Document:

exv10wnn

 

  

Exhibit 10(nn)

POTASH CORPORATION OF SASKATCHEWAN INC.

2005 PERFORMANCE
OPTION PLAN

	1.	 	Purpose of Plan

Potash Corporation of Saskatchewan Inc. (the
“Corporation”) by resolution of its Board of Directors (the “Board”) has
established, subject to shareholder approval at the Corporation’s 2005
Annual and Special Meeting of shareholders, this Potash Corporation of
Saskatchewan Inc. 2005 Performance Option Plan (the “Plan”) to support
the Corporation’s compensation philosophy of providing selected
employees and officers with an opportunity to: promote the growth and
profitability of the Corporation; align their interests with
shareholders; and, earn compensation commensurate with corporate
performance. The Corporation believes this Plan will directly assist in
supporting the Corporation’s compensation philosophy by providing
participants with the opportunity through stock options, which will
vest, if at all, based on corporate performance over a three-year
period, to acquire Common Shares of the Corporation (“Common Shares”).

	2.	 	Duration of this Plan

This Plan was adopted by the Board on February 28,
2005 to be effective as of January 1, 2005 (the “Effective
Date”), subject to shareholder approval at the Corporation’s 2005 Annual
and Special Meeting of shareholders, and shall remain in effect, unless
sooner terminated as provided herein, until one (1) year from the
Effective Date, at which time it will terminate. After this Plan is
terminated, no stock options may be granted but stock options previously
granted shall remain outstanding in accordance with their applicable
terms and conditions and this Plan’s terms and conditions.

	3.	 	Administration

This Plan shall be administered by the
Compensation Committee of the Board or any other committee designated by
the Board to administer this Plan (the “Committee”). The Committee shall
be responsible for administering this Plan, subject to this Section 3
and the other provisions of this Plan. The Committee may employ
attorneys, consultants, accountants, agents, and other individuals, any
of whom may be an employee, and the Committee, the Corporation, and its
officers and directors shall be entitled to rely upon the advice,
opinions, or valuations of any such individuals. All actions taken and
all interpretations and determinations made by the Committee shall be
made in the Committee’s sole discretion and shall be final and binding
upon the participants, the Corporation, and all other interested
individuals.

	4.	 	Authority of the Committee

The Committee shall have full and exclusive
discretionary power to interpret the terms and the intent of this Plan
and any Stock Option Award Agreement or other agreement or document
ancillary to or in connection with this Plan, to determine eligibility
for stock options and to adopt such rules, regulations, forms,
instruments, and guidelines for administering this Plan as the Committee
may deem necessary or proper. Such authority shall include adopting
modifications and amendments to any Stock Option Award Agreement that
are necessary to comply with the laws of the countries and other
jurisdictions in which the Corporation and/or its subsidiaries operate.

	5.	 	Shares Subject to Stock Options

The aggregate number of Common Shares issuable
after February 28, 2005 pursuant to stock options under this Plan
may not exceed 1,200,000 Common Shares. The aggregate number of
Common Shares in respect of which stock options have been granted to any
one person pursuant to this Plan and which remain outstanding shall not
at any time exceed 300,000. The authorized limits under this Plan shall
be subject to adjustment under Sections 12 and 13.

If any stock option granted under this Plan, or
any portion thereof, expires or terminates for any reason without having
been exercised in full, the Common Shares with respect to which such
option has not been exercised shall again be available for further stock
options under this Plan; provided, however, that any stock option that
is granted under this Plan that does not vest as a result of a failure
to satisfy the Performance Measures, shall not be again available for
grant under this Plan.

	6.	 	Grant of Stock Options

From time to time the Board may designate
individual officers and employees of the Corporation and its
subsidiaries eligible to be granted options to purchase Common Shares
and the number of Common Shares which each such person will be granted a
stock

 

C-2

option to purchase; provided that the aggregate number of Common
Shares subject to such stock options may not exceed the number provided
for in Section 5 of this Plan. Non-employee directors and other
non-employee contractors and third party vendors are not eligible to
participate in this Plan.

	7.	 	Option Price

The option price for any option granted under
this Plan to any optionee shall be fixed by the Board when the option is
granted and shall be not less than the fair market value of the Common
Shares at such time which, for optionees resident in the United States
and any other optionees designated by the Board, shall be deemed to be
the closing price per Common Share on the New York Stock Exchange on the
last trading day immediately preceding the day the option is granted
and, for all other optionees, shall be deemed to be the closing price
per Common Share on the Toronto Stock Exchange on the last trading day
immediately preceding the day the option is granted; provided that, in
either case, if the Common Shares did not trade on such exchange on such
day the option price shall be the closing price per share on such
exchange on the last day on which the Common Shares traded on such
exchange prior to the day the option is granted.

	8.	 	Vesting of Stock Options

Subject to achievement of Performance Measures
as certified and approved by the Audit Committee of the Board, stock
options granted under this Plan will vest no later than thirty (30) days
after the audited financial statements for the applicable
Performance Period have been approved by the Board.

	9.	 	Performance Measures for Vesting of Stock Options

	(a)	 	The Performance Measures which will be used to determine the degree to which stock options
will vest over the three-year period beginning the first day of the fiscal year in which
they are granted (the “Performance Period”) shall be cash flow return on investment
(“CFROI”) and weighted average cost of debt and equity capital (“WACC”).

	 	(i)	 	CFROI is the ratio of after tax operating cash flow to average gross investment over
the fiscal year, calculated as A divided by B, where (1) A equals operating income
plus nonrecurring or unusual items plus accrued incentive awards plus depreciation and
amortization less cash taxes, and (2) B equals the average of total assets plus
accumulated depreciation plus accumulated amortization less cash and cash equivalents
less non interest bearing current liabilities.

	 
	 	(ii)	 	WACC is the weighted average cost of debt and equity capital, calculated as [A times
the product of B divided by C] plus [D times the product of E divided by C], where (1) A
equals the after-tax market yield cost of debt, (2) B equals the market
value of debt less cash and cash equivalents (3) C equals the market value of debt
less cash and cash equivalents, plus the market value of equity, (4) D equals the
cost of equity, and (5) E equals the market value of equity.

	(b)	 	In determining the number of stock options that will actually vest based on the degree to
which the Performance Measures have been attained during the applicable Performance Period,
the following chart shall be utilized which shows the three year average excess of CFROI
being greater than WACC and the respective portion of the stock option that will vest:

	 	 	 	 	 	 	 	 
	 
	 	Performance Measure	 	 	Vesting Scale	 
	 	3 year average excess of

CFROI > WACC

	 	 	% of Stock Option Grant

Vesting
	 
	 	<0%

	 	 	 	0	%	 
	 	0.20%

	 	 	 	30	%	 
	 	1.20%

	 	 	 	70	%	 
	 	2.20%

	 	 	 	90	%	 
	 	2.50%

	 	 	 	100	%	 
	 

	(c)	 	In assessing the portion of the stock options that shall vest in accordance with the above
chart, the following shall be done:

	 	(i)	 	Each year, the CFROI and WACC will be calculated in accordance with the definitions
herein, based on the audited financial statements and approved by the Audit Committee.

	 
	 	(ii)	 	In each Performance Period, the average of the three fiscal years shall be calculated
by taking the simple average of the individual years’ results.

 

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	 	(iii)	 	The resulting three-year average will then be applied, using the scale above to
determine the number of stock options, if any, that will vest as of the end of the
Performance Period.

	 
	 	(iv)	 	For results falling between the reference points in the chart above, the level of
vesting shall be mathematically interpolated between the reference points.

