Document:

exv4w2

 

Exhibit 4.2

[Form of Warrant for Tak Investors]

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS
AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES
ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF
COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE PROVISIONS OF
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

WARRANT TO PURCHASE

SHARES OF COMMON STOCK

OF

PRESCIENT APPLIED INTELLIGENCE, INC.

Expires May 4, 2008

			
	No.: W-05- AA (Replaces Warrant No: W-05-A)
	 	Number of Shares: 1,534,091
	Date of Issuance: September 8, 2005	 	 

     FOR VALUE RECEIVED, subject to the provisions hereinafter set forth, the undersigned,
Prescient Applied Intelligence, Inc., a Delaware corporation (together with its successors and
assigns, the “Issuer”), hereby certifies that TAK INVESTMENTS LLC or its registered assigns
is entitled to subscribe for and purchase, during the Term (as hereinafter defined), up to One
Million Five Hundred Thirty Four Thousand Ninety One (1,534.091) shares (subject to adjustment as
hereinafter provided) of the duly authorized, validly issued, fully paid and non-assessable Common
Stock of the Issuer, at an exercise price per share equal to the Warrant Price then in effect,
subject, however, to the provisions and upon the terms and conditions hereinafter set forth.
Capitalized terms used in this Warrant and not otherwise defined herein shall have the respective
meanings specified in Section 9 hereof. This Warrant is being issued in replacement and full substitution of that Warrant dated May 4, 2005, initially exercisable for an aggregate 1,534,091 shares
of Common Stock (the “Old Warrant”). Upon execution and delivery of this Warrant, the Old Warrant shall be deemed
terminated and of no further force or effect.

     1. Term. The term of this Warrant shall commence on May 4, 2005 and shall expire at
6:00 p.m., eastern time, on May 4, 2008 (such period being the “Term”).

     2. Method of Exercise; Payment; Issuance of New Warrant; Transfer and
Exchange.

     (a) Time of Exercise. The purchase rights represented by this Warrant may be
exercised in whole or in part during the Term.

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     (b) Method of Exercise. The Holder hereof may exercise this Warrant, in whole or in
part, by the surrender of this Warrant (with the exercise form attached hereto duly executed) at
the principal office of the Issuer, and by the payment to the Issuer of an amount of consideration
therefor equal to the Warrant Price in effect on the date of such exercise multiplied by the number
of shares of Warrant Stock with respect to which this Warrant is then being exercised, payable at
such Holder’s election (i) by certified or official bank check or by wire transfer to an account
designated by the Issuer, (ii) by “cashless exercise” in accordance with the provisions of
subsection (c) of this Section 2, but only when a registration statement under the Securities Act
providing for the resale of the Warrant Stock is not then in effect, or (iii) by a combination of
the foregoing methods of payment selected by the Holder of this Warrant.

     (c) Cashless Exercise. Notwithstanding any provisions herein to the contrary and
commencing one (1) year following the Original Issue Date, if (i) the Per Share Market Value of one
share of Common Stock is greater than the Warrant Price (at the date of calculation as set forth
below) and (ii) a registration statement under the Securities Act providing for the resale of the
Warrant Stock is not then in effect, in lieu of exercising this Warrant by payment of cash, the
Holder may exercise this Warrant by a cashless exercise and shall receive the number of shares of
Common Stock equal to an amount (as determined below) by surrender of this Warrant at the principal
office of the Issuer together with the properly endorsed Notice of Exercise in which event the
Issuer shall issue to the Holder a number of shares of Common Stock computed using the following
formula:

	 	 	 	 	 
	 	 	X = Y — (A)(Y)
	 

	 	 	 	           B
	 
	 	 	 	 
	Where

	 	X=
	 	the number of shares of Common Stock to be issued to the Holder.
	 
	 	 	 	 
	 

	 	Y=
	 	the number of shares of Common Stock purchasable upon
exercise of all of the Warrant or, if only a portion of the Warrant is being
exercised, the portion of the Warrant being exercised.
	 
	 	 	 	 
	 

	 	A=
	 	the Warrant Price.
	 
	 	 	 	 
	 

	 	B=
	 	the Per Share Market Value of one share of Common Stock.

     (d) Issuance of Stock Certificates. In the event of any exercise of the rights
represented by this Warrant in accordance with and subject to the terms and conditions hereof, (i)
certificates for the shares of Warrant Stock so purchased shall be dated the date of such exercise
and delivered to the Holder hereof within a reasonable time, not exceeding three (3) Trading Days
after such exercise or, at the request of the Holder (provided that a registration statement under
the Securities Act providing for the resale of the Warrant Stock is then in effect), issued and
delivered to the Depository Trust Company (“DTC”) account on the Holder’s behalf via the
Deposit Withdrawal Agent Commission System (“DWAC”) within a reasonable time, not exceeding
three (3) Trading Days after such exercise, and the Holder hereof shall be deemed for all purposes
to be the holder of the shares of Warrant Stock so purchased as of the date of such exercise and
(ii) unless this Warrant has expired, a new Warrant representing the number of shares of Warrant
Stock, if any, with respect to which this Warrant shall not then have been

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exercised (less any amount thereof which shall have been canceled in payment or partial
payment of the Warrant Price as hereinabove provided) shall also be issued to the Holder hereof at
the Issuer’s expense within such time.

     (e) Transferability of Warrant. Subject to Section 2(f), this Warrant may be
transferred by a Holder without the consent of the Issuer. If transferred pursuant to this
paragraph and subject to the provisions of subsection (f) of this Section 2, this Warrant may be
transferred on the books of the Issuer by the Holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant at the principal office of the Issuer, properly endorsed
(by the Holder executing an assignment in the form attached hereto) and upon payment of any
necessary transfer tax or other governmental charge imposed upon such transfer. This Warrant is
exchangeable at the principal office of the Issuer for Warrants to purchase the same aggregate
number of shares of Warrant Stock, each new Warrant to represent the right to purchase such number
of shares of Warrant Stock as the Holder hereof shall designate at the time of such exchange. All
Warrants issued on transfers or exchanges shall be dated the Original Issue Date and shall be
identical with this Warrant except as to the number of shares of Warrant Stock issuable pursuant
hereto.

     (f) Compliance with Securities Laws.

     (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant or
the shares of Warrant Stock to be issued upon exercise hereof are being acquired solely for
the Holder’s own account and not as a nominee for any other party, and for investment, and
that the Holder will not offer, sell or otherwise dispose of this Warrant or any shares of
Warrant Stock to be issued upon exercise hereof except pursuant to an effective registration
statement, or an exemption from registration, under the Securities Act and any applicable
state securities laws.

     (ii) Except as provided in paragraph (iii) below, this Warrant and all certificates
representing shares of Warrant Stock issued upon exercise hereof shall be stamped or
imprinted with a legend in substantially the following form:

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED
UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS
OR THE ISSUER SHALL HAVE RECEIVED AN OPINION OF COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER
THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

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     (iii) The Issuer agrees to reissue this Warrant or certificates representing any of the
Warrant Stock, without the legend set forth above if at such time, prior to making any
transfer of any such securities, the Holder shall give written notice to the Issuer
describing the manner and terms of such transfer and removal as the Issuer may reasonably
request. Such proposed transfer and removal will not be effected until: (a) either (i) the
Issuer has received an opinion of counsel reasonably satisfactory to the Issuer, to the
effect that the registration of such securities under the Securities Act is not required in
connection with such proposed transfer, (ii) a registration statement under the Securities
Act covering such proposed disposition has been filed by the Issuer with the Securities and
Exchange Commission and has become effective under the Securities Act, (iii) the Issuer has
received other evidence reasonably satisfactory to the Issuer that such registration and
qualification under the Securities Act and state securities laws are not required, or (iv)
the Holder provides the Issuer with reasonable assurances that such security can be sold
pursuant to Rule 144 under the Securities Act; and (b) either (i) the Issuer has received an
opinion of counsel reasonably satisfactory to the Issuer, to the effect that registration or
qualification under the securities or “blue sky” laws of any state is not required in
connection with such proposed disposition, or (ii) compliance with applicable state
securities or “blue sky” laws has been effected or a valid exemption exists with respect
thereto. The Issuer will respond to any such notice from a holder within five (5) business
days. In the case of any proposed transfer under this Section 2(f), the Issuer will use
reasonable efforts to comply with any such applicable state securities or “blue sky” laws,
but shall in no event be required, (x) to qualify to do business in any state where it is
not then qualified, (y) to take any action that would subject it to tax or to the general
service of process in any state where it is not then subject, or (z) to comply with state
securities or “blue sky” laws of any state for which registration by coordination is
unavailable to the Issuer. The restrictions on transfer contained in this Section 2(f)
shall be in addition to, and not by way of limitation of, any other restrictions on transfer
contained in any other section of this Warrant. Whenever a certificate representing the
Warrant Stock is required to be issued to a the Holder without a legend, in lieu of
delivering physical certificates representing the Warrant Stock, provided the Issuer’s
transfer agent is participating in the DTC Fast Automated Securities Transfer program, the
Issuer shall use its reasonable best efforts to cause its transfer agent to electronically
transmit the Warrant Stock to the Holder by crediting the account of the Holder’s Prime
Broker with DTC through its DWAC system (to the extent not inconsistent with any provisions
of this Warrant or the Purchase Agreement).

     3. Stock Fully Paid; Reservation and Listing of Shares; Covenants.

     (a) Stock Fully Paid. The Issuer represents, warrants, covenants and agrees that all
shares of Warrant Stock which may be issued upon the exercise of this Warrant or otherwise
hereunder will, upon issuance, be duly authorized, validly issued, fully paid and non-assessable
and free from all taxes, liens and charges created by or through the Issuer. The Issuer further
covenants and agrees that during the period within which this Warrant may be exercised, the Issuer
will at all times have authorized and reserved for the purpose of the issue upon exercise of this
Warrant a sufficient number of shares of Common Stock to provide for the exercise of this Warrant.

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     (b) Reservation. If any shares of Common Stock required to be reserved for issuance
upon exercise of this Warrant or as otherwise provided hereunder require registration or
qualification with any governmental authority under any federal or state law before such shares may
be so issued, the Issuer will in good faith use its best efforts at its expense to cause such
shares to be duly registered or qualified. If the Issuer shall list any shares of Common Stock on
any securities exchange or market it will, at its expense, list thereon, maintain and increase when
necessary such listing, of, all shares of Warrant Stock from time to time issued upon exercise of
this Warrant or as otherwise provided hereunder (provided that such Warrant Stock has been
registered pursuant to a registration statement under the Securities Act then in effect), and, to
the extent permissible under the applicable securities exchange rules, all unissued shares of
Warrant Stock which are at any time issuable hereunder, so long as any shares of Common Stock shall
be so listed. The Issuer will also so list on each securities exchange or market, and will
maintain such listing of, any other securities which the Holder of this Warrant shall be entitled
to receive upon the exercise of this Warrant if at the time any securities of the same class shall
be listed on such securities exchange or market by the Issuer.

     (c) Covenants. The Issuer shall not by any action including, without limitation,
amending the Certificate of Incorporation or the by-laws of the Issuer, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities
or any other action, avoid or seek to avoid the observance or performance of any of the terms of
this Warrant, but will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate to protect the rights of the
Holder hereof against dilution (to the extent specifically provided herein) or impairment. Without
limiting the generality of the foregoing, the Issuer will (i) not permit the par value, if any, of
its Common Stock to exceed the then effective Warrant Price, (ii) not amend or modify any provision
of the Certificate of Incorporation or by-laws of the Issuer in any manner that would adversely
affect the rights of the Holders of the Warrants, (iii) take all such action as may be reasonably
necessary in order that the Issuer may validly and legally issue fully paid and nonassessable
shares of Common Stock, free and clear of any liens, claims, encumbrances and restrictions (other
than as provided herein or under applicable securities laws) upon the exercise of this Warrant, and
(iv) use its best efforts to obtain all such authorizations, exemptions or consents from any public
regulatory body having jurisdiction thereof as may be reasonably necessary to enable the Issuer to
perform its obligations under this Warrant.

