Document:

Execution
Copy

       

      COMMON
STOCK PURCHASE AGREEMENT

       

      by
and between

       

      KINGSBRIDGE
CAPITAL LIMITED

       

      and

       

      DISCOVERY
LABORATORIES, INC.

       

      dated
as of June 11, 2010

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      TABLE
OF CONTENTS

      

      
        
          
            
              
                	
                        ARTICLE
      I

                      	
                        DEFINITIONS

                      	
                        1

                      
	 
      	 
      	 
      
	
                        ARTICLE
      II

                      	
                        PURCHASE
      AND SALE OF COMMON STOCK

                      	
                        7

                      
	 
      	 
      	 
      
	
                        Section
      2.1

                      	
                        Purchase
      and Sale of Stock

                      	
                        7

                      
	
                        Section
      2.2

                      	
                        Closing

                      	
                        7

                      
	
                        Section
      2.3

                      	
                        Warrant

                      	
                        7

                      
	
                        Section
      2.4

                      	
                        Blackout
      Shares

                      	
                        7

                      
	 
      	 
      	 
      
	
                        ARTICLE
      III

                      	
                        DRAW
      DOWN TERMS

                      	
                        8

                      
	 
      	 
      	 
      
	
                        Section
      3.1

                      	
                        Draw
      Down Notice

                      	
                        8

                      
	
                        Section
      3.2

                      	
                        Supplemental
      Amount

                      	
                        8

                      
	
                        Section
      3.3

                      	
                        Number
      of Shares

                      	
                        8

                      
	
                        Section
      3.4

                      	
                        Limitation
      on Draw Downs

                      	
                        9

                      
	
                        Section
      3.5

                      	
                        Trading
      Cushion

                      	
                        9

                      
	
                        Section
      3.6

                      	
                        Settlement

                      	
                        9

                      
	
                        Section
      3.7

                      	
                        Delivery
      of Shares; Payment of Draw Down Amount.

                      	
                        9

                      
	
                        Section
      3.8

                      	
                        Failure
      to Deliver Shares

                      	
                        10

                      
	 
      	 
      	 
      
	
                        ARTICLE
      IV

                      	
                        REPRESENTATIONS
      AND WARRANTIES OF THE COMPANY

                      	
                        11

                      
	 
      	 
      	
                         
      

                      
	
                        Section
      4.1

                      	
                        Organization,
      Good Standing and Power

                      	
                        11

                      
	
                        Section
      4.2

                      	
                        Authorization;
      Enforcement

                      	
                        11

                      
	
                        Section
      4.3

                      	
                        Capitalization

                      	
                        12

                      
	
                        Section
      4.4

                      	
                        Issuance
      of Shares

                      	
                        12

                      
	
                        Section
      4.5

                      	
                        No
      Conflicts

                      	
                        13

                      
	
                        Section
      4.6

                      	
                        Commission
      Documents, Financial Statements.

                      	
                        14

                      
	
                        Section
      4.7

                      	
                        No
      Material Adverse Change

                      	
                        14

                      
	
                        Section
      4.8

                      	
                        No
      Undisclosed Liabilities

                      	
                        15

                      
	
                        Section
      4.9

                      	
                        No
      Undisclosed Events or Circumstances

                      	
                        15

                      
	
                        Section
      4.10

                      	
                        Actions
      Pending

                      	
                        15

                      
	
                        Section
      4.11

                      	
                        Compliance
      with Law

                      	
                        15

                      
	
                        Section
      4.12

                      	
                        Operation
      of Business.

                      	
                        16

                      
	
                        Section
      4.13

                      	
                        Certain
      Fees

                      	
                        17

                      
	
                        Section
      4.14

                      	
                        Disclosure

                      	
                        17

                      
	
                        Section
      4.15

                      	
                        Material
      Non-Public Information

                      	
                        17

                      
	
                        Section
      4.16

                      	
                        Acknowledgment
      Regarding Investor’s Purchase of Shares

                      	
                        18

                      
	 
      	 
      	 
      
	
                        ARTICLE
      V

                      	
                        REPRESENTATIONS,
      WARRANTIES AND COVENANTS OF THE INVESTOR

                      	
                        18

                      
	 
      	 
      	 
      
	
                        Section
      5.1

                      	
                        Organization
      and Standing of the Investor

                      	
                        18

                      
	
                        Section
      5.2

                      	
                        Authorization
      and Power

                      	
                        18

                      

              

            

          

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      

      
        
          
            
              
                	
                        Section
      5.3

                      	
                        No
      Conflicts

                      	
                        18

                      
	
                        Section
      5.4

                      	
                        Financial
      Capability

                      	
                        19

                      
	
                        Section
      5.5

                      	
                        Information

                      	
                        19

                      
	
                        Section
      5.6

                      	
                        Trading
      Restrictions

                      	
                        19

                      
	
                        Section
      5.7

                      	
                        Not
      an Affiliate

                      	
                        19

                      
	
                        Section
      5.8

                      	
                        Prospectus
      Delivery

                      	
                        20

                      
	 
      	 
      	 
      
	
                        ARTICLE
      VI

                      	
                        COVENANTS
      OF THE COMPANY

                      	
                        20

                      
	 
      	 
      	 
      
	
                        Section
      6.1

                      	
                        Securities
      Compliance

                      	
                        20

                      
	
                        Section
      6.2

                      	
                        Reservation
      of Common Stock

                      	
                        20

                      
	
                        Section
      6.3

                      	
                        Registration
      and Listing

                      	
                        20

                      
	
                        Section
      6.4

                      	
                        Compliance
      with Laws.

                      	
                        21

                      
	
                        Section
      6.5

                      	
                        Other
      Financing

                      	
                        21

                      
	
                        Section
      6.6

                      	
                        Prohibited
      Transactions

                      	
                        22

                      
	
                        Section
      6.7

                      	
                        Corporate
      Existence

                      	
                        22

                      
	
                        Section
      6.8

                      	
                        Non-Disclosure
      of Non-Public Information

                      	
                        22

                      
	
                        Section
      6.9

                      	
                        Notice
      of Certain Events Affecting Registration; Suspension of Right to Request a
      Draw Down

                      	
                        23

                      
	
                        Section
      6.10

                      	
                        Amendments
      to the Registration Statement

                      	
                        23

                      
	
                        Section
      6.11

                      	
                        Prospectus
      Delivery

                      	
                        23

                      
	 
      	 
      	
                         
      

                      
	
                        ARTICLE
      VII

                      	
                        CONDITIONS
      TO THE OBLIGATION OF THE INVESTOR TO ACCEPT A DRAW DOWN

                      	
                        24

                      
	 
      	 
      	 
      
	
                        Section
      7.1

                      	
                        Accuracy
      of the Company’s Representations and Warranties

                      	
                        24

                      
	
                        Section
      7.2

                      	
                        Performance
      by the Company

                      	
                        24

                      
	
                        Section
      7.3

                      	
                        Compliance
      with Law

                      	
                        24

                      
	
                        Section
      7.4

                      	
                        Effective
      Registration Statement

                      	
                        24

                      
	
                        Section
      7.5

                      	
                        No
      Knowledge

                      	
                        24

                      
	
                        Section
      7.6

                      	
                        No
      Suspension

                      	
                        25

                      
	
                        Section
      7.7

                      	
                        No
      Injunction

                      	
                        25

                      
	
                        Section
      7.8

                      	
                        No
      Proceedings or Litigation

                      	
                        25

                      
	
                        Section
      7.9

                      	
                        Sufficient
      Shares Registered for Sale

                      	
                        25

                      
	
                        Section
      7.10

                      	
                        Payment
      of Fees and Expenses

                      	
                        25

                      
	
                        Section
      7.11

                      	
                        Opinion
      of Counsel

                      	
                        25

                      
	
                        Section
      7.12

                      	
                        Accuracy
      of Investor’s Representations and Warranties

                      	
                        25

                      
	
                         
      

                      	 
      	
                         
      

                      
	
                        ARTICLE
      VIII

                      	
                        TERMINATION

                      	
                        25

                      
	 
      	 
      	 
      
	
                        Section
      8.1

                      	
                        Term

                      	
                        25

                      
	
                        Section
      8.2

                      	
                        Other
      Termination; Blackout Periods.

                      	
                        26

                      
	
                        Section
      8.3

                      	
                        Effect
      of Termination

                      	
                        27

                      
	
                         
      

                      	 
      	 
      
	
                        ARTICLE
      IX

                      	
                        INDEMNIFICATION

                      	
                        27

                      
	 
      	 
      	 
      
	
                        Section
      9.1

                      	
                        Indemnification.

                      	
                        27

                      

              

            

          

        

      

      
        
           

        

        
          - ii
-

          
            

          

        

        
           

        

      

      

      
        
          
            	
                    Section
      9.2

                  	
                    Notification
      of Claims for Indemnification

                  	
                    28

                  
	 
      	 
      	 
      
	
                    ARTICLE
      X

                  	
                    MISCELLANEOUS

                  	
                    30

                  
	 
      	 
      	 
      
	
                    Section
      10.1

                  	
                    Fees
      and Expenses.

                  	
                    30

                  
	
                    Section
      10.2

                  	
                    Reporting
      Entity for the Common Stock

                  	
                    30

                  
	
                    Section
      10.3

                  	
                    Brokerage

                  	
                    31

                  
	
                    Section
      10.4

                  	
                    Notices

                  	
                    32

                  
	
                    Section
      10.5

                  	
                    Assignment

                  	
                    33

                  
	
                    Section
      10.6

                  	
                    Amendment;
      No Waiver

                  	
                    33

                  
	
                    Section
      10.7

                  	
                    Entire
      Agreement

                  	
                    33

                  
	
                    Section
      10.8

                  	
                    Title
      and Subtitles

                  	
                    34

                  
	
                    Section
      10.9

                  	
                    Counterparts

                  	
                    34

                  
	
                    Section
      10.10

                  	
                    Choice
      of Law

                  	
                    34

                  
	
                    Section
      10.11

                  	
                    Specific
      Enforcement, Consent to Jurisdiction.

                  	
                    34

                  
	
                    Section
      10.12

                  	
                    Survival

                  	
                    34

                  
	
                    Section
      10.13

                  	
                    Publicity

                  	
                    35

                  
	
                    Section
      10.14

                  	
                    Severability

                  	
                    35

                  
	
                    Section
      10.15

                  	
                    Further
      Assurances

                  	
                    35

                  

          

        

      

      
        
           

        

        
          - iii
-

          
            

          

        

        
           

        

      

      This
COMMON STOCK PURCHASE AGREEMENT (this “Agreement”) is
entered into as of the 11th day of
June, 2010, by and between Kingsbridge Capital Limited, an entity organized and
existing under the laws of the British Virgin Islands, whose business address is
P.O. Box 1075, Elizabeth House, 9 Castle Street, St. Helier, Jersey, Channel
Islands (the “Investor”), and
Discovery Laboratories, Inc. a corporation organized and existing under the laws
of the State of Delaware (the “Company”).

       

      WHEREAS,
the parties desire that, upon the terms and subject to the conditions and
limitations set forth herein, the Company may issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase from the
Company, up to $35 million worth of newly-issued shares of Common Stock (as
defined below); and

       

      WHEREAS,
the offer and sale of the shares of Common Stock hereunder have been registered
by the Company pursuant to the Registration Statement (as defined below), which
has been declared effective by order of the Commission under the Securities Act;
and

       

      WHEREAS,
in consideration for the Investor’s execution and delivery of, and its
performance of its obligations under, this Agreement, the Company is
concurrently issuing to the Investor a Warrant in the form of Exhibit A hereto (the
“Warrant”)
pursuant to which the Investor may purchase from the Company up to 1,250,000
shares of Common Stock, upon the terms and subject to the conditions set forth
therein;

       

      NOW,
THEREFORE, the parties hereto agree as follows:

       

      ARTICLE
I

      DEFINITIONS

       

      As used
in this Agreement, the following terms shall have the meanings set forth
below:

       

      “Adjusted Average
Volume” means the average trading volume of the thirty (30) Trading Days
during the forty (40) Trading Days prior to the issuance of the Draw Down Notice
that results from excluding the five (5) Trading Days with the highest trading
volume during such period and the five (5) Trading Days with the lowest trading
volume during such period; provided, however, that in the event
of any Reverse Split that takes effect during any such forty (40) day measuring
period for which the Company has elected to make a Draw Down using the “Second Methodology” for
determining the “Minimum Obligated Amount,” then the Adjusted Average Volume
shall be further adjusted accordingly to reflect such Reverse
Split.

       

      “Blackout Amount”
shall have the meaning assigned to such term in Section 8.2 hereof.

       

      “Blackout Notice”
shall have the meaning assigned to such term in Section 8.2 hereof.

       

      “Blackout Period”
shall have the meaning assigned to such term in Section 8.2 hereof

       

      “Blackout Shares”
shall have the meaning assigned to such term in Section 8.2 hereof.

       

      “Bylaws” shall have
the meaning assigned to such term in Section 4.3 hereof.

      
        
           

        

        
           

          
            

          

        

        
           

        

      

       

      “Charter” shall have
the meaning assigned to such term in Section 4.3 hereof.

       

      “Closing Date” shall
have the meaning assigned to such term in Section 2.2 hereof.

       

      “Closing Price” as of
any particular Trading Day, means the closing price per share of the Common
Stock as reported by the Principal Market on such day.

       

      “Commission” means the
United States Securities and Exchange Commission.

       

      “Commission Documents”
shall have the meaning assigned to such term in Section 4.6
hereof.

       

      “Commitment Period”
means the period commencing on the Closing Date and expiring on the earliest to
occur of (i) the date on which the Investor shall have purchased Shares
pursuant to this Agreement representing the Maximum Commitment Amount,
(ii) the date this Agreement is terminated pursuant to Article VIII hereof,
and (iii) the date occurring thirty-six (36) months from the Closing
Date.

       

      “Common Stock” means
the common stock of the Company, par value $0.001 per share.

       

      “Condition Satisfaction
Date” shall have the meaning assigned to such term in Article VII
hereof.

       

      “Cure Period” shall
have the meaning specified in Section 3.8.

       

      “Damages” means any
loss, claim, damage, liability, costs and expenses (including, without
limitation, reasonable attorneys’ fees and expenses and costs and reasonable
expenses of expert witnesses and investigation).

       

      “Draw Down” shall have
the meaning assigned to such term in Section 3.1 hereof.

       

      “Draw Down Amount”
means the aggregate dollar amount of a Draw Down, including the Minimum
Obligated Amount plus
the Supplemental Amount (if any).

       

      “Draw Down Notice”
shall have the meaning assigned to such term in Section 3.1 hereof.

       

      “Draw Down Pricing
Period” means, with respect to each Draw Down, a period of eight (8)
consecutive Trading Days beginning on the first Trading Day specified in a Draw
Down Notice.

       

      “DTC” means the
Depository Trust Company, or any successor thereto.

       

      “EST” means Eastern
Standard Time in the United States.

       

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

       

      “FDA” shall have the
meaning specified in Section 4.12.

       

      
        
           

        

        
          - 2
-

          
            

          

        

        
           

        

      

       

      “FINRA” means the
United States Financial Industry Regulatory Authority.

       

      “GAAP” shall have the
meaning specified in Section 4.6.

       

      “Governmental
Licenses” shall have the meaning specified in Section 4.12.

       

      “IDEA” shall have the
meaning assigned to such term in Section 4.6.

       

      “Intellectual
Property” shall have the meaning specified in Section 4.12.

       

      “Knowledge” means the
actual knowledge of the Company’s Chief Executive Officer, Chief Financial
Officer, General Counsel or Deputy General Counsel.

       

      “Make Whole Amount”
shall have the meaning specified in Section 3.8.

       

      “Market
Capitalization” means, as of any Trading Day, the product of (i) the
Closing Price multiplied
by (ii) the number of outstanding shares of Common Stock as reported
by Bloomberg L.P. using the DES function.

       

      “Material Adverse
Effect” means any effect that is not negated, corrected, cured or
otherwise remedied within a reasonable period of time on the business,
operations, properties or financial condition of the Company and its
consolidated subsidiaries that is material and adverse to the Company and such
subsidiaries, taken as a whole, and/or any condition, circumstance, or situation
that would prohibit or otherwise interfere with the ability of the Company to
perform any of its obligations under this Agreement in any material respect;
provided, however, that none of the following shall individually constitute a
“Material Adverse
Effect”:  (i) the effects of conditions or events that are
generally applicable to the capital, financial, banking or currency markets or
the biotechnology or pharmaceutical industries; (ii) the effects of conditions
or events that are reasonably expected to occur in the Company’s ordinary course
of business (such as, by way of example only, failed clinical trials, serious
adverse events involving the Company’s product candidates or products, delays in
product development or commercial launch, unfavorable regulatory determinations,
difficulties in generating product sales or involving collaborators or
intellectual property disputes); (iii) any changes or effects resulting from the
announcement or consummation of the transactions contemplated by this Agreement,
including, without limitation, any changes or effects associated with any
particular Draw Down, and (iv) changes in the market price of the Common
Stock.

       

      “Maximum Commitment
Amount” means the lesser of (i) the number of Shares issued and sold to
the Investor hereunder in respect of $35 million in aggregate Draw Down Amounts
actually paid or (ii) 31,597,149 shares of Common Stock (representing 19.99% of
158,064,779, the number of shares of Common Stock outstanding as of June 11,
2010 and as adjusted for stock splits, stock combinations, stock dividends and
recapitalizations that occur on or after the date of this Agreement) minus the
number of Blackout Shares, if any, delivered to the Investor under Section
8.2(b) hereunder; provided, however, that the Maximum Commitment Amount shall
not exceed under any circumstances that number of shares of Common Stock that
the Company may issue pursuant to this Agreement and the transactions
contemplated hereby without (a) breaching the Company's obligations under the
rules and regulations of The NASDAQ Capital Market® and the
Principal Market (if different) or (b) obtaining stockholder approval under the
applicable rules and regulations of the NASDAQ Capital Market and the Principal
Market (if different), notwithstanding that such approval may have been
obtained.

       

      
        
           

        

        
          - 3
-

          
            

          

        

        
           

        

      

       

      “Minimum Obligated
Amount” means, in respect of a Draw Down, the maximum guaranteed amount
of funds that the Company may request that, subject to the conditions,
limitations and adjustments set forth herein (including limitations and
adjustments based upon the Threshold Price), the Investor will be
unconditionally obligated to deliver.  The Minimum Obligated Amount
shall be determined, in the Company’s sole discretion, using either of the
following methodologies:

       

      (a)           First
Methodology:

       

      Using
this methodology, the Minimum Obligated Amount will be based solely upon the
Threshold Price applicable to the Draw Down Pricing Period, as determined using
the following table (which Threshold Price shall be adjusted accordingly in the
event of any Reverse Split):

       

      
        
          
            
              
                
                  
                    	
                            Minimum Obligated Amount Based on First Methodology

                          	 
	
                            Threshold Price Range

                          	 	
                            Minimum Obligated Amount

                          	 
	 
      	 	 	 
	
                            Equal
      to or greater than $6.00

                          	 	$	7,250,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $5.00 but less than $6.00

                          	 	$	6,500,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $4.00 but less than $5.00

                          	 	$	4,250,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $3.00 but less than $4.00

                          	 	$	3,500,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $2.00 but less than $3.00

                          	 	$	2,750,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $1.25 but less than $2.00

                          	 	$	2,000,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $0.75 but less than $1.25

                          	 	$	1,350,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $0.50 but less than $0.75

                          	 	$	1,000,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $0.25 but less than $0.50

                          	 	$	500,000	 
	 
      	 	 	 	 
	
                            Equal
      to or greater than $0.20 but less than $0.25

                          	 	$	350,000	 

                  

                

              

            

          

        

      

       

      (b)           Second
Methodology:

       

      Alternatively,
the Minimum Obligated Amount may be determined based upon the following
formula:

       

      
        
           

        

        
          - 4
-

          
            

          

        

        
           

        

      

       

      Minimum
Obligated Amount = (8 Trading Days per Draw Down Pricing Period) multiplied by (Adjusted
Average Volume) multiplied by
(Threshold Price) multiplied by
(0.1985).

       

      (c)           In
respect of any Draw Down, the Company may request all or any portion of the
Minimum Obligated Amount.

       

      (d)           Notwithstanding
the foregoing, under no circumstance shall the Minimum Obligated Amount in
respect of any Draw Down exceed the lesser of (i) 3.5% of Market Capitalization
as of the date upon which the applicable Draw Down Notice is delivered or (ii)
$15,000,000.

       

      “New VWAP” shall have
the meaning assigned to such term in Section 8.2 hereof.