	10.	 	Terms of Stock Options

The period during which a stock option is
exercisable may not exceed 10 years from the date the stock option
is granted, and the Stock Option Award Agreement may contain provisions
limiting the number of Common Shares with respect to which the stock
option may be exercised in any one year. Each stock option agreement
shall contain provisions to the effect that:

	(a)	 	if the employment of an optionee as an officer or employee of the Corporation or a
subsidiary terminates, by reason of his or her death, or if an optionee who is a retiree
pursuant to Section 10(b) dies, the legal personal representatives of the optionee will
be entitled to exercise any unexercised vested options, including such stock options that
may vest after the date of death, during the period ending at the end of the twelfth
calendar month following the calendar month in which the optionee dies, failing which
exercise the stock options terminate;

	 
	(b)	 	subject to the terms of Section 10(a) above, if the employment of an optionee as an
officer or employee of the Corporation or a subsidiary terminates, by reason of retirement
in accordance with the then prevailing retirement policy of the Corporation or subsidiary,
the optionee will be entitled to exercise any unexercised vested stock options, including
such stock options that may vest after the date of retirement, during the period ending at
the end of the 36th month following the calendar month in which the optionee retires,
failing which exercise the stock options terminate;

	 
	(c)	 	if the employment of an optionee as an officer or employee of the Corporation or a
subsidiary terminates, for any reason other than as provided in Sections 10(a) or (b),
the optionee will be entitled to exercise any unexercised vested stock options, to the
extent exercisable at the date of such event, during the period ending at the end of the
calendar month immediately following the calendar month in which the event occurs, failing
which exercise the stock options terminate;

	 
	(d)	 	for greater certainty and for these purposes, an optionee’s employment with the
Corporation or a subsidiary shall be considered to have terminated effective on the last day
of the optionee’s actual and active employment with the Corporation or subsidiary whether
such day is selected by agreement with the optionee or unilaterally by the Corporation or
subsidiary and whether with or without advance notice to the optionee. For the avoidance of
doubt, no period of notice that is given or ought to have been given under applicable law in
respect of such termination of employment will be utilized in determining an optionee’s
entitlement under the Plan. The employment of an optionee with the Corporation shall be
deemed to have terminated for all purposes of the Plan if such person is employed by or
provides services to a person that is a subsidiary of the Corporation and such person ceases
to be a subsidiary of the Corporation, unless the Committee determines otherwise; and

	 
	(e)	 	each stock option is personal to the optionee and is not assignable, except (i) as
provided in Section 10(a), and (ii) at the election of the Board, a stock option may
be assignable to the spouse, children and grandchildren of the original optionee and to a
trust, partnership or limited liability company, the entire beneficial interest of which is
held by one or more of the foregoing.

Nothing contained in Sections 10(a), (b) or
(c) shall extend the period during which a stock option may
be exercised beyond its stipulated expiration date or the date on which
it is otherwise terminated in accordance with the provisions of this
Plan.

If a stock option is assigned pursuant to
Section 10(e)(ii), the references in Sections 10(a), (b) and
(c) to the termination of employment or death of an optionee shall
not relate to the assignee of a stock option but shall relate to the
original optionee. In the event of such assignment, legal personal
representatives of the original optionee shall not be entitled to
exercise the assigned stock option, but the assignee of the stock option
or the legal personal representatives of the assignee may exercise the
stock option during the applicable specified period.

	11.	 	Exercise of Stock Options

Subject to the provisions of this Plan, a
vested stock option may be exercised from time to time by delivering to
the Corporation at its registered office a written notice of exercise
specifying the number of Common Shares with respect to which the stock
option is being exercised and accompanied by payment in cash or
certified cheque in full of the purchase price of the Common Shares then
being purchased.

 

 C-4

	12.	 	Adjustments

Appropriate adjustments to the authorized
limits set forth in Section 5, in the number, class and/or type of
Common Shares optioned and in the option price per share, both as to
stock options granted or to be granted, may be made by the Board in its
discretion to give effect to adjustments in the number of Common Shares
which result from subdivisions, consolidations or reclassifications of
the Common Shares, the payment of share dividends by the Corporation,
the reconstruction, reorganization or recapitalization of the
Corporation or other relevant changes in the capital of the Corporation.

	13.	 	Mergers

If the Corporation proposes to amalgamate or
merge with another body corporate, the Corporation shall give written
notice thereof to optionees in sufficient time to enable them to
exercise outstanding vested stock options, to the extent they are
otherwise exercisable by their terms, prior to the effective date of
such amalgamation or merger if they so elect. The Corporation shall use
its best efforts to provide for the reservation and issuance by the
amalgamated or continuing corporation of an appropriate number of Common
Shares, with appropriate adjustments, so as to give effect to the
continuance of the stock options to the extent reasonably practicable.
In the event that the Board determines in good faith that such
continuance is not in the circumstances practicable, it may upon 30 days’
notice to optionees terminate the stock options.

	14.	 	Change of Control

If a “change of control” of the Corporation
occurs, each then outstanding stock option granted under this Plan may
be exercised, in whole or in part, even if such option is not otherwise
exercisable by its terms. For purposes of this Plan, a change of control
of the Corporation shall be deemed to have occurred if any of the
following occur, unless the Board adopts a plan after the Effective Date
of this Plan that has a different definition (in which case such
definition shall be applied), or the Committee decides to modify or
amend the following definition through an amendment of this Plan:

	(a)	 	within any period of two consecutive years, individuals who at the beginning of such
period constituted the Board and any new directors whose appointment by the Board or
nomination for election by shareholders of the Corporation was approved by a vote of at
least a majority of the directors then still in office who either were directors at the
beginning of the period or whose appointment or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board;

	 
	(b)	 	there occurs an amalgamation, merger, consolidation, wind-up, reorganization or
restructuring of the Corporation with or into any other entity, or a similar event or series
of such events, other than any such event or series of events which results in securities of
the surviving or consolidated corporation representing 50% or more of the combined voting
power of the surviving or consolidated corporation’s then outstanding securities entitled to
vote in the election of directors of the surviving or consolidated corporation being
beneficially owned, directly or indirectly, by the persons who were the holders of the
Corporation’s outstanding securities entitled to vote in the election of directors of the
Corporation prior to such event or series of events in substantially the same proportions as
their ownership immediately prior to such event of the Corporation’s then outstanding
securities entitled to vote in the election of directors of the Corporation;

	 
	(c)	 	50% or more of the fixed assets (based on book value as shown on the most recent available
audited annual or unaudited quarterly consolidated financial statements) of the Corporation
are sold or otherwise disposed of (by liquidation, dissolution, dividend or otherwise) in
one transaction or series of transactions within any twelve month period;

	 
	(d)	 	any party, including persons acting jointly or in concert with that party, becomes
(through a take-over bid or otherwise) the beneficial owner, directly or indirectly, of
securities of the Corporation representing 20% or more of the combined voting power of the
Corporation’s then outstanding securities entitled to vote in the election of directors of
the Corporation, unless in any particular situation the Board determines in advance of such
event that such event shall not constitute a change of control; or

	 
	(e)	 	the Board approves and/or recommends that shareholders accept, approve or adopt any
transaction that would constitute a change of control under clause b, c or d above and
determines that the change of control resulting from such transaction will be deemed to have
occurred as of a specified date earlier than the date under b, c or d, as applicable.