     (d) Loss, Theft, Destruction of Warrants. Upon receipt of evidence satisfactory to
the Issuer of the ownership of and the loss, theft, destruction or mutilation of any Warrant and,
in the case of any such loss, theft or destruction, upon receipt of indemnity or security
satisfactory to the Issuer or, in the case of any such mutilation, upon surrender and cancellation
of such Warrant, the Issuer will make and deliver, in lieu of such lost, stolen, destroyed or
mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same
number of shares of Common Stock.

     4. Adjustment of Warrant Price. The price at which such shares may be purchased upon
exercise of this Warrant shall be subject to adjustment from time to time as set forth in this
Section 4. The Issuer shall give the Holder notice of any event described below which requires an
adjustment pursuant to this Section 4 in accordance with the notice provisions set forth in Section
5.

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     (a) Recapitalization, Reorganization, Reclassification, Consolidation, Merger or Sale.

     (i) In case the Issuer after the Original Issue Date shall do any of the following
(each, a “Triggering Event”): (a) consolidate with or merge into any other Person
and the Issuer shall not be the continuing or surviving corporation of such consolidation or
merger, or (b) permit any other Person to consolidate with or merge into the Issuer and the
Issuer shall be the continuing or surviving Person but, in connection with such
consolidation or merger, any Capital Stock of the Issuer shall be changed into or exchanged
for Securities of any other Person or cash or any other property, or (c) transfer all or
substantially all of its properties or assets to any other Person, or (d) effect a capital
reorganization or reclassification of its Capital Stock, then, and in the case of each such
Triggering Event, proper provision shall be made so that, upon the basis and the terms and
in the manner provided in this Warrant, the Holder of this Warrant shall be entitled upon
the exercise hereof at any time after the consummation of such Triggering Event, to the
extent this Warrant is not exercised prior to such Triggering Event, to receive at the
Warrant Price in effect at the time immediately prior to the consummation of such Triggering
Event in lieu of the Common Stock issuable upon such exercise of this Warrant prior to such
Triggering Event, the Securities, cash and property to which such Holder would have been
entitled upon the consummation of such Triggering Event if such Holder had exercised the
rights represented by this Warrant immediately prior thereto (including the right of a
shareholder to elect the type of consideration it will receive upon a Triggering Event),
subject to adjustments (subsequent to such corporate action) as nearly equivalent as
possible to the adjustments provided for elsewhere in this Section 4.

     (ii) Notwithstanding anything contained in this Warrant to the contrary, a Triggering
Event shall not be deemed to have occurred if, prior to the consummation thereof, each
Person (other than the Issuer) which may be required to deliver any Securities, cash or
property upon the exercise of this Warrant as provided herein shall assume, by written
instrument delivered to, and reasonably satisfactory to, the Holder of this Warrant, (A) the
obligations of the Issuer under this Warrant (and if the Issuer shall survive the
consummation of such Triggering Event, such assumption shall be in addition to, and shall
not release the Issuer from, any continuing obligations of the Issuer under this Warrant)
and (B) the obligation to deliver to such Holder such Securities, cash or property as, in
accordance with the foregoing provisions of this subsection (a), such Holder shall be
entitled to receive, and such Person shall have similarly delivered to such Holder an
opinion of counsel for such Person, which counsel shall be reasonably satisfactory to such
Holder, or in the alternative, a written acknowledgement executed by the President or Chief
Financial Officer of the Issuer, stating that this Warrant shall thereafter continue in full
force and effect and the terms hereof (including, without limitation, all of the provisions
of this subsection (a)) shall be applicable to the Securities, cash or property which such
Person may be required to deliver upon any exercise of this Warrant or the exercise of any
rights pursuant hereto.

     (b) Stock Dividends, Subdivisions and Combinations. If at any time the Issuer shall:

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     (i) take a record of the holders of its Common Stock for the purpose of entitling them
to receive a dividend payable in, or other distribution of, shares of Common Stock,

     (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of
Common Stock, or

     (iii) combine its outstanding shares of Common Stock into a smaller number of shares of
Common Stock,

then (1) the number of shares of Common Stock for which this Warrant is exercisable immediately
after the occurrence of any such event shall be adjusted to equal the number of shares of Common
Stock which a record holder of the same number of shares of Common Stock for which this Warrant is
exercisable immediately prior to the occurrence of such event would own or be entitled to receive
after the happening of such event, and (2) the Warrant Price then in effect shall be adjusted to
equal (A) the Warrant Price then in effect multiplied by the number of shares of Common Stock for
which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of
shares of Common Stock for which this Warrant is exercisable immediately after such adjustment.

     (c) Certain Other Distributions. If at any time the Issuer shall take a record of the
holders of its Common Stock for the purpose of entitling them to receive any dividend or other
distribution of:

     (i) cash (other than a cash dividend payable out of earnings or earned surplus legally
available for the payment of dividends under the laws of the jurisdiction of incorporation
of the Issuer),

     (ii) any evidences of its indebtedness, any shares of stock of any class or any other
securities or property of any nature whatsoever (other than cash, Common Stock Equivalents
or Additional Shares of Common Stock), or

     (iii) any warrants or other rights to subscribe for or purchase any evidences of its
indebtedness, any shares of stock of any class or any other securities or property of any
nature whatsoever (other than cash, Common Stock Equivalents or Additional Shares of Common
Stock),

then (1) the number of shares of Common Stock for which this Warrant is exercisable shall be
adjusted to equal the product of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such adjustment multiplied by a fraction (A) the numerator of
which shall be the Per Share Market Value of Common Stock at the date of taking such record and (B)
the denominator of which shall be such Per Share Market Value minus the amount allocable to one
share of Common Stock of any such cash so distributable and of the fair value (as determined in
good faith by the Board of Directors of the Issuer and supported by an opinion from an investment
banking firm of recognized national standing acceptable to (but not affiliated with) the Holder) of
any and all such evidences of indebtedness, shares of stock, other securities

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or property or warrants or other subscription or purchase rights so distributable, and (2) the
Warrant Price then in effect shall be adjusted to equal (A) the Warrant Price then in effect
multiplied by the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares of Common Stock for which
this Warrant is exercisable immediately after such adjustment. A reclassification of the Common
Stock (other than a change in par value, or from par value to no par value or from no par value to
par value) into shares of Common Stock and shares of any other class of stock shall be deemed a
distribution by the Issuer to the holders of its Common Stock of such shares of such other class of
stock within the meaning of this Section 4(c) and, if the outstanding shares of Common Stock shall
be changed into a larger or smaller number of shares of Common Stock as a part of such
reclassification, such change shall be deemed a subdivision or combination, as the case may be, of
the outstanding shares of Common Stock within the meaning of Section 4(b).

     (d) Issuance of Additional Shares of Common Stock.

          (i) In the event the Issuer shall at any time issue any Additional Shares of Common Stock
(otherwise than as provided in the foregoing subsections (a) through (c) of this Section 4), at a
price per share less than the Warrant Price then in effect or without consideration, then the
Warrant Price upon each such issuance shall be adjusted to that price determined by multiplying the
Warrant Price then in effect by a fraction:

     (A) the numerator of which shall be equal to the sum of (x) the number of
            shares of Outstanding Common Stock immediately prior to the issuance of such
Additional Shares of Common Stock plus (y) the number of shares of Common
Stock (rounded to the nearest whole share) which the aggregate consideration for the
total number of such Additional Shares of Common Stock so issued would purchase at a
price per share equal to the Warrant Price then in effect, and

     (B) the denominator of which shall be equal to the number of shares of
Outstanding Common Stock immediately after the issuance of such Additional Shares of
Common Stock.

          (ii) No adjustment of the number of shares of Common Stock for which this Warrant shall be
exercisable shall be made under paragraph (i) of Section 4(d) upon the issuance of any Additional
Shares of Common Stock which are issued pursuant to the exercise of any Common Stock Equivalents,
if any such adjustment shall previously have been made upon the issuance of such Common Stock
Equivalents (or upon the issuance of any warrant or other rights therefor) pursuant to Section
4(e).

          (iii) Notwithstanding the terms of this Section 4(d) to the contrary, if the Issuer issues any
warrants pursuant to the Subsequent Common Stock Financing (as defined in the Purchase Agreement)
at a price per share less than the Warrant Price then in effect, then the Warrant Price shall be
adjusted to a price equal to the price per share of such warrants issued pursuant to the Subsequent
Common Stock Financing. In addition, the Warrant Price shall be adjusted to $.50 per share if (A)
the Issuer does not consummate the Subsequent Common Stock Financing within one hundred twenty
(120) days of the Original Issue Date in an amount equal to

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or greater than $1,500,000, or (B) the Issuer’s cash balance on December 31, 2005 is less than
$1,500,000.

     (e) Issuance of Common Stock Equivalents. If the Issuer shall at any time issue or
sell any Common Stock Equivalents, whether or not the rights to exchange or convert thereunder are
immediately exercisable, and the aggregate price per share for which Common Stock is issuable upon
such conversion or exchange plus the consideration received by the Issuer for issuance of such
Common Stock Equivalent divided by the number of shares of Common Stock issuable pursuant to such
Common Stock Equivalent (the “Aggregate Per Common Share Price”) shall be less than the
Warrant Price then in effect, or if, after any such issuance of Common Stock Equivalents, the price
per share for which Additional Shares of Common Stock may be issuable thereafter is amended or
adjusted, and such price as so amended shall make the Aggregate Per Common Share Price be less than
the Warrant Price in effect at the time of such amendment or adjustment, then the Warrant Price
upon each such issuance or amendment shall be adjusted as provided in Section 4(d). No further
adjustment of the Warrant Price then in effect shall be made under this Section 4(e) upon the
issuance of any Common Stock Equivalents which are issued pursuant to the exercise of any warrants
or other subscription or purchase rights therefor, if any such adjustment shall previously have
been made upon the issuance of such warrants or other rights pursuant to this Section 4(e). No
further adjustments of the Warrant Price then in effect shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Common Stock Equivalents.

     (f) Superseding Adjustment. If, at any time after any adjustment of the number of
shares of Common Stock for which this Warrant is exercisable and the Warrant Price then in effect
shall have been made pursuant to Section 4(e) as the result of any issuance of Common Stock
Equivalents, and (i) such Common Stock Equivalents, or the right of conversion or exchange in such
Common Stock Equivalents, shall expire, and all or a portion of such or the right of conversion or
exchange with respect to all or a portion of such Common Stock Equivalents, as the case may be,
shall not have been exercised, or (ii) the consideration per share for which shares of Common Stock
are issuable pursuant to such Common Stock Equivalents shall be increased, then such previous
adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were
deemed to have been issued by virtue of the computation made in connection with the adjustment so
rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation.
Upon the occurrence of an event set forth in this Section 4(f) above, there shall be a
recomputation made of the effect of such Common Stock Equivalents on the basis of: (i) treating the
number of Additional Shares of Common Stock theretofore actually issued or issuable pursuant to the
previous exercise of Common Stock Equivalents or any such right of conversion or exchange, as
having been issued on the date or dates of any such exercise and for the consideration actually
received and receivable therefor, and (ii) treating any such Common Stock Equivalents which then
remain outstanding as having been granted or issued immediately after the time of such increase of
the consideration per share for which Additional Shares of Common Stock are issuable under such
Common Stock Equivalents; whereupon a new adjustment of the number of shares of Common Stock for
which this Warrant is exercisable and the Warrant Price then in effect shall be made, which new
adjustment shall supersede the previous adjustment so rescinded and annulled.