       

      “Old VWAP” shall have
the meaning assigned to such term in Section 8.2 hereof.

       

      “Permitted
Transaction” shall have the meaning assigned to such term in Section 6.5
hereof.

       

      “Person” means any
individual, corporation, partnership, limited liability company, association,
trust or other entity or organization, including any government or political
subdivision or an agency or instrumentality thereof.

       

      “Primary Discount
Rate” means, for any Trading Day during a Draw Down Pricing Period, (i)
4.375% if the VWAP in respect of such Trading Day is equal to or exceeds $6.00;
(ii) 4.750% if the VWAP in respect of such Trading Day is equal to or exceeds
$5.00 but is less than $6.00; (iii) 5.250% if the VWAP in respect of such
Trading Day is equal to or exceeds $4.00 but is less than $5.00; (iv) 5.750% if
the VWAP in respect of such Trading Day is equal to or exceeds $3.00 but is less
than $4.00; (v) 6.000% if the VWAP in respect of such Trading Day is equal to or
exceeds $2.00 but is less than $3.00; (vi) 7.500% if the VWAP in respect of such
Trading Day is equal to or exceeds $1.25 but is less than $2.00; (vii) 8.500% if
the VWAP in respect of such Trading Day is equal to or exceeds $0.75 but is less
than $1.25; (viii) 9.500% if the VWAP in respect of such Trading Day is equal to
or exceeds $0.50 but is less than $0.75; (ix) 15.000% if the VWAP in respect of
such Trading Day is equal to or exceeds $0.25 but is less than $0.50 or (x)
17.500% if the VWAP in respect of such Trading Day is equal to or exceeds $0.20
but is less than $0.25.

       

      “Principal Market”
means the NYSE Amex, NASDAQ Capital Market, NASDAQ Global Select Market, NASDAQ
Global Market or New York Stock Exchange, whichever is at the time the principal
trading exchange or market for the Common Stock.

       

      “Prohibited
Transaction” shall have the meaning assigned to such term in Section 6.6
hereof.

       

      “Prospectus” as used
in this Agreement means the prospectus in the form included in the Registration
Statement, as supplemented from time to time pursuant to Rule 424(b) of the
Securities Act, including the documents incorporated by reference
therein.

       

      
        
           

        

        
          - 5
-

          
            

          

        

        
           

        

      

       

      “Purchase Price” means
the per share price at which Shares will be issued and sold hereunder for any
given Trading Day, which shall be equal to the product of the VWAP multiplied by (one (1) minus the Primary Discount
Rate); provided that, notwithstanding the actual VWAP for any given Trading Day,
(i) in respect of any Minimum Obligated Amount, the price used as the VWAP for
the foregoing formula in respect of such Trading Day shall not be less than the
Threshold Price and (ii) in respect of any Supplemental Amount (or portion
thereof), the price used as the VWAP for the foregoing formula in respect of
such Trading Day shall not be less than the Supplemental Threshold
Price.

       

      “Registration
Statement” means the registration statement on Form S-3, Commission File
Number 333-151654, filed on June 13, 2008  by the Company with the
Commission under the Securities Act for the registration of Common Stock, as
such Registration Statement may be amended and supplemented from time to time
(including pursuant to Rule 424(b) under the Securities Act), including all
documents filed as part thereof or incorporated by reference therein, and
including all information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 430B under the Securities
Act.

      

      “Reverse Split” means
any reverse stock split, stock combination or other similar action taken by the
Company that reduces the number of shares of Common Stock outstanding and
simultaneously increases the price per share therefor,
proportionately.

       

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

       

      “Settlement Date”
shall have the meaning specified in Section 3.5.

       

      “Shares” means the
shares of Common Stock of the Company that are and/or may be purchased
hereunder.

       

      “SOXA” shall have the
meaning specified in Section 4.6.

       

      “Subsidiary” means any
corporation or other entity of which at least a majority of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or any
of its other Subsidiaries.

       

      “Supplemental Amount”
means funds that the Company may request in connection with a Draw Down that
would be in addition to the Minimum Obligated Amount, which, when aggregated
with all other amounts drawn by the Company (including such Minimum Obligated
Amount) shall not exceed the Aggregate Commitment Amount.

       

      “Supplemental Threshold
Price” means, in respect of a Draw Down Pricing Period and a Supplemental
Amount requested by the Company therefor, a price specified by the Company, in
its sole discretion, in the applicable Draw Down Notice.

       

      “Threshold Price”
means, in respect of a Draw Down Pricing Period, either (i) 90% of the closing
price of the Common Stock on the Trading Day immediately preceding the first
Trading Day of such Draw Down Pricing Period or (ii) a price specified by the
Company, in its sole discretion, in the applicable Draw Down Notice, provided
that under no circumstances may the Threshold Price be less than $0.20 per
share.

       

      
        
           

        

        
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      “Trading Day” means
any day other than a Saturday or a Sunday on which the Principal Market is open
for trading in equity securities.

       

      “VWAP” means the
volume weighted average price (the aggregate sales price of all trades of Common
Stock during each Trading Day divided by the total number of shares of Common
Stock traded during such Trading Day) of the Common Stock during any Trading Day
as reported by Bloomberg, L.P. using the AQR function, or another mutually
agreed recognized reporting platform.

       

      “Warrant” shall have
the meaning set forth in the recitals of this Agreement.

       

      “Warrant Shares” means
the shares of Common Stock issuable to the Investor upon exercise of the
Warrant.

       

      ARTICLE
II

      PURCHASE
AND SALE OF COMMON STOCK

       

      Section
2.1          Purchase and Sale of
Stock.  Upon the terms and subject to the conditions set forth
in this Agreement, the Company shall to the extent it elects to make Draw Downs
in accordance with Article III hereof, issue and sell to the Investor and the
Investor shall purchase Common Stock from the Company for an aggregate (in Draw
Down Amounts) of up to the Maximum Commitment Amount, consisting of purchases
based on Draw Downs in accordance with Article III hereof.

       

      Section
2.2          Closing.  In
consideration of and in express reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, the Company agrees to issue
and sell to the Investor, and the Investor agrees to purchase from the Company,
that number of the Shares to be issued in connection with each Draw
Down.  The execution and delivery of this Agreement (the “Closing”) shall take
place at the offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane,
New York, NY 10038 at 5:00 p.m. local time on June 11, 2010, or at such other
time and place (including, without limitation, by way of facsimile exchange of
executed documents from different locations) or on such date as the Investor and
the Company may agree upon (the “Closing
Date”).  Each party shall deliver at or prior to the Closing
all documents, instruments and writings required to be delivered at the Closing
by such party pursuant to this Agreement.

       

      Section
2.3          Warrant.  On
the Closing Date, the Company shall issue and deliver the Warrant to the
Investor.  For sake of clarity, in the event that neither a
registration statement nor an exemption from registration is available, there is
no circumstance that requires the Company to effect a net cash settlement of the
Warrant.

       

      Section
2.4          Blackout
Shares.  The Company shall issue and deliver any Blackout
Amount or issue and deliver any Blackout Shares to the Investor in accordance
with Section 8.2(b) hereof.

      
        
           

        

        
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      ARTICLE
III

      DRAW
DOWN TERMS

       

      Subject
to the satisfaction of the conditions hereinafter set forth in this Agreement,
the parties agree as follows:

       

      Section
3.1          Draw Down
Notice.  During the Commitment Period, the Company may, in its
sole discretion, issue a Draw Down Notice (as hereinafter defined) which shall
specify the dollar amount the Company desires to raise from the Investor from
the sale of Common Stock hereunder (each such capital raising transaction, a
“Draw Down”),
including the Minimum Obligated Amount and any Supplemental
Amount.  The Company shall inform the Investor in writing by sending a
duly completed notice in the form of Exhibit B hereto
(each, a “Draw Down
Notice”) by e-mail to the addresses set forth in Section 10.4, with a
copy to the Investor’s counsel, as to such Draw Down Amount before commencement
of trading on the first Trading Day of the related Draw Down Pricing
Period.  In addition to the Draw Down Amount, each Draw Down Notice
shall designate the first Trading Day of the Draw Down Pricing Period, the
Threshold Price, the Supplemental Threshold Price (if any) and the allocation of
Minimum Obligated Amount and Supplemental Amount (if any).  Each Draw
Down Notice shall be accompanied by a certificate (substantially in the form of
Exhibit C
hereof), signed by the Chief Executive Officer or Chief Financial Officer, dated
as of the date of such Draw Down Notice.

       

      Section
3.2          Supplemental
Amount.  In the event that the Company chooses to request a
Supplemental Amount in connection with a Draw Down, such request shall be deemed
to be an option granted by the Company to the Investor to purchase additional
Shares (i.e., in
addition to the Shares purchased in respect of the Minimum Obligated Amount) for
an amount up to the Supplemental Amount.  The Investor may exercise
all or any portion of this option for any Trading Day during the Draw Down
Pricing Period, and purchase Shares in respect of all or any portion of the
Supplemental Amount, at a price per share equal to the Purchase
Price.  For any Trading Day during the applicable Draw Down Pricing
Period for which the Investor exercises its option, it shall notify the Company
in writing not later than 6:59 A.M. EST on the Trading Day immediately following
the Trading Day for which such purchase is effectively made.  Such
notice to the Company, substantially in the form of Exhibit D hereof,
shall specify the aggregate dollar amount for the purchase, the Purchase Price
and the resulting number of Shares to be purchased in respect of the
Supplemental Amount requested.  Any portion of a Supplemental Amount
remaining unexercised after 8:00 P.M. EST on the final Trading Day of a Draw
Down Pricing Period shall automatically expire, terminate and be of no further
force or effect.

       

      Section
3.3          Number of
Shares.  The number of Shares to be issued in connection with
each Draw Down shall be equal to the sum of the number of shares issuable for
each Trading Day of the Draw Down Pricing Period.  Subject to Section
3.7(b), the number of Shares issuable for a Trading Day during a Draw Down
Pricing Period shall be equal to the sum of the quotients of MOA divided by PP [(MOA)/PP] plus SA divided by SAPP [(SA)/SAPP] , where MOA is equal to one eighth
(1/8th) of the
Minimum Obligated Amount, SA is equal to the
Supplemental Amount (or portion thereof) exercised by the Investor in respect of
such Trading Day, PP is
equal to the Purchase Price in respect of such Trading Day and SAPP is equal to
the Supplemental Amount Purchase Price in respect of such Trading
Day.

       

      
        
           

        

        
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      Section
3.4          Limitation on Draw
Downs.  Only one Draw Down shall be permitted for each Draw
Down Pricing Period.

       

      Section
3.5          Trading
Cushion.  Unless the parties agree in writing otherwise, there
shall be a minimum of three (3) Trading Days between the expiration of any Draw
Down Pricing Period and the beginning of the next succeeding Draw Down Pricing
Period.

       

      Section
3.6          Settlement.  The
number of Shares purchased by the Investor in any Draw Down shall be determined
and settled on two separate dates. Shares purchased by the Investor in respect
of the first four Trading Days of any Draw Down Pricing Period shall be
determined and settled no later than the sixth (6th)
Trading Day of such Draw Down Pricing Period.  Shares purchased by the
Investor in respect of the second (2nd) four
(4) Trading Days of any Draw Down Pricing Period shall be determined and settled
no later than the second (2nd)
Trading Day after the last Trading Day of such Draw Down Pricing
Period.  Each date on which settlement of the purchase and sale of
Shares occurs hereunder being referred to as a “Settlement
Date.”  The Investor shall provide the Company with delivery
instructions for the Shares to be issued at each Settlement Date at least two
Trading Days in advance of such Settlement Date.  The number of Shares
actually issued shall be rounded down to the nearest whole number of
Shares.

       

      Section
3.7           Delivery of Shares; Payment
of Draw Down Amount.

       

      (a)           On
each Settlement Date, the Company shall deliver the Shares purchased by the
Investor to the Investor or its designee(s) via DTC’s Deposit/Withdrawal at
Custodian (DWAC) system, and the Investor shall cause payment therefor to be
made to the Company’s designated account by wire transfer of immediately
available funds, if the Shares are received by the Investor no later than 12:00
P.M. EST, or next day available funds, if the Shares are received
thereafter.  Upon the written request of the Company, the Investor
will cause its banker to confirm to the Company that the Investor has provided
irrevocable instructions to cause payment for the Shares to be made as set forth
above, upon confirmation by such banker that the Shares have been delivered
through the DTC in unrestricted form.

       

      (b)           (i)
for each Trading Day during a Draw Down Pricing Period on which the VWAP is less
than the Threshold Price, such Trading Day shall be disregarded in calculating
the number of Shares to be issued in respect of the Minimum Obligated Amount for
such Draw Down, and the Draw Down Amount in respect of such Draw Down Pricing
Period shall be reduced by one eighth (1/8th) of the
Minimum Obligated Amount specified in the Draw Down Notice; provided, however, that the
Investor may purchase Shares in respect of such Trading Day and Minimum
Obligated Amount of up to one eighth (1/8th) of
such Minimum Obligated Amount for a Purchase Price determined using a VWAP equal
to the Threshold Price; (ii) if trading in the Company’s Common Stock is
suspended for any reason for more than three (3) consecutive or non-consecutive
hours during trading hours on the Principal Market on any Trading Day during a
Draw Down Pricing Period, such Trading Day shall be disregarded in calculating
the number of Shares to be issued in respect of the Minimum Obligated Amount for
such Draw Down, and the Draw Down Amount in respect of such Draw Down Pricing
Period shall be reduced by one eighth (1/8th) of the
Minimum Obligated Amount specified in the Draw Down Notice; provided, however, that the
Investor may purchase Shares in respect of such Trading Day and Minimum
Obligated Amount of up to one eighth (1/8th) of
such Minimum Obligated Amount and (iii) for each Trading Day during a Draw Down
Pricing Period for which the Company has specified a Supplemental Amount, but
the VWAP is less than the Supplemental Threshold Price, the Investor may
purchase Shares in respect of such Supplemental Amount (or portion thereof) in
consideration for payment to the Company of an amount per Share equal to the
Purchase Price, determined using a VWAP equal to the Supplemental Threshold
Price.  For the avoidance of doubt, any Trading Day that is
disregarded for the purposes of calculating the number of Shares to be issued in
respect of a Minimum Obligated Amount in accordance with (i) and (ii) above
shall only reduce such number of Shares by one eighth (1/8th) of the
Minimum Obligated Amount, notwithstanding that such Trading Day may be so
disregarded for the reasons specified in both (i) and (ii).

       

      
        
           

        

        
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      (c)           In
the event that the Investor chooses to purchase Shares in respect of a Trading
Day which would otherwise not be issued and sold on the basis of one of the
reasons set forth in Section 3.7(b) above, the Investor shall notify the Company
in writing not later than 8 A.M. EST on the Trading Day immediately following
such Trading Day.

       

      Section
3.8           Failure to Deliver
Shares.

       

      (a)           If
on any Settlement Date, the Company fails to take all actions within its
reasonable control to cause the delivery of the Shares purchased by the
Investor, and such failure is not cured within two (2) Trading Days following
such Settlement Date (such period, the “Cure Period”), the Company shall pay to
the Investor on demand in cash by wire transfer of immediately available funds
to an account designated by the Investor, as liquidated damages for such failure
and not as a penalty, an amount equal to two percent (2.0%) of the payment
required to be paid by the Investor on such Settlement Date (i.e., the Draw Down
Amount).  If on or prior to the 70th day
following the Settlement Date, the Investor shall notify the Company of the Make
Whole Amount, the Company shall pay to the Investor on demand in cash by wire
transfer of immediately available funds the difference, if positive, between the
Make Whole Amount and the amount paid to Investor as liquidated damages pursuant
to the foregoing sentence.  If the Company shall fail to make timely
payment of the Make Whole Amount within two (2) Trading Days following demand
therefor from the Investor as herein provided, as liquidated damages for such
failure and not as a penalty, in addition to the Make Whole Amount, the Company
shall pay to the Investor an additional two percent (2.0%) for each 30-day
period (prorated for such periods less than 30 days) following the date of such
demand from the Investor, until the Make Whole Amount shall have been paid in
full to the Investor.  As used herein, the Make Whole Amount shall be
an amount equal to the sum of (i) the Draw Down Amount actually paid by the
Investor in respect of such Shares plus (ii) an amount equal to the actual
loss suffered by the Investor in respect of sales to subsequent purchasers,
pursuant to transactions entered into before the Settlement Date, of the Shares
that were required to be delivered by the Company on such Settlement Date, which
shall be based upon documentation reasonably satisfactory to the Company
demonstrating the difference (if greater than zero) between (A) the price
per share paid by the Investor to purchase such number of shares of Common Stock
necessary for the Investor to meet its share delivery obligations to such
subsequent purchasers minus (B) the average Draw Down Discount Price during
the applicable Draw Down Pricing Period in respect of such Settlement
Date.

       

      
        
           

        

        
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      (b)           Notwithstanding
the foregoing,  in the event that the Company is prevented from
delivering Shares in respect of any such Settlement Date in a timely manner by
any fact or circumstance that is not reasonably within the control of, or
directly attributable to, the Company, or is otherwise reasonably within the
control of, or directly attributable to, the Investor, then the Cure Period
shall be automatically extended until such time as such fact or circumstance is
cured.  For the purposes of this Section 3.8 facts or circumstances
that are reasonably within the control of the Company include such facts and
circumstances solely attributable to acts or omissions of the Company, its
officers, directors, employees, agents and representatives, including, without
limitation, any transfer agent(s) and/or accountant(s) engaged by the Company in
connection with the Company’s performance of its obligations
hereunder.  Notwithstanding anything to the contrary set forth in this
Agreement, in the event that the Company pays the Make Whole Amount in respect
of any Settlement Date in accordance with this Section 3.8, such payment shall
be the Investor’s sole remedy in respect of the Company’s failure to deliver
Shares in respect of such Settlement Date, and the Company shall not be
obligated to deliver such Shares.

       

      ARTICLE
IV

      REPRESENTATIONS
AND WARRANTIES OF THE COMPANY

       

      The
Company hereby makes the following representations and warranties to the
Investor:

       

      Section
4.1          Organization, Good Standing
and Power.  The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own, lease and operate
its properties and assets and to carry on its business as now being
conducted.  Except as set forth in the Commission Documents (as
defined below), as of the date hereof, the Company does not own more than fifty
percent (50%) of the outstanding capital stock of or control any other business
entity, other than any wholly-owned subsidiary that is not “significant” within
the meaning of Regulation S-X promulgated by the Commission.  The
Company is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or
property owned by it makes such qualification necessary, other than those in
which the failure to be so qualified or be in good standing would not have a
Material Adverse Effect.

       

      Section
4.2          Authorization;
Enforcement.  The Company has the requisite corporate power and
authority to enter into and perform its obligations under this Agreement and the
Warrant and to issue the Shares, the Warrant and the Warrant Shares;
(ii) the execution and delivery of this Agreement and the execution,
issuance and delivery of the Warrant, by the Company and the consummation by it
of the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action and no further consent or
authorization of the Company or its Board of Directors or stockholders is
required (other than as contemplated by Section 6.4); and (iii) this Agreement
has been duly executed and delivered, and the Warrant has been duly executed,
issued and delivered, by the Company and constitutes a valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation, conservatorship,
receivership, or similar laws relating to, or affecting generally the
enforcement of, creditors’ rights and remedies or indemnification or by other
equitable principles of general application (including any limitation of
equitable remedies).

       

      
        
           

        

        
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      Section
4.3          Capitalization.  The
authorized capital stock of the Company and the shares thereof issued and
outstanding are set forth in the Commission Documents as of the date specified
therein.  All of the outstanding shares of the Common Stock have been
duly and validly authorized and issued, and are fully paid and
non-assessable.  Except as set forth in this Agreement, as described
in the Commission Documents or as disclosed on a schedule (the “Disclosure Schedule”)
previously delivered to the Investor, as of December 31, 2009, no shares of
Common Stock were entitled to preemptive rights or registration rights and there
were no outstanding options, warrants, scrip, rights issued by the Company to
subscribe to, call or commitments of any character whatsoever issued by the
Company relating to, or securities or rights convertible into or exchangeable
for or giving any right to subscribe for, any shares of capital stock of the
Company, except for stock options issued by the Company to its employees,
directors and consultants.  Except as set forth in this Agreement, the
Commission Documents, or as previously disclosed to the Investor in the
Disclosure Schedule, as of December 31, 2009, there were no contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of the capital stock of the Company or
options, securities or rights convertible into or exchangeable for or giving any
right to subscribe for any shares of capital stock of the
Company.  Except as described in the Commission Documents or as
previously disclosed to the Investor in the Disclosure Schedule, as of the date
hereof the Company is not a party to any agreement granting registration rights
to any Person with respect to any of its equity or debt
securities.  Except as set forth in the Commission Documents or as
previously disclosed to the Investor in the Disclosure Schedule, as of the date
hereof the Company is not a party to, and it has no Knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of the
Company.  The offer and sale of all capital stock, convertible
securities, rights, warrants, or options of the Company issued during the twelve
month period immediately prior to the Closing complied in all material respects
with all applicable federal and state securities laws, and no stockholder has a
right of rescission or damages with respect thereto that would reasonably be
expected to have a Material Adverse Effect.  The Company has furnished
or made available to the Investor true and correct copies of the Company’s
Amended and Restated Certificate of Incorporation, as in effect on the date
hereof (the “Charter”), and the
Company’s Amended and Restated Bylaws, as in effect on the date hereof (the
“Bylaws”).