	15.	 	Amendment or Discontinuance of this Plan

The Board may amend or discontinue the Plan at
any time but, subject to Sections 12, 13, and 14, no such
amendment may increase the aggregate maximum number of Common Shares
that may be subject to stock options under this Plan, change the manner
of determining the minimum option price, extend the option period under
any option beyond 10 years or, without the consent of the holder of
the option, alter or impair any option previously granted to an optionee
under this Plan; and, provided further, that, without the prior approval
of the Corporation’s shareholders, stock options issued under this Plan
shall not be repriced, replaced, or

 

 C-5

regranted through cancellation, or
by lowering the option price of a previously granted stock option.
Pre-clearance of the Toronto Stock Exchange of amendments to the Plan
will be required to the extent provided under the relevant rules of the
Toronto Stock Exchange.

	16.	 	Evidence of Stock Options

Each stock option granted under this Plan shall
be evidenced by a written stock option agreement between the Corporation
and the optionee which shall give effect to the provisions of this Plan
and include such other terms as the Committee shall determine (“Stock
Option Award Agreement”).

 

This certificate evidences and confirms the
grant to
[          ]
(the “Optionee”) of options to purchase the number
of Common Shares of the Corporation specified under
Paragraph (1) on the terms and subject to the conditions of
the Potash Corporation of Saskatchewan Inc. 2005 Performance
Option Plan (the “2005 Plan”) and the terms and
conditions set forth below. In the event of any inconsistency
between the terms of the 2005 Plan and those set forth below,
the terms of the 2005 Plan shall control. Capitalized terms used
below that are not defined in this certificate shall have the
meanings specified in the 2005 Plan.

			
	 	1.	
    Number of Shares: The Optionee is hereby granted
    options under the 2005 Plan to purchase
    [          ]
    Common Shares.
    
	 
	 	2.	
    Option Exercise Price: The exercise price for
    each Common Share is
    $[          ].
    
	 
	 	3.	
    Time and Conditions to Vesting: The options will
    become vested following the end of the Performance Period
    January 1, 2005 through December 31, 2007 if, and to
    the extent, the applicable Performance Measures for the
    Performance Period are achieved. Subject to applicable
    conditions under the 2005 Plan with respect to continued
    employment during the Performance Period and achievement of the
    minimum Performance Measures, the date for vesting will be
    determined but will not be later than 30 days after the
    audited financial statements of the Corporation for the 2007
    fiscal year of the Corporation have been approved by the Board.
    Upon vesting, the Optionee will have the right to purchase a
    number of Common Shares covered by the option equal to the
    percentage determined in accordance with the performance matrix
    and vesting scale provided under the 2005 Plan.
    
	 
	 	4.	
    Once vested, the options will continue to be
    exercisable until the expiry date for the options of
    May [          ],
    2015.
    
	 
	 	5.	
    Notwithstanding the provisions of
    paragraph 4 above, this option will terminate as provided
    in paragraph 10 of the 2005 Plan in the event that the
    actual and active employment of the Optionee ceases. The option
    is personal to the Optionee and is not assignable, except in
    accordance with the conditions attached hereto as
    Appendix I.
    
	 
	 	6.	
    Notice of exercise of the option is to be given
    in accordance with paragraph 11 of the 2005 Plan.
    
	 
	 	7.	
    Adjustments to the option may be made as provided
    in paragraph 12 of the 2005 Plan, the provisions of
    paragraph 13 of the 2005 Plan shall apply in the event of a
    proposed amalgamation or merger of the Corporation, and the
    provisions of paragraph 14 of the 2005 Plan will apply in
    the event of a “change of control” of the Corporation
    as defined in that paragraph.
    
	 
	 	8.	
    This grant of option is subject to receipt of any
    necessary regulatory approvals and shall be governed by the laws
    of Saskatchewan.
    

		
	 	
    Potash Corporation of Saskatchewan
    Inc.

			
	 	by: 	

		
	 	
    

	 	
    President and
    
	 	
    Chief Executive Officer
    

Date: May
[          ],
2005

 

Potash Corporation of Saskatchewan Inc.

2005 Performance Option Plan

	1.	 	Purpose of Plan

Potash Corporation of Saskatchewan Inc. (the “Corporation”) by resolution of its Board of
Directors (the “Board”) has established, subject to shareholder approval at the Corporation’s
2005 Annual and Special Meeting of shareholders, this Potash Corporation of Saskatchewan Inc.
2005 Performance Option Plan (the “Plan”) to support the Corporation’s compensation philosophy of
providing selected employees and officers with an opportunity to: promote the growth and
profitability of the Corporation; align their interests with shareholders; and, earn compensation
commensurate with corporate performance. The Corporation believes this Plan will directly assist
in supporting the Corporation’s compensation philosophy by providing participants with the
opportunity through stock options, which will vest, if at all, based on corporate performance
over a three-year period, to acquire Common Shares of the Corporation (“Common Shares”).

	 
	2.	 	Duration of this Plan

This Plan was adopted by the Board on February 28, 2005 to be effective as of January 1, 2005
(the “Effective Date”), subject to shareholder approval at the Corporation’s 2005 Annual and
Special Meeting of shareholders, and shall remain in effect, unless sooner terminated as provided
herein, until one (1) year from the Effective Date, at which time it will terminate. After this
Plan is terminated, no stock options may be granted but stock options previously granted shall
remain outstanding in accordance with their applicable terms and conditions and this Plan’s terms
and conditions.

	 
	3.	 	Administration

This Plan shall be administered by the Compensation Committee of the Board or any other committee
designated by the Board to administer this Plan (the “Committee”). The Committee shall be
responsible for administering this Plan, subject to this Section 3 and the other provisions of
this Plan. The Committee may employ attorneys, consultants, accountants, agents, and other
individuals, any of whom may be an employee, and the Committee, the Corporation, and its officers
and directors shall be entitled to rely upon the advice, opinions, or valuations of any such
individuals. All actions taken and all interpretations and determinations made by the Committee
shall be made in the Committee’s sole discretion and shall be final and binding upon the
participants, the Corporation, and all other interested individuals.

	 
	4.	 	Authority of the Committee

The Committee shall have full and exclusive discretionary power to interpret the terms and the
intent of this Plan and any Stock Option Award Agreement or other agreement or document ancillary
to or in connection with this Plan, to determine eligibility for stock options and to adopt such
rules, regulations, forms, instruments, and guidelines for administering this Plan as the
Committee may deem necessary or proper. Such authority shall include adopting modifications and
amendments to any Stock Option Award Agreement that are necessary to comply with the laws of the
countries and other jurisdictions in which the Corporation and/or its subsidiaries operate.

	 
	5.	 	Shares Subject to Stock Options

The aggregate number of Common Shares issuable after February 28, 2005 pursuant to stock options
under this Plan may not exceed 1,200,000 Common Shares. The aggregate number of Common Shares in
respect of which stock options have been granted to any one person pursuant to this Plan and
which remain outstanding shall not at any time exceed 300,000. The authorized limits under this
Plan shall be subject to adjustment under Sections 12 and 13.

	 
	 	 	If any stock option granted under this Plan, or any portion thereof, expires or terminates for
any reason without having been exercised in full, the Common Shares with respect to which such
option has not been exercised shall again be available for further stock options under this Plan;
provided, however, that any stock option that is granted under this Plan that does not vest as a
result of a failure to satisfy the Performance Measures, shall not be again available for grant
under this Plan.

	 
	6.	 	Grant of Stock Options

From time to time the Board may designate individual officers and employees of the Corporation
and its subsidiaries eligible to be granted options to purchase Common Shares and the number of
Common Shares which each such person will be granted a stock option to purchase; provided that
the aggregate number of Common Shares subject to such stock options may not exceed the number
provided for in Section 5 of this Plan. Non-employee directors and other non-employee contractors
and third party vendors are not eligible to participate in this Plan.