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     (g) Purchase of Common Stock by the Issuer. If the Issuer at any time shall, directly
or indirectly through a Subsidiary or otherwise, purchase, redeem or otherwise acquire any shares
of Common Stock at a price per share greater than the Per Share Market Value, then the Warrant
Price upon each such purchase, redemption or acquisition shall be adjusted to that price determined
by multiplying such Warrant Price by a fraction (i) the numerator of which shall be the number of
shares of Outstanding Common Stock immediately prior to such purchase, redemption or acquisition
minus the number of shares of Common Stock which the aggregate consideration for the total number
of such shares of Common Stock so purchased, redeemed or acquired would purchase at the Per Share
Market Value; and (ii) the denominator of which shall be the number of shares of Outstanding Common
Stock immediately after such purchase, redemption or acquisition. For the purposes of this
subsection (h), the date as of which the Per Share Market Price shall be computed shall be the
earlier of (x) the date on which the Issuer shall enter into a firm contract for the purchase,
redemption or acquisition of such Common Stock, or (y) the date of actual purchase, redemption or
acquisition of such Common Stock. For the purposes of this subsection (g), a purchase, redemption
or acquisition of a Common Stock Equivalent shall be deemed to be a purchase of the underlying
Common Stock, and the computation herein required shall be made on the basis of the full exercise,
conversion or exchange of such Common Stock Equivalent on the date as of which such computation is
required hereby to be made, whether or not such Common Stock Equivalent is actually exercisable,
convertible or exchangeable on such date.

     (h) Other Provisions applicable to Adjustments under this Section. The following
provisions shall be applicable to the making of adjustments of the number of shares of Common Stock
for which this Warrant is exercisable and the Warrant Price then in effect provided for in this
Section 4:

          (i) Computation of Consideration. To the extent that any Additional Shares of Common
Stock or any Common Stock Equivalents (or any warrants or other rights therefor) shall be issued
for cash consideration, the consideration received by the Issuer therefor shall be the amount of
the cash received by the Issuer therefor, or, if such Additional Shares of Common Stock or Common
Stock Equivalents are offered by the Issuer for subscription, the subscription price, or, if such
Additional Shares of Common Stock or Common Stock Equivalents are sold to underwriters or dealers
for public offering without a subscription offering, the initial public offering price (in any such
case subtracting any amounts paid or receivable for accrued interest or accrued dividends and
without taking into account any compensation, discounts or expenses paid or incurred by the Issuer
for and in the underwriting of, or otherwise in connection with, the issuance thereof). In
connection with any merger or consolidation in which the Issuer is the surviving corporation (other
than any consolidation or merger in which the previously outstanding shares of Common Stock of the
Issuer shall be changed to or exchanged for the stock or other securities of another corporation),
the amount of consideration therefore shall be, deemed to be the fair value of such portion of the
assets and business of the nonsurviving corporation as the Board may determine to be attributable
to such shares of Common Stock or Common Stock Equivalents, as the case may be. Such determination
of the fair value of such consideration shall me made by an Independent Appraiser. The
consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other
rights to subscribe for or purchase the same shall be the consideration received by the Issuer for
issuing such warrants or other rights plus the additional consideration payable to the Issuer upon
exercise of such warrants

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or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to
the terms of any Common Stock Equivalents shall be the consideration received by the Issuer for
issuing warrants or other rights to subscribe for or purchase such Common Stock Equivalents, plus
the consideration paid or payable to the Issuer in respect of the subscription for or purchase of
such Common Stock Equivalents, plus the additional consideration, if any, payable to the Issuer
upon the exercise of the right of conversion or exchange in such Common Stock Equivalents. In the
event of any consolidation or merger of the Issuer in which the Issuer is not the surviving
corporation or in which the previously outstanding shares of Common Stock of the Issuer shall be
changed into or exchanged for the stock or other securities of another corporation, or in the event
of any sale of all or substantially all of the assets of the Issuer for stock or other securities
of any corporation, the Issuer shall be deemed to have issued a number of shares of its Common
Stock for stock or securities or other property of the other corporation computed on the basis of
the actual exchange ratio on which the transaction was predicated, and for a consideration equal to
the fair market value on the date of such transaction of all such stock or securities or other
property of the other corporation. In the event any consideration received by the Issuer for any
securities consists of property other than cash, the fair market value thereof at the time of
issuance or as otherwise applicable shall be as determined in good faith by the Board. In the
event Common Stock is issued with other shares or securities or other assets of the Issuer for
consideration which covers both, the consideration computed as provided in this Section 4(h)(i)
shall be allocated among such securities and assets as determined in good faith by the Board.

          (ii) When Adjustments to Be Made. The adjustments required by this Section 4 shall be
made whenever and as often as any specified event requiring an adjustment shall occur, except that
any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that
would otherwise be required may be postponed (except in the case of a subdivision or combination of
shares of the Common Stock, as provided for in Section 4(b)) up to, but not beyond the date of
exercise if such adjustment either by itself or with other adjustments not previously made adds or
subtracts less than one percent (1%) of the shares of Common Stock for which this Warrant is
exercisable immediately prior to the making of such adjustment. Any adjustment representing a
change of less than such minimum amount (except as aforesaid) which is postponed shall be carried
forward and made as soon as such adjustment, together with other adjustments required by this
Section 4 and not previously made, would result in a minimum adjustment or on the date of exercise.
For the purpose of any adjustment, any specified event shall be deemed to have occurred at the
close of business on the date of its occurrence.

          (iii) Fractional Interests. In computing adjustments under this Section 4, fractional
interests in Common Stock shall be taken into account to the nearest one one-hundredth
(1/100th) of a share.

          (iv) When Adjustment Not Required. If the Issuer shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive a dividend or distribution or
subscription or purchase rights and shall, thereafter and before the distribution to stockholders
thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or
purchase rights, then thereafter no adjustment shall be required by reason of the

-11-

 

taking of such record and any such adjustment previously made in respect thereof shall be
rescinded and annulled.

          (i) Form of Warrant after Adjustments. The form of this Warrant need not be changed
because of any adjustments in the Warrant Price or the number and kind of Securities purchasable
upon the exercise of this Warrant.

          (j) Escrow of Warrant Stock. If after any property becomes distributable pursuant to
this Section 4 by reason of the taking of any record of the holders of Common Stock, but prior to
the occurrence of the event for which such record is taken, and the Holder exercises this Warrant,
any shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the
last shares of Common Stock for which this Warrant is exercised (notwithstanding any other
provision to the contrary herein) and such shares or other property shall be held in escrow for the
Holder by the Issuer to be issued to the Holder upon and to the extent that the event actually
takes place, upon payment of the current Warrant Price. Notwithstanding any other provision to the
contrary herein, if the event for which such record was taken fails to occur or is rescinded, then
such escrowed shares shall be cancelled by the Issuer and escrowed property returned.

          5. Notice of Adjustments. Whenever the Warrant Price or Warrant Share Number shall be
adjusted pursuant to Section 4 hereof (for purposes of this Section 5, each an “adjustment”), the
Issuer shall cause its Chief Financial Officer to prepare and execute a certificate setting forth,
in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method
by which such adjustment was calculated (including a description of the basis on which the Board
made any determination hereunder), and the Warrant Price and Warrant Share Number after giving
effect to such adjustment, and shall cause copies of such certificate to be delivered to the Holder
of this Warrant promptly after each adjustment. Any dispute between the Issuer and the Holder of
this Warrant with respect to the matters set forth in such certificate may at the option of the
Holder of this Warrant be submitted to a national or regional firm reasonably acceptable to the
Issuer and the Holder, provided that the Issuer shall have ten (10) days after receipt of
notice from such Holder of its selection of such firm to object thereto, in which case such Holder
shall select another such firm and the Issuer shall have no such right of objection unless the
Issuer identifies a valid conflict of interest for such firm with any of the parties. The firm
selected by the Holder of this Warrant as provided in the preceding sentence shall be instructed to
deliver a written opinion as to such matters to the Issuer and such Holder within thirty (30) days
after submission to it of such dispute. Such opinion shall be final and binding on the parties
hereto. The costs and expenses of the initial accounting firm shall be paid equally by the Issuer
and the Holder and, in the case of an objection by the Issuer, the costs and expenses of the
subsequent accounting firm shall be paid in full by the Isuer.

          6. Fractional Shares. No fractional shares of Warrant Stock will be issued in
connection with any exercise hereof, but in lieu of such fractional shares, the Issuer shall make a
cash payment therefor equal in amount to the product of the applicable fraction multiplied by the
Per Share Market Value then in effect.

          7. Intentionally Omitted.

-12-

 

          8. Call. Notwithstanding anything herein to the contrary, the Issuer, at its option
and at any time prior to the one (1) year anniversary of the Original Issue Date, may call up to
fifty percent (50%) of the shares of Warrant Stock issuable upon exercise of this Warrant by
providing the Holder of this Warrant written notice pursuant to Section 13 (the “Call
Notice”) if (A) the Per Share Market Value of the Common Stock is equal to or greater than
$2.50 (as may be adjusted for any stock splits or combinations of the Common Stock) for a period of
twenty (20) consecutive Trading Days immediately prior to the date of delivery of the Call Notice
or (B) the Issuer’s revenue for the fiscal year ending December 31, 2005 as reflected in the
Issuer’s audited financial statements is twenty-five percent (25%) greater than the revenue for the
fiscal year ended December 31, 2004, as disclosed in the Issuer’s Form 10-KSB for the fiscal year
ended December 31, 2004; provided, that (i) a registration statement under the
Securities Act providing for the resale of the Warrant Stock and the Common Stock issued pursuant
to the Purchase Agreement is then in effect and has been effective, without lapse or suspension of
any kind, for a period of sixty (60) consecutive calendar days, (ii) trading in the Common Stock
shall not have been suspended by the Securities and Exchange Commission or the OTC Bulletin Board
(or other principal exchange on which the Common Stock is traded) and (iii) the Issuer is in
material compliance with the terms and conditions of this Warrant and the other Transaction
Documents (as defined in the Purchase Agreement); provided, further, that a
registration statement under the Securities Act providing for the resale of the Warrant Stock and
the Common Stock issued pursuant to the Purchase Agreement is in effect from the date of delivery
of the Call Notice until the date which is the later of (A) the date the Holder exercises the
Warrant pursuant to the Call Notice and (B) the twentieth (20th) Trading Day after the
Holder receives the Call Notice (the “Early Termination Date”). The rights and privileges
of the Holder to exercise the shares of Warrant Stock subject to the Call Notice (the “Called
Warrant Shares”) shall expire on the Early Termination Date if this Warrant is not exercised
with respect to such Called Warrant Shares prior to such Early Termination Date. In the event this
Warrant is not exercised with respect to the Called Warrant Shares, the Issuer shall remit to the
Holder of this Warrant (1) $.01 per Called Warrant Share and (2) a new Warrant representing the
number of shares of Warrant Stock, if any, which shall not have been subject to the Call Notice
upon the Holder tendering to the Issuer the applicable Warrant certificate.