       

      Section
4.4          Issuance of
Shares.  Subject to Section 6.4, the Shares, the Warrant and
the Warrant Shares have been, and any Blackout Shares will be, duly authorized
by all necessary corporate action (except to the extent that the number of
Blackout Shares required to be issued exceeds the number of authorized shares of
Common Stock under the Charter) and, when issued and paid for in accordance with
the terms of this Agreement and the Warrant, and subject to, and in reliance on,
the representations, warranties and covenants made herein by the Investor, the
Shares and the Warrant Shares shall be validly issued and outstanding, fully
paid and non-assessable, and the Investor shall be entitled to all rights
accorded to a holder of shares of Common Stock.

      
        
           

        

        
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      Section
4.5          No
Conflicts.  The execution, delivery and performance of this
Agreement, the Warrant and any other document or instrument contemplated hereby
or thereby, by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and shall not in any
material respect: (i) result in the violation of any provision of the
Charter or Bylaws, (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any rights of termination, amendment, acceleration or cancellation
of, any material agreement, mortgage, deed of trust, indenture, note, bond,
license, lease agreement, instrument or obligation to which the Company is a
party and that has not been waived where such default or conflict would
constitute a Material Adverse Effect, (iii) create or impose a lien, charge
or encumbrance on any property of the Company under any agreement or any
commitment to which the Company is a party or by which the Company is bound or
by which any of its respective properties or assets are bound which would
constitute a Material Adverse Effect, (iv) result in a violation of any
federal, state, local or foreign statute, rule, regulation, order, writ,
judgment or decree (including federal and state securities laws and regulations)
applicable to the Company or any of its subsidiaries or by which any property or
asset of the Company or any of its subsidiaries are bound where such violation
would constitute a Material Adverse Effect, or (v) require any consent of
any third-party that has not been obtained pursuant to any material contract to
which the Company is a party or to which any of its assets, operations or
management may be bound where the failure to obtain any such consent would
constitute a Material Adverse Effect.  The Company is not required
under applicable federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement or the Warrant, or issue and sell the
Shares or the Warrant Shares or the Blackout Shares (except to the extent that
the number of Blackout Shares required to be issued exceeds the number of
authorized shares of Common Stock under the Charter) in accordance with the
terms hereof and thereof (other than any filings that the Company may be
required to make with the Commission, the FINRA/NASDAQ or state securities
commissions subsequent to the Closing, and, any registration statement
(including any amendment or supplement thereto) or any other filing or consent
which may be filed pursuant to this Agreement or the Warrant); provided that,
for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Investor herein.

       

      
        
           

        

        
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      Section
4.6           Commission Documents,
Financial Statements.

       

      (a)           The
Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange
Act, and since December 31, 2009 the Company has timely filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the Commission pursuant to the reporting requirements of the Exchange Act,
including material filed pursuant to Section 13(a) or 15(d) of the Exchange Act
(all of the foregoing, and, for the purpose of determining the Company’s
compliance with Section 7.1 hereof, any such reports, schedules, forms,
statements and other documents filed with the Commission and publicly available
after the date hereof but on or prior to the applicable Condition Satisfaction
Date, including filings incorporated by reference, being referred to herein as
the “Commission
Documents”).  Except as previously disclosed to the Investor in
writing or as disclosed in a publicly-available press release of the Company,
since December 31, 2009, the Company has maintained all requirements for the
continued listing or quotation of its Common Stock, and such Common Stock is
currently listed or quoted on the Principal Market.  The Company has
made available (including through the Commission’s EDGAR filing system (together
with the successor interactive data filing system, “IDEA”)) to the Investor true
and complete copies of the Commission Documents filed with the Commission since
December 31, 2009 and prior to the Closing Date.  The Company has not
provided to the Investor any information which, according to applicable law,
rule or regulation, should have been disclosed publicly by the Company but which
has not been so disclosed, other than with respect to the transactions
contemplated by this Agreement.  As of the date it was filed with the
Commission, the Company’s Annual Report on Form 10-K for the year ended December
31, 2009 complied in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission promulgated thereunder
then-applicable to such document, and, as of the date it was filed with the
Commission, after giving effect to the information disclosed and incorporated by
reference therein, to the Company’s Knowledge such Annual Report on Form 10-K
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  As of their respective dates, to the Company’s
Knowledge the financial statements, together with the related notes and
schedules thereto, of the Company included in the Commission Documents filed
with the Commission since December 31, 2009 complied as to form in all material
respects with all then-applicable accounting requirements and the published
rules and regulations of the Commission or other then-applicable rules and
regulations with respect thereto.  Such financial statements, together
with the related notes and schedules thereto, have been prepared in accordance
with generally accepted accounting principles (“GAAP”) applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements), and fairly present in all material
respects the financial condition of the Company and its subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).

       

      (b)           The
Company has timely filed with the Commission and made available to the Investor
via IDEA or otherwise all certifications and statements required by (x) Rule
13a-14 or Rule 15d-14 under the Exchange Act or (y) 18 U.S.C. Section 1350
(Section 906 of the Sarbanes-Oxley Act of 2002 (“SOXA”)) with respect
to all relevant Commission Documents.  The Company is in compliance in
all material respects with the provisions of SOXA applicable to it as of the
date hereof.  The Company maintains disclosure controls and procedures
required by Rule 13a-15 or Rule 15d-15 under the Exchange Act.  As
used in this Section 4.6(b), the term “file” shall be broadly construed to
include any manner in which a document or information is furnished, supplied or
otherwise made available to the Commission.

       

      Section
4.7          No Material Adverse
Change.  Except as disclosed in the Commission Documents, as
previously disclosed to the Investor in the Disclosure Schedule or as disclosed
in a publicly available press release of the Company, since December 31, 2009 no
event or series of events has or have occurred that would, individually or in
the aggregate, have a Material Adverse Effect.

      
        
           

        

        
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      Section
4.8          No Undisclosed
Liabilities.  To the Company’s Knowledge, neither the Company
nor any of its subsidiaries has any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) that would be required to be disclosed on a balance
sheet of the Company or any subsidiary (including the notes thereto) in
conformity with GAAP and are not disclosed in the Commission Documents, other
than those incurred in the ordinary course of the Company’s or its subsidiaries
respective businesses since December 31, 2009 or which, individually or in the
aggregate, do not or would not have a Material Adverse Effect.

       

      Section
4.9          No Undisclosed Events or
Circumstances.  To the Company’s Knowledge, no event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective businesses, properties, operations or financial
condition, which, under applicable law, rule or regulation, requires public
disclosure or announcement by the Company but which has not been so publicly
announced or disclosed and which, individually or in the aggregate, would have a
Material Adverse Effect.

       

      Section
4.10        Actions
Pending.  There is no action, suit, claim, investigation or
proceeding pending or, to the Knowledge of the Company, threatened against the
Company or any subsidiary which questions the validity of this Agreement or the
transactions contemplated hereby or any action taken or to be taken pursuant
hereto or thereto.  Except as set forth in the Commission Documents or
in the Disclosure Schedule, there is no action, suit, claim, investigation or
proceeding pending or, to the Knowledge of the Company, threatened, against or
involving the Company, any subsidiary or any of their respective properties or
assets, or to the Knowledge of the Company involving any officers or directors,
in their capacity as officers or directors, of the Company or any of its
subsidiaries, including, without limitation, any securities class action lawsuit
or stockholder derivative lawsuit, that would be reasonably expected to have a
Material Adverse Effect.  Except as set forth in the Commission
Documents or as previously disclosed to the Investor in writing, no judgment,
order, writ, injunction or decree or award has been issued by or, to the
Knowledge of the Company, requested of any court, arbitrator or governmental
agency which would be reasonably expected to result in a Material Adverse
Effect.

       

      Section
4.11        Compliance with
Law.  The business of the Company and its subsidiaries has been
and is presently being conducted in accordance with all applicable federal,
state, local and foreign governmental laws, rules, regulations and ordinances,
except as set forth in the Commission Documents or such that would not
reasonably be expected to cause a Material Adverse Effect.  Except as
set forth in the Commission Documents, each of the Company and its subsidiaries
have all franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals necessary for the conduct of their
respective businesses as now being conducted by them, except for such
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals, the failure to possess which, individually or in
the aggregate, would not be reasonably expected to have a Material Adverse
Effect.

       

      
        
           

        

        
          - 15
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      Section
4.12         Operation of
Business.

       

      (a)           The
Company or one or more of its Subsidiaries possesses such permits, licenses,
approvals, consents and other authorizations (including licenses, accreditation
and other similar documentation or approvals of any local health departments)
(collectively, “Governmental
Licenses”) issued by the appropriate federal, state, local or foreign
regulatory agencies or bodies, including, without limitation, the United States
Food and Drug Administration (“FDA”), necessary to
conduct the business now operated by it, except where the failure to possess
such Governmental Licenses, individually or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect or as otherwise
disclosed in the Commission Documents.  The Company and its
Subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses and all applicable FDA rules and regulations, guidelines
and policies, and all applicable rules and regulations, guidelines and policies
of any governmental authority exercising authority comparable to that of the FDA
(including to the extent applicable any non-governmental authority whose
approval or authorization is required under foreign law comparable to that
administered by the FDA), except where the failure to so comply, individually or
in the aggregate, would not reasonably be expected to have a Material Adverse
Effect or as otherwise disclosed in the Commission Documents.  To the
Knowledge of the Company, all of the Governmental Licenses are valid and in full
force and effect, except where the invalidity of such Governmental Licenses or
the failure of such Governmental Licenses to be in full force and effect,
individually or in the aggregate, would not reasonably be expected to have a
Material Adverse Effect or as otherwise disclosed in the Commission
Documents.  As to each product that is subject to FDA regulation or
similar legal provisions in any foreign jurisdiction that is developed,
manufactured, tested, packaged, labeled, marketed, sold, distributed and/or
commercialized by the Company or any of its Subsidiaries, each such product is
being developed, manufactured, tested, packaged, labeled, marketed, sold,
distributed and/or commercialized in compliance with all applicable requirements
of the FDA (and to the extent applicable any non-governmental authority whose
approval or authorization is required under foreign law comparable to that
administered by the FDA), except where such non-compliance, individually or in
the aggregate, would not reasonably be expected to have a Material Adverse
Effect or as otherwise disclosed in the Commission Documents.  Except
as set forth in the Commission Documents or the Registration Statement, neither
the Company nor any of its Subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such Governmental Licenses or
relating to a potential violation of, failure to comply with, or request to
produce additional information under, any FDA rules and regulations, guidelines
or policies which, if the subject of any unfavorable decision, ruling or
finding, individually or in the aggregate, would have a Material Adverse
Effect.

       

      (b)           The
Company or one or more of its Subsidiaries owns or possesses adequate patents,
patent rights, licenses, inventions, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks, trade names, trade dress, logos,
copyrights and other intellectual property, including, without limitation, all
of the intellectual property described in the Commission Documents as being
owned or licensed by the Company (collectively, “Intellectual
Property”), necessary to carry on the business now operated by it, except
where the failure to own or possess such Intellectual Property would not,
individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect.  Except as set forth in the Commission Documents,
there are no actions, suits or judicial proceedings pending, or to the Company’s
Knowledge threatened in writing, relating to patents or proprietary information
to which the Company or any of its Subsidiaries is a party or of which any
property of the Company or any of its Subsidiaries is subject, and, to the
Company’s Knowledge, neither the Company nor any of its Subsidiaries has
received any notice or is otherwise aware of any infringement of or conflict
with asserted rights of others with respect to any Intellectual Property or of
any facts or circumstances which could render any Intellectual Property invalid
or inadequate to protect the interest of the Company and its Subsidiaries
therein, and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, individually or in the
aggregate, would not reasonably be expected to have a Material Adverse
Effect.

       

      
        
           

        

        
          - 16
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      (c)           All
material clinical trials conducted by, or on behalf of, the Company or any of
its Subsidiaries, or in which the Company or any of its Subsidiaries has
participated that are described in the Commission Documents, or the results of
which are referred to in the Commission Documents, if any, are the only clinical
trials currently being conducted by or on behalf of the Company and its
Subsidiaries.  All such clinical trials conducted, supervised or
monitored by, or on behalf of, the Company or any of its Subsidiaries, to the
Knowledge of the Company, have been conducted in all material respects in
compliance with all applicable federal, state, local and foreign laws, and the
regulations and requirements of any applicable governmental entity, including,
but not limited to, FDA good clinical practice and good laboratory practice
requirements.  Except as set forth in the Commission Documents,
neither the Company nor any of its Subsidiaries has received any notices or
correspondence from the FDA or any other governmental agency requiring the
termination or suspension of any clinical trials conducted by, or on behalf of,
the Company or any of its Subsidiaries or in which the Company or any of its
Subsidiaries has participated that are described in the Commission Documents, if
any, or the results of which are referred to in the Commission
Documents.  To the Knowledge of the Company, all clinical trials
previously conducted by, or on behalf of, the Company or any of its Subsidiaries
while conducted by or on behalf of the Company or any of its Subsidiaries, were
conducted in all material respects in compliance with all then-applicable
federal, state, local and foreign laws, and the regulations and requirements of
any applicable governmental entity, including, but not limited to, FDA good
clinical practice and good laboratory practice requirements, except as set forth
in the Commission Documents.

       

      Section
4.13        Certain
Fees.  Except as expressly set forth in this Agreement, no
brokers, finders or financial advisory fees or commissions will be payable by
the Company or any of its subsidiaries in respect of the transactions
contemplated by this Agreement.

       

      Section
4.14        Disclosure.  To
the Company’s Knowledge, neither this Agreement nor any other documents,
certificates or instruments furnished to the Investor by or on behalf of the
Company or any subsidiary in connection with the transactions contemplated by
this Agreement contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made herein or
therein, in the light of the circumstances under which they were made herein or
therein, not misleading.

       

      Section
4.15        Material Non-Public
Information.  Except for this Agreement and the transactions
contemplated hereby and the Disclosure Schedule, neither the Company nor its
employees have disclosed to the Investor, any material non-public information
that, according to applicable law, rule or regulation, should have been
disclosed publicly by the Company prior to the date hereof but which has not
been so disclosed.

      
        
           

        

        
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      Section
4.16        Acknowledgment Regarding
Investor’s Purchase of Shares.  The Company acknowledges and
agrees that the Investor is acting solely in the capacity of an arm’s length
investor with respect to this Agreement and the transactions contemplated
hereunder.  The Company further acknowledges that the Investor is not
acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to this Agreement and the transactions contemplated
hereunder and any advice given by the Investor or any of its representatives or
agents in connection with this Agreement and the transactions contemplated
hereunder is merely incidental to the Investor’s purchase of the
Shares.

       

      ARTICLE
V

      REPRESENTATIONS,
WARRANTIES AND COVENANTS OF THE INVESTOR

       

      The
Investor hereby makes the following representations, warranties and covenants to
the Company:

       

      Section
5.1          Organization and Standing of
the Investor.  The Investor is a company duly organized,
validly existing and in good standing under the laws of the British Virgin
Islands.

       

      Section
5.2          Authorization and
Power.  The Investor has the requisite power and authority to
enter into and perform its obligations under this Agreement and to purchase the
Shares, any Blackout Shares, the Warrant and the Warrant Shares in accordance
with the terms hereof.  The execution, delivery and performance of
this Agreement and the Warrant by Investor and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action, and no further consent or authorization of the
Investor, its Board of Directors or stockholders is required.  This
Agreement has been duly executed and delivered by the Investor and constitutes a
valid and binding obligation of the Investor enforceable against the Investor in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership, or similar laws relating to, or affecting
generally the enforcement of creditor’s rights and remedies or indemnification
or by other equitable principles of general application (including any
limitation of equitable remedies).

       

      Section
5.3          No
Conflicts.  The execution, delivery and performance of this
Agreement, the Warrant and any other document or instrument contemplated hereby,
by the Investor and the consummation of the transactions contemplated hereby and
thereby do not (i) violate any provision of the Investor’s charter
documents or bylaws, (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any material agreement, mortgage, deed of trust, indenture,
note, bond, license, lease agreement, instrument or obligation to which the
Investor is a party, (iii) create or impose a lien, charge or encumbrance
on any property of the Investor under any agreement or any commitment to which
the Investor is a party or by which the Investor is bound or by which any of its
respective properties or assets are bound, (iv) result in a violation of
any federal, state, local or foreign statute, rule, regulation, order, writ,
judgment or decree (including federal and state securities laws and regulations)
applicable to the Investor or by which any property or asset of the Investor are
bound or affected, or (v) require the consent of any third-party that has
not been obtained pursuant to any material contract to which Investor is subject
or to which any of its assets, operations or management may be
subject.  The Investor is not required under applicable federal,
state, foreign or local law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement or to purchase or acquire the Shares, the
Warrant, the Warrant Shares or any Blackout Shares in accordance with the terms
hereof, provided that, for purposes of the representation made in this sentence,
the Investor is assuming and relying upon the accuracy of the relevant
representations and agreements of the Company herein.

      
        
           

        

        
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      Section
5.4          Financial
Capability.  The Investor has the financial capability to
perform all of its obligations under this Agreement, including the capability to
purchase the Shares, the Warrant, the Warrant Shares and any Blackout Shares in
accordance with the terms hereof.  The Investor has such knowledge and
experience in business and financial matters that it is capable of evaluating
the merits and risks of an investment in Common Stock and the
Warrant.  The Investor is an “accredited investor”
as defined in Regulation D promulgated under the Securities
Act.  The Investor is a “sophisticated
investor” as described in Rule 506(b)(2)(ii) of Regulation
D.  The Investor acknowledges that an investment in the Common Stock
is speculative and involves a high degree of risk.

       

      Section
5.5          Information.  The
Investor and its advisors, if any, have been furnished with all materials
relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Shares, any Blackout Shares, the Warrant
and the Warrant Shares which have been requested by the Investor.  The
Investor has reviewed or received copies of the Commission
Documents.  The Investor and its advisors, if any, have been afforded
the opportunity to ask questions of the Company.  The Investor has
sought such accounting, legal and tax advice as it has considered necessary to
make an informed investment decision with respect to its acquisition of the
Shares, any Blackout Shares, the Warrant and the Warrant Shares.  The
Investor understands that it (and not the Company) shall be responsible for its
own tax liabilities that may arise as a result of this investment or the
transactions contemplated by this Agreement.

       

      Section
5.6          Trading
Restrictions.  The Investor covenants that during the
Commitment Period, neither the Investor nor any of its affiliates nor any entity
managed or controlled by the Investor will (i) enter into or execute or cause or
assist any Person to enter into or execute any “short sale” (as such
term is defined in Rule 200 of Regulation SHO, or any successor regulation,
promulgated by the Commission under the Exchange Act) of any securities of the
Company, and that the Investor and its affiliates shall comply with all other
applicable securities laws (including Regulation M), provided, however, that, for the avoidance
of doubt, the Investor may sell during any Draw Down Pricing Period up to that
number of shares of Common Stock that it is unconditionally entitled to purchase
and receive from the Company in respect of such Draw Down Pricing Period in
compliance with applicable securities laws.

       

      Section
5.7          Not an
Affiliate.  The Investor is not an officer, director or “affiliate” (as
defined in Rule 405 of the Securities Act) of the Company.

      
        
           

        

        
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      Section
5.8          Prospectus
Delivery.  The Investor agrees that unless the Shares, the
Warrant Shares or any Blackout Shares are eligible for resale pursuant to all
the conditions of Rule 144, it will resell the Shares, the Warrant Shares and
any Blackout Shares only pursuant to the Registration Statement, in a manner
described under the caption “Plan of Distribution”
in the Registration Statement, and in a manner in compliance with all applicable
securities laws, including, without limitation, any applicable prospectus
delivery requirements of the Securities Act and the insider trading restrictions
of the Exchange Act; provided that in no event shall the Company be under any
obligation to the Investor to supplement the Prospectus to reflect the issuance
of any Shares pursuant to a Draw Down at any time prior to the day following the
last Settlement Date with respect to such Draw Down.