	 
	7.	 	Option Price

The option price for any option granted under this Plan to any optionee shall be fixed by the
Board when the option is granted and shall be not less than the fair market value of the Common
Shares at such time which, for optionees resident in the United States and any other optionees
designated by the Board, shall be deemed to be the closing price per Common Share on the New York
Stock Exchange on the last trading day immediately preceding the day the option is granted and,
for all other optionees, shall be deemed to be the closing price per Common Share on the Toronto
Stock Exchange on the last trading day immediately preceding the day the option is granted;
provided that, in either case, if the Common Shares did not trade on such exchange on such day
the option price shall be the closing price per share on such exchange on the last day on which
the Common Shares traded on such exchange prior to the day the option is granted.

	 
	8.	 	Vesting of Stock Options

Subject to achievement of Performance Measures as certified and approved by the Audit Committee
of the Board, stock options granted under this Plan will vest no later than thirty (30) days
after the audited financial statements for the applicable Performance Period have been approved
by the Board.

	 
	9.	 	Performance Measures for Vesting of Stock Options

	 	a.	 	The Performance Measures which will be used to determine the degree to which stock
options will vest over the three-year period beginning the first day of the fiscal year in
which they are granted (the “Performance Period”) shall be cash flow return on investment
(“CFROI”) and weighted average cost of debt and equity capital (“WACC”).

	 	i)	 	CFROI is the ratio of after tax operating cash flow to average gross investment over
the fiscal year, calculated as A divided by B, where (1) A equals operating income plus
nonrecurring or unusual items plus accrued incentive awards plus depreciation and
amortization less cash taxes, and (2) B equals the average of total assets plus
accumulated depreciation plus accumulated amortization less cash and cash equivalents less
non interest bearing current liabilities.

	 	ii)	 	WACC is the weighted average cost of debt and equity capital, calculated as [A times the
product of B divided by C] plus [D times the product of E divided by C], where (1) A equals
the after-tax market yield cost of debt, (2) B equals the market value of debt less cash and
cash equivalents (3) C equals the market value of debt less cash and cash equivalents, plus
the market value of equity, (4) D equals the cost of equity, and (5) E equals the market
value of equity.

	 	b.	 	In determining the number of stock options that will actually vest based on the degree to
which the Performance Measures have been attained during the applicable Performance Period,
the following chart shall be utilized which shows the three year average excess of CFROI
being greater than WACC and the respective portion of the stock option that will vest:

	 	 	 	 	 	 
	 	 	 	 	 	 
	 	Performance Measure	 	 	Vesting Scale	 
	 	 	 	 	 	 
	 	3 year average excess of	 	 	% of Stock Option Grant	 
	 	CFROI>WACC	 	 	Vesting	 
	 	 	 	 	 	 
	 	<0%	 	 	0%	 
	 	 	 	 	 	 
	 	0.20%	 	 	30%	 
	 	 	 	 	 	 
	 	1.20%	 	 	70%	 
	 	 	 	 	 	 
	 	2.20%	 	 	90%	 
	 	 	 	 	 	 
	 	2.50%	 	 	100%	 
	 	 	 	 	 	 
	 

	 	c.	 	In assessing the portion of the stock options that shall vest in accordance with the
above chart, the following shall be done:

	 	i)	 	Each year, the CFROI and WACC will be calculated in accordance with the definitions
herein, based on the audited financial statements and approved by the Audit Committee.

	 	ii)	 	In each Performance Period, the average of the three fiscal years shall be calculated by taking the simple average of the individual years’ results.

	 	iii)	 	The resulting three-year average will then be applied, using the scale above to determine the number of stock options, if any, that will vest as of the end
of the Performance Period.

	 	iv)	 	For results falling between the reference points in the chart above, the level of vesting shall be mathematically interpolated between the reference points.

	10.	 	Terms of Stock Options

The period during which a stock option is exercisable may not exceed 10 years from the date the
stock option is granted, and the Stock Option Award Agreement may contain provisions limiting the
number of Common Shares with respect to which the stock option may be exercised in any one year.
Each stock option agreement shall contain provisions to the effect that:

	 	a.	 	if the employment of an optionee as an officer or employee of the Corporation or a
subsidiary terminates, by reason of his or her death, or if an optionee who is a retiree
pursuant to Section 10(b) dies, the legal personal representatives of the optionee will be
entitled to exercise any unexercised vested options, including such stock options that may
vest after the date of death, during the period ending at the end of the twelfth calendar
month following the calendar month in which the optionee dies, failing which exercise the
stock options terminate;

	 	b.	 	subject to the terms of Section 10(a) above, if the employment of an optionee as an
officer or employee of the Corporation or a subsidiary terminates, by reason of retirement
in accordance with the then prevailing retirement policy of the Corporation or subsidiary,
the optionee will be entitled to exercise any unexercised vested stock options, including
such stock options that may vest after the date of retirement, during the period ending at
the end of the 36th month following the calendar month in which the optionee retires,
failing which exercise the stock options terminate;

	 	c.	 	if the employment of an optionee as an officer or employee of the Corporation or a
subsidiary terminates, for any reason other than as provided in Sections 10(a) or (b), the
optionee will be entitled to exercise any unexercised vested stock options, to the extent
exercisable at the date of such event, during the period ending at the end of the calendar
month immediately following the calendar month in which the event occurs, failing which
exercise the stock options terminate;

	 	d.	 	for greater certainty and for these purposes, an optionee’s employment with the
Corporation or a subsidiary shall be considered to have terminated effective on the last day
of the optionee’s actual and active employment with the Corporation or subsidiary whether
such day is selected by agreement with the optionee or unilaterally by the Corporation or
subsidiary and whether with or without advance notice to the optionee. For the avoidance of
doubt, no period of notice that is given or ought to have been given under applicable law in respect of such termination of employment will be utilized in
determining an optionee’s entitlement under the Plan. The employment of an optionee with the
Corporation shall be deemed to have terminated for all purposes of the Plan if such person is
employed by or provides services to a person that is a subsidiary of the Corporation and such
person ceases to be a subsidiary of the Corporation, unless the Committee determines otherwise;
and

	 	e.	 	each stock option is personal to the optionee and is not assignable, except (i) as
provided in Section 10(a), and (ii) at the election of the Board, a stock option may be
assignable to the spouse, children and grandchildren of the original optionee and to a
trust, partnership or limited liability company, the entire beneficial interest of which is
held by one or more of the foregoing.

	 

	 	 	Nothing contained in Sections 10(a), (b) or (c) shall extend the period during which a stock
option may be exercised beyond its stipulated expiration date or the date on which it is
otherwise terminated in accordance with the provisions of this Plan.

	 
	 	 	If a stock option is assigned pursuant to Section 10(e)(ii), the references in Sections 10(a),
(b) and (c) to the termination of employment or death of an optionee shall not relate to the
assignee of a stock option but shall relate to the original optionee. In the event of such
assignment, legal personal representatives of the original optionee shall not be entitled to
exercise the assigned stock option, but the assignee of the stock option or the legal personal
representatives of the assignee may exercise the stock option during the applicable specified
period.

	 
	11.	 	Exercise of Stock Options

Subject to the provisions of this Plan, a vested stock option may be exercised from time to time
by delivering to the Corporation at its registered office a written notice of exercise specifying
the number of Common Shares with respect to which the stock option is being exercised and
accompanied by payment in cash or certified cheque in full of the purchase price of the Common
Shares then being purchased.