          9. Definitions. For the purposes of this Warrant, the following terms have the
following meanings:

     “Additional Shares of Common Stock” means all shares of Common Stock issued by
the Issuer after the Original Issue Date, and all shares of Other Common, if any, issued by
the Issuer after the Original Issue Date, except: (i) securities issued (other than for
cash) in connection with a merger, acquisition, or consolidation, (ii) securities issued
pursuant to a bona fide firm underwritten public offering of the Issuer’s securities, (iii)
securities issued pursuant to the conversion or exercise of convertible or exercisable
securities issued or outstanding on or prior to the date hereof or issued pursuant to the
Purchase Agreement, (iv) the Warrant Stock, (v) securities issued in connection with bona
fide strategic alliances or other partnering arrangements so long as such issuances are not
for the purpose of raising capital, (vi) Common Stock issued or options to purchase Common
Stock granted or issued pursuant to the Issuer’s stock option plans and employee stock
purchase plans as they now exist and (vii) any warrants issued to the placement agent for
the transactions contemplated by the Purchase Agreement or for

-13-

 

other financial advisory services rendered to the Issuer.

     “Board” shall mean the Board of Directors of the Issuer.

     “Capital Stock” means and includes (i) any and all shares, interests,
participations or other equivalents of or interests in (however designated) corporate stock,
including, without limitation, shares of preferred or preference stock, (ii) all partnership
interests (whether general or limited) in any Person which is a partnership, (iii) all
membership interests or limited liability company interests in any limited liability
company, and (iv) all equity or ownership interests in any Person of any other type.

     “Certificate of Incorporation” means the Certificate of Incorporation of the
Issuer as in effect on the Original Issue Date, and as hereafter from time to time amended,
modified, supplemented or restated in accordance with the terms hereof and thereof and
pursuant to applicable law.

     “Common Stock” means the Common Stock, par value $.001 per share, of the Issuer
and any other Capital Stock into which such stock may hereafter be changed.

     “Common Stock Equivalent” means any Convertible Security or warrant, option or
other right to subscribe for or purchase any Additional Shares of Common Stock or any
Convertible Security.

     “Convertible Securities” means evidences of Indebtedness, shares of Capital
Stock or other Securities which are or may be at any time convertible into or exchangeable
for Additional Shares of Common Stock. The term “Convertible Security” means one of the
Convertible Securities.

     “Governmental Authority” means any governmental, regulatory or self-regulatory
entity, department, body, official, authority, commission, board, agency or instrumentality,
whether federal, state or local, and whether domestic or foreign.

     “Holders” mean the Persons who shall from time to time own any Warrant. The
term “Holder” means one of the Holders.

     “Independent Appraiser” means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of recognized
standing (which may not be the firm that regularly examines the financial statements of the
Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets
of corporations or other entities as going concerns, and which is not affiliated with either
the Issuer or the Holder of any Warrant.

     “Issuer” means Prescient Applied Intelligence, Inc., a Delaware corporation,
and its successors.

     “Majority Holders” means at any time the Holders of Warrants exercisable for a
majority of the shares of Warrant Stock issuable under the Warrants then outstanding.

-14-

 

     “Original Issue Date” means May 4, 2005.

     “OTC Bulletin Board” means the over-the-counter electronic bulletin board.

     “Other Common” means any other Capital Stock of the Issuer of any class which
shall be authorized at any time after the date of this Warrant (other than Common Stock) and
which shall have the right to participate in the distribution of earnings and assets of the
Issuer without limitation as to amount.

     “Outstanding Common Stock” means, at any given time, the aggregate amount of
outstanding shares of Common Stock, assuming full exercise, conversion or exchange (as
applicable) of all options, warrants and other Securities which are convertible into or
exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock that
are outstanding at such time.

     “Person” means an individual, corporation, limited liability company,
partnership, joint stock company, trust, unincorporated organization, joint venture,
Governmental Authority or other entity of whatever nature.

     “Per Share Market Value” means on any particular date (a) the closing bid price
per share of the Common Stock on such date on the OTC Bulletin Board or another registered
national stock exchange on which the Common Stock is then listed, or if there is no such
price on such date, then the closing bid price on such exchange or quotation system on the
date nearest preceding such date, or (b) if the Common Stock is not listed then on the OTC
Bulletin Board or any registered national stock exchange, the closing bid price for a share
of Common Stock in the over-the-counter market, as reported by the OTC Bulletin Board or in
the National Quotation Bureau Incorporated or similar organization or agency succeeding to
its functions of reporting prices) at the close of business on such date, or (c) if the
Common Stock is not then reported by the OTC Bulletin Board or the National Quotation Bureau
Incorporated (or similar organization or agency succeeding to its functions of reporting
prices), then the average of the “Pink Sheet” quotes for the relevant conversion period, as
determined in good faith by the holder, or (d) if the Common Stock is not then publicly
traded the fair market value of a share of Common Stock as determined by an Independent
Appraiser selected in good faith by the Majority Holders; provided, however,
that the Issuer, after receipt of the determination by such Independent Appraiser, shall
have the right to select an additional Independent Appraiser, in which case, the fair market
value shall be equal to the average of the determinations by each such Independent
Appraiser; and provided, further that all determinations of the Per Share
Market Value shall be appropriately adjusted for any stock dividends, stock splits or other
similar transactions during such period. The determination of fair market value by an
Independent Appraiser shall be based upon the fair market value of the Issuer determined on
a going concern basis as between a willing buyer and a willing seller and taking into
account all relevant factors determinative of value, and shall be final and binding on all
parties. In determining the fair market value of any shares of Common Stock, no
consideration shall be given to any restrictions on

-15-

 

transfer of the Common Stock imposed by agreement or by federal or state securities
laws, or to the existence or absence of, or any limitations on, voting rights.

     “Purchase Agreement” means the Common Stock and Warrant Purchase Agreement
dated as of April ___, 2005 among the Issuer and the Purchasers.

     “Purchasers” means the purchasers of Common Stock and Warrants issued by the
Issuer pursuant to the Purchase Agreement.

     “Securities” means any debt or equity securities of the Issuer, whether now or
hereafter authorized, any instrument convertible into or exchangeable for Securities or a
Security, and any option, warrant or other right to purchase or acquire any Security.
“Security” means one of the Securities.

     “Securities Act” means the Securities Act of 1933, as amended, or any similar
federal statute then in effect.

     “Subsidiary” means any corporation at least 50% of whose outstanding Voting
Stock shall at the time be owned directly or indirectly by the Issuer or by one or more of
its Subsidiaries, or by the Issuer and one or more of its Subsidiaries.

     “Term” has the meaning specified in Section 1 hereof.

     “Trading Day” means (a) a day on which the Common Stock is traded on the OTC
Bulletin Board, or (b) if the Common Stock is not listed on the OTC Bulletin Board, a day on
which the Common Stock is traded on any other registered national stock exchange, or (c) if
the Common Stock is not traded on any other registered national stock exchange, a day on
which the Common Stock is traded on the OTC Bulletin Board, or (d) if the Common Stock is
not traded on the OTC Bulletin Board, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau Incorporated (or any
similar organization or agency succeeding its functions of reporting prices);
provided, however, that in the event that the Common Stock is not listed or
quoted as set forth in (a), (b) and (c) hereof, then Trading Day shall mean any day except
Saturday, Sunday and any day which shall be a legal holiday or a day on which banking
institutions in the State of New York are authorized or required by law or other government
action to close.

     “Voting Stock” means, as applied to the Capital Stock of any corporation,
Capital Stock of any class or classes (however designated) having ordinary voting power for
the election of a majority of the members of the Board of Directors (or other governing
body) of such corporation, other than Capital Stock having such power only by reason of the
happening of a contingency.

     “Warrants” means the Warrants issued and sold pursuant to the Purchase
Agreement, including, without limitation, this Warrant, and any other warrants of like tenor
issued in substitution or exchange for any thereof pursuant to the provisions of Section
2(c), 2(d) or 2(e) hereof or of any of such other Warrants.

-16-

 

     “Warrant Price” initially means U.S. $0.50, as such price may be adjusted from
time to time as shall result from the adjustments specified in this Warrant, including
Section 4 hereto.

     “Warrant Share Number” means at any time the aggregate number of shares of
Warrant Stock which may at such time be purchased upon exercise of this Warrant, after
giving effect to all prior adjustments and increases to such number made or required to be
made under the terms hereof.

     “Warrant Stock” means Common Stock issuable upon exercise of any Warrant or
Warrants or otherwise issuable pursuant to any Warrant or Warrants.

          10. Other Notices. In case at any time:

	 	(A)	 	the Issuer shall make any
distributions to the holders of Common Stock; or
	 
	 	(B)	 	the Issuer shall authorize the
granting to all holders of its Common Stock of rights to
subscribe for or purchase any shares of Capital Stock of any
class or other rights; or
	 
	 	(C)	 	there shall be any
reclassification of the Capital Stock of the Issuer; or
	 
	 	(D)	 	there shall be any capital
reorganization by the Issuer; or
	 
	 	(E)	 	there shall be any (i)
consolidation or merger involving the Issuer or (ii) sale,
transfer or other disposition of all or substantially all of the
Issuer’s property, assets or business (except a merger or other
reorganization in which the Issuer shall be the surviving
corporation and its shares of Capital Stock shall continue to be
outstanding and unchanged and except a consolidation, merger,
sale, transfer or other disposition involving a wholly-owned
Subsidiary); or
	 
	 	(F)	 	there shall be a voluntary or
involuntary dissolution, liquidation or winding-up of the Issuer
or any partial liquidation of the Issuer or distribution to
holders of Common Stock;

then, in each of such cases, the Issuer shall give written notice to the Holder of the date on
which (i) the books of the Issuer shall close or a record shall be taken for such dividend,
distribution or subscription rights or (ii) such reorganization, reclassification, consolidation,
merger, disposition, dissolution, liquidation or winding-up, as the case may be, shall take place.
Such notice also shall specify the date as of which the holders of Common Stock of record shall
participate in such dividend, distribution or subscription rights, or shall be entitled to exchange
their

-17-

 

certificates for Common Stock for securities or other property deliverable upon such
reorganization, reclassification, consolidation, merger, disposition, dissolution, liquidation or
winding-up, as the case may be. Such notice shall be given at least twenty (20) days prior to the
action in question and not less than ten (10) days prior to the record date or the date on which
the Issuer’s transfer books are closed in respect thereto. This Warrant entitles the Holder to
receive copies of all financial and other information distributed or required to be distributed to
the holders of the Common Stock.

          11. Amendment and Waiver. Any term, covenant, agreement or condition in this Warrant
may be amended, or compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), by a written instrument or written instruments executed
by the Issuer and the Majority Holders; provided, however, that no such amendment
or waiver shall reduce the Warrant Share Number, increase the Warrant Price, shorten the period
during which this Warrant may be exercised or modify any provision of this Section 11 without the
consent of the Holder of this Warrant. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of this Warrant unless the same
consideration is also offered to all holders of the Warrants.

          12. Governing Law. This Warrant shall be governed by and construed in accordance with
the internal laws of the State of New York, without giving effect to any of the conflicts of law
principles which would result in the application of the substantive law of another jurisdiction.

          13. 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 earlier of (i) the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified for notice prior to 5:00 p.m., eastern time,
on a Trading Day, (ii) the Trading Day after the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number specified for notice
later than 5:00 p.m., eastern time, on any date and earlier than 11:59 p.m., eastern time, on such
date, (iii) the Trading Day following the date of mailing, if sent by nationally recognized
overnight courier service or (iv) actual receipt by the party to whom such notice is required to be
given. The addresses for such communications shall be with respect to the Holder of this Warrant
or of Warrant Stock issued pursuant hereto, addressed to such Holder at its last known address or
facsimile number appearing on the books of the Issuer maintained for such purposes, or with respect
to the Issuer, addressed to:

Prescient Applied Intelligence, Inc.