       

      ARTICLE
VI

      COVENANTS
OF THE COMPANY

       

      The
Company covenants with the Investor as follows, which covenants are for the
benefit of the Investor and its permitted assignees (as defined
herein):

       

      Section
6.1          Securities
Compliance.  The Company shall notify the Commission and the
Principal Market, if and as applicable, in accordance with their respective
rules and regulations, of the transactions contemplated by this Agreement, and
shall use commercially reasonable efforts to take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Shares and the Warrant
Shares and the Blackout Shares, if any, to the Investor.  Each
Commission Document to be filed with the Commission after the Closing Date and
incorporated by reference in the Registration Statement and Prospectus, when
such document becomes effective or is filed with the Commission, as the case may
be, shall comply in all material respects with the requirements of the
Securities Act or the Exchange Act, as applicable, and other federal, state and
local laws, rules and regulations applicable to it, and shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.

       

      Section
6.2          Reservation of Common
Stock.  As of the date hereof, the Company has available and
the Company shall reserve and keep available at all times, free of preemptive
rights and other similar contractual rights of stockholders, shares of Common
Stock for the purpose of enabling the Company to satisfy any obligation to issue
the Shares in connection with all Draw Downs contemplated hereunder and the
Warrant Shares.  The number of shares so reserved from time to time,
as theretofore increased or reduced as hereinafter provided, may be reduced by
the number of shares actually delivered hereunder, or as otherwise agreed by the
parties in writing.

       

      Section
6.3          Registration and
Listing.  During the Commitment Period, the Company shall use
commercially reasonable efforts to: (i) take all action necessary to cause its
Common Stock to continue to be registered under Section 12(b) or 12(g) of the
Exchange Act, (ii) comply in all material respects with its reporting and filing
obligations under the Exchange Act, (iii) prevent the termination or suspension
of such registration, or the termination or suspension of its reporting and
filing obligations under the Exchange Act or Securities Act (except as expressly
permitted herein).  The Company shall use commercially reasonable
efforts to maintain the listing and trading of its Common Stock and the listing
of the Shares purchased by Investor hereunder on the Principal Market
(including, without limitation, maintaining sufficient net tangible assets) and
will comply in all material respects with the Company’s reporting, filing and
other obligations under the bylaws or rules of the FINRA and the Principal
Market.  The Company will not be required to carry out any action
pursuant to this Agreement or the Warrant that would adversely impact the
listing of the Company’s securities on the Principal Market, which Principal
Market may be changed by the Company in the future in the Company’s
discretion.

       

      
        
           

        

        
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      Section
6.4           Compliance with
Laws.

       

      (a)           The
Company shall comply, and cause each subsidiary to comply, with all applicable
laws, rules, regulations and orders, noncompliance with which would reasonably
be expected to have a Material Adverse Effect.  Without limiting the
generality of the foregoing, neither the Company nor any of its officers,
directors or affiliates will take, directly or indirectly, any action designed
or intended to stabilize or manipulate the price of any security of the Company,
or which would in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the Company, in
each case in contravention of applicable laws, rules, regulations or
orders.

       

      (b)           Without
the consent of its stockholders in accordance with FINRA rules and regulations
and the rules and regulations of the NASDAQ Capital Market and the Principal
Market (if different), the Company will not be obligated to issue, and the
Investor will not be obligated to purchase, any Shares or Blackout Shares which
would otherwise result in the issuance under this Agreement and the Warrant of
Shares, Warrant Shares and Blackout Shares (collectively) representing more than
the applicable percentage under the rules of the FINRA, NASDAQ Capital Market
and Principal Market (if different), including, without limitation, NASDAQ
Listing Rule 5635(d), that would require stockholder approval of the issuance
thereof.  Nothing herein shall compel the Company to seek such consent
of its stockholders.  In addition, the Company will not be obligated
to issue, and the Investor will not be obligated to purchase, any Shares,
Warrant Shares or Blackout Shares if as a result of the acquisition of such
Shares and/or Warrant Shares and/or Blackout Shares, the Company would be
required to file any notification or report forms under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.  Nothing herein shall
compel the Company to file such notification and report forms.

       

      Section
6.5          Other
Financing.  Nothing in this Agreement shall be construed to
restrict the right of the Company to offer, sell and/or issue securities of any
kind whatsoever, provided such transaction is not a Prohibited Transaction (as
defined below) (any such transaction that is not a Prohibited Transaction is
referred to in this Agreement as a “Permitted
Transaction”).  Without limiting the generality of the
preceding sentence, the Company may, without the prior written consent of the
Investor, (i) establish stock option, stock purchase, stock bonus or other
equity incentive or award plans or agreements (for directors, employees,
consultants and/or advisors), and issue securities thereunder, and amend such
plans or agreements, including increasing the number of shares available
thereunder, (ii) issue equity securities to finance, or otherwise in connection
with, the acquisition, license or sale of one or more other companies,
equipment, technologies or lines of business, (iii) issue shares of Common Stock
and/or other securities in connection with the Company’s option, equity
incentive or award plans, stock purchase plans, stock bonus programs, rights
plans, warrants or options, (iv) issue shares of Common Stock and/or other
securities in connection with the acquisition, license or sale of products,
licenses, equipment or other assets and strategic collaborations, partnerships,
joint ventures or similar transactions; (v) issue shares of Common and/or other
securities to employees, consultants and/or advisors as consideration for
services rendered or to be rendered, (vi) issue and sell equity or debt
securities in a public offering, (vii) issue and sell any equity or debt
securities in a private placement (other than in connection with any Prohibited
Transaction), (viii) issue equity securities to equipment lessors, equipment
vendors, banks or similar lending institutions in connection with leases or
loans, or in connection with strategic, commercial or licensing transactions,
including without limitation in connection with the Company’s
current  loan, or any future strategic, commercial or licensing
transactions with, PharmaBio Development, Inc., (ix) issue securities in
connection with any stock split, stock dividend, recapitalization,
reclassification or similar event by the Company and (x) issue shares of Common
Stock to the Investor under any other agreement entered into between the
Investor and the Company.

       

      
        
           

        

        
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      Section
6.6          Prohibited
Transactions.  Except as set forth on Schedule 6.6 of the
Disclosure Schedule and except as permitted by Section 6.5, during the term of
this Agreement, the Company shall not enter into any Prohibited Transaction
without the prior written consent of the Investor, which consent may be withheld
at the sole discretion of the Investor.  For the purposes of this
Agreement, the term “Prohibited
Transaction” shall refer to the issuance by the Company of any “future
priced securities,” which shall mean the issuance of shares of Common Stock or
securities of any type whatsoever that are, or may become, convertible or
exchangeable into shares of Common Stock where the purchase, conversion or
exchange price for such Common Stock is determined using any floating discount
or other post-issuance adjustable discount to the market price of Common Stock,
including, without limitation, pursuant to any equity line or other committed
equity financing, including, without limitation, any financing that is
substantially similar to the financing provided for under this Agreement,
provided that any
future issuance by the Company of (i) a convertible security (“Convertible
Security”) that (A) contains provisions that adjust the conversion price
of such Convertible Security in the event of stock splits, dividends,
distributions, reclassifications or similar events or pursuant to anti-dilution
provisions or (B) is issued in connection with the Company obtaining debt
financing to support  research and development activities where the
issuance of Convertible Securities is conditioned upon or otherwise related to
the Company meeting certain defined development milestones, (ii) securities
in a registered direct public offering or an unregistered private placement
where the price per share of such securities is fixed concurrently with the
execution of definitive documentation relating to the offering or placement, as
applicable and (iii) securities issued in connection with a secured debt
financing, shall not be a Prohibited Transaction.

       

      Section
6.7          Corporate
Existence.  The Company shall take all steps necessary to
preserve and continue the corporate existence of the Company.

       

      Section
6.8          Non-Disclosure of Non-Public
Information.  Subject to Section 6.9 below, except as otherwise
expressly provided in this Agreement or the Warrant, none of the Company, its
officers, directors, employees nor agents shall disclose material non-public
information to the Investor, its advisors or representatives.

      
        
           

        

        
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      Section
6.9          Notice of Certain Events
Affecting Registration; Suspension of Right to Request a Draw
Down.  The Company shall promptly notify the Investor upon the
occurrence of any of the following events in respect of the Registration
Statement or the Prospectus related to the offer, issuance and sale of the
Shares and the Warrant Shares hereunder: (i) receipt of any request for material
additional information by the Commission or any other federal or state
governmental authority or for amendments or supplements to the Registration
Statement or the Prospectus during the period of effectiveness of the
Registration Statement; (ii) the issuance by the Commission or any other federal
or state governmental authority of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose; and (iii) receipt of any notification with respect to the suspension of
the qualification or exemption from qualification of any of any capital
securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose.  If at any time the Commission shall
issue any stop order suspending the effectiveness of the Registration Statement,
the Company shall use commercially reasonable efforts to obtain the withdrawal
of such order at the earliest possible time.  The Company shall not be
required to disclose to the Investor the substance or specific reasons of any of
the events set forth in clauses (i) through (iii) of the first sentence of this
Section 6.9, only that the event has occurred.  The Company shall not
request a Draw Down during the continuation of any of the foregoing
events.

       

      Section
6.10        Amendments to the
Registration Statement.  The Company shall not file any
amendment to the Registration Statement or make any amendment or supplement to
the Prospectus (to the extent related to the sale of Shares hereunder) of which
the Investor shall not have been previously or be simultaneously advised;
provided, however, that the Company may, to the extent it deems advisable, and
without the prior consent of or notice to the Investor, supplement the
Prospectus within two (2) Trading Days following the Settlement Date for each
Draw Down solely to reflect the issuance of Shares with respect to such Draw
Down; and provided further that the Company need not advise the Investor
regarding any supplement the purpose of which is to update the Registration
Statement and the Prospectus to include information the Company has previously
filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act,
and (b) so long as, in the reasonable opinion of counsel for the Investor, a
Prospectus is required to be delivered in connection with sales of the Shares by
the Investor, if the Company files any information, documents or reports that
are incorporated by reference in the Registration Statement pursuant to the
Exchange Act, the Company shall, if requested in writing by the Investor,
deliver a copy of such information, documents or reports to the Investor
promptly following such filing to the extent such information, documents or
reports are not available on the Commission’s IDEA filing system.

       

      Section
6.11        Prospectus
Delivery.  From time to time for such period as in the
reasonable opinion of counsel for the Investor a prospectus is required by the
Securities Act to be delivered in connection with sales by the Investor, the
Company will expeditiously deliver to the Investor, without charge, as many
copies of the Prospectus (and of any amendment or supplement thereto related to
sales by the Investor) as the Investor may reasonably request.  The
Company consents to the use of the Prospectus (and of any amendment or
supplement thereto) in accordance with the provisions of the Securities Act and
state securities laws in connection with the offering and sale of the Shares and
the Warrant Shares and for such period of time thereafter as the Prospectus is
required by the Securities Act to be delivered in connection with sales of the
Shares and the Warrant Shares.  Notwithstanding the foregoing, in no
event shall the Company be under any obligation to the Investor to supplement
the Prospectus to reflect the issuance of any Shares pursuant to a Draw Down at
any time prior to the day following the last Settlement Date with respect to
such Draw Down.

       

      
        
           

        

        
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      ARTICLE
VII

      CONDITIONS
TO THE OBLIGATION OF THE INVESTOR

      TO
ACCEPT A DRAW DOWN

       

      The
obligation of the Investor hereunder to accept a Draw Down Notice and to acquire
and pay for the Shares in accordance therewith is subject to the satisfaction or
waiver, at each Condition Satisfaction Date, of each of the conditions set forth
below.  Other than those conditions set forth in Section 7.12, which
are for the Company’s sole benefit and may be waived by the Company at any time
in its sole discretion, the conditions are for the Investor’s sole benefit and
may be waived by the Investor at any time in its sole discretion.  As
used in this Agreement, the term “Condition Satisfaction
Date” shall mean, with respect to each Draw Down, the date on which the
applicable Draw Down Notice is delivered to the Investor and each Settlement
Date.

       

      Section
7.1          Accuracy of the Company’s
Representations and Warranties.  Each of the representations
and warranties of the Company shall be true and correct in all material respects
as of the date when made as though made at that time except for representations
and warranties that are expressly made as of a particular date.

       

      Section
7.2          Performance by the
Company.  The Company shall have, in all material respects,
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement and the Warrant to be performed, satisfied or
complied with by the Company on or prior to the applicable Condition
Satisfaction Date.

       

      Section
7.3          Compliance with
Law.  The Company shall have complied in all respects with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby except
for any failures to so comply which would not be reasonably expected to have a
Material Adverse Effect.

       

      Section
7.4          Effective Registration
Statement.  The Registration Statement shall have previously
become effective and shall remain effective and (i) neither the Company nor the
Investor shall have received notice that the Commission has issued or intends to
issue a stop order with respect to the Registration Statement or that the
Commission otherwise has suspended or withdrawn the effectiveness of the
Registration Statement, either temporarily or permanently, or intends or has
threatened to do so (unless the Commission’s concerns have been addressed and
the Investor is reasonably satisfied that the Commission no longer is
considering or intends to take such action), and (ii) no other suspension of the
use or withdrawal of the effectiveness of the Registration Statement or the
Prospectus shall exist.

       

      Section
7.5          No
Knowledge.  The Company shall have no Knowledge of any event
that could reasonably be expected to have the effect of causing the Registration
Statement with respect to the sale of the Shares to be suspended or otherwise
ineffective (which event is reasonably likely to occur within eight Trading Days
following the Trading Day on which a Draw Down Notice is delivered) as of the
Settlement Date.

      
        
           

        

        
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      Section
7.6          No
Suspension.  Trading in the Company’s Common Stock shall not
have been suspended by the Commission, the Principal Market or the FINRA and
trading in securities generally as reported on the Principal Market shall not
have been suspended or limited as of the Condition Satisfaction
Date.

       

      Section
7.7          No
Injunction.  No statute, rule, regulation, order, decree, writ,
ruling or injunction shall have been enacted, entered, promulgated, endorsed or,
to the Knowledge of the Company, threatened by any court or governmental
authority of competent jurisdiction which prohibits the consummation of or which
would materially modify or delay any of the transactions contemplated by this
Agreement.

       

      Section
7.8          No Proceedings or
Litigation.  No action, suit or proceeding before any
arbitrator or any court or governmental authority shall have been commenced or,
to the Knowledge of the Company, threatened, and, to the Knowledge of the
Company no inquiry or investigation by any governmental authority shall have
been threatened, against the Company or any subsidiary, or any of the officers,
directors or affiliates of the Company or any subsidiary, seeking to enjoin,
prevent or change the transactions contemplated by this Agreement, or seeking
material damages in connection with such transactions, except for any action,
suit or proceeding that would not reasonably be expected to have a Material
Adverse Effect.

       

      Section
7.9          Sufficient Shares Registered
for Sale.  The Company shall have sufficient Shares, calculated
using the Closing Price of the Common Stock as of the Trading Day immediately
preceding the applicable Draw Down Notice, registered under the Registration
Statement to issue and sell such Shares in accordance with such Draw Down
Notice.

       

      Section
7.10        Payment of Fees and
Expenses.  The Company shall be current on any and all invoices
submitted to the Company in respect of fees and expenses of the Investor
provided for in Section 10.1 hereof, except for such fees, or portion thereof,
that the Company disputes in good faith, provided that such invoices were
submitted to the Company not less than twenty (20) Trading Days prior to
delivery of the applicable Draw Down Notice.

       

      Section
7.11        Opinion of
Counsel.  Prior to receipt of the first Draw Down Notice, the
Investor shall have received an opinion of counsel to the Company mutually
agreed upon between the parties.

       

      Section
7.12        Accuracy of Investor’s
Representations and Warranties.  The representations and
warranties of the Investor shall be true and correct in all material respects as
of the date when made as though made at that time except for representations and
warranties that are expressly made as of a particular date.

       

      ARTICLE
VIII

      TERMINATION

       

      Section
8.1          Term.  Unless
otherwise terminated in accordance with Section 8.2 below, this Agreement shall
terminate upon the earlier to occur of (i) the expiration of the Commitment
Period or (ii) the issuance of Shares pursuant to this Agreement in an amount
equal to the Maximum Commitment Amount.

      
        
           

        

        
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      Section
8.2           Other Termination; Blackout
Periods.

       

      (a)           The
Investor may terminate this Agreement upon (x) one (1) Trading Day’s notice if
the Company enters into any Prohibited Transaction as set forth in Section 6.6
without the Investor’s prior written consent, or (y) one (1) Trading Day’s
notice if the Investor provides written notice of a Material Adverse Effect to
the Company, and such Material Adverse Effect continues for a period of ten (10)
Trading Days after the receipt by the Company of such notice.

       

      (b)           The
Company may terminate this Agreement upon one (1) Trading Day’s notice;
provided, however, that the Company shall not terminate this Agreement pursuant
to this Section 8.2(c) during any Draw Down Pricing Period; provided further,
that, in the event of any termination of this Agreement by the Company pursuant
to this Section 8.2(c), so long as the Investor owns Shares purchased hereunder,
unless all of such shares of Common Stock may be sold by the Investor without
registration and without any time, volume or manner limitations pursuant to Rule
144(b) (or any similar provision then in effect) under the Securities Act, the
Company shall not suspend or withdraw the Registration Statement or otherwise
cause the Registration Statement to become ineffective, or voluntarily delist
the Common Stock from, the Principal Market without listing the Common Stock on
another Principal Market.

       

      (c)           Each
of the parties hereto may terminate this Agreement upon one (1) Trading Day’s
notice if the other party has breached a material representation, warranty or
covenant to this Agreement and such breach is not remedied within ten (10)
Trading Days after notice of such breach is delivered to the breaching
party.

       

      (d)           If,
in the good faith judgment of the Company, following consultation with legal
counsel, it would be detrimental to the Company or its stockholders for sales of
securities of the Company to be made pursuant to the Registration Statement due
to (i) the existence of a material development or potential material development
involving the Company that the Company would be obligated to disclose or
incorporate by reference in the Registration Statement and which the Company has
not disclosed, or which disclosure would be premature or otherwise inadvisable
at such time or would have a Material Adverse Effect on the Company or its
stockholders, or (ii) a filing of a Company-initiated registration of any class
of its equity securities would adversely affect or require premature disclosure
of such material development or potential material development (the Company’s
notice thereof, a “Blackout Notice”),
the Company shall have the right to suspend use of such Registration Statement
for a period of not more than thirty (30) days (any such deferral or suspension
period, a “Blackout
Period”).  The Investor acknowledges that it would be seriously
detrimental to the Company and its stockholders for the Registration Statement
to remain in effect during a Blackout Period and therefore essential to suspend
the use thereof during such Blackout Period and agrees to cease any disposition
of the Shares under the Registration Statement during such Blackout
Period.  The Company may not exercise any of its rights under this
section to suspend the effectiveness of the Registration Statement more than six
(6) times in any twelve (12) month period.  In the event that, within
five (5) Trading Days following any Settlement Date, the Company gives a
Blackout Notice to the Investor and the VWAP on the Trading Day immediately
preceding such Blackout Period (“Old VWAP”) is greater
than the VWAP on the first Trading Day following such Blackout Period that the
Investor may sell its Shares pursuant to an effective Registration Statement
(“New VWAP”),
then the Company shall pay to the Investor, by wire transfer of immediately
available funds to an account designated by the Investor, the “Blackout
Amount.”  For the purposes of this Agreement, Blackout Amount
means the product of (i) the number of Shares purchased by the Investor pursuant
to the most recent Draw Down and actually held by the Investor (and not
otherwise sold, hypothecated or transferred) immediately prior to the Blackout
Period and (ii) the result, if greater than zero, obtained by subtracting the
New VWAP from the Old VWAP; provided, however, that no Blackout Amount shall be
payable in respect of Shares (x) that are otherwise freely tradable by the
Investor, including under Rule 144, during the Blackout Period or (y) if the
Company offers to repurchase from the Investor such Shares for a per share
purchase price equal to the VWAP on the Trading Day immediately preceding the
day on which any such Blackout Period began.  For any Blackout Period
in respect of which a Blackout Amount becomes due and payable, rather than
paying the Blackout Amount, the Company may at its sole discretion, issue to the
Investor shares of Common Stock with an aggregate market value determined as of
the first Trading Day following such Blackout Period equal to the Blackout
Amount (“Blackout
Shares”).