	 
	12.	 	Adjustments

Appropriate adjustments to the authorized limits set forth in Section 5, in the number, class
and/or type of Common Shares optioned and in the option price per share, both as to stock options
granted or to be granted, may be made by the Board in its discretion to give effect to
adjustments in the number of Common Shares which result from subdivisions, consolidations or
reclassifications of the Common Shares, the payment of share dividends by the Corporation, the
reconstruction, reorganization or recapitalization of the Corporation or other relevant changes
in the capital of the Corporation.

	 
	13.	 	Mergers

If the Corporation proposes to amalgamate or merge with another body corporate, the Corporation
shall give written notice thereof to optionees in sufficient time to enable them to exercise
outstanding vested stock options, to the extent they are otherwise exercisable by their terms,
prior to the effective date of such amalgamation or merger if they so elect. The Corporation
shall use its best efforts to provide for the reservation and issuance by the amalgamated or
continuing corporation of an appropriate number of Common Shares, with appropriate adjustments,
so as to give effect to the continuance of the stock options to the extent reasonably
practicable. In the event that the Board determines in good faith that such continuance is not in
the circumstances practicable, it may upon 30 days’ notice to optionees terminate the stock
options.

	 
	14.	 	Change of Control

If a “change of control” of the Corporation occurs, each then outstanding stock option granted
under this Plan may be exercised, in whole or in part, even if such option is not otherwise
exercisable by its terms. For purposes of this Plan, a change of control of the Corporation shall
be deemed to have occurred if any of the following occur, unless the Board adopts a plan after
the Effective Date of this Plan that has a different definition (in which case such definition
shall be applied), or the Committee decides to modify or amend the following definition through
an amendment of this Plan:

	 	a.	 	within any period of two consecutive years, individuals who at the beginning of such
period constituted the Board and any new directors whose appointment by the Board or
nomination for election by shareholders of the Corporation was approved by a vote of at
least a majority of the directors then still in office who either were directors at the
beginning of the period or whose appointment or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board;

	 	b.	 	there occurs an amalgamation, merger, consolidation, wind-up, reorganization or
restructuring of the Corporation with or into any other entity, or a similar event or series
of such events, other than any such event or series of events which results in securities of
the surviving or consolidated corporation representing 50% or more of the combined voting
power of the surviving or consolidated corporation’s then outstanding securities entitled to
vote in the election of directors of the surviving or consolidated corporation being
beneficially owned, directly or indirectly, by the persons who were the holders of the
Corporation’s outstanding securities entitled to vote in the election of directors of the
Corporation prior to such event or series of events in substantially the same proportions as
their ownership immediately prior to such event of the Corporation’s then outstanding
securities entitled to vote in the election of directors of the Corporation;

	 	c.	 	50% or more of the fixed assets (based on book value as shown on the most recent
available audited annual or unaudited quarterly consolidated financial statements) of the
Corporation are sold or otherwise disposed of (by liquidation, dissolution, dividend or
otherwise) in one transaction or series of transactions within any twelve month period;

	 	d.	 	any party, including persons acting jointly or in concert with that party, becomes
(through a take-over bid or otherwise) the beneficial owner, directly or indirectly, of
securities of the Corporation representing 20% or more of the combined voting power of the
Corporation’s then outstanding securities entitled to vote in the election of directors of
the Corporation, unless in any particular situation the Board determines in advance of such
event that such event shall not constitute a change of control; or

	 	e.	 	the Board approves and/or recommends that shareholders accept, approve or adopt any
transaction that would constitute a change of control under clause b, c or d above and
determines that the change of control resulting from such transaction will be deemed to have
occurred as of a specified date earlier than the date under b, c or d, as applicable.

	 

	15.	 	Amendment or Discontinuance of this Plan

	 	 	The Board may amend or discontinue the Plan at any time but, subject to Sections 12, 13, and 14,
no such amendment may increase the aggregate maximum number of Common Shares that may be subject
to stock options under this Plan, change the manner of determining the minimum option price,
extend the option period under any option beyond 10 years or, without the consent of the holder
of the option, alter or impair any option previously granted to an optionee under this Plan; and,
provided further, that, without the prior approval of the Corporation’s shareholders, stock
options issued under this Plan shall not be repriced, replaced, or regranted through
cancellation, or by lowering the option price of a previously granted stock option. Pre-clearance
of the Toronto Stock Exchange of amendments to the Plan will be required to the extent provided
under the relevant rules of the Toronto Stock Exchange.

	 
	16.	 	Evidence of Stock Options

Each stock option granted under this Plan shall be evidenced by a written stock option agreement
between the Corporation and the optionee which shall give effect to the provisions of this Plan and
include such other terms as the Committee shall determine (“Stock Option Award Agreement”).

 

APPENDIX I

This option may be assigned, in whole or in part,
only if the following conditions are satisfied:

			
	 	1.	
    No consideration may be paid in connection with
    the assignment.
    
	 
	 	2.	
    An assignment may be made only to one or more
    persons or entities included in the following: the original
    Optionee’s spouse, children and grandchildren and a trust,
    partnership or limited liability company, the entire beneficial
    interest of which is held by one or more of the foregoing.
    
	 
	 	3.	
    Prior to any such assignment,
    

			
	 	(a)	
    the assignor shall advise the Corporation, in a
    writing delivered to Potash Corporation of Saskatchewan Inc.,
    122 1st Avenue South, Saskatoon, Saskatchewan, Canada
    S7K 7G3, Attention: General Counsel, of all pertinent
    information concerning the proposed assignment, including the
    date of the assignment, the number of shares involved, the
    relationship of the assignee to the original Optionee and the
    address and telephone number of the assignee; and
    
	 
	 	(b)	
    the assignee shall agree in a writing so
    delivered to advise the Corporation in writing of any change in
    the name, address or telephone number of the assignee.
    

The decision to assign all or part of this option
involves complex tax and financial considerations. An Optionee
should consult the Optionee’s own tax and financial
advisors before such assignment.EXHIBIT 4.1

                          SECURITIES PURCHASE AGREEMENT

      This Securities  Purchase  Agreement (this "Agreement") is dated as of May
2, 2005 among Knockout Holdings,  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 agrees
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 Notes  (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.

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

            "Closing  Date" means the  Trading  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.

            "Commission" means the Securities and Exchange Commission.

            "Common  Stock"  means the common  stock of the  Company,  par value
      $0.001,  and any securities into which such common stock shall hereinafter
      have been reclassified into.

<PAGE>

            "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.

            "Disclosure  Schedules" shall have the meaning ascribed to such term
      in Section 3.1 hereof.

            "Escrow  Agreement" shall mean the escrow agreement,  in the form of
      Exhibit E attached hereto.

            "Exchange  Act"  means  the  Securities  Exchange  Act of  1934,  as
      amended.

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

            "KW" means  Keith  Wellner,  attorney  for DCOFI  Master  LDC,  with
      offices at 830 Third Avenue, 14th Floor, New York, New York 10022.

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

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

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

            "Notes"  means,  the 11% Senior  Secured  Notes due,  subject to the
      terms  therein,  May 2,  2008,  issued by the  Company  to the  Purchasers
      hereunder, in the form of Exhibit A attached hereto.

            "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.

            "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.

            "Registration   Rights  Agreement"  means  the  Registration  Rights
      Agreement, dated the date hereof, among the Company and the Purchasers, in
      the form of Exhibit B attached hereto.

            "Registration  Statement" means a registration statement meeting the
      requirements set forth in the  Registration  Rights Agreement and covering
      the resale of the Warrant  Shares by each Purchaser as provided for in the
      Registration Rights Agreement.

                                       2
<PAGE>

            "Required Approvals" shall have the meaning ascribed to such term in
      Section 3.1(e).

            "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.

            "SEC  Reports"  shall  have the  meaning  ascribed  to such  term in
      Section 3.1(h) hereof.