1247 Ward Avenue, Suite 200

West Chester, Pennsylvania 19380

Attention: Stan Szczygiel

Tel. No.: (610) 719-1600

Fax No.: (610) 719-6161

	 	 	 
	with copies (which copies
	 	 
	shall not constitute notice
	 	 
	to the Issuer) to:

	 	Montgomery, McCracken, Walker & Rhoads, LLP

-18-

 

	 	 	 
	 

	 	123 South Broad Street
	 

	 	Avenue of the Arts
	 

	 	Philadelphia, Pennsylvania 19109
	 

	 	Attention: Kathleen O’Brien
	 

	 	Tel. No.: (215) 772-7288
	 

	 	Fax No.: (215) 772-7620

Copies of notices to the Holder shall be sent to Pillsbury Winthrop Shaw Pittman LLP, 1650 Tysons
Boulevard, Suite 1400, McLean, Virginia 22102-4859, Attention: Alicia A. Prather, Tel No.: (703)
770-7996, Fax No.: (703) 770-7901. Any party hereto may from time to time change its address for
notices by giving at least ten (10) days written notice of such changed address to the other party
hereto.

          14. Warrant Agent. The Issuer may, by written notice to each Holder of this Warrant,
appoint an agent having an office in New York, New York for the purpose of issuing shares of
Warrant Stock on the exercise of this Warrant pursuant to subsection (b) of Section 2 hereof,
exchanging this Warrant pursuant to subsection (d) of Section 2 hereof or replacing this Warrant
pursuant to subsection (d) of Section 3 hereof, or any of the foregoing, and thereafter any such
issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.

          15. Remedies. The Issuer stipulates that the remedies at law of the Holder of this
Warrant in the event of any default or threatened default by the Issuer in the performance of or
compliance with any of the terms of this Warrant are not and will not be adequate and that, to the
fullest extent permitted by law, such terms may be specifically enforced by a decree for the
specific performance of any agreement contained herein or by an injunction against a violation of
any of the terms hereof or otherwise.

          16. Successors and Assigns. This Warrant and the rights evidenced hereby shall inure
to the benefit of and be binding upon the successors and assigns of the Issuer, the Holder hereof
and (to the extent provided herein) the Holders of Warrant Stock issued pursuant hereto, and shall
be enforceable by any such Holder or Holder of Warrant Stock.

          17. Modification and Severability. If, in any action before any court or agency
legally empowered to enforce any provision contained herein, any provision hereof is found to be
unenforceable, then such provision shall be deemed modified to the extent necessary to make it
enforceable by such court or agency. If any such provision is not enforceable as set forth in the
preceding sentence, the unenforceability of such provision shall not affect the other provisions of
this Warrant, but this Warrant shall be construed as if such unenforceable provision had never been
contained herein.

          18. Headings. The headings of the Sections of this Warrant are for convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

-19-

 

     IN WITNESS WHEREOF, the Issuer has executed this Warrant as of the day and year first above
written.

	 	 	 	 	 
	 	PRESCIENT APPLIED INTELLIGENCE, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 

-20-

 

EXERCISE FORM

PRESCIENT APPLIED INTELLIGENCE, INC.

The undersigned                     , pursuant to the provisions of the within Warrant, hereby elects to
purchase ___shares of Common Stock of Prescient Applied Intelligence, Inc. covered by the within
Warrant.

	 	 	 	 	 	 	 
	Dated:

	 	 
	 	Signature
	 	 
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	Address
	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 

ASSIGNMENT

FOR VALUE RECEIVED,                      hereby sells, assigns and transfers unto                     
the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint
___, attorney, to transfer the said Warrant on the books of the within named corporation.

	 	 	 	 	 	 	 
	Dated:

	 	 
	 	Signature
	 	 
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	Address
	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 

PARTIAL ASSIGNMENT

FOR VALUE RECEIVED,                      hereby sells, assigns and transfers unto                     
the right to purchase ___shares of Warrant Stock evidenced by the within Warrant together
with all rights therein, and does irrevocably constitute and appoint                     , attorney,
to transfer that part of the said Warrant on the books of the within named corporation.

	 	 	 	 	 	 	 
	Dated:

	 	 
	 	Signature
	 	 
	 

	 	 
	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	 	 	Address
	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	 	 	 	 	 

FOR USE BY THE ISSUER ONLY:

This Warrant No. W-___canceled (or transferred or exchanged) this ___day of                     , ___,
shares of Common Stock issued therefor in the name of                     , Warrant No. W-___issued
for ___shares of Common Stock in the name of                     .

-21-JOHN
GROSS EMPLOYMENT AGREEMENT

This Agreement is entered into as of
June 27, 2005 by and between Majesco Entertainment Company (the
"Company"), a Delaware corporation, on the
one hand and John Gross ("Executive"), on the
other hand.

1.    Duties and Scope of Employment.

(a)    Positions and Duties.    During
Executive's Employment (as defined below), Executive will serve
as the Company's Executive Vice President, Chief Financial
Officer ("EVP"). Executive will report
directly to the Company's Chief Executive Officer (the
"CEO"). Executive will render such business
and professional services in the performance of his duties, consistent
with Executive's position as the EVP, as will reasonably be
assigned to him by the CEO and/or the Company's President. The
period of Executive's employment with the Company under this
Agreement will commence on June 21, 2005 (the "Effective
Date") and is referred to herein as
"Employment".

(b)    Obligations.

(I) During
Executive's Employment and except as provided in Section 1(b)(II)
below, Executive agrees that he will (i) devote his full business
efforts and time to the Company, (ii) devote all of his business time
and attention, his best efforts, and apply his skill and ability to
promote the interest of the Company; (iii) carry out his duties in a
professional and competent manner and faithfully serve the Company and
(iv) generally promote the interest of the Company.

(II) The Company may from time to time establish
written rules, regulations and policies and Executive shall faithfully
observe these in the performance of his duties; provided that any such
rules, regulations and policies shall not serve to amend any provisions
of this Agreement. For the duration of his Employment, Executive agrees
not to actively engage in any other incremental new employment,
occupation, or consulting activity for any direct or indirect
remuneration without the prior written approval of the CEO (which
approval will not be unreasonably withheld); provided, however, that
Executive may, without the approval of the CEO, serve in any capacity
with any civic, educational, or charitable organization provided such
services do not interfere with Executive's obligations to the
Company.

2.    At-Will Employment.    Executive and
the Company agree that Executive's Employment constitutes
"at-will" employment. Executive and the
Company acknowledge that this employment relationship may be terminated
at any time, upon written notice to the other party, with or without
Cause (as defined herein) or with or without Good Reason (as defined
herein), at the option either of the Company or Executive. However, as
described in this Agreement, Executive may be entitled to severance
benefits depending upon the circumstances of Executive's
termination of Employment as set forth in Section 6. Upon the
termination of Executive's Employment for any reason, subject to
the terms of this Agreement, Executive will be entitled to payment of
any accrued but unpaid salary, accrued but unused vacation, expense
reimbursements, and other benefits due to Executive through his
termination date under any Company-provided or paid plans, policies,
and arrangements in accordance with and subject to the terms of such
plans, policies and arrangements. Executive agrees to resign from all
positions that he holds with the Company (or any Company affiliates),
immediately following the termination of his Employment for any
reason.

Nothwithstanding the foregoing, in the event Executive
voluntarily terminates his Employment without Good Reason, he must
provide one (1) month prior written notice of termination to the
Company. If Executive terminates his Employment pursuant to the
preceeding sentence, the Company shall have the right at any time
during the one (1)-month notice period to reduce his offices, duties
and responsibilities, or to relieve him of such offices, duties and
responsibilities and to place him on a paid leave-of-absence status,
provided that during such notice period he shall remain a full-time
employee of the Company and shall continue to receive his salary and
all other compensation and other benefits as provided in this
Agreement.

3.    Compensation.

(a)    Base Salary.    As of the Effective Date, the
Company will pay Executive an annual salary of $250,000 as compensation
for his services (the "Base Salary"). The
Base Salary will be paid periodically in accordance with the
Company's normal payroll practices (but no less frequently than
once per month) and be subject to the usual, required withholding.
Executive's salary will be subject to review and any increases
will be made based upon the Company's standard practices.

(b)    Annual Bonus.    For the Company's 2005
fiscal year, the Executive shall be eligible for a target performance
bonus of 50% of his base salary earned from the Effective Date
through October 31, 2005 (the "2005 Bonus").
The actual amount of the 2005 Bonus paid shall be determined by the
Company in its sole discretion but shall be at least $62,500.
Commencing with the annual period November 1, 2005 through October 31,
2006 (the "Annual Period" and where the
Annual Period shall represent the Company's fiscal year) and for
each Annual Period (or portion thereof, it being understood that with
respect to any partial Annual Period hereunder the Annual Bonus shall
be pro-rated based on the number of days in such Annual Period that
Executive was an employee of the Company) thereafter during his
Employment, Executive will be eligible to receive a discretionary bonus
(the "Annual Bonus"). The target Annual Bonus
for each Annual Period shall be 50% of Executive's Base
Salary (with such Base Salary determined as of the end of the
applicable performance period) unless such target bonus percentage is
subsequently increased by the Company. Based on the evaluation by the
Company in its sole and absolute discretion that the Executive achieved
some or all of the goals established by the Company in its sole and
absolute discretion (the "Established Goals")
for such Annual Period, the Company shall determine in its sole and
absolute discretion the amount of the Annual Bonus that will be paid to
Executive, provided, however, Executive will be given the opportunity
to provide to the CEO his own evaluation of the achievement of such
Established Goals. Executive may also provide his own input with
respect to what objectives should constitute the Established Goals but
the actual determination of the Established Goals shall be decided by
the Company in its sole and absolute discretion, Notwithstanding the
foregoing, for fiscal year 2006, Executive shall receive a minimum
Annual Bonus of at least $62,500. The 2005 Bonus and any subsequent
year's Annual Bonus shall be paid to Executive within ninety (90)
days after the end of the Annual Period and is subject to Executive
being a Company employee and on working status with the Company through
the last day of the applicable Annual Period.

(c)    Equity Compensation.

(I)
Within fifteen days after the Effective Date, Executive will be granted
a non-qualified stock option pursuant to the Company's Amended
and Restated 2004 Employee, Director and Consultant Incentive Plan (the
"Stock Plan") to purchase 100,000 shares of
Company's common stock (the "Time Vested
Option"). The Time Vested Option will be granted pursuant
to an effective registration statement, under the Securities Act of
1933, that is filed with the Securities and Exchange Commission. The
Time Vested Option (i) will have a per-share exercise price equal to
the fair market value of a Company common share as determined by the
closing trading price of Company common shares on the grant date and
(ii) will vest and become exercisable as to 1/36th of such
share grant amount each month commencing as of the Effective Date,
subject to Executive's continuous
"Service" with the Company. For purposes of
this Agreement, "Service" shall mean
providing service to the Company (or any Company affiliate) as either a
director, employee and/or consultant.

(II) In the
event that Executive's Employment is terminated for Cause by the
Company the unexercised portion of the Time Vested Option at the time
of such termination shall be immediately forfeited and cancelled
without consideration.