       

      
        
           

        

        
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      Section
8.3          Effect of
Termination.  In the event of termination by the Company or the
Investor, written notice thereof shall forthwith be given to the other party and
the transactions contemplated by this Agreement shall be terminated without
further action by either party.  If this Agreement is terminated as
provided in Section 8.1 or 8.2 herein, this Agreement shall become void and of
no further force and effect, except as provided in Section
10.13.  Nothing in this Section 8.3 shall be deemed to release the
Company or the Investor from any liability for any breach under this Agreement
occurring prior to such termination, or to impair the rights of the Company and
the Investor to compel specific performance by the other party of its
obligations under this Agreement arising prior to such termination.

       

      ARTICLE
IX

      INDEMNIFICATION

       

      Section
9.1           Indemnification.

       

      (a)           Except
as otherwise provided in this Article IX, unless disputed as set forth in
Section 9.2, the Company agrees to indemnify, defend and hold harmless the
Investor and its affiliates and their respective officers, directors, agents,
employees, subsidiaries, partners, members and controlling persons (each, an
“Investor Indemnified
Party”), to the fullest extent permitted by law from and against any and
all Damages directly resulting from or directly arising out of any breach of any
representation or warranty, covenant or agreement (except as otherwise
specifically provided) by the Company in this Agreement; provided, however, that
the Company shall not be liable under this Article IX to an Investor Indemnified
Party to the extent that such Damages resulted or arose from the breach by an
Investor Indemnified Party of any representation, warranty, covenant or
agreement of an Investor Indemnified Party contained in this Agreement, or the
negligence, recklessness, willful misconduct or bad faith of an Investor
Indemnified Party.  The parties intend that any Damages subject to
indemnification pursuant to this Article IX will be net of insurance proceeds
(which the Investor agrees to use commercially reasonable efforts to recover or
to cause any Investor Indemnified Party to recover).  Accordingly, the
amount which the Company is required to pay to any Investor Indemnified Party
hereunder (a “Company
Indemnity Payment”) will be reduced by any insurance proceeds actually
recovered by or on behalf of any Investor Indemnified Party in reduction of the
related Damages.  In addition, if an Investor Indemnified Party
receives a Company Indemnity Payment required by this Article IX in respect of
any Damages and subsequently receives any such insurance proceeds, then the
Investor will pay, or will cause such other Investor Indemnified Party to pay,
to the Company an amount equal to the Company Indemnity Payment received less
the amount of the Company Indemnity Payment that would have been due if the
insurance proceeds had been received, realized or recovered before the Company
Indemnity Payment was made.

       

      
        
           

        

        
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      (b)           Except
as otherwise provided in this Article IX, unless disputed as set forth in
Section 9.2, the Investor agrees to indemnify, defend and hold harmless the
Company and its affiliates and their respective officers, directors, agents,
employees, subsidiaries, partners, members and controlling persons (each, a
“Company Indemnified
Party”), to the fullest extent permitted by law from and against any and
all Damages directly resulting from or directly arising out of any breach of any
representation or warranty, covenant or agreement by the Investor in this
Agreement; provided, however, that the Investor shall not be liable under this
Article IX to a Company Indemnified Party to the extent that such Damages
resulted or arose from the breach by a Company Indemnified Party of any
representation, warranty, covenant or agreement of a Company Indemnified Party
contained in this Agreement or the negligence, recklessness, willful misconduct
or bad faith of a Company Indemnified Party.  The parties intend that
any Damages subject to indemnification pursuant to this Article IX will be net
of insurance proceeds (which the Company agrees to use commercially reasonable
efforts to recover or to cause any Company Indemnified Party to
recover).  Accordingly, the amount which the Investor is required to
pay to any Company Indemnified Party hereunder (an “Investor Indemnity
Payment”) will be reduced by any insurance proceeds theretofore actually
recovered by or on behalf of any Company Indemnified Party in reduction of the
related Damages.  In addition, if a Company Indemnified Party receives
an Investor Indemnity Payment required by this Article IX in respect of any
Damages and subsequently receives any such insurance proceeds, then the Company
Indemnified Party will pay, or will cause such other Company Indemnified Party
to pay, to the Investor an amount equal to the Investor Indemnity Payment
received less the amount of the Investor Indemnity Payment that would have been
due if the insurance proceeds had been received, realized or recovered before
the Investor Indemnity Payment was made.

       

      Section
9.2          Notification of Claims for
Indemnification.  Each party entitled to indemnification under
this Article IX (an “Indemnified Party”)
shall, promptly after the receipt of notice of the commencement of any claim
against such Indemnified Party in respect of which indemnity may be sought from
the party obligated to indemnify such Indemnified Party under this Article IX
(the “Indemnifying
Party”), notify the Indemnifying Party in writing of the commencement
thereof.  Any such notice shall describe the claim in reasonable
detail.  The failure of any Indemnified Party to so notify the
Indemnifying Party of any such action shall not relieve the Indemnifying Party
from any liability which it may have to such Indemnified Party (a) other than
pursuant to this Article IX or (b) under this Article IX unless, and only to the
extent that, such failure results in the Indemnifying Party’s forfeiture of
substantive rights or defenses or the Indemnifying Party is prejudiced by such
delay.  The procedures listed below shall govern the procedures for
the handling of indemnification claims.

       

      
        
           

        

        
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      (a)           Any
claim for indemnification for Damages that do not result from a Third Party
Claim as defined in the following paragraph, shall be asserted by written notice
given by the Indemnified Party to the Indemnifying Party.  Such
Indemnifying Party shall have a period of thirty (30) days after the receipt of
such notice within which to respond thereto.  If such Indemnifying
Party does not respond within such thirty (30) day period, such Indemnifying
Party shall be deemed to have refused to accept responsibility to make payment
as set forth in Section 9.1.  If such Indemnifying Party does not
respond within such thirty (30) day period or rejects such claim in whole or in
part, the Indemnified Party shall be free to pursue such remedies as specified
in this Agreement.

       

      (b)           If
an Indemnified Party shall receive notice or otherwise learn of the assertion by
a person or entity not a party to this Agreement of any threatened legal action
or claim (collectively a “Third Party Claim”),
with respect to which an Indemnifying Party may be obligated to provide
indemnification, the Indemnified Party shall give such Indemnifying Party
written notice thereof within twenty (20) days after becoming aware of such
Third Party Claim.

       

      (c)           An
Indemnifying Party may elect to defend (and, unless the Indemnifying Party has
specified any reservations or exceptions, to seek to settle or compromise) at
such Indemnifying Party’s own expense and by such Indemnifying Party’s own
counsel, any Third Party Claim.  Within thirty (30) days after the
receipt of notice from an Indemnified Party (or sooner if the nature of such
Third Party Claim so requires), the Indemnifying Party shall notify the
Indemnified Party whether the Indemnifying Party will assume responsibility for
defending such Third Party Claim, which election shall specify any reservations
or exceptions.  If such Indemnifying Party does not respond within
such thirty (30) day period or rejects such claim in whole or in part, the
Indemnified Party shall be free to pursue such remedies as specified in this
Agreement.  In case any such Third Party Claim shall be brought
against any Indemnified Party, and it shall notify the Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled to assume the
defense thereof at its own expense, with counsel satisfactory to such
Indemnified Party in its reasonable judgment; provided, however, that any
Indemnified Party may, at its own expense, retain separate counsel to
participate in such defense at its own expense.  Notwithstanding the
foregoing, in any Third Party Claim in which both the Indemnifying Party, on the
one hand, and an Indemnified Party, on the other hand, are, or are reasonably
likely to become, a party, such Indemnified Party shall have the right to employ
separate counsel and to control its own defense of such claim if, in the
reasonable opinion of counsel to such Indemnified Party, either (x) one or more
significant defenses are available to the Indemnified Party that are not
available to the Indemnifying Party or (y) a conflict or potential conflict
exists between the Indemnifying Party, on the one hand, and such Indemnified
Party, on the other hand, that would make such separate representation
advisable; provided, however, that in such circumstances the Indemnifying Party
(i) shall not be liable for the fees and expenses of more than one counsel to
all Indemnified Parties and (ii) shall reimburse the Indemnified Parties for
such reasonable fees and expenses of such counsel incurred in any such Third
Party Claim, as such expenses are incurred, provided that the Indemnified
Parties agree to repay such amounts if it is ultimately determined that the
Indemnifying Party was not obligated to provide indemnification under this
Article IX.  The Indemnifying Party agrees that it will not, without
the prior written consent of the Indemnified Party, settle, compromise or
consent to the entry of any judgment in any pending or threatened claim relating
to the matters contemplated hereby (if any Indemnified Party is a party thereto
or has been actually threatened to be made a party thereto) unless such
settlement, compromise or consent includes an unconditional release of such
Indemnified Party from all liability arising or that may arise out of such
claim.  The Indemnifying Party shall not be liable for any settlement
of a claim effected against an Indemnified Party without the Indemnifying
Party’s written consent, which consent shall not be unreasonably withheld,
conditioned or delayed. The rights accorded to an Indemnified Party hereunder
shall be in addition to any rights that any Indemnified Party may have at common
law, by separate agreement or otherwise; provided, however, that notwithstanding
the foregoing or anything to the contrary contained in this Agreement, nothing
in this Article IX shall restrict or limit any rights that any Indemnified Party
may have to seek equitable relief.

       

      
        
           

        

        
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      ARTICLE
X

      MISCELLANEOUS

       

      Section
10.1         Fees and
Expenses.

       

      (a)           Each
of the Company and the Investor agrees to pay its own expenses incident to the
performance of its obligations hereunder, except that the Company shall be
solely responsible for (i) all reasonable attorneys fees and expenses incurred
by the Investor in connection with the preparation, negotiation, execution and
delivery of this Agreement and the Warrant, and review of the Registration
Statement, and in connection with any amendments and modifications to this
Agreement, (ii) subject in all cases to Section 10.1(b) hereof, all reasonable
fees and expenses incurred in connection with the Investor’s enforcement of this
Agreement, including, without limitation, all reasonable attorneys fees and
expenses, (iii) as compensation for all other ongoing due diligence, legal and
transaction expenses of the Investor during the term of this Agreement, a fee
equal to 1.85% of the gross proceeds of each individual Draw Down (which amount
may be deducted from the aggregate purchase price paid in respect of such Draw
Down); provided that
for any calendar quarter during which the Company elects not to deliver a Draw
Down Notice hereunder, the Company shall pay to the Investor a fee equal to
$15,000, and (iv) all stamp or other similar taxes and duties, if any, levied in
connection with issuance of the Shares pursuant hereto; provided, however, that the maximum
aggregate amount payable by the Company pursuant to clause (i) above shall be
$45,000 and the Investor shall bear all fees and expenses described in clause
(i) above in excess of $45,000.  For the avoidance of doubt, payment
of the fee specified in clause (iii) of the foregoing sentence shall be the sole
obligation of the Company with respect to such expenses of the
Investor.

       

      (b)           If
any action at law or in equity is necessary to enforce or interpret the terms of
this Agreement or the Warrant, the prevailing party shall be entitled to
reasonable fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.

       

      Section
10.2        Reporting Entity for the
Common Stock.  The reporting entity relied upon for the
determination of the trading price or trading volume of the Common Stock on any
given Trading Day for the purposes of this Agreement shall be Bloomberg, L.P.,
any successor thereto, or any mutually agreed upon trading platform, provided
that the Closing Price shall be reported by the Principal Market.  The
written mutual consent of the Investor and the Company shall be required to
employ any other reporting entity.

       

      
        
           

        

        
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      Section
10.3        Brokerage.  Each
of the parties hereto represents that it has had no dealings in connection with
this transaction with any finder or broker who will demand payment of any fee or
commission from the other party.  The Company on the one hand, and the
Investor, on the other hand, agree to indemnify the other against and hold the
other harmless from any and all liabilities to any Persons claiming brokerage
commissions or finder’s fees on account of services purported to have been
rendered on behalf of the indemnifying party in connection with this Agreement
or the transactions contemplated hereby.

       

      
        
           

        

        
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      Section
10.4        Notices.  All
notices, demands, requests, consents, approvals, and other communications
required or permitted hereunder shall be in writing and, unless otherwise
specified herein, shall be (i) personally served, (ii) deposited in the mail,
registered or certified, return receipt requested, postage prepaid, (iii)
delivered by reputable air courier service with charges prepaid, or (iv)
transmitted by hand delivery, telegram, or facsimile, addressed as set forth
below or to such other address as such party shall have specified most recently
by written notice given in accordance herewith, in each case with a copy to the
e-mail address set forth beside the facsimile number for the addressee
below.  Any notice or other communication required or permitted to be
given hereunder shall be deemed effective (a) upon hand delivery or delivery by
facsimile, with accurate confirmation generated by the transmitting facsimile
machine, at the address or number designated below (if delivered on a Trading
Day during normal business hours where such notice is to be received), or the
first Trading Day following such delivery (if delivered other than on a Trading
Day during normal business hours where such notice is to be received) or (b) on
the second Trading Day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur.  The addresses for such
communications shall be:

       

      If to the
Company:

       

      Discovery
Laboratories, Inc.

      2600
Kelley Road, Suite 100

      Warrington,
Pennsylvania 18976

      Facsimile:
215-488-9557

      Attention:
Deputy General Counsel

      Email:
mtempleton@DiscoveryLabs.com

       

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

       

      Sonnenschein,
Nath & Rosenthal LLP

      1221
Avenue of the Americas

      New York,
NY  10020-1089

      Facsimile:
212 768 6800

      Attention:
Ira L. Kotel, Esq.

      Email:
ikotel@sonnenschein.com

       

      if to the
Investor:

       

      Kingsbridge
Capital Limited

      Attention:
Mr. Antony Gardner-Hillman

      P.O. Box
1075

      Elizabeth
House

      9 Castle
Street

      St.
Helier

      Jersey

      JE42QP

      Channel
Islands

      Telephone:
011-44-1534-636-041

      Facsimile:
011-44-1534-636-042

      Email:
admin@kingsbridgecap.com; and adamgurney@kingsbridgecap.com

      
        
           

        

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

      

      Kingsbridge
Corporate Services Limited

      Kingsbridge
House

      New
Abbey

      Kilcullen,
County Kildare

      Republic
of Ireland

      Telephone:
011-353-45-481-811

      Facsimile:
011-353-45-482-003

      Email:
adamgurney@kingsbridge.ie; theabrowne@kingsbridge.ie; and
pwhelan@kingsbridge.ie

       

      and
another copy (which shall not constitute notice) to:

       

      Stroock
& Stroock & Lavan LLP

      180
Maiden Lane

      New York,
NY 10038

      Facsimile:
(212) 806-9238

      Attention:
Keith M. Andruschak, Esq. — kandruschak@stroock.com

       

      Either
party hereto may from time to time change its contact information for notices
under this Section by giving at least ten (10) days’ prior written notice of
such changed contact information to the other party hereto.

       

      Section
10.5        Assignment.  Neither
this Agreement nor any rights of the Investor or the Company hereunder may be
assigned by either party to any other Person without the prior written consent
of the other party, and any purported assignment without such consent shall be
void ab initio.

       

      Section
10.6        Amendment; No
Waiver.  No party shall be liable or bound to any other party
in any manner by any warranties, representations or covenants except as
specifically set forth in this Agreement and the Warrant.  Except as
expressly provided in this Agreement and the Warrant, neither this Agreement nor
any term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by both parties hereto.  The failure of
either party to insist on strict compliance with this Agreement, or to exercise
any right or remedy under this Agreement, shall not constitute a waiver of any
rights provided under this Agreement, nor estop the parties from thereafter
demanding full and complete compliance nor prevent the parties from exercising
such a right or remedy in the future.

       

      Section
10.7        Entire
Agreement.  This Agreement and the Warrant set forth the entire
agreement and understanding of the parties relating to the subject matter hereof
and supersedes all prior and contemporaneous agreements, negotiations and
understandings between the parties, both oral and written, relating to the
subject matter hereof.

      
        
           

        

        
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      Section
10.8        Title and
Subtitles.  The titles and subtitles used in this Agreement are
used for the convenience of reference and are not to be considered in construing
or interpreting this Agreement.

       

      Section
10.9        Counterparts.  This
Agreement may be executed in multiple counterparts, each of which may be
executed by less than all of the parties and shall be deemed to be an original
instrument which shall be enforceable against the parties actually executing
such counterparts and all of which together shall constitute one and the same
instrument.

       

      Section
10.10      Choice of
Law.  This Agreement shall be construed under the laws of the
State of New York, without giving effect to the choice of law provisions of such
state that would cause the application of the laws of any other
jurisdiction.

       

      Section
10.11       Specific Enforcement,
Consent to Jurisdiction.

       

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

       

      (b)           Each
of the Company and the Investor (i) hereby irrevocably submits to the
jurisdiction of the United States District Court and other courts of the United
States sitting in the State of New York for the purposes of any suit, action or
proceeding arising out of or relating to this Agreement and (ii) hereby waives,
and agrees not to assert in any such suit, action or proceeding, any claim that
it is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper.  Each of the Company and
the Investor consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof.  Nothing in
this Section 10.12 shall affect or limit any right to serve process in any other
manner permitted by law.

       

      Section
10.12      Survival.  The
representations and warranties of the Company and the Investor contained in
Articles IV and V and the covenants contained in Article V and Article VI shall
survive the execution and delivery hereof and the Closing until the termination
of this Agreement, and the agreements and covenants set forth in Article VIII
and Article IX of this Agreement shall survive the execution and delivery hereof
and the Closing hereunder.

       

      
        
           

        

        
          - 34
-

          
            

          

        

        
           

        

      

      Section
10.13      Publicity.  Except
as otherwise required by applicable law or regulation, or Nasdaq rule or
judicial process, prior to the Closing, neither the Company nor the Investor
shall issue any press release or otherwise make any public statement or
announcement with respect to this Agreement or the transactions contemplated
hereby or the existence of this Agreement.  In the event the Company
is required by law, regulation, Nasdaq rule or judicial process, based upon
reasonable advice of the Company’s counsel, to issue a press release or
otherwise make a public statement or announcement with respect to this Agreement
prior to the Closing, the Company shall consult with the Investor on the form
and substance of such press release, statement or
announcement.  Promptly after the Closing, each party may issue a
press release or otherwise make a public statement or announcement with respect
to this Agreement or the transactions contemplated hereby or the existence of
this Agreement; provided that, prior to issuing any such press release, making
any such public statement or announcement, the party wishing to make such
release, statement or announcement consults and cooperates in good faith with
the other party in order to formulate such press release, public statement or
announcement in form and substance reasonably acceptable to both
parties.

       

      Section
10.14      Severability.  The
provisions of this Agreement are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of the provisions contained in this Agreement shall, for any reason, be
held to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of a
provision of this Agreement, and this Agreement shall be reformed and construed
as if such invalid or illegal or unenforceable provision, or part of such
provision, had never been contained herein, so that such provisions would be
valid, legal and enforceable to the maximum extent
possible.  Notwithstanding the foregoing, if the severance of such
provision materially changes the economic benefits of this Agreement, as
reformed, to either party as such benefits are anticipated as of the date
hereof, then such party may terminate this Agreement on five (5) Trading Days
prior written notice to the other party.

       

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

       

      [Remainder
of this page intentionally left blank]

       

      
        
           

        

        
          - 35
-

          
            

          

        

        
           

        

      

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

       

      
        
          	
                  KINGSBRIDGE
      CAPITAL LIMITED

                
	 
      
	
                  By:

                	
                  /s/ Antony
  Gardner-Hillman

                
	 
      	
                  Antony
      Gardner-Hillman

                
	 
      	
                  Director

                
	 
      	 
      
	
                  DISCOVERY
      LABORATORIES, INC.

                
	 
      
	
                  By:

                	
                  /s/ John G. Cooper

                
	 
      	
                  John
      G. Cooper

                
	 
      	
                  Executive
      Vice President and Chief Financial
Officer

                

        

      

       

      [Signature
Page to Common Stock Purchase Agreement]

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Exhibit
A

       

      Form
of Warrant

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Exhibit
B

       

      Form
of Draw Down Notice

       

      Kingsbridge
Capital Limited

      Attention:
Mr. Tony Hillman

      P.O. Box
1075

      Elizabeth
House

      9 Castle
Street

      St.
Helier

      Jersey

      JE42QP

      Channel
Islands

      Facsimile:
011-44-1534-636-042

      Email:
admin@kingsbridgecap.com; and adamgurney@kingsbridgecap.com

      

      Kingsbridge
Corporate Services Limited

      Kingsbridge
House

      New
Abbey

      Kilcullen,
County Kildare

      Republic
of Ireland

      Facsimile:
011-353-45-482-003

      Email:
adamgurney@kingsbridge.ie; theabrowne@kingsbridge.ie and
pwhelan@kingsbridge.ie

       

      Stroock
& Stroock & Lavan LLP

      180
Maiden Lane

      New York,
NY 10038

      Facsimile:
(212) 806-5400

      Attention:
Keith M. Andruschak, Esq. – kandruschak@stroock.com

       

      Reference
is hereby made to that certain Common Stock Purchase Agreement dated as of June
__, 2010 (the “Agreement”) by and between Discovery Laboratories, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
“Company”), and Kingsbridge Capital Limited, an entity organized and existing
under the laws of the British Virgin Islands (the
“Investor”).  Capitalized terms used and not otherwise defined herein
shall have the meanings given such terms in the Agreement.