            "Securities" means the Notes and the Warrant Shares.

            "Securities Act" means the Securities Act of 1933, as amended.

            "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"  means the  Security  Agreement  and any other
      documents and filing required  thereunder in order to grant the Purchasers
      a  perfected  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 Notes  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.

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

            "Trading  Day" means a day on which the Common  Stock is traded on a
      Trading Market.

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

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

            "Warrant  Shares"  means the shares of Common  Stock  issuable  upon
      exercise of the Warrant.

            "Warrant" means the five-year  warrant to purchase 700,000 shares of
      Common  Stock at an  exercise  price of  $0.01,  in the form of  Exhibit C
      attached hereto.

                                       3
<PAGE>

                                   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,  up to  $3,000,000  principal  amount of the  Notes.  Each
Purchaser  shall deliver to the Company via wire  transfer or a certified  check
immediately available funds equal to its Subscription Amount less the amounts to
be  delivered to the Escrow Agent  pursuant to Section  2.2(b),  and the Company
shall deliver to each  Purchaser its respective  Note 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 Section  2.2, the
Closing shall occur at the offices of the Company, or such other location as the
parties shall mutually agree.

      2.2   Deliveries.

            a)    On the Closing Date,  the Company shall deliver to the counsel
                  for  such  Purchasers  with  respect  to  each  Purchaser  the
                  following:

                  (i)   this Agreement duly executed by the Company;

                  (ii)  a Note with a principal amount equal to such Purchaser's
                        Subscription  Amount,  registered  in the  name  of such
                        Purchaser;

                  (iii) the Security  Agreement,  duly  executed by the Company,
                        along with all the Security Documents;

                  (iv)  the Warrant, duly executed by the Company;

                  (v)   the Registration Rights Agreement,  duly executed by the
                        Company;

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

                  (vii) a legal opinion of Company Counsel.

            b)    On the Closing Date, the Purchaser shall deliver to the Escrow
                  Agent (as defined in the Escrow  Agreement)  an  aggregate  of
                  $412,500 (the "Escrowed  Funds"),  which  represents the first
                  fifteen months' interest on the Notes, subject to the terms of
                  the Escrow Agreement.  The Escrowed Funds shall be held by the
                  Escrow  Agent to be released at such time as is  necessary  to
                  pay the first fifteen months' interest payments on the Notes.

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

                  (i)   this Agreement duly executed by such Purchaser;

                  (ii)  such Purchaser's  Subscription  Amount less the Escrowed
                        Funds by wire transfer to the account of the Company;

                                       4
<PAGE>

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

                  (iv)  the Escrow Agreement, duly executed by such Purchaser.

      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, trading in the
                        Common  Stock  shall  not  have  been  suspended  by the
                        Commission  (except  for any  suspension  of  trading of
                        limited  duration  agreed  to  by  the  Company,   which
                        suspension  shall be  terminated  prior to the Closing),
                        and, at any time prior to the Closing  Date,  trading in
                        securities  generally as reported by Bloomberg Financial
                        Markets  shall not have been  suspended  or limited,  or
                        minimum  prices  shall  not  have  been  established  on
                        securities whose trades are reported by such service, or
                        on any Trading  Market,  nor shall a banking  moratorium
                        have been  declared  either by the United  States or New
                        York State authorities nor shall there have occurred any

                                       5
<PAGE>

                        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 Notes at the Closing.

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

      3.1   Representations  and Warranties of the Company.  Except as set forth
in Schedule 3.1 (the "Disclosure  Schedule") which Disclosure  Schedule 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 and indirect  subsidiaries of
      the Company are set forth in Schedule  3.1(a) of the Disclosure  Schedule.
      The Company  owns,  directly or  indirectly,  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.  Each of the Company and 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

                                       6
<PAGE>

      authorized  by all  necessary  action  on the part of the  Company  and no
      further  action is required by the Company in connection  therewith  other
      than in connection with the Required Approvals.  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.

            (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)  subject to the Required
      Approvals,  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,  other than (i) the filing with the  Commission of
      the Registration Statement,  (ii) the notice and/or application(s) to each
      applicable  Trading  Market for the  issuance  and  listing of the Warrant
      Shares for  trading  thereon in the time and manner  required  thereby and
      (iv) the  filing of Form D with the  Commission  and such  filings  as are
      required to be made under applicable state securities laws  (collectively,
      the "Required Approvals").

            (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  Warrant  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 Warrant  Shares at least equal
      to the Required  Minimum on the date  hereof.  The Company has not, and to

                                       7
<PAGE>

      the  knowledge  of the  Company,  no  Affiliate  of the  Company has sold,
      offered for sale or  solicited  offers to buy or otherwise  negotiated  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.

            (g)   Capitalization.  The  capitalization  of the Company is as set
      forth  inSchedule  3.1(g),  the  Description of Securities  section of the
      Disclosure  Schedule.  The Company has not issued any capital  stock since
      April 21,  2005.  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 set
      forth in Schedule 3.1(g) and the Description of Securities  section of the
      Disclosure  Schedule,  as a  result  of  the  purchase  and  sale  of  the
      Securities,  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  securities  or rights
      convertible or exchangeable  into shares of Common Stock. 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 Stockholder 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.  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.

            (h)   SEC Reports;  Financial Statements.  The Company has filed all
      reports  required  to be  filed  by it under  the  Securities  Act and the
      Exchange Act,  including  pursuant to Section 13(a) or 15(d) thereof,  for
      the two years  preceding  the date hereof (or such  shorter  period as the
      Company  was  required  by law  to  file  such  material)  (the  foregoing
      materials,  including the exhibits thereto, being collectively referred to
      herein as the "SEC  Reports")  on a timely  basis or has  received a valid
      extension of such time of filing and has filed any such SEC Reports  prior
      to the expiration of any such extension. As of their respective dates, the
      SEC Reports complied in all material respects with the requirements of the
      Securities  Act and the Exchange Act and the rules and  regulations of the
      Commission  promulgated  thereunder,  and  none of the SEC  Reports,  when
      filed,  contained  any untrue  statement of a material  fact or omitted to
      state a material fact required to be stated  therein or necessary in order
      to make the statements  therein, in light of the circumstances under which
      they were made, not  misleading.  The financial  statements of the Company
      included  comply  in all  material  respects  with  applicable  accounting
      requirements  and the rules and regulations of the Commission with respect

                                       8
<PAGE>

      thereto as in effect at the time of filing. Such financial statements have
      been  prepared  in  accordance  with  United  States  generally   accepted
      accounting  principles  applied on a  consistent  basis during the periods
      involved ("GAAP"),  except as may be otherwise specified in such financial
      statements and except that unaudited financial  statements may not contain
      all  footnotes  required  by GAAP,  and  fairly  present  in all  material
      respects  the  financial  position  of the  Company  and its  consolidated
      subsidiaries as of and for the dates thereof and the results of operations
      and  cash  flows  for the  periods  then  ended,  subject,  in the case of
      unaudited statements, to normal, immaterial, year-end audit adjustments.

            (i)   Material  Changes.  Since  the  date  of  the  latest  audited
      financial   statements  (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  or  required  to  be
      disclosed in filings made with the  Commission,  (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. The Company does not have
      pending before the Commission  any request for  confidential  treatment of
      information.

            (j)   Litigation. Other than as set forth in the Disclosure Schedule
      under the caption "Legal  Proceedings," 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.  The
      Commission  has not issued any stop order or other  order  suspending  the
      effectiveness  of any  registration  statement filed by the Company or any
      Subsidiary under the Exchange Act or the Securities Act.

            (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

                                       9
<PAGE>

      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,  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.