(III) Except as otherwise
provided in this Agreement, the Time Vested Option will be subject to
the Company's standard terms and conditions for executive stock
option awards and will be issued pursuant to and consistent with the
terms of the Stock Plan which includes a provision that options may be
exercised in accordance with a cashless exercise program established
with a securities brokerage firm. All stock options granted to
Executive will have a ten-year maximum term and any vested portions of
such options will remain exercisable after 

2

Executive's Employment terminates as
follows, subject to the ten-year term: (i) if Executive's
Employment terminates by the Executive with Good Reason or is
terminated by the Company without Cause the options will remain
exercisable for twelve (12) months, (ii) if Executive's
Employment terminates voluntarily by the Executive without Good Reason
such options, will remain exercisable for three (3) months, (iii) if
Executive's Employment is terminated for Cause by the Company
such options, will be forfeited as soon as the Executive is notified
that he has been terminated for Cause as set forth in the Stock Plan,
and (iv) if Executive's Employment terminates by reason of death
or Disability (as defined in the Stock Plan) such vested options will
remain exercisable for twelve (12) months.

(d)    Vacation.    During his Employment, Executive
shall be eligible for vacation, personal and sick time all in
accordance with applicable Company policies.

(e)    Long-Term Incentive Compensation.    During his
Employment, Executive shall be eligible for grants under the
Company's Long-Term Incentive Compensation Program. Any such
grants will vest if established performance objectives for sales,
profit, among other things, are met. It is expected that such grants
will (i) be in the form of restricted shares and/or stock options, (ii)
have an aggregate grant value approximately worth 80% of annual
Base Salary and (iii) be first implemented in the Company's
fiscal year 2006.

4.    Employee
Benefits.    During his Employment, Executive (and his
dependents as applicable) will be eligible to participate in accordance
with the terms of all Company employee benefit plans (including without
limitation health, medical and dental insurance coverage), policies,
and arrangements that are applicable to other senior executives of
Company, as such plans, policies, and arrangements may exist from time
to time and subject to the terms and conditions of such plans, policies
and arrangements. The Company agrees to pay the cost of the premiums
for $25,000 term life insurance on the life of the Executive during his
Employment. The Executive shall have the right to designate the
beneficiary of such policy or policies. Should the Executive not be
insurable during his Employment, the Company's duty to furnish
such insurance shall be suspended until such time as Executive becomes
insurable during the Employment period.

5.    Expenses.    During Executive's Employment,
the following provisions in this Section 5 shall be applicable:

(a)    Business Expenses.    Company
will reimburse Executive for reasonable travel, entertainment, and
other business expenses incurred by Executive in the furtherance of the
performance of Executive's duties hereunder, in accordance with
the Company's expense reimbursement policy as in effect from time
to time. The Company will pay an allowance of up to $36,000 each fiscal
year (pro-rated for fiscal year 2005) to Executive for costs which are
associated with Executive's travel and where such costs are
validated by receipts and appropriate documentation.

(b)    Transportation.    Company will
pay a monthly allowance of $750 to Executive for costs associated with
the Executive's use of his automobile and for related
transportation expenses.

6.    Severance.

(a)    Termination Without Cause or
Resignation for Good Reason.    If Executive's Employment
is terminated by the Company without Cause or by Executive for Good
Reason, then, subject to Section 7, Executive (or Executive's
heirs or estate in the event of Executive's death after Executive
has become entitled to the following payments and benefits) will
receive from the Company:

(i) subject to Section
6(a)(vi), continued payment of Executive's then Base Salary for a
period of 12 months (the "Continuance
Period") payable in accordance with the Company's
regular payroll practices;

(ii) a cash lump sum
payment, paid at the time the Annual Bonus is generally paid, (but in
no event later than 90 days after the end of the Company's fiscal
year), equal to the then Target Bonus percentage multiplied by
Executive's then Base Salary;

3

(iii) for any such
termination occurring within 90 days after an Annual Period, but prior
to the payment of any Annual Bonus for such Annual Period, an Annual
Bonus with respect to such preceding Annual Period (payable within 90
days following the end of such Annual Period), provided that Executive
would have otherwise received an Annual Bonus if he had remained
employed as of the date of the payment of such Annual Bonus for such
Annual Period;

(iv) reimbursement for any
applicable premiums Executive pays to continue coverage for Executive
and Executive's eligible dependents under the Company's
Group Health benefit plans under COBRA for a period of eighteen months,
or, if earlier, until Executive is eligible for similar benefits from
another employer (all provided Executive validly elects to continue
coverage under applicable law);

(v) Executive
will be paid any accrued but unpaid salary, accrued but unused
vacation, expense reimbursements and other benefits due to Executive
through his termination date under any Company-provided or paid plans,
policies, and arrangements in accordance with and subject to the terms
of such plans, policies and arrangements; and

(vi) if a termination of employment described in
this Section 6(a) occurs within 12 months after a Change in Control,
then (x) Executive's stock options (or other unvested
compensatory equity) shall all be immediately and fully vested and
exercisable and (y) the payment specified in Section 6(a)(i) will
instead be paid in a single cash lump sum payment to Executive within
10 days after the effective date of the separation agreement and
release of claims referenced in Section 7(a).

(b)    Voluntary Termination without Good
Reason.    If Executive's Employment terminates
voluntarily by Executive without Good Reason, then, subject to the
terms of this Agreement (including Section 3 (c)): (i) all further
vesting of Executive's outstanding equity awards will terminate
immediately; (ii) all payments of compensation by the Company to
Executive hereunder will terminate immediately; (iii) Executive will be
paid any accrued but unpaid salary, accrued but unused vacation,
expense reimbursements and other benefits due to Executive through his
termination date under any Company-provided or paid plans, policies,
and arrangements in accordance with and subject to the terms of such
plans, policies and arrangements; and (iv) Executive will not be
eligible for severance benefits under this Agreement or otherwise.

(c)    Termination for Cause.    If
Executive's Employment is terminated for Cause by the Company,
then, subject to the terms of this Agreement (including Section 3 (c))
(1) all of Executive's vested and unvested outstanding stock
options will be forfeited and cancelled without consideration as soon
as Executive is notified that he has been terminated for Cause, (ii)
all payments of compensation by the Company to Executive hereunder will
terminate immediately, (iii) Executive will be paid any accrued but
unpaid salary, accrued but unused vacation, expense reimbursements and
other benefits due to Executive through his termination date under any
Company-provided or paid plans, policies, and arrangements in
accordance with and subject to the terms of such plans, policies and
arrangements, and (iv) Executive will not be eligible for severance
benefits under this Agreement or otherwise.

(d)    Termination due to Death or
Disability.    If Executive's Employment terminates by
reason of death or Disability (as defined in the Stock Plan), then (1)
Executive will be paid any accrued but unpaid salary, accrued but
unused vacation, expense reimbursements and other benefits due to
Executive through his termination date under any Company-provided or
paid plans, policies, and arrangements and will be entitled to receive
benefits only in accordance with the Company's then applicable
plans, policies, and arrangements, and (ii) subject to Section 3(c),
Executive's outstanding equity awards will be governed in
accordance with the terms and conditions of this Agreement and the
applicable award agreement(s).

(e)    Sole
Right to Severance.    This Agreement is intended to represent
Executive's sole entitlement to severance payments and benefits
in connection with the termination of his 

4

Employment. To the extent Executive receives
severance or similar payments and/or benefits under any other Company
plan, program, agreement, policy, practice, or the like (including
without limitation any change in control arrangements), severance
payments and benefits due to Executive under this Agreement will be
correspondingly reduced (and vice-versa).

(f)    Change in Control of
Company.    The Company is evaluating the prospective
implementation of Change in Control arrangements for certain selected
key executives. If, and to the extent that, the Company's Board
of Directors (or committee of such Board of Directors) adopts any such
Change in Control arrangements, Executive will be a participant in
those arrangements.

(g)    Section 280G
Excise Tax.    If any payment or benefit Executive would receive
(whether or not Executive's employment is or has been
terminated), but determined without regard to any additional payment
required under this Section 6(g), (collectively, the
"Payment") would (x) constitute a
"parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code"), and (y) be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties
payable with respect to such excise tax (such excise tax, together with
any such interest and penalties, are hereinafter collectively referred
to as the "Excise Tax"), then Executive will
be entitled to receive from the Company an additional payment (the
"Gross-Up Payment," and any iterative
payments pursuant to this paragraph also shall be
"Gross-Up Payments") in an amount that shall
fund the payment by Executive of any Excise Tax on the Payment, as well
as all income and employment taxes on the Gross-Up Payment, any Excise
Tax imposed on the Gross-Up Payment and any interest or penalties
imposed with respect to income and employment taxes imposed on the
Gross-Up Payment. For this purpose, all income taxes will be assumed to
apply to Executive at the highest marginal rate. Any Gross-Up Payment
shall be paid to Executive, or for his benefit, within 15 days
following receipt by the Company of the report of the accounting firm
described below.

The accounting firm engaged by the Company for
general audit purposes as of the day prior to the effective date of the
Change in Control shall perform the foregoing calculations. If the
accounting firm so engaged by the Company is also serving as accountant
or auditor for the individual, entity or group which will control the
Company upon the occurrence of a Change in Control, the Company shall
appoint a nationally recognized accounting firm other than the
accounting firm engaged by the Company for general audit purposes to
make the determinations required hereunder. The Company shall bear all
expenses with respect to the determinations by such accounting firm
required to be made hereunder.

The accounting firm engaged to
make the determinations hereunder shall provide its calculations,
together with detailed supporting documentation, to the Company and
Executive within thirty calendar days after the date on which such
accounting firm has been engaged to make such determinations or such
other time as requested by the Company or Executive. If the accounting
firm determines that no Excise Tax is payable with respect to a
Payment, it shall furnish the Company and Executive with an opinion
reasonably acceptable to Executive that no Excise Tax will be imposed
with respect to such Payment. Any good faith determinations of the
accounting firm made hereunder shall be final, binding, and conclusive
upon the Company and Executive.

Executive shall notify the
Company in writing of any claim by the Internal Revenue Service that,
if successful, would require the payment of a Gross-Up Payment. Such
notice shall be given as soon as practicable after Executive knows of
such claim and shall apprise the Company of the nature of the claim and
the date on which the claim is requested to be paid. Executive agrees
not to pay the claim until the expiration of the thirty-day period
following the date on which Executive notifies the Company, or such
shorter period ending on the date the taxes with respect to such claim
are due (the "Notice Period"). If the Company
notifies the Executive in writing prior to the expiration of the Notice
Period that it desires to contest the claim, Executive shall: (i) give
the Company any information reasonably requested by the Company
relating to the claim; (ii) take action in connection with the claim as
the Company may reasonably request, including, without limitation,
accepting legal representation with respect to such claim by an
attorney reasonably selected by the Company and 

5

reasonably acceptable to Executive; (iii)
cooperate with the Company in good faith in contesting the claim; and
(iv) permit the Company to participate in any proceedings relating to
the claim. Executive shall permit the Company to control all
proceedings related to the claim and, at its option, permit the Company
to pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such
claim. If requested by the Company, Executive agrees either to pay the
tax claimed and sue for a refund or contest the claim in any
permissible manner and to prosecute such contest to a determination
before any administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts as the Company shall determine;
provided, however, that, if the Company directs Executive to pay
such claim and pursue a refund, the Company shall advance the amount of
such payment to Executive on an after-tax and interest-free basis (the
"Advance"). The Company's control of
the contest related to the claim shall be limited to the issues related
to the Gross-Up Payment and Executive shall be entitled to settle or
contest, as the case may be, any other issues raised by the Internal
Revenue Service or other taxing authority. If the Company does not
notify Executive in writing prior to the end of the Notice Period of
its desire to contest the claim, the Company shall pay to Executive an
additional Gross-Up Payment in respect of the excess parachute payments
that are the subject of the claim, and Executive agrees to pay the
amount of the Excise Tax that is the subject of the claim to the
applicable taxing authority in accordance with applicable law.

