hereunder shall be due on a day other
      than a Business Day, such payment shall be made on the next succeeding Business
      Day.

    

    h)  Headings.
      The
      headings contained herein are for convenience only, do not constitute a part
      of
      this Debenture and shall not be deemed to limit or affect any of the provisions
      hereof.

    

    *********************

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    IN
      WITNESS WHEREOF, the Company has caused this Debenture to be duly executed
      by a
      duly authorized officer as of the date first above indicated.

    

    
      	 	 	 
	 	APRECIA
              INC.
	 
 	 
 	 
 
	 	By:  	 
	 	
              

              Name:

              Title:

            
	 	Title 

    
      	
               

               

            

    

    

    
      
         

      

      
        17

        
          

        

      

      
         

      

    

    ANNEX
      A

    

    NOTICE
      OF CONVERSION

     

    

    The
      undersigned hereby elects to convert principal under the 7% Convertible
      Debenture of Aprecia Inc., a Delaware corporation (the “Company”),
      due
      on March ___, 2008, into shares of common stock, par value $0.0001 per share
      (the “Common
      Stock”),
      of
      the Company according to the conditions hereof, as of the date written below.
      If
      shares are to be issued in the name of a person other than the undersigned,
      the
      undersigned will pay all transfer taxes payable with respect thereto and is
      delivering herewith such certificates and opinions as reasonably requested
      by
      the Company in accordance therewith. No fee will be charged to the holder for
      any conversion, except for such transfer taxes, if any.

    

    By
      the
      delivery of this Notice of Conversion the undersigned represents and warrants
      to
      the Company that its ownership of the Common Stock does not exceed the amounts
      determined in accordance with Section 13(d) of the Exchange Act, specified
      under
      Section 4 of this Debenture.

    

    The
      undersigned agrees to comply with the prospectus delivery requirements under
      the
      applicable securities laws in connection with any transfer of the aforesaid
      shares of Common Stock. 

    

    Conversion
      calculations:   

    Date
      to
      Effect Conversion:

    

    Principal
      Amount of Debentures to be Converted:

    

    Payment
      of Interest in Common Stock __ yes __ no

    If
      yes,
      $_____ of Interest Accrued on Account of Conversion at Issue.

    Number
      of
      shares of Common Stock to be issued:

    Signature:

    Name:

    Address:

    

    
      
         

      

      
        18

        
          

        

      

      
         

      

    

    

    Schedule
      1

    

    CONVERSION
      SCHEDULE

    

    The
      7%
      Convertible Debentures due on March ___, 2008, in the aggregate principal amount
      of $____________ issued by Aprecia Inc., a __________ corporation. This
      Conversion Schedule reflects conversions made under Section 4 of the above
      referenced Debenture.

    

    Dated:
      

    

    

    
      	
               

              Date
                of Conversion

              (or
                for first entry, Original Issue Date)

            	
               

              Amount
                of Conversion

            	
               

              Aggregate
                Principal Amount Remaining Subsequent to Conversion

              (or
                original Principal Amount)

            	
               

              Company
                Attest

            
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 
	 	 	 	 

    

    

    

    
      
         

      

      
        19

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