            (o)   Patents and Trademarks. The Company and the Subsidiaries have,
      or have  rights to use,  all  patents,  patent  applications,  trademarks,
      trademark applications,  service marks, trade names, copyrights,  licenses
      and other similar rights  necessary or material for use in connection with
      their respective  businesses and which the failure to so have could have a
      Material  Adverse  Effect   (collectively,   the  "Intellectual   Property
      Rights").  Neither the Company nor any  Subsidiary  has received a written
      notice that the  Intellectual  Property  Rights used by the Company or any
      Subsidiary  violates or  infringes  upon the rights of any Person.  To the
      knowledge  of the  Company,  all such  Intellectual  Property  Rights  are
      enforceable and there is no existing infringement by another Person of any
      of the Intellectual Property Rights of others.

            (p)   Insurance.  The  Company and the  Subsidiaries  are insured by
      insurers of recognized  financial  responsibility  against such losses and
      risks and in such amounts as are prudent and  customary in the  businesses
      in which the Company and the Subsidiaries are engaged,  including, but not
      limited to,  directors and officers  insurance  coverage at least equal to
      the aggregate  Subscription  Amount.  To the best of Company's  knowledge,
      such insurance  contracts and policies are accurate and complete.  Neither
      the Company nor any  Subsidiary has any reason to believe that it will not
      be able to renew its existing insurance coverage as and when such coverage
      expires or to obtain  similar  coverage  from  similar  insurers as may be
      necessary to continue its business without a significant increase in cost.

                                       10
<PAGE>

            (q)   Transactions  With  Affiliates  and  Employees.  Except as set
      forth in the SEC Reports, none of the officers or directors of the Company
      and, to the knowledge of the Company, none of the employees of the Company
      is 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
      $50,000  other  than (i) for  payment  of  salary or  consulting  fees for
      services  rendered,  (ii) reimbursement for expenses incurred on behalf of
      the Company and (iii) for other employee benefits,  including stock option
      agreements under any stock option plan of the Company.

            (r)   Sarbanes-Oxley;  Internal Accounting Controls.  The Company is
      in material  compliance with all provisions of the  Sarbanes-Oxley  Act of
      2002 which are  applicable  to it as of the  Closing  Date.  Except as set
      forth in the SEC  Reports,  the  Company and the  Subsidiaries  maintain a
      system of internal  accounting  controls  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.  The  Company  has
      established disclosure controls and procedures (as defined in Exchange Act
      Rules   13a-15(e)  and  15d-15(e))  for  the  Company  and  designed  such
      disclosure  controls and  procedures to ensure that  material  information
      relating to the Company, including its Subsidiaries,  is made known to the
      certifying  officers by others within those entities,  particularly during
      the period in which the Company's  most  recently  filed  periodic  report
      under  the  Exchange  Act,  as the case may be,  is  being  prepared.  The
      Company's  certifying  officers have  evaluated the  effectiveness  of the
      Company's  controls and procedures as of the date prior to the filing date
      of the most recently  filed  periodic  report under the Exchange Act (such
      date,  the  "Evaluation  Date").  Except as set forth in the SEC  Reports,
      since the Evaluation Date,  there have been no significant  changes in the
      Company's  internal  controls  (as such term is defined in Item  307(b) of
      Regulation S-K under the Exchange Act) or, to the Company's knowledge,  in
      other  factors  that could  significantly  affect the  Company's  internal
      controls.

            (s)   Certain Fees.  Except as set forth in the Disclosure  Schedule
      under  the  caption  "Recent  Sales  of  Unregistered  Securities;  Use of
      Proceeds  from  Registered  Securities,"  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.

                                       11
<PAGE>

            (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.  The
      issuance and sale of the  Securities  hereunder  does not  contravene  the
      rules and regulations of the Trading Market.

            (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.  No  Person  has any  right to cause the
      Company  to  effect  the  registration  under  the  Securities  Act of any
      securities of the Company.

            (w)   Listing and  Maintenance  Requirements.  The Company's  Common
      Stock is registered pursuant to Section 12(g) of the Exchange Act, and the
      Company  has taken no action  designed  to, or which to its  knowledge  is
      likely to have the effect of,  terminating the  registration of the Common
      Stock under the Exchange Act nor has the Company received any notification
      that the Commission is contemplating  terminating such  registration.  The
      Company  has not, in the 12 months  preceding  the date  hereof,  received
      notice  from any Trading  Market on which the Common  Stock is or has been
      listed or quoted to the effect that the Company is not in compliance  with
      the  listing or  maintenance  requirements  of such  Trading  Market.  The
      Company  is,  and  has no  reason  to  believe  that  it  will  not in the
      foreseeable future continue to be, in compliance with all such listing and
      maintenance requirements. -

            (x)   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.

            (y)   Disclosure. The Company confirms that neither it nor any other
      Person  acting on its behalf has provided any of the  Purchasers  or their
      agents  or  counsel  with  any  information   that  constitutes  or  might
      constitute material,  nonpublic  information.  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.

                                       12
<PAGE>

            (z)   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   Stockholder   approval  provisions,
      including,  without  limitation,  under the rules and  regulations  of any
      exchange or automated  quotation  system on which any of the securities of
      the Company are listed or designated.

            (aa)  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).  The Company  has no  knowledge  of any facts or  circumstances
      which  lead  it to  believe  that  it  will  file  for  reorganization  or
      liquidation   under  the   bankruptcy  or   reorganization   laws  of  any
      jurisdiction  within  one  year  from the  Closing  Date.  The  Disclosure
      Schedule sets forth all outstanding secured and unsecured  Indebtedness of
      the Company or any Subsidiary,  or for which the Company or any Subsidiary
      has commitments. For the purposes of this Agreement,  "Indebtedness" shall
      mean (a) any  liabilities  for borrowed money or amounts owed in excess of
      $50,000 (other than trade accounts payable incurred in the ordinary course
      of  business),  (b) all  guaranties,  endorsements  and  other  contingent
      obligations in respect of Indebtedness of others,  whether or not the same
      are  or  should  be  reflected  in the  Company's  balance  sheet,  except
      guaranties  by  endorsement  of  negotiable  instruments  for  deposit  or
      collection or similar transactions in the ordinary course of business; and
      (c) the present value of any lease payments in excess of $50,000 due under
      leases  required to be  capitalized in accordance  with GAAP.  Neither the
      Company nor any Subsidiary is in default with respect to any Indebtedness.

            (bb)  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.

                                       13
<PAGE>

            (cc)  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.

            (dd)  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 corrupt 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

            (ee)  Accountants.  The Company's  accountants are BDO Seidman, LLP.
      To the Company's knowledge, such accountants, who the Company expects will
      express  their opinion with respect to the  financial  statements  for the
      year ending December 31, 2005, are a registered  public accounting firm as
      required by the Securities Act.

            (ff)  Seniority.  As of the Closing Date, no  indebtedness  or other
      equity of the Company is senior to or pari passu with,  the Notes 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).

            (gg)  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.  By  making  this
      representation   the  Company   does  not,   in  any  manner,   waive  the
      attorney/client  privilege or the  confidentiality  of the  communications
      between the Company and its lawyers.

            (hh)  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.  The Company further acknowledges that in
      addition to purchasing Securities,  the Purchasers or their affiliates may
      directly  or  indirectly  own Common  Stock in the  Company  and that such
      parties,  exercising  their rights  hereunder may  adversely  impact their
      other holdings as well as the other equity Stockholders in the Company.

                                       14
<PAGE>

      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.

            (b)   Purchaser Representation.  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,  has no
      present  intention  of  distributing  any of  such  Securities  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).  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 it
      exercises any Warrants 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.