If, after receipt by Executive of an Advance, Executive becomes
entitled to a refund with respect to the claim to which such Advance
relates, Executive shall pay the Company the amount of the refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after receipt by Executive of an Advance, a
determination is made that Executive shall not be entitled to any
refund with respect to the claim and the Company does not promptly
notify Executive of its intent to contest the denial of refund, then
the amount of the Advance shall not be required to be repaid by
Executive and the amount thereof shall offset the amount of the
additional Gross-Up Payment then owing to Executive.

7.    Conditions to Receipt of Severance; No Duty to
Mitigate.

(a)    Separation Agreement and Release of
Claims.    The receipt of any severance pursuant to Section 6
will be subject to Executive signing and not revoking a separation
agreement and release of claims in a form acceptable to the Company,
which includes a general release in favor of the Company and its
affiliates together with their respective officers, directors,
stockholders, employees, agents and successors and assigns from any and
all claims Executive may have against them including but not limited
to, arising from Executive's Employment and/or termination of
Employment. The aforementioned general release shall not include a
waiver of claims against the stockholders, employees or agents of the
Company that do not arise out of or relate to Executive's
Employment. In the event Executive breaches the provisions of Section 8
of this Agreement, in addition to any other remedies of law or in
equity, the Company may cease making any payments or benefits to which
Executive otherwise may be entitled to under Section 6. No severance
will be paid or provided until the separation agreement and release
agreement becomes effective.

(b)    No Duty to
Mitigate.    Executive will not be required to mitigate the
amount of any payment contemplated by this Agreement, nor will any
earnings that Executive may receive from any other source reduce any
such payment.

8.    Confidential and Proprietary
Information; Non-Competition; Non-Solicitation.

(a)    Confidentiality.    Except in the performance of
Executive's duties hereunder, at no time during Executive's
Employment or any time thereafter, shall Executive, individually or
jointly with others, for his benefit of the benefit of any third party,
publish, disclose, use or authorize anyone else to publish, disclose or
use, any secret or confidential and proprietary information relating to
any aspect of the business or operations of the Company, including,
without limitation, any trade secrets, customer lists and programs,
manuals and forms, customer files, financial data, employee-related
information, marketing or business plans, suppliers, trade or
industrial practices of the Company, and any Company information
concerning purchasing, finances, accounting, engineering, methods,
processes, compositions, technology, formulas, electronic information
processing procedures (including 

6

computer software), research and development
programs, potential client lists, marketing, affiliations, sales and
inventions. Executive acknowledges and agrees that such information is
a valuable asset of the Company and is the Company's sole and
exclusive property. Upon the termination of Executive's
employment, regardless of the reason for or circumstances giving rise
to such termination or at any other time at the request of the Company,
Executive shall immediately return to the Company all of the property
of the Company, including all such confidential and proprietary
information, in his possession or control and Executive agrees not to
retain any copies, duplicates, reproductions or excerpts in whatsoever
form of any Company property.

(b)    Non-Competition/Non-Solicitation.

(i) In the course of Executive's employment
with the Company, he will acquire and have access to confidential or
proprietary information concerning the Company. Furthermore, his
position as EVP of the Company places him in a position of confidence
and trust with the clients and employees of the Company. Executive also
acknowledges that the clients serviced by the Company are located
throughout the world and accordingly, it is reasonable that the
restrictive covenants set forth below are not limited by specific
geographic area but by the location of the Company's clients. He
further acknowledges that the rendering of services to the
Company's clients necessarily requires the disclosure of
confidential information and trade secrets of the Company and its
subsidiaries (such as without limitation, marketing plans, budgets,
designs, client preferences and policies, and identity of appropriate
personnel of clients with sufficient authority to influence a shift in
suppliers.) Executive and the Company agree that in the course of
Executive's Employment, he will develop a personal
acquaintanceship and relationship with the Company's clients, and
knowledge of those clients' affairs and requirements which may
constitute the Company's primary or only contact with such
clients. Executive acknowledges that the Company's relationships
with its established clientele may therefore be placed in his hands in
confidence and trust. Executive consequently agrees that it is
reasonable and necessary for the protection of the goodwill and
business of the Company that he makes the covenants contained herein;
and accordingly, Executive agrees that while he is in the
Company's employ and for a one year period (and in the case of
Section 8(b)(i)(b), a two-year period) after the termination of his
employment for any reason whatsoever, he shall not directly or
indirectly except on behalf of the Company:

a)
attempt in any manner to solicit from any client (as hereinafter
defined) business of the type performed by the Company or to persuade
any client of the Company to cease to do business or to reduce the
amount of business which any such client has customarily done or, to
the best of Executive's knowledge, that is likely to do with the
Company (as of the date of termination of employment), whether or not
the relationship between the Company and such client was originally
established in whole or in part through his efforts; or

b) employ (including to retain, engage or conduct
business with) or attempt to employ or assist anyone else to employ any
person who is then or at any time during the preceding year was in the
Company's employ; or

c) render any
services of the type rendered by the Company to its clients to or for
any client of the Company; provided, however, that this Section
8(b)(i)(c) shall not prevent Executive from becoming employed by a
client; or

d) perform services that compete with
the business or businesses conducted by the Company or any of its
affiliates (or which business the Company can at the time of
Executive's termination of employment establish it will likely
conduct within one (1) year following the date of his termination;
provided that Executive participated in the planning or development of
any such new business).

As used in this Section 8(b), the term
"Company" shall include subsidiaries of the
Company and the term "client" shall mean (I)
anyone who is a client of the Company at the time of the termination of
Executive's employment with the Company or, if Executive's
employment shall not have terminated, at the time of the alleged
prohibited conduct; (2) anyone who was a client at any time

7

during the two year period immediately
preceding the termination of Executive's employment with the
Company or, if Executive's employment shall not have terminated,
during the two year period immediately preceding the date of the
alleged prohibited conduct; and (3) any prospective clients to whom the
Company had made a presentation (or similar offering of services)
within the one year period immediately preceding the termination of
Executive's employment with the Company or if Executive's
employment shall not have terminated, within the one year period
immediately preceding the date of the alleged prohibited conduct.

(c)    Injunctive Relief.    Executive acknowledges
that a breach or threatened breach of any of the terms set forth in
this Section 8 shall result in an irreparable and continuing harm to
the Company for which there shall be no adequate remedy of law. The
Company shall, without posting a bond, be entitled to obtain injunctive
and other equitable relief, in addition to any other remedies available
to the Company.

(d)    Survival of Terms;
Representations.    Executive's and Company's
obligations under this Section 8 hereof shall remain in full force and
effect notwithstanding the termination of Executive's employment.
Executive acknowledges that he is sophisticated in business, and that
the restrictions and remedies set forth in this Section 8 do not create
an undue hardship on him and will not prevent him from earning a
livelihood. Executive and the Company agree that the restrictions and
remedies contained in this Section 8 are reasonable and necessary to
protect the Company's legitimate business interests regardless of
the reason for or circumstances giving rise to termination of
Executive's employment and that Executive and the Company intend
that such restrictions and remedies shall be enforceable to the fullest
extent permissible by law. If it shall be found by a court of competent
jurisdiction that any such restriction or remedy is unenforceable but
would be enforceable if some part thereof were deleted or modified,
then such restriction or remedy shall apply with such modification as
shall be necessary to make it enforceable to the fullest extent
permissible under law.

9.    Intellectual
Property.    Executive expressly understands and agrees that any
and all improvements, inventions, discoveries, processes, know-how or
other intellectual property (including without limitation patents,
licenses, copyrights, trade names, trademarks, assumed names and
service marks and applications therefor, marketing and advertising
campaigns, logos and slogans, designs and software programs) developed,
conceived or created by him in the course of his employment with the
Company, either individually or in collaboration with others, and
whether or not during normal working hours or on the premises of the
Company (collectively, "Developments") shall
be, as between Executive and the Company, the sole and absolute
property of the Company, and he will, whenever requested to do so
(either during Executive's Employment or thereafter), execute and
assign any and all applications, assignments and/or other instruments
and do all things which the Company may deem necessary or appropriate
in order to apply for, obtain, maintain, enforce and defend patents,
copyrights, trade names or trademarks of the United States or of
foreign countries for said Developments, or in order to assign and
convey or otherwise make available to the Company the sole and
exclusive right, title, and interest in and to said Developments
(provided that where Executive is providing assistance to the Company
pursuant to this Section 9 after Executive's employment has
terminated, the Company shall reimburse Executive for any pre-approved
reasonable out of pocket expenses). Executive agrees to make full and
prompt disclosure to the Company of all Developments conceived or
created by him during his employment with the Company.

10.    Definitions.

(a)    Benefit
Plans.    For purposes of this Agreement, "Benefit
Plans" means plans, policies, or arrangements that Company
sponsors (or participates in) and that immediately prior to
Executive's termination of employment provide Executive and
Executive's eligible dependents with medical, dental, or vision
benefits. Benefit Plans do not include any other type of benefit
(including, but not by way of limitation, financial counseling,
disability, life insurance, or retirement benefits).

(b)    Cause.    For purposes of this Agreement,
"Cause" means (i) Executive's act of
dishonesty or fraud in connection with the performance of his
responsibilities to the Company with the intention that such act result
in Executive's substantial personal enrichment, (ii)
Executive's conviction of, or pleas of nolo contendere to, a
felony, (iii) Executive's willful failure to follow lawful,
reasonable 

8

instructions of the CEO or President, (iv)
Executive's willful misconduct provided such misconduct is
injurious to the Company, or (v) Executive's violation or breach
of any fiduciary or contractual duty to the Company which results in
material damage to the Company or its business; provided that if any of
the foregoing events is capable of being cured, the Company will
provide written notice to Executive describing the specific nature of
such event and Executive will thereafter have 20 days to cure such
event. During any cure period, Executive will continue to receive all
of the compensation and benefits provided under this Agreement;
provided, however, that Executive may not exercise any of his
outstanding stock options (or any other unexercised Company equity
awards) unless and until he cures the events or items in question to
the Company's satisfaction. The date of termination of employment
for Cause shall be (x) the 21st day after notice was provided to the
Executive if the event(s) in question is/are not cured to the
Company's satisfaction or (y) the date that notice was provided
to the Executive if the event(s) is/are not capable of being cured
including without limitation an occurrence of subsection 10(b)(ii). For
purposes of this Section 10(b), no lawful act or failure to act will be
considered "willful" unless the act or
failure to act was committed/omitted by Executive without a reasonable,
good faith belief that it was in the best interests of the Company
and/or was inconsistent with prior direction of the CEO or President or
Company policy.

(c)    Change in Control.    For
purposes of this Agreement, a "Change in
Control" means the occurrence of any of the following
events:

(i) Ownership. Any
"Person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended)
becomes the "Beneficial Owner" (as defined in
Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing 50% or more of the total voting power
represented by the Company's then outstanding voting securities
(excluding for this purpose the Company or its Affiliates or any
employee benefit plan of the Company) pursuant to a transaction or a
series of related transactions which the Company's Board of
Directors (the "Board") does not approve;
or

(ii) Merger/Sale of Assets. A merger or
consolidation of the Company whether or not approved by the Board,
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity or the parent
of such corporation) at least 50% of the total voting power
represented by the voting securities of the Company or such surviving
entity or parent of such corporation outstanding immediately after such
merger or consolidation, or the stockholders of the Company approve an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or

(iii) Change in Board Composition. A change in the
composition of the Board, as a result of which fewer than a majority of
the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are
directors of the Company as of the Effective Date, or (B) are elected,
or nominated for election, to the Board with the affirmative votes of
at least a majority of the Incumbent Directors at the time of such
election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened
proxy contest relating to the election of directors to the
Company).