       

      In
accordance with and pursuant to Section 3.1 of the Agreement, the Company hereby
issues this Draw Down Notice to the Investor pursuant to the terms set forth
below.

       

      First
Trading Day of Draw Down Pricing Period: __________, 20[_];

       

      
        
          
            	
                    Minimum
      Obligated Amount:

                  	
                    $_______________

                  

          

        

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      (determined
using First Methodology/
Second Methodology (PLEASE CIRCLE ONE));

       

      
        
          
            
              	
                      Threshold
      Price:

                    	
                      $_______________.

                    
	 	 
	
                      Supplemental
      Amount:

                    	
                      $_______________;

                    
	 	 
	
                      Supplemental
      Threshold Price:

                    	
                      $_______________

                    

            

          

        

      

      

      Enclosed
with this Draw Down Notice is an executed copy of the Officer’s Certificate
described in Section 3.1 of the Agreement, the base form of which is attached to
such Agreement as Exhibit C.

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Exhibit
C

       

      Form
of Officer’s Certificate

       

      I, [NAME
OF OFFICER], do hereby certify to Kingsbridge Capital Limited (the “Investor”), with
respect to the common stock of Discovery Laboratories, Inc. (the “Company”) issuable in
connection with the Draw Down Notice, dated _______________ (the “Notice”) attached
hereto and delivered pursuant to Article III of the Common Stock Purchase
Agreement, dated June __, 2010 (the “Agreement”), by and
between the Company and the Investor, as follows (capitalized terms used but
undefined herein have the meanings given to such terms in the
Agreement):

       

      I am the
duly elected [OFFICER] of the Company.

       

      The
representations and warranties of the Company set forth in Article IV of the
Agreement are true and correct in all material respects as though made on and as
of the date hereof (except for such representations and warranties that are made
as of a particular date).

       

      The
Company has performed in all material respects all covenants and agreements to
be performed by the Company on or prior to the date hereof related to the Notice
and has satisfied each of the conditions to the obligation of the Investor set
forth in Article VII of the Agreement.

       

      The
Registration Statement is currently effective with the Commission for the sale
of Shares to the Investor.

       

      Assuming
the accuracy of the representations and agreements of the Investor contained in
Section 5.10 of the Agreement, the Shares issuable in respect of the Notice will
be delivered via book entry through the DTC to an account designated by the
Investor.

       

      The
undersigned has executed this Certificate this _____ day of, 20[_].

       

      
        
          
            	
                    Name:

                  	
                      

                  
	
                    Title:

                  	
                      

                  

          

        

      

       

      
        
           

        

        
           

          
            

          

        

        
           

        

      

      Exhibit
D

       

      Form
of Supplemental Amount Exercise Notice

       

      Discovery
Laboratories, Inc.

      2600
Kelley Road, Suite 100

      Warrington,
Pennsylvania 18976

      Facsimile:
215-488-9557

      Attention:
Deputy General Counsel

       

      Reference
is hereby made to that certain Common Stock Purchase Agreement, dated as of June
[__], 2010 (the “Agreement”), by and
between Kingsbridge Capital Limited, an entity organized and existing under the
laws of the British Virgin Islands (the “Investor”), and
Discovery Laboratories, Inc. a corporation organized and existing under the laws
of the State of Delaware (the “Company”).  Capitalized
terms used and not otherwise defined herein shall have the meanings given such
terms in the Agreement.

       

      In
connection with that certain Draw Down Notice, dated _________ (the “Notice”), the
undersigned duly authorized representative of the Investor hereby notifies the
Company in accordance with Section 3.2 of the Agreement that the Investor shall
fund the Supplemental Amount (or portion thereof) specified in the Notice as
follows:

       

      
        
          
            
              
                	
                        Trading
      Day of Exercise:

                      	
                        ____________________

                      
	 	 
	
                        Supplemental
      Amount (or portion thereof):

                      	
                        $___________________

                      
	 	 
	
                        Purchase
      Price:

                      	
                        $___________________

                      
	 	 
	
                        Number
      of Shares:

                      	
                        ____________________

                      

              

            

          

        

      

      

      The
Shares issuable for such Supplemental Amount (or portion thereof) shall be
issued and paid for in connection with the next Settlement Date.

       

      
        
          
            	
                    Name:

                  	
                      

                  
	
                    Title:EXECUTION
COPY

     

    
      
        

      

    REVOLVING
CREDIT AGREEMENT

     

    -
Between -

     

    MOD-PAC
CORP.

    as
Borrower

     

    -
And -

     

    MANUFACTURERS
AND TRADERS TRUST COMPANY

    as
Lender

     

    
      
        

      

    Dated:
as of June 9, 2010

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    WITNESSETH

     

    REVOLVING
CREDIT AGREEMENT (“Agreement”) dated as of June 9, 2010 between MOD-PAC
CORP., a New York Corporation with its principal place of business at
1801 Elmwood Avenue, Buffalo New York 14207 (“Borrower”) and MANUFACTURERS
AND TRADERS TRUST COMPANY, a New York banking corporation, with a place
of business at One Fountain Plaza, Buffalo, New York 14203 (together with its
successors and/or assigns the “Lender”).

     

    BACKGROUND

     

    WHEREAS,
Borrower has requested that Lender provide financing to Borrower in the form of
a revolving loan facility for its general corporate purposes, to finance the
future working capital requirements of Borrower and to provide letters of credit
to Borrower; and

     

    WHEREAS,
the Lender is willing to provide financing to the Borrower on the terms and
conditions set forth herein.

     

    NOW,
THEREFORE, the Borrower and the Lender agree as
follows:

     

    ARTICLE
II.   DEFINITIONS

     

    1.1           Definitions.  As
used in this Agreement, unless otherwise specified, the following terms shall
have the following respective meanings:

     

     “Administrative
Fee”- has the meaning set forth in Section
2.4(j).

     

     “Advance”,
or collectively, “Advances”
– any amount advanced to the Borrower under the Revolving Credit.

     

    “Affiliate”
or “Affiliates”
– singly or collectively, any Person that directly or indirectly, through one or
more intermediaries, Controls, or is Controlled by, or is under Common Control
with the Person specified. Notwithstanding the foregoing, no individual shall be
considered an Affiliate of a Person solely by reason of such individual’s
position as an officer or director of such Person or an Affiliate of such
Person.

     

     “Anti-Terrorism
Laws” – any statutes, regulations, codes, rules and/or executive orders
and relating to terrorism or money laundering, including Executive Order No.
13224, the USA Patriot Act, the Laws comprising or implementing the Bank Secrecy
Act, and the Laws administered by the United States Treasury Department’s Office
of Foreign Asset Control (as any of the forgoing Laws may from time to time be
amended, renewed, extended or replaced).

     

     “Applicable
Interest Margin” – two hundred seventy-five (275) basis
points.

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

     “Borrower”
– as defined in the opening paragraph of this Agreement.

     

     “Business
Day” – any day excluding Saturday, Sunday, and any day in which banks in
Buffalo, New York are authorized by law or governmental action to
close.

     

     “Change
of Control” – means (a) the acquisition of ownership or voting control,
directly or indirectly, beneficially (within the meaning of Rules 13d-3 and
13d-5 of the Exchange Act, as then in effect) or of record, on or after the
Closing Date, by any Person or group (within the meaning of Sections 13d and 14d
of the Exchange Act, as then in effect), of shares representing more than fifty
percent (50%) of the aggregate ordinary Voting Power represented by the issued
and outstanding capital stock of Borrower; (b) the occupation of a majority of
the seats (other than vacant seats) on the board of directors or other governing
body of Borrower by Persons who were neither (i) nominated by the board of
directors or other governing body of Borrower nor (ii) appointed by directors so
nominated or (c) the sale of substantially all of the assets of the
Borrower.

     

     “Closing
Date” – the date of this Agreement.

     

     “Code”
– the Internal Revenue Code of 1986, as amended.

     

     “Collateral”
– as defined in Section 3.4 of this Agreement.

     

     “Collateral
Documents” – collectively, the Security Agreement and Financing
Statements.

     

     “Compliance
Certificate” – a certificate from the Chief Executive Officer, Chief
Financial Officer or Vice President of Finance of Borrower substantially in the
form of Exhibit C
attached hereto with all blanks appropriately completed.

     

     “Control”,
“Controlling”,
“Controlled
by”, and “under
Common Control with” – the possession, direct or indirect, of the power
to (a) vote 51% or more of the securities having ordinary voting power for
the election of directors, or (b) cause the direction of the management and
policies, whether by contract or through the ownership of stock or other
interests, or otherwise.

     

     “Credit”
– the Revolving Credit as defined in this Agreement.

     

    “Current
Assets” means, at any time, the consolidated aggregate amount of all
current assets of the Borrower and any Subsidiaries, including, but not limited
to, cash, cash equivalents, marketable securities, receivables maturing within
twelve (12) months from such time, and inventory (net of LIFO Reserve), all as
determined in accordance with GAAP.

     

    “Current
Liabilities” means, at any time, the consolidated aggregate amount of all
liabilities and obligations of the Borrower and any Subsidiaries which are due
and payable on demand or within twelve (12) months from such time, or should be
properly reflected as attributable to such twelve (12) month period in
accordance with GAAP.

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

     

     “Current
Ratio” means, at any time, the ratio of (i) (a) Current Assets minus
(b) cash to (ii) (a) Current Liabilities plus
(b) the sum of (I) the aggregate outstanding principal amount of all Revolving
Loans and (II) the LC Exposure.

     

     “Disposal”
– the intentional or unintentional abandonment, discharge, deposit, injection,
dumping, spilling, leaking, storing, burning, terminal destruction or placing of
any substance so that it or any of its constituents may enter the
Environment.

     

    “Domestic
Subsidiary” shall mean each Subsidiary of the Borrower that is organized
under the laws of the United States, any state, territory, protectorate or
commonwealth thereof, or the District of Columbia.

     

     “Environment”
– any water including, but not limited to, surface water and ground water or
water vapor; any land including land surface or subsurface; stream sediments;
air; fish; wildlife; plants; and all other natural resources or environmental
media.

     

     “Environmental
Laws” – all federal, state, provincial and local environmental, land use,
zoning, health, chemical use, safety and sanitation laws, statutes, ordinances,
regulations, codes and rules relating to the protection of the Environment
and/or governing the use, storage, treatment, generation, transportation,
processing, handling, production or disposal of Hazardous Substances and the
policies, guidelines, procedures, interpretations, decisions, orders and
directives of federal, state and local governmental agencies and authorities
with respect thereto.

     

     “Environmental
Permits” – all licenses, permits, approvals, authorizations, consents or
registrations required by any applicable Environmental Laws and all applicable
judicial and administrative orders in connection with ownership, lease,
purchase, transfer, closure, use and/or operation of Borrower’s property and/or
as may be required for the storage, treatment, generation, transportation,
processing, handling, production or disposal of Hazardous
Substances.

     

    “Environmental
Questionnaire” – a questionnaire and all attachments thereto
concerning:  (a) activities and conditions affecting the Environment at any
property of Borrower or (b) the enforcement or possible enforcement of any
Environmental Law against Borrower. As of the date hereof, Borrower has not
delivered any Environmental Questionnaire to Lender

     

     “Environmental
Report” – a written report prepared for Borrower by an environmental
consulting or environmental engineering firm. As of the date hereof, Borrower
has not delivered any Environmental Report to Lender.

     

     “ERISA”
– the Employee Retirement Income Security Act of 1974, as amended by the
Multiemployer Pension Plan Amendments Act of 1980.

     

     “Event
of Default” – as defined in Section 7.1 of this
Agreement.

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

     

    “Exchange
Act” – means the Securities Exchange Act of 1934, as
amended.

     

     “Executive
Order No. 13224” - the Executive Order No. 13224 on Terrorist Financing,
effective September 24, 2001, as the same has been, or shall hereafter be,
amended, renewed, extended or replaced.

     

     “Fiscal
Year” or “fiscal
year” – each twelve (12) month period ending on December 31of each
year.

     

    “Foreign
Subsidiary” means a Subsidiary that is organized under the laws of any
jurisdiction other than the United States, any State thereof or the District of
Columbia.

     

     “GAAP”
– means as of the date of any determination, generally accepted accounting
principles in effect from time to time in the United States of America,
consistently applied and maintained throughout the relevant periods and from
period to period.

     

    “Hazardous
Substances” – without limitation, any explosives, radon, radioactive
materials, asbestos, urea formaldehyde foam insulation, polychlorinated
biphenyls, petroleum and petroleum products, methane, hazardous materials,
hazardous wastes, hazardous or toxic substances and any other material defined
as a hazardous substance in Section 101(14) of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, 42 U.S.C. Section
9601(14).

     

     “Incipient
Default” – an event or condition which, but for the requirements of
notice, or lapse of time, or both, would constitute an Event of
Default.

     

    “Indebtedness”
– at a particular date, without duplication, (a) all indebtedness of a Person
for borrowed money whether or not evidenced by a note, bond, debenture or other
debt instrument, or for the deferred purchase price of property (excluding trade
accounts payable in the ordinary course of business), whether short term or long
term, (b) any indebtedness secured by a lien on a Person’s assets whether or not
such Person is primarily liable for repayment thereof, (c) the Stated Amount of
all letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder and not repaid by such Person, (d)
lease obligations of such Person which, in accordance with GAAP, should be
capitalized , (e) any other transaction (including forward sale or purchase
agreements) having the commercial effect of a borrowing of money entered into by
such Person to finance its operations or capital requirements and (f) any
obligations described in any of the preceding clauses for which a Person is
obligated pursuant to a guaranty (and not already included as part of the
consolidated Indebtedness of such Person).

     

     “Intangible
Assets” – on a consolidated basis with respect to the Borrower and any
Subsidiaries, (a) all loans or advances to and other receivables owing from, any
officer and employees and other receivables owing from, any officers, employees
and Affiliates, (b) goodwill, and (c) any other assets deemed
intangible under GAAP.

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

     

    “Inventory”
– inventory, as defined in the Uniform Commercial Code as in effect in New York
State as of the date of this Agreement, and in any event shall include returned
or repossessed goods.

     

    “LC
Disbursement” –means the aggregate amount of all draws paid by the Lender
pursuant to the Letters of Credit.

     

    “LC
Exposure” – means, at any time, the sum of (a) the aggregate undrawn
amounts of all outstanding Letters of Credit at such time, plus
(b) the aggregate amount of all LC Disbursements drawn under any Letters of
Credit that have not yet been reimbursed by the Borrower at such
time.

     

    “Letter
of Credit” – means any irrevocable standby letter of credit issued to
Lender pursuant to this Agreement.

     

    “Letter
of Credit Commitment” – means the commitment of the Lender under this
Agreement to issue Letters of Credit in an aggregate Stated Amount available to
be drawn not to exceed, at any time, (i) one million Five Hundred Thousand and
00/100 dollars ($1,500,000.00) minus
(ii) the LC Exposure at such time.

     

    “Letter
of Credit Documents” – means, with respect to any Letter of Credit,
collectively, any application therefor and any other agreements, instruments,
guarantees or other documents (whether general in application or applicable only
to such Letter of Credit) governing or providing for (a) the rights and
obligations of the parties concerned or at risk with respect to such Letter of
Credit, or (b) any collateral security for any of such obligations, each as the
same may be modified and supplemented and in effect from time to
time.

     

    “Letter
of Credit Fees” – as defined in Section
2.4(i).

     

     “Lender”
– as defined in the opening paragraph of this Agreement, and its successors and
assigns.

     

     “Libor
Loan” – any portion of the Revolving Credit on which interest is
calculated based on the Libor Rate plus an Applicable Interest
Margin.

     

     “Libor
Rate” – the rate per annum (rounded upward, if necessary, to the nearest
1/16th of 1%)
obtained by dividing (i) the applicable  London Interbank Offered Rate
for the one-month interest period, as fixed by the British Bankers Association
for United States dollar deposits in the London interbank market at
approximately 11:00 a.m. London, England time (or as soon thereafter as
practicable) each day (or if such day is not a London Business Day, as fixed in
the same manner on the immediately preceding London Business Day, which day’s
rate shall, unless otherwise provided for, apply to the immediately succeeding
non-London Business Days), as determined by the Lender from any broker, quoting
service or commonly available source utilized by the Lender, by (ii) a
percentage equal to 100% minus the stated maximum rate of all reserves required
to be maintained against “Eurocurrency Liabilities” as specified in Regulation D
(or against any other category of liabilities, which includes deposits by
reference to which the interest rate on LIBOR Rate Loan(s) is determined, or any
category of extensions of credit or other assets which includes loans by a
non-United States’ office of a bank to United States’ residents) on such date to
any member bank of the Federal Reserve System. Notwithstanding any provision
above, the practice of rounding to determine LIBOR may be discontinued at any
time in the Bank’s sole discretion.

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

     

     “Lien”
– any mortgage, deed of trust, pledge, hypothecation, assignment, security
interest, lien, charge or encumbrance, or preference, priority or other security
agreement or preferential arrangement in respect of any asset of any kind or
nature whatsoever (including, without limitation, any conditional sale or other
title retention agreement, any financing lease having substantially the same
economic effect as any of the foregoing, and the filing of, or agreement to
give, any financing statement under the Uniform Commercial Code or comparable
law of any jurisdiction).

     

     “Loan”
or “Loans”
– individually and collectively, any Advance under the Revolving Loan, whether
initially made as a Libor Loan or converted to a Prime Rate Loan pursuant to
Section 2.10.

     

     “Loan
Account” – an account maintained with the Lender for the Borrower into
which the proceeds of any funds borrowed hereunder shall be initially
deposited.

     

     “Loan
Document” – any document executed and delivered by Borrower or the Lender
in connection with this Agreement including, without limitation, the Revolving
Note, the Collateral Documents and the Letter of Credit Documents.

     

    “London
Business Day” shall mean any day on which dealings in United States
dollar deposits are carried on by banking institutions in the London interbank
market

     

     “Material
Adverse Effect” – means any condition or event that the Lender reasonably
determines has had or is reasonably likely to have  a material adverse
effect on (a) the business, operations, property or condition (financial or
otherwise) or prospects of the Borrower, (b) the business, operations, property,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries, if any, taken as a whole, or (c) the validity or enforceability of
this Agreement or any of the other Loan Documents or the rights and remedies of
Lender hereunder or thereunder.

     

     “Maximum
Limit” – the maximum aggregate amount which the Borrower can borrow under
the Credit, which is Three Million and 00/100 dollars
($3,000,000.00).

     

     “Net
Income” – for any fiscal period, the net after tax income (loss) of the
Borrower and any Subsidiaries on a consolidated basis for such period determined
on an accrual and consolidated basis.

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

     

     “Note”
or “Notes”
– any and all notes evidencing any Indebtedness created under this
Agreement.

     

    “Obligations”
means any and all indebtedness or other obligations of the Borrower to the
Lender in any capacity, now existing or hereafter incurred, however created or
evidenced, regardless of kind, class or form, whether direct, indirect, absolute
or contingent (including obligations pursuant to any guaranty, endorsement,
other assurance of payment or otherwise), whether joint or several, whether from
time to time reduced and thereafter increased, or entirely extinguished and
thereafter reincurred, together with all extensions, renewals and replacements
thereof, and all interest, fees, charges, costs or expenses which accrue on or
in connection with the foregoing, including any indebtedness or obligations (i)
not yet outstanding but contracted for, or with regard to which any other
commitment by the Lender exists; (ii) arising prior to, during or after any
pendency of any bankruptcy, insolvency, receivership or other similar
proceeding, regardless of whether allowed or allowable in such proceeding; (iii)
owed by the Borrower to others and which the Lender obtained, or may obtain, by
assignment or otherwise; and (iv) payable under this
Agreement.