                                       15
<PAGE>

            (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 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.

                                  ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

      4.1   Interest Payments to be Held in Escrow.

            On the Closing Date, the Purchaser shall deliver to the Escrow Agent
      (as  defined  in the Escrow  Agreement)  an  aggregate  of  $412,500  (the
      "Escrowed Funds"),  which represents the first fifteen months' interest on
      the  Notes,  subject to the terms of the Escrow  Agreement.  The  Escrowed
      Funds shall be held by the Escrow Agent to be released in accordance  with
      the  terms  of the  Escrow  Agreement  to pay the  first  fifteen  months'
      interest payments on the Notes

      4.2   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 4.2(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 and the  Registration  Rights
      Agreement.

            (b)   The Purchasers agree to the imprinting, so long as is required
      by this  Section  4.2(b),  of a  legend  on any of the  Securities  in the
      following form:

      [NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES
      ARE [EXERCISABLE]  [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

                                       16
<PAGE>

      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 the Registration  Rights 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,  including, if the
      Securities are subject to registration pursuant to the Registration Rights
      Agreement,   the  preparation  and  filing  of  any  required   prospectus
      supplement  under  Rule  424(b)(3)  under  the  Securities  Act  or  other
      applicable provision of the Securities Act to appropriately amend the list
      of Selling Stockholders thereunder.

      4.3   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 Warrant
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.

      4.4   Furnishing of Information. 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,  if the  Company is not  required  to file  reports
pursuant to 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. The Company
further  covenants that it will take such further  action as any  Stockholder 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.

                                       17
<PAGE>

      4.5   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.

      4.6   Intentionally Omitted.

      4.7   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  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).

      4.8   Stockholder  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  Stockholder  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.

      4.9   Non-Public  Information.  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.

      4.10  Use of Proceeds.  The Company  shall use the net  proceeds  from the
sale of the  Securities  hereunder  for working  capital  and general  corporate
purposes, including advertising.

      4.11  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

                                       18
<PAGE>

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.

      4.12  Indemnification  of  Purchasers.  Subject to the  provisions of this
Section  4.11,  the Company will  indemnify  and hold the  Purchasers  and their
directors,  officers,  stockholders,  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  representation,  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.

      4.13  Reservation and Listing of Securities.

            (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.

                                       19
<PAGE>

            (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 75th day
      after such date.

            (c)   The Company shall,  if applicable:  (i) in the time and manner
      required by the 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  Required  Minimum on the date of such
      application,  (ii) take all steps necessary to cause such shares of Common
      Stock to be approved for listing on the Trading Market as soon as possible
      thereafter,  (iii) provide to the Purchasers evidence of such listing, and
      (iv)  maintain the listing of such Common Stock on any date at least equal
      to the  Required  Minimum on such date on such  Trading  Market or another
      Trading Market.

      4.14  Subsequent  Equity Sales.  In addition to the  limitations set forth
herein,  from the date hereof until such time as no  Purchaser  holds any of the
Securities,  the Company shall be prohibited  from effecting or entering into an
agreement  to  effect  any  subsequent  financing  involving  a  "Variable  Rate
Transaction"  (each as defined  below)  without  the prior  written  approval of
Purchaser.  Notwithstanding  the  foregoing,  the  Company  may  enter  into any
subsequent  financing,  without the prior written approval of Purchaser and even
if such financing  involves a Variable Rate Transaction if the net proceeds from
the  financing  is used to prepay the Notes in full  pursuant to Section 2(e) of
the Notes.  The term  "Variable  Rate  Transaction"  shall mean a transaction in
which the  Company  issues or sells (i) any debt or equity  securities  that are
convertible  into,  exchangeable  or  exercisable  for,  or include the right to
receive  additional shares of Common Stock either (A) at a conversion,  exercise
or  exchange  rate or other  price that is based  upon  and/or  varies  with the
trading prices of or quotations for the shares of Common Stock at any time after
the  initial  issuance  of  such  debt  or  equity  securities,  or  (B)  with a
conversion,  exercise or  exchange  price that is subject to being reset at some
future date after the initial  issuance of such debt or equity  security or upon
the occurrence of specified or contingent events directly or indirectly  related
to the business of the Company or the market for the Common Stock. Any Purchaser
shall be entitled to obtain  injunctive  relief  against the Company to preclude
any such  issuance,  which  remedy  shall be in addition to any right to collect
damages.

      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.   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 Note  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  Most  Favored  Nation  Provision.  Any time the Company  effects any
subsequent financing while the Note is outstanding, each Purchaser may elect, in
its sole  discretion,  to exchange  all or some of its Notes then held by it for
the securities  issued in a subsequent  financing based on the then  outstanding
principal amount of the Note plus accrued but unpaid interest and any other fees
then owed by the Company to the Purchaser, and the effective price at which such
securities are sold in such subsequent financing.

                                       20
<PAGE>

                                   ARTICLE V.
                                 MISCELLANEOUS

      5.1   Termination.  This Agreement may be terminated by any Purchaser,  by
written notice to the other parties,  if the Closing has not been consummated on
or before May 1, 2005;  provided that no such  termination will affect the right
of any party to sue for any breach by the other party (or parties).

      5.2   Fees.  At the  Closing,  the Company has agreed to (i)  reimburse DC
Asset Management LLC ("DCAM") $25,000,  for its legal fees and expenses and (ii)
pay  DCAM  $90,000  as a  structuring  fee.  The  payment  shall be made by wire
transfer to the following account:

      DC Asset Management
      013-0848158-65 (Checking account)
      ABA/routing #021000021 (wires only)
      Swift code for JPMorgan is CHASUS33

The Company shall be responsible for reimbursement of the Purchaser's reasonable
out-of-pocket  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 issuance 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  Trading  Day,  (b) the next  Trading  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 Trading Day or later than 5:30 p.m. (New York City time) on any Trading
Day, (c) the second  Trading 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.

                                       21
<PAGE>

      5.6   Construction.  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".

      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.

                                       22
<PAGE>

      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.

      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 therefor,  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 Note,  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 therefor, 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

                                       23
<PAGE>

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.

      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  effective  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 Document.  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.  For reasons of
administrative  convenience only,  Purchasers and their respective  counsel have
chosen to communicate  with the Company through KW. KW does not represent all of
the Purchasers but only DCOFI Master LDC. 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.

                            (Signature Pages Follow)

                                       24
<PAGE>

      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.

KNOCKOUT HOLDINGS, INC.           Address for Notice:
                                  -------------------

                                  100 W. Whitehall Ave.
 /s/ Oscar Turner                 Northlake, IL 60164-2349
-----------------------
Oscar Turner
Chief Financial Officer
                                  Telephone: (708) 273-6900
                                  Facsimile: (708) 273-6901

With a copy to (which shall not constitute notice):

                   [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                      SIGNATURE PAGE FOR PURCHASER FOLLOWS]

                                       25
<PAGE>

 [PURCHASER SIGNATURE PAGES TO KNOCKOUT HOLDINGS 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 Investing Entity:  DCOFI Master LDC
                           ----------------
Signature of Authorized Signatory of Investing Entity: /s/ Richard Smithline
                                                       ---------------------
Name of Authorized Signatory: Richard Smithline
                              -----------------
Title of Authorized Signatory: Director
                               --------
Email Address of Authorized Entity:
                                   ---------------------------------------------
Address for Notice of Investing Entity:

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

Subscription Amount:

EIN Number: [PROVIDE THIS UNDER SEPARATE COVER]

                           [SIGNATURE PAGES CONTINUE]

                                       26

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