(d)    Good Reason.    For purposes of
this Agreement, "Good Reason" means the
occurrence of any of the following without Executive's express
prior written consent: (i) a material reduction in Executive's
position or duties, (ii) a reduction of Executive's Base Salary
or target Annual Bonus percentage other than a reduction that also is
applied to substantially all of the Company's other senior
executives, (iii) a material reduction in the aggregate level of
benefits made available to Executive other than a reduction that also
is applied to substantially all of the Company's other senior
executives, (iv) relocation of Executive's primary place of
business for the performance of his duties to the Company to a location
that its more than 30 miles from its location as of the Effective Date,
unless it is closer to Executive's residence as of the Effective
Date or (v) any material breach or material violation of a material
provision of this Agreement by the Company (or any successor to the
Company); provided that the Executive must provide written notice to
the Company of not more than 

9

thirty (30) days after the occurrence of the
event(s) constituting Good Reason and providing further that if any of
the foregoing events is capable of being cured, the Executive will
provide notice to Company describing the specific nature of such event
and Company will thereafter have 20 days to cure such event.

11.    Indemnification and Insurance.    Executive will
be covered under the Company's insurance policies and, subject to
applicable law, will be provided indemnification to the maximum extent
permitted by the Company's bylaws and Certificate of
Incorporation, with such insurance coverage and indemnification to be
in accordance with the Company's standard practices for senior
executive officers but on terms no less favorable than provided to any
other Company senior executive officer.

12.    Confidential Information.    Executive agrees to
execute the Company's standard form of employee confidential
information agreement (the "Confidential Information
Agreement") upon commencement of employment. During his
Employment, Executive further agrees to execute any updated versions of
the Confidential Information Agreement (any such updated version also
referred to as the "Confidential Information
Agreement") as may be required of substantially all of the
Company's executive officers.

13.    Assignment.    This Agreement will be binding
upon and inure to the benefit of (a) the heirs, executors, and legal
representatives of Executive upon Executive's death and (b) any
successor of the Company. Any such successor of the Company will be
deemed substituted for the Company under the terms of this Agreement
for all purposes. Any successor will expressly assume in writing all of
the Company's obligations under this Agreement. For this purpose,
"successor" means any person, firm,
corporation, or other business entity which at any time, whether by
purchase, merger, or otherwise, directly or indirectly acquires all or
substantially all of the assets or business of the Company. None of the
rights of Executive to receive any form of compensation payable
pursuant to this Agreement may be assigned or transferred except by
will or the laws of descent and distribution. Any other attempted
assignment, transfer, conveyance, or other disposition of
Executive's right to compensation or other benefits will be null
and void.

14.    Notices.    All notices, requests,
demands, and other communications called for hereunder will be in
writing and will be deemed given (a) on the date of delivery if
delivered personally, (b) one day after being sent by a well
established commercial overnight service, or (c) four days after being
mailed by registered or certified mail, return receipt requested,
prepaid and addressed to the parties or their successors at the
following addresses, or at such other addresses as the parties may
later designate in writing:

If to the Company:

Majesco Entertainment Company
 P.O. Box 6570

Edison, NJ 08818

		
	Attn: 	Chief
Executive Officer
 Majesco Entertainment Company

If to
Executive:

John Gross

at the last residential
address known by the Company as provided by Executive in writing.

15.    Severability; Obligations.    If any provision
hereof becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable, or void, this Agreement will continue in
full force and effect without said provision.

16.    Arbitration.

(a) If any dispute arises
between the Company and Executive that the parties cannot resolve
themselves, including any dispute over the application, validity,
construction, or interpretation of this Agreement, arbitration in
accordance with the then-applicable National Rules for the Resolution
of 

10

Employment disputes of the American
Arbitration Association shall provide the exclusive remedy for
resolving any such dispute, regardless of its nature; provided,
however, the Company may enforce Executive's obligations under
Sections 8 and 12 hereof by an action for injunctive relief and damages
in a court of competent jurisdiction.

(b) This Section 16 shall
apply to claims arising under state and federal statutes, local
ordinances, and the common law. The arbitrator shall apply the same
substantive law that a court with jurisdiction over the parties and
their dispute would apply under the terms of this Agreement. The
arbitrator's remedial authority shall equal the remedial power
that a court with jurisdiction over the parties and their dispute would
have. If the then-applicable rules of the American Arbitration
Association conflict with the procedures of this Section 16, the latter
shall apply.

(c) If the parties cannot agree upon an arbitrator,
the parties shall select a single arbitrator from a list of seven
arbitrators provided by the American Arbitration Association
("AAA"). The names of the seven listed
arbitrators shall be derived from the AAA employment law roster. If the
parties cannot agree on selecting an arbitrator from that list, then
the parties shall alternately strike names from the list, with the
first party to strike being determined by lot. After each party has
used three strikes, the remaining name on the list shall be the
arbitrator.

(d) Each party may be represented by counsel or by
another representative of the party's choice and each party shall
pay the costs and fees of its counsel or other representative and its
own filing and administrative fees provided, however, that Executive
will only be responsible to pay those costs and fees which he would
have had to pay for had the disputed matter been initiated in
court.

(e) The arbitrator shall render an award and opinion in
the form typical of those rendered in labor arbitrations, and that
award shall be final and binding and non-appealable except as
specifically provided by law. To the extent that any part of this
Section 16 is found to be legally unenforceable for any reason, that
part shall be modified or deleted in such a manner as to render this
Section 16 (or the remainder of this Section 16) legally enforceable
and as to ensure that except as provided in clause (b) of this Section
16, all conflicts between the Company and Executive shall be resolved
by neutral, binding arbitration. The remainder of this Section 16 shall
not be affected by any such modification or deletion but shall be
construed as severable and independent. If a court finds that the
arbitration procedures of this Section 16 are not absolutely binding,
then the parties intend any arbitration decision to be fully admissible
in evidence, given great weight by any finder of fact, and treated as
determinative to the maximum extent permitted by law.

(f) Unless
the parties agree otherwise, any arbitration shall take place in the
American Arbitration Association's offices in Somerset, New
Jersey.

(g) Executive has read and understands this Section 16,
which discusses arbitration. Executive understands that by signing this
Agreement, Executive agrees to submit any claims arising out of,
relating to, or in connection with this Agreement, or the
interpretation, validity, construction, performance, breach or
termination thereof, or Executive's employment or the termination
thereof, to binding arbitration, and that this arbitration provision
constitutes a waiver of Executive's right to a jury trial and
relates to the resolution of all disputes relating to all aspects of
the employer/employee relationship, including but not limited to the
following:

(i) Any and all claims for wrongful
discharge of employment, breach of contract, both express and implied;
breach of the covenant of good faith and fair dealing, both express and
implied; negligent or intentional infliction of emotional distress;
negligent or intentional misrepresentation; negligent or intentional
interference with contract or prospective economic advantage; and
defamation;

(ii) Any and all claims for
violation of any federal, state or municipal statute, including,
without limitation, Title VII of the Civil Rights Act of 1964, as
amended, the Civil Rights Act of 1991, the Equal Pay Act, the Employee
Retirement Income Security Act, as amended, the Age Discrimination in
Employment Act of 1967, the Americans with Disabilities Act of 1990,
the Family and Medical Leave Act of 1993, the Fair Labor Standards Act,
the New Jersey Family Leave Act, the New Jersey Conscientious Employee
Protection Act and the New Jersey Law Against Discrimination; and

11

(iii)   Any and all
claims arising out of any other federal, state or local laws or
regulations relating to employment or employment discrimination.

(h) Executive (i) understands that other options such as federal and
state administrative remedies and judicial remedies exist and (ii)
knows that by signing this Agreement those remedies are forever
precluded and that regardless of the nature of Executive's
complaint, he knows that it can only be resolved by arbitration.

(i) To the extent Executive asserts a claim that would otherwise
require filing the claim with a governmental agency, Executive may, but
need not, file such claim with the applicable agency (including,
without limitation, the Equal Employment Opportunity Commission), and
if Executive fails to do so, the Company shall not assert a defense of
failure to exhaust administrative remedies.

17.    No
Conflict.    Executive represents and warrants that he is not
subject to any agreement, instrument, order, judgment or decree of any
kind, or any other restrictive agreement of any character, which would
prevent him from entering into this Agreement or which would be
breached by him upon the performance of his duties pursuant to this
Agreement.

18.    Integration.    Except as
otherwise provided herein, this Agreement and the Confidential
Information Agreement represents the entire agreement and understanding
between the parties as to the subject matter herein and supersedes all
prior or contemporaneous agreements whether written or oral. No waiver,
alteration, or modification of any of the provisions of this Agreement
will be binding unless in a writing that specifically references this
Section and is signed by duly authorized representatives of all of the
parties hereto.

19.    Waiver of Breach.    The
waiver of a breach of any term or provision of this Agreement, which
must be in writing signed by all of the parties, will not operate as or
be construed to be a waiver of any other previous or subsequent breach
of this Agreement.

20.    Survival.    The
Confidential Information Agreement, the Company's and
Executive's responsibilities under Sections 3, 6, 7, 8, 9, 11,
12, 16 and Section 18 will survive the termination of this
Agreement.

21.    Headings.    All captions and
section headings used in this Agreement are for convenient reference
only and do not form a part of this Agreement.

22.    Taxes and Withholding.    All payments made
pursuant to this Agreement will be subject to withholding of applicable
taxes. Executive shall be solely responsible for satisfying his tax
liabilities incurred in connection with this Agreement including,
without limitation, any payments and all other obligations, whether for
taxes, interest, penalties or in any other respect whatsoever that are
required as a result of Internal Revenue Code Sections 280G, 409A
and/or 4999. If applicable, the Executive and the Company may jointly
agree to modify certain payments under this Agreement in order to
conform to the requirements of Internal Revenue Code Section 409A.

23.    Governing Law.    This Agreement will be
governed by the laws of the State of New Jersey (with the exception of
its conflict of laws provisions).

24.    Jurisdiction.    The State of New Jersey shall
have exclusive jurisdiction to entertain any legal or equitable action
with respect to Sections 8 or 12 of this Agreement except that the
Company may institute any such suit against Executive in any
jurisdiction in which he may be at the time. In the event suit is
instituted in New Jersey, it is agreed that service of summons or other
appropriate legal process may be effected upon any party by delivery it
has to the last known address.

25.    Acknowledgment.    Executive acknowledges that
he has had the opportunity to discuss this matter with and obtain
advice from his private attorney, has had sufficient time to, and has
carefully read and fully understands all the provisions of this
Agreement, and is knowingly and voluntarily entering into this
Agreement.

26.    Counterparts.    This Agreement
may be executed in counterparts, and each counterpart will have the
same force and effect as an original and will constitute an effective,
binding agreement on the part of each of the undersigned.

12

27.    No Strict
Construction:    The language used in this Agreement will be
deemed to be the language chosen by the Company and Executive to
express the parties' mutual intent, and no rule of law or
contract interpretation that provides that in the case of ambiguity or
uncertainty a provision should be construed against the draftsperson
will be applied against any party.

IN WITNESS WHEREOF, each of
the parties has executed this Agreement, in the case of the Company by
a duly authorized officer, as of the day and year written below.

COMPANY:

Majesco Entertainment Company

By: /s/ Jesse
Sutton        

Title: President
Date: June 27,
2005

		
	EXECUTIVE:  	/s/
John Gross        

John
Gross

Date: 6/10/05

13

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