     

    “Pension
Plan” – any pension plan as defined in Section 3(2) of ERISA which is a
multiemployer plan or single employer plan as defined in Section 4001 of ERISA
and subject to Title IV of ERISA and which is (i) a plan maintained by Borrower
for employees or former employees of Borrower, (ii) a plan to which Borrower
contributes or is required to contribute, (iii) a plan to which Borrower was
required to make contributions at any time, or (iv) any other plan with respect
to which Borrower has incurred or may incur liability, including contingent
liability, under Title IV of ERISA, to such plan or to the Pension Benefit
Guaranty Corporation. For purposes of this definition and for purposes of
Sections 4.10 and 5.10 hereof, “Borrower” shall include any trade or business
(whether or not incorporated) which is deemed to be a “single employer” within
the meaning of Section 4001(b)(1) of ERISA. Each such Pension Plan in existence
as of the date of this Agreement is listed and
identified on Schedule 1 annexed hereto

     

     “Permitted
Encumbrances” – all encumbrances described on Schedule 4.3 to this
Agreement.

     

     “Person”
– any individual, corporation, limited liability company, partnership, joint
venture, trust, unincorporated association, government or political subdivision
or other entity, body, organization or group.

     

     “Prime
Rate” – the rate of interest publicly announced by the Lender from time
to time as its prime rate and as a base rate for calculating interest on certain
loans.  The Prime Rate may or may not be the most favorable rate
charged by the Lender to its customers.

     

     “Prime
Rate Loan” – any portion of the Revolving Credit for which interest is
calculated based on the Prime Rate.

    
      
         

      

      
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     “Receivable”
– the right to payment for Goods sold or leased or services rendered by the
applicable entity, whether or not earned by performance, and may, without
limitation, in whole or in part be in the form of an Account, Chattel Paper,
Document, or Instrument, as such terms are defined in the Uniform Commercial
Code as in effect in New York State on the date of this Agreement.

     

     “Release”
– has the same meaning as given to that term in Section 101(22) of the
Comprehensive, Environmental Response, Compensation and Liability Act of 1980,
42 U.S.C. Section 9601, et.
seq. and the regulations promulgated thereunder.

     

     “Reportable
Event” – any event with regard to a Pension Plan described in
Section 4043(c) of ERISA, or in regulations issued thereunder.

     

     “Request
Certificate” – a certificate in the form annexed hereto as Exhibit
B, with all blanks appropriately completed, and duly executed on behalf
of the applicable Person.

     

     “Revolving
Credit” – as defined in Section 2.1 of this Agreement.

     

     “Revolving
Credit Commitment” –the obligation of Lender to make Revolving Loans and
issue Letters of Credit, subject to the terms of this Agreement.

     

     “Revolving
Credit Maturity Date” – June 9, 2013 which date may be shortened in
accordance with Sections 2.12 or 7.2 of this Agreement.

     

     “Revolving
Loan” or “Revolving
Loans” – as defined in Section 2.1 of this Agreement.

     

     “Revolving
Note” – the promissory note of the Borrower in the form of Exhibit A
hereto, and all replacements and renewals thereof, evidencing the promise of the
Borrower to repay to the Lender all Advances under the Revolving
Credit.

     

     “Security
Agreement” and “Security
Interests” – as defined in Section 3.6 of this
Agreement.

     

     “Stated
Amount” means the stated amount available to be drawn under a Letter of
Credit after giving effect to any reductions in such Stated Amount which have
occurred pursuant to the terms of such Letter of Credit.

     

     “Subordinated
Debt” means all indebtedness of the Borrower which has been formally
subordinated to payment and collection of the
Obligations.

     

     “Subsidiary”
– with respect to a Person, any entity of which at least 50% of the voting stock
or voting equity interests is owned by such Person directly, or indirectly
through one or more Subsidiaries.  If such Person has no Subsidiaries,
the provisions of this Agreement relating to Subsidiaries shall be inapplicable,
without affecting the applicability of such provisions to any entity
alone.

    
      
         

      

      
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     “Tangible
Net Worth” means the consolidated aggregate assets of Borrower and any
Subsidiaries excluding all Intangible Assets, less liabilities, plus
Subordinated Debt, all determined in accordance with GAAP (except to the extent
that under GAAP “tangible net worth” excludes leasehold improvements which are
included in “Tangible Net Worth” as defined herein).

     

     “USA
Patriot Act” - the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,
Public Law 107-56, as the same has been, or shall hereafter be, renewed,
extended, amended or replaced.

     

     “Voting
Power” means, with respect to any Person, the exclusive ability to
control, through the ownership of shares of capital stock, partnership
interests, membership interests or otherwise, the election of members of the
board of directors or other similar governing body of such Person.  The
holding of a designated percentage of Voting Power of a Person means the
ownership of shares of capital stock, partnership interests, membership
interests or other interests of such Person sufficient to control exclusively
the election of that percentage of the members of the board of directors or
similar governing body of such Person.

     

    1.2           Accounting
Terms.  All
accounting terms not otherwise defined herein have the meaning assigned to them
in accordance with GAAP. If a change in GAAP affects the computation of any
financial ratio or requirement set forth in this Agreement, and either the
Borrower or the Lender shall so request, the Lender and the Borrower shall
negotiate in good faith to amend such ratio or requirement to preserve the
original intent thereof in light of such change in GAAP; and until such
amendment shall have been agreed to the ratio or requirement shall be computed
without giving effect to such change.

     

    ARTICLE
II.   THE
CREDIT

     

    2.1 The
Revolving Credit.

     

    (a)  Revolving
Loans.  The Lender agrees, subject to the terms and conditions
and relying upon the representations and warranties set forth in this Agreement
and within the limits hereof, to make one or more loans (each a “Revolving
Loan”, and collectively the “Revolving Loans”) to Borrower, and Borrower may
make a request for a Revolving Loan or Revolving Loans from the Lender, at any
one time and from time to time, from the date hereof until the Revolving Credit
Maturity Date or the earlier termination of this Agreement pursuant to the terms
hereof, in total not in excess of the Maximum Limit in the aggregate at any one
time outstanding (collectively, the “Revolving Credit”).  The
Revolving Loans may be repaid and reborrowed in accordance with the provisions
hereof.

    
      
         

      

      
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    (b)  Method
for Loans.  When Borrower wants the Lender to make a Revolving
Loan available, the Borrower shall notify the Lender not later than 2:00 P.M. on
the Business Day that such Revolving Loan is requested.  In such
notice, which may be given by means of a Request Certificate in the form of
Exhibit B hereto, as appropriate, with all blanks appropriately completed, the
Borrower shall specify (i) the aggregate amount of the Revolving Loan
requested, which shall be in a minimum amount of $20,000 and shall be in whole
multiples of $10,000 for amounts in excess of such minimum amount and
(ii) the proposed date on which the Revolving Loan is to be funded which
shall be a Business Day.  Lender will make the proceeds of the
Revolving Loan available to the Borrower by a deposit to the applicable Loan
Account on the Business Day of such request if the request is made before 2:00
P.M., and on the next Business Day if made after 2:00 P.M., provided the
conditions set forth in Article III of this Agreement have been
satisfied.

     

    The
Lender shall not incur any liability to Borrower  in acting upon any
notice referred to above or upon any telephonic notice which the Lender believes
in good faith to have been given on behalf of the Borrower by a duly authorized
officer or other Person authorized to borrow on behalf of Borrower or for
otherwise acting in good faith hereunder.

     

    2.2 The
Revolving Note.  The
Revolving Loans shall be evidenced by the Revolving Note, with all blanks
appropriately completed, payable as provided therein to the
Lender.  The Revolving Note shall be inscribed by the holder thereof
on the schedule attached thereto and any continuation thereof with the date of
the making of each Revolving Loan, the amount of each Revolving Loan, all
payments of principal, and the aggregate outstanding principal balance
thereof.  Any such inscription shall constitute prima facie evidence
of the accuracy of the information so recorded; provided, however, the failure
of the Lender to make any such inscription shall not affect the obligations of
Borrower under the Revolving Note or this Agreement.

     

    2.3 Interest.

     

    (a)  Rates.  The
Revolving Note shall bear interest payable monthly in arrears on the first day
of each month for interest accrued during the preceding month prior to maturity
(whether by acceleration or otherwise) on the balance of principal thereof from
time to time unpaid.  Revolving Loans shall bear interest at a per
annum rate of interest equal to the LIBOR Rate plus the Applicable Interest
Margin, unless the circumstances set forth in 2.10 below are applicable. The
LIBOR Rate shall be determined daily and the interest rate applicable to the
Revolving Note will change simultaneously with each change in the LIBOR Rate. In
no event shall the per annum interest rate applicable to the Revolving Note be
less than 3.35%.

     

    (b)  Default
Rate.  After maturity, whether by acceleration or otherwise,
the Revolving Note shall bear interest at a per annum rate equal to three
percent (3%) in excess of the otherwise applicable rate of interest thereon;
provided, however, in no event shall the rate of interest on the Revolving Note
exceed the maximum rate authorized by law.

     

    (c)  Computation
of Interest.  Interest on Libor Loans shall be calculated on
the basis of days elapsed in a year of 360 days, which will result in a higher
effective annual rate. Interest on Prime Rate Loans, if any, shall be calculated
on the basis of the actual number of days elapsed in a year of 365/366
days.  If the Revolving Note is not paid when due, whether because the
Revolving Note becomes due on a Saturday, Sunday or bank holiday or for any
other reason, the Borrower will pay interest thereon at the aforesaid rate until
the date of actual receipt of payment by the holder of the Revolving
Note.

    
      
         

      

      
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    2.4 Letters
of Credit.

     

    (a)  Letters
of Credit.  Subject
to the terms and conditions set forth herein, the Borrower may request the
Lender to issue, at any time and from time to time, Letters of Credit for the
account of the Borrower in such form as is acceptable to the Lender in its
reasonable determination in an aggregate Stated Amount not to exceed the lesser
of: (i) the Letter of Credit Commitment less the Letter of Credit Exposure and
(ii) the Maximum Limit, less all outstanding Revolving Loans and the LC Exposure
at such time.  Letters of Credit issued hereunder shall constitute
utilization of the Revolving Credit.

     

    (b)  Notice
of Issuance; Amendment; Renewal or Extension.  To request the
issuance of a Letter of Credit (or the amendment, renewal or extension of an
outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or
transmit by electronic communication, including without limitation PDF documents
delivered via electronic mail) to the Lender (reasonably in advance of the
requested date of issuance, amendment, renewal or extension) a notice requesting
the issuance of a Letter of Credit, or identifying the Letter of Credit to be
amended, renewed or extended, and specifying the date of issuance, amendment,
renewal or extension (which shall be a Business Day), the date on which such
Letter of Credit is to expire (in compliance with paragraph (d) of this
Section), the amount of such Letter of Credit, the name and address of the
beneficiary thereof and such other information as shall be necessary to prepare,
amend, renew or extend such Letter of Credit. The Borrower shall submit a letter
of credit application on the Lender's standard form in connection with any
request for a Letter of Credit.  In the event of any inconsistency
between the terms and conditions of this Agreement and the terms and conditions
of any form of letter of credit application or other agreement submitted by the
Borrower to, or entered into by the Borrower with, the Lender relating to any
Letter of Credit, the terms and conditions of this Agreement shall
control.  In addition, to the extent that any provision of any such
letter of credit application or other agreement is more restrictive (from the
perspective of the Borrower) than a similar provision of this Agreement, then
the less restrictive provision in this Agreement shall
control.  Furthermore, nothing contained in any such letter of credit
application or other agreement shall derogate from any of the rights, or add to
the obligations, of the Borrower contained in this
Agreement.

     

    (c)    Limitations
on Amounts. A Letter of Credit shall be issued, amended, renewed or
extended only if (and upon issuance, amendment, renewal or extension of each
Letter of Credit the Borrowers shall be deemed to represent and warrant that),
after giving effect to such issuance, amendment, renewal or extension the Letter
of Credit Exposure does not exceed the lesser of: (i) the Letter of Credit
Commitment or (ii) the Maximum Limit less all outstanding Revolving Loans at
such time.

    
      
         

      

      
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    (d)    Expiration
Date.  Each Letter of Credit shall expire at or prior to the
close of business on the earlier of (i) the date which is twelve (12) months
after the date of the issuance of such Letter of Credit (or, in the case of any
renewal or extension thereof, twelve (12) months after the then current
expiration date of such Letter of Credit) or (ii) the Revolving Credit Maturity
Date.

     

    (e)    Reimbursement.  If
the Lender shall receive a request for a drawing for an LC Disbursement in
respect of a Letter of Credit, the Lender shall provide the Borrower with notice
thereof, which notice may be telephonic or by e-mail correspondence to the Chief
Executive Officer, Chief Financial Officer  or Vice President of
Finance of the Borrower, as soon as possible thereafter but in any event at
least two Business Days prior to the Business Day on which such LC Disbursement
is to be made to the beneficiary.  The Borrower shall pay to the
Letter of Credit Issuer the amount in dollars of each such LC Disbursement
(which may be funded with the proceeds of a Revolving Loan) on the Business Day
preceding the Business Day on which such LC Disbursement is to be paid to the
beneficiary thereof.

     

    (f)    Obligations
Absolute.  The Borrower’s obligation to reimburse LC
Disbursements shall be absolute, unconditional and irrevocable, and shall be
performed strictly in accordance with the terms of this Agreement and the Letter
of Credit Documents under any and all circumstances whatsoever and irrespective
of (i) any lack of validity or enforceability of any Letter of Credit, or any
term or provision therein, (ii) any draft or other document presented under a
Letter of Credit proving to be forged, fraudulent or invalid in any respect or
any statement therein being untrue or inaccurate in any respect, and (iii) any
other event or circumstance whatsoever, whether or not similar to any of the
foregoing, that might, but for the provisions of this Section, constitute a
legal or equitable discharge of the Borrower’s obligations
hereunder.  Neither the Lender, nor any of its employees, officers or
directors, shall have any liability or responsibility by reason of or in
connection with the issuance or transfer of any Letter of Credit by the Lender
or any payment or failure to make any payment thereunder (irrespective of any of
the circumstances referred to in the preceding sentence), or any error,
omission, interruption, loss or delay in transmission or delivery of any draft,
notice or other communication under or relating to any Letter of Credit
(including any document required to make a drawing thereunder), any error in
interpretation of technical terms or any consequence arising from causes beyond
the control of the Lender; provided
that the foregoing shall not be construed to excuse the Lender from liability to
the Borrower to the extent of any direct damages (as opposed to consequential
damages, claims in respect of which are hereby waived by the Borrower to the
extent permitted by applicable law) suffered by the Borrower that are caused by
the Lender's paying a draft  or other demand for payment presented
under a Letter of Credit when the draft does not substantially comply with the
terms of the Letter of Credit. The parties hereto expressly agree that the
Lender, acting in good faith, may accept documents that appear on their face to
be in compliance with the terms of a Letter of Credit without responsibility for
further investigation, regardless of any notice or information to the contrary,
and may make payment upon presentation of documents that appear on their face to
be in compliance with the terms of such Letter of
Credit:

     

    (I)    the
Lender shall have the right, in its sole discretion but acting in good faith, to
decline to accept such documents and to make such payment if such documents are
not in strict compliance with the terms of such Letter of Credit;
and

    
      
         

      

      
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     (II)      this
sentence shall establish the standard of care to be exercised by the Lender when
determining whether drafts and other documents presented under a Letter of
Credit comply with the terms thereof (and the parties hereto hereby waive, to
the extent permitted by applicable law, any standard of care inconsistent with
the foregoing).

     

    (g)   Disbursement
Procedures.  The Lender shall, within a reasonable time
following its receipt thereof, examine all documents purporting to represent a
demand for payment under a Letter of Credit. The Lender shall promptly after
such examination notify the Borrower by telephone (confirmed by telecopy) of
such demand for payment and whether the Lender has made or will make an LC
Disbursement thereunder; provided
that any failure to give or delay in giving such notice shall not relieve the
Borrower of their obligation to reimburse the Lender with respect to any such LC
Disbursement.

     

    (h)   Interim
Interest.  If
the Lender shall make any LC Disbursement, then, unless the Borrower reimburses
the Lender for such LC Disbursement, in full, on or prior to the date such LC
Disbursement is made, the unpaid amount thereof shall bear interest, for each
day from and including the date such LC Disbursement is made to but excluding
the date that the Borrower reimburses such LC Disbursement, at the rate per
annum equal to the LIBOR Rate plus the Applicable Interest Margin; provided
that, if the Borrower fails to reimburse such LC Disbursement within five (5)
Business Days of becoming due pursuant to paragraph (e) of this Section, then
default interest shall accrue in accordance with Section 2.2(b)
hereof.

     

    (i)    Letter
of Credit Fees.  The Borrower agrees to pay to the Lender a fee
with respect to each Letter of Credit, which shall accrue at a rate per
annum equal to 1.75%  on the Stated Amount thereof for the
period from the date of issuance (or renewal) to the expiration date thereof
(the “Letter of
Credit Fees”). Letter of Credit Fees accrued through and including the
end of each fiscal quarter of Borrower shall be payable on the third (3rd)
Business Day following such date, commencing on the first such date to occur
after the effective date of the Letter of Credit; provided
that all such fees shall be payable on the date on which the Revolving Credit
terminates and any such fees accruing after the date on which the Revolving
Credit terminates shall be payable on demand. Any other fees payable to the
Lender pursuant to this paragraph shall be payable within ten (10) days after
demand.

     

    (j)    Administrative
Fees.  The
Borrower agrees to pay directly to the Lender, a fee in respect of each Letter
of Credit issued by it (an “Administrative
Fee”) in the amount of the Lender’s standard fees, as announced to its
customers from time to time, for issuance, negotiation and amendment (including
any extensions of such expiration date that may be made at the election of the
beneficiary thereof).  Accrued Administrative Fees shall be due and
payable on demand.

     

    2.5  Charge
to Account.
On the date that any principal of or interest on the Notes or any fees or
charges payable under this Agreement are due, Borrower authorizes the Lender to
debit any deposit account of Borrower maintained with Lender on such due date in
an amount equal to such unpaid principal, interest, fees or charges, as
applicable due from Borrower

    
      
         

      

      
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    2.6  Optional
Prepayments

     

    (a)  Libor
Loans.  Borrower shall have the right to repay without premium
all or any portion of the Revolving Loans outstanding under the Revolving Credit
at any time.

     

    All
repayments of the Revolving Loans shall be subject to a minimum amount of
$10,000, and incremental multiples of $10,000.

     

    2.7  Use
of Proceeds.  Borrower
covenants to the Lender that it will use the proceeds of the all Advances for
working capital and general corporate requirements, including, but not limited
to, for repurchases of Borrower’s stock, acquisitions, and the payment of
dividends.

     

    2.8  Late
Charge.  Upon
failure to make any payment of principal or interest on the Revolving Note
(other than the principal amount due on maturity) within ten (10) days of
the due date thereof, the Borrower promises to pay, upon demand by the Lender, a
late charge equal to five percent (5%) of the amount of any such overdue
amount of principal or interest.

     

    2.9  Special
Provisions Governing Libor Loans - Increased Costs.

     

    (a)  In
the event that on any day, the Lender shall have determined (which determination
shall be final, conclusive and binding) that:

     

    (I)  by
reason of conditions in the London Interbank Eurodollar Market or of conditions
affecting the position of the Lender in such market occurring after the date
hereof, adequate fair means do not exist for establishing the Libor Rate,
or

     

    (II) by
reason of (a) any change in any applicable law or governmental rule,
regulation, guideline or order (or any written interpretation thereof and
including any new law or governmental rule, regulation, guideline or order but
excluding any of the foregoing relating to taxes referred to in
Section 2.11), or (ii) other circumstances affecting the Lender or the
London Interbank Eurodollar Market or the position of the Lender in such Market
(such as, but not limited to, official reserve requirements), the Libor Rate
does not represent the effective pricing to the Lender for U.S. dollar deposits
of comparable amounts for the relevant period due to such increased costs; then,
and in either such event, the Lender shall on such date  give notice
by telephone, confirmed in writing, to the Borrower of such
determination.

     

    (b)  Thereafter,
the Borrower shall pay to the Lender upon written request therefor, such
additional amounts as the Lender shall reasonably determine to be required to
compensate the Lender for such increased costs.  A certificate as to
such additional amounts submitted to the Borrower by the Lender setting forth
the applicable computation in reasonable detail shall, absent manifest error, be
final, conclusive and binding upon Borrower and the
Lender.

     

    (c)  In
lieu of paying to the Lender such additional amounts as required by this
Section 2.9, the Borrower may, if such determination by the Lender relates
to a Libor Loan then being requested by the Borrower pursuant to the terms
hereof, on such day by giving notice by telephone to the Lender, withdraw such
request.

    
      
         

      

      
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    2.10    Required
Termination and Repayment of Libor Loans.

     

    (a)  In
the event the Lender shall have reasonably determined, at any time (which
determination shall be final, conclusive and binding but shall be made only
after consultation with the Borrower), that the making or continuation of any or
all of the Libor Loans hereunder:

     

    (I)  has
become unlawful by compliance by the Lender in good faith with any applicable
law, governmental rule, regulation, guideline or order, or

     

    (II) would
cause the Lender severe hardship as a result of a contingency occurring after
the date hereof which materially and adversely affects the London Interbank
Eurodollar Market (such as, but not limited to disruptions resulting from
political or economic events); then, and in either such event, the Lender shall
on such date (and in any event as soon as possible after making such
determination) give telephonic notice to the Borrower, confirmed in writing, of
such determination, identifying which of the Libor Loans was so
affected.

     

    (b)  The
Borrower then shall  repay each such affected Libor Loan, together
with all interest accrued thereon.

     

    (c)  In
lieu of the repayment to the Lender required by Section 2.10(b), the
Borrower may exercise the following options:

     

    (I)  If
the determination by the Lender relates to a Libor Loan then being requested by
Borrower pursuant to the terms hereof, the Borrower may, on such date by giving
notice by telephone to the Lender, withdraw such request; or

     

    (II) The
Borrower may, by giving notice by telephone to the Lender, require the Lender to
make the Libor Loan then being requested in the form of a Prime Rate Loan, or to
convert its outstanding Libor Loan or Loans that are so affected into a Prime
Rate Loan.  Such notice shall pertain only to the affected Libor
Loans  outstanding or to be outstanding.

     

    2.11    Taxes.  If
any taxes or duties of any kind shall be payable, or ruled to be payable, by or
to any taxing authority of or in the United States, or any other foreign
country, or any political subdivision of any thereof, in respect of any of the
transactions contemplated by this Agreement (including, but not limited to,
execution, delivery, performance, enforcement, or payment of principal or
interest of or under the Revolving Note or the making of any Libor Loan), by
reason of any now existing or hereafter enacted statute, rule, regulation or
other determination (excluding any taxes imposed on or measured by the net
income of the Lender), the Borrower will:

    (a)  pay
on written request therefor all such taxes or duties, including interest and
penalty, if any,

    
      
         

      

      
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    (b)  promptly
furnish the Lender with evidence of any such payment,
and

     

    (c)  indemnify
and hold the Lender and any holder or holders of the Revolving Note harmless and
indemnified against any liability or liabilities with respect to or in
connection with any such taxes or the payment thereof or resulting from any
delay or omission to pay such taxes;

     

    provided,
however, the Borrower shall not have any obligation to indemnify or hold
harmless the Lender or to “gross up” the Lender or any holder of the Note for
withholding taxes or similar taxes that become payable following the Lender’s
assignment of all or any portion of its rights under this
Agreement  or the Note if such withholding or other taxes would not be
payable if the Lender had not effected such
assignment.

     

    Without
prejudice to the survival of any other agreement of Borrower under this
Agreement, the agreement and obligations of the Borrower contained in this
Section 2.11 shall survive the termination of this Agreement.

     

    2.12    Annual
Facility Fee; Termination of Facilities.

     

    As consideration for the
Lender’s commitment to make available the Revolving Credit, the Borrower agrees
to pay to Lender a fee (“Facility Fee”) on the average daily unused portion of
the Revolving Credit Commitment from the date of this Agreement until the
Revolving Credit Maturity Date at the per annum rate of 0.125%, calculated on
the basis of a year of 360 days, payable monthly, in arrears, on the first day
of each month during the term of this Agreement and a final payment on the
Revolving Credit Maturity Date.

     

    Borrower
may terminate this Agreement at any time by providing prior written notice (a
“Termination Notice”) to Lender setting forth the  proposed effective
date of any such termination.Borrower shall not be required to pay any fee for
such termination.

     

    Any termination of this
Agreement shall only become effective, after receipt by Lender of a Termination
Notice, on the first day thereafter that all outstanding Advances and LC
Exposure, together with any accrued and unpaid interest, fees and/or
expenses  have been reduced to zero and Borrower has paid all other
amounts due and payable to Lender under this Agreement or any Loan Document. On
such date, Lender shall have no further commitment to make Advances or issue
Letters of Credit under this Agreement.

     

    2.13    Payments.
All payments of interest, principal, fees and other expenses by the
Borrower under this Agreement unless otherwise specified shall be made in lawful
currency of the United States of America and in immediately available funds
without counterclaim or setoff and free and clear and without reduction for any
present or future income, stamp or other taxes, deductions or withholdings
(except as may be required by law and subject to the proviso of Section 2.11
hereof), all of which shall be paid by the Borrower for its own
account.  All payments shall be made not later than 12:00 Noon
(Buffalo, New York time) on the due date at the Lender’s office, unless such
amount is sooner paid by the Lender debiting a deposit account for
Borrower.  All payments (unless stated herein otherwise) shall be
applied first to the payment of all fees, expenses and other amounts due to the
Lender (excluding principal and interest), then to accrued interest, and the
balance on account of outstanding principal; provided, however, that after an
Event of Default, payments will be applied to the obligations of Borrower to the
Lender as the Lender determines in its sole
discretion.

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

    
      

      ARTICLE
III.   CONDITIONS TO THE
CREDIT

       

      The
Lender’s agreement to lend, contained in this Agreement, shall be effective only
upon fulfillment of the following conditions at or prior to the date of the
execution of this Agreement.

      

      3.4    Borrower
Action.  The
Borrower shall have taken all necessary and appropriate corporate and
shareholder action and shall have adopted resolutions authorizing the execution
and delivery of this Agreement, the Revolving Note, the Loan Documents and the
taking of all action required of Borrower by this Agreement; and the Borrower
shall have furnished to the Lender copies certified as of the date of the
execution of this Agreement of such resolutions and such other company documents
as the Lender shall reasonably request.

      

      3.5    Borrower
Documents. There
shall have been furnished to the Lender a general certificate from Borrower
including: (i) certificates of Borrower’s good standing duly issued of
recent date by each jurisdiction where Borrower is qualified to do business;
(ii) copies of the certificates of incorporation and current by-laws of
Borrower, certified by its Secretary as of the date of the execution of this
Agreement; (iii) an incumbency certificate specifying the officers of
Borrower, together with their specimen signatures; and (iv) such other
certifications and exhibits as the Lender may reasonably request.

      

      3.6    Note. The Borrower shall have
executed and delivered to the Lender the Revolving Note, appropriately
completed, evidencing the Borrower’s obligations to repay the
Credit.

      

      3.7    Security
Agreement.
Borrower shall have executed and delivered to the Lender (i) one or
more security agreements (“Security Agreements”) in form and content
satisfactory to the Lender granting to the Lender, security interests (“Security
Interests”) in all of Borrower’s Equipment, Inventory, Accounts, Documents,
Instruments, Chattel Paper, Investment Property, General Intangibles, Deposit
Accounts, Letter of Credit Rights, Patents, Trademarks, Tradenames, Copyrights,
Hedge Agreements, Insurance Proceeds, Tax Refunds, Cash and License Rights,
whether now owned or hereafter acquired, wherever located, and any and all
proceeds thereof (“Collateral”), as continuing collateral security for the
payment of any and all Indebtedness and liabilities, whether now existing or
hereafter incurred, of the Borrower to the Lender arising under this Agreement
and the Loan Documents; and (ii) appropriate financing statements
(“Financing Statements”) to perfect the Security Interests, which Security
Interests shall, at the time  of the execution of this Agreement, be
superior to all other liens and security interests in such property except as to
liens and security interests approved by the Lender, including those set forth
on Schedule 4.3.

      
        
           

        

        
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      3.8    Opinion. Independent counsel for the
Borrower shall have furnished to the Lender, their favorable opinion, in form
and content satisfactory to the Lender and its counsel, dated the date of the
execution of this Agreement..

      

      3.9    Certificates.  The Borrower shall
have provided to the Lender, appropriately completed insurance certificates,
binders or policies evidencing compliance with Section 5.5 of this
Agreement, and an appropriately completed Request Certificate indicating the
amount requested to be borrowed on the Closing Date.

      

      3.10   Subsequent
Extensions of Credit-Revolving Credit.  Subsequent to the
satisfaction of the conditions set forth herein, each request to the Lender for
a Revolving Loan after the date hereof shall constitute confirmation by the
Borrower of all the factual matters set forth in the form of Compliance
Certificate as of the date of such Revolving Loan in the same manner as if a
written Compliance Certificate had been delivered, and such factual matters
shall be true on the date such Revolving Loan is made.  No Revolving Loan
shall be made if such certification is not made without
qualification.

      

      3.11   Other
Matters. All
matters incidental to the execution and delivery of this Agreement, the
Revolving Note, the Collateral Documents and the other documents required hereby
including, without limitation, the payment of all fees and expenses required to
be paid by the Borrower to the Lender and its counsel, and all action required
by this Agreement, shall be satisfactory to the Lender and to its counsel, and
this Agreement shall be in effect.

      

      ARTICLE
IV.   REPRESENTATIONS AND
WARRANTIES

       

      The
Borrower makes the following representations and warranties:

      

      4.1    Good
Standing and Authority.  Borrower is a corporation, duly organized,
validly existing, and in good standing under the laws of its jurisdiction of
organization; has powers and authority to transact the business in which it is
engaged; is duly licensed or qualified and in good standing in each jurisdiction
in which the conduct of such business requires such licensing or such
qualification except where the failure to do so could not reasonably be expected
to have a Material Adverse Effect; Borrower has all necessary power and
authority to execute, deliver and perform this Agreement, the Revolving Note,
the Collateral Documents and any other Loan Documents to which it is a party,
all of which have been duly authorized by all proper and necessary corporate and
shareholder action.

      

      4.2    Valid and
Binding Obligation.  This Agreement, the
Revolving Note, the Loan Documents, and any other document executed in
connection herewith to which Borrower is a party, will constitute the legal,
valid and binding obligations of the Borrower, enforceable in accordance with
their respective terms, except as enforceability (i) may be limited by
state, provincial or federal bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting the rights of creditors generally and
(ii) may be subject to equity principles in the event equitable remedies
are sought.

      

      4.3    Good
Title. The
Borrower has good and marketable title to, or a valid leasehold interest in, all
of its assets, none of which is subject to any mortgage, indenture, pledge,
Lien, conditional sales contract, security interest, encumbrance, claim, trust
or charge, except for  Permitted Encumbrances.

      
        
           

        

        
          18

          
            

          

        

        
           

        

      

      

      4.4    No
Pending Litigation.
Except as set forth on Schedule 4.4, there are not any actions,
suits, proceedings (whether or not purportedly on behalf of Borrower) or
investigations pending or, to the knowledge of Borrower, threatened, against
Borrower, which would, in any case or in the aggregate, be reasonably expected
to have a Material Adverse Effect, or which question the validity of this
Agreement, the Revolving Note, the Collateral Documents, or any other documents
required by this Agreement, or any action taken or to be taken pursuant to any
of the foregoing.

      

      4.5    No
Consent or Filing.
No consent, license, approval or authorization of, or registration,
declaration or filing with, any court, governmental body or authority or other
Person or entity is required in connection with the valid execution, delivery or
performance of this Agreement, the Revolving Note, the Collateral Documents, or
any other Loan Document to which Borrower is a party, or in connection with any
of the transactions contemplated thereby, other than filings and recordings in
connection with the Collateral Documents.

      

      4.6    No
Violations. 
Borrower is not in material violation of any term of its certificate of
incorporation or by-laws, or of any mortgage, borrowing agreement or other
material instrument or agreement pertaining to Indebtedness for borrowed
money.  Borrower is not in violation of any order, writ, judgment,
injunction or decree of any court of competent jurisdiction or, of any statute,
rule or regulation of any competent governmental authority which might
reasonably be expected to result in, a Material Adverse Effect.  The
execution and delivery of this Agreement, the Revolving Note, the Collateral
Documents, and the other Loan Documents, and to the best of Borrower’s
knowledge, the performance of all of the same is and will be in compliance with
the foregoing and will not result in any violation or result in the creation of
any mortgage, Lien, security interest, charge or encumbrance upon any of its
properties or assets except in favor of the Lender.  There exists no fact
or circumstance not disclosed in this Agreement or in the documents furnished in
connection herewith (so far as Borrower can now reasonably foresee) that would
be reasonably expected to have a Material Adverse Effect.

      

      4.7    Financial
Statements.
Borrower has furnished to the Lender audited financial statements showing
the financial condition of Borrower as of December 31, 2009 prepared by the
accounting firm of Ernst & Young, LLP, which statements present fairly the
financial position of Borrower and its Subsidiaries as of such date and the
results of its operations and changes in its financial position for such period
then ended and has been prepared in conformity with GAAP applied on a basis
consistent with that of similar periods for preceding years. To the best of
Borrower’s knowledge, from the date of such financial statements to the date of
the execution of this Agreement, there have not been any materially adverse
changes in the financial condition of Borrower except as disclosed in such
financial statements.  None of the property or assets shown in the
financial statements delivered to the Lender has been materially adversely
affected as the result of any fire, explosion, accident, flood, drought, storm,
earthquake, condemnation, requisition, statutory or regulatory change, act of
God, or act of public enemy or other casualty, whether or not
insured.

      
        
           

        

        
          19

          
            

          

        

        
           

        

      

      

      4.8    Tax
Returns. Borrower
has duly filed all federal and other tax returns required to be filed and has
duly paid all taxes required by such returns through the date hereof after
giving effect to any extensions.  Borrower has not received any notice of
assessments by the Internal Revenue Service or any other taxing authority for
additional unpaid taxes except as set forth in Schedule 4.8 hereto.

      

      4.9    Subsidiaries
and Affiliates. 
 Except as set forth on Schedule 4.9, Borrower does not have any
Subsidiaries or Affiliates.

      

      4.10   ERISA
Matters.  No
Pension Plan has been terminated or partially terminated or is insolvent or in
reorganization, nor have any proceedings been instituted to terminate or
reorganize any Pension Plan; Borrower has not withdrawn from any Pension Plan in
a complete or partial withdrawal, nor has a condition occurred which if
continued would result in a complete or partial withdrawal; Borrower has not
incurred any withdrawal liability, including contingent withdrawal liability, to
any Pension Plan pursuant to Title IV of ERISA; Borrower has not incurred
any liability to the Pension Benefit Guaranty Corporation other than for
required insurance premiums which have been paid when due; no Reportable Event
has occurred; and no Pension Plan or other “employee pension benefit plan” as
defined in Section 3(2) of ERISA to which Borrower is a party has an
“accumulated funding deficiency” (whether or not waived) as defined in
Section 302 of ERISA or in Section 412 of the Internal Revenue
Code.  Each Pension Plan and each other “employee benefit plan” as defined
in Section 3(2) of ERISA to which Borrower is a party is in substantial
compliance with ERISA, and no such plan, or any administrator, trustee or
fiduciary thereof has engaged in a prohibited transaction described in
Section 406 of ERISA or in Section 4975 of the Internal Revenue
Code.

      

      4.11   Licenses,
Permits and Approvals.  Borrower has obtained,
and shall maintain in effect at all times hereafter, all necessary licenses,
permits, approvals, consents and registrations which are appropriate or
necessary to conduct its business.

      

      4.12   Environmental
Matters.

      

      (a)  To
the knowledge of Borrower, no above ground or underground storage tanks
containing Hazardous Substances are located on any property owned, leased or
operated by Borrower, and no such tanks have been located on any property,
owned, leased or operated by Borrower, except as may have been removed in
material compliance with applicable Environmental Laws.

       

      (b)  To
the knowledge of Borrower, no property owned, leased or operated by Borrower is
or has been used for the Disposal of any Hazardous Substance or for the
unpermitted or unauthorized treatment, storage or Disposal of Hazardous
Substances in violation of any applicable Environmental Law or except as would
not be reasonably expected to have a Material Adverse Effect.

       

      (c)  To
the knowledge of Borrower, no material Release of a Hazardous Substance has
occurred or is threatened on, at, from or, to our knowledge, near any property
owned, leased or operated by Borrower that will now or in the future (based on
Environmental Laws currently in effect) require (i) remedial or corrective
action, removal, monitoring or closure pursuant to any Environmental Law
currently in effect or (ii) Borrower to incur costs pursuant to the terms or
conditions of any lease, except as would not be reasonably expected to have a
Material Adverse Effect.

      
        
           

        

        
          20

          
            

          

        

        
           

        

      

      (d)  Borrower
is not subject to any existing, pending or threatened suit, claim, notice of
violation or non-routine request for information under any material
Environmental Law.

       

      (e)  Borrower
is in compliance with, and has obtained all Environmental Permits required by
all Environmental Laws, except as would not be reasonably expected to have a
Material Adverse Effect.

       

      4.13   Anti-Terrorism
Laws.

      

      (a) General. 
Borrower is not in violation of any Anti-Terrorism Law or engaged in or
conspiring to engage in any transaction that evades or avoids, or has the
purpose of evading or avoiding, or attempts to violate, any of the prohibitions
set forth in any Anti-Terrorism Law.

       

      (b) Executive
Order No. 13224.  Neither the Borrower or its Affiliates or their
respective agents acting or benefiting in any capacity in connection with the
Loans or other transactions hereunder, is any of the following (each a “Blocked
Person”):

       

      (I) a
Person that is listed in the annex to, or is otherwise subject to the provisions
of, the Executive Order No. 13224;

       

      (II) a
Person owned or controlled by, or acting for or on behalf of, any Person that is
listed in the annex to, or is otherwise subject to the provisions of, the
Executive Order No. 13224;

       

      (III) a
Person or entity with which any Bank is prohibited from dealing or otherwise
engaging in any transaction by any Anti-Terrorism Law;

       

      (IV) a
Person or entity that commits, threatens or conspires to commit or supports
“terrorism” as defined in the Executive Order No. 13224;

       

      (V) a
Person or entity that is named as a “specially designated national” on the most
current list published by the U.S. Treasury Department Office of Foreign Asset
Control at its official website or any replacement website or other replacement
official publication of such list; or

       

      (VI) a
Person or entity who is affiliated or associated with a Person or entity listed
above.

       

      Neither
the Borrower, or any Affiliate of the Borrower or, to the knowledge of the
Borrower, any of its agents acting in any capacity in connection with the Loans
or other transactions hereunder (i) conducts any business or engages in making
or receiving any contributions of funds, goods or services to or for the benefit
of any Blocked Person, or (ii) deals in, or otherwise engages in any
transaction relating to, any property or interests in property blocked pursuant
to the Executive Order No. 13224.

      
        
           

        

        
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      4.14   Regulations.
The Borrower is not engaged principally or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying any “margin stock” (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System of the United States of America).
Neither the granting of any Revolving Loan (or any conversion thereof) or Letter
of Credit nor the use of the proceeds of any Revolving Loan or Letter of Credit
will violate, or be inconsistent with, the provisions of Regulation T, U or X or
any other regulation of such Board of Governors.

      

      ARTICLE
V.   AFFIRMATIVE
COVENANTS

       

      During
the term of this Agreement, and so long thereafter as any Indebtedness of
Borrower to the Lender shall remain unpaid, including any Indebtedness for fees
and expenses, Borrower will:

      

      5.1    Payments.
Duly and punctually pay the principal of, interest on, and all fees and charges
on, all Indebtedness incurred by Borrower pursuant to this Agreement in the
manner set forth in this Agreement.

      

      5.2    Future
Financial Statements.  Furnish to the
Lender:

      

      (a) Within one hundred
and twenty (120) days after the end of each fiscal year of the Borrower, (i)
audited financial statements of Borrower as of the end of such year, fairly
presenting Borrower’s financial position, which statements shall consist of a
balance sheet and related statements of income, retained earnings, and cash flow
covering the period of Borrower immediately preceding fiscal year, and which
shall be prepared by independent certified public accountants satisfactory to
Borrower and the Lender, (ii) a completed Compliance Certificate from the
Borrower in the form of Exhibit C
attached hereto, (iii) a copy of any Management Letter delivered by such
accountants to Borrower in connection with any such audited financial statements
and (iv) a Receivables aging report and an Inventory summary report signed by
the Borrower in form satisfactory to the Lender.

       

      (b) Within thirty (30)
days after the end of each month of the Borrower, financial statements of
Borrower as of the end of such month, fairly presenting its financial position,
which statements shall consist of a balance sheet and related statements of
income, retained earnings, and cash flow covering the period from the end of the
immediately preceding fiscal year to the end of such quarter, all in such detail
as the Lender may request.

       

      (c) Furnish to the
Lender, within thirty (30) days after the end of each quarter after the date
hereof during the term of this Agreement or more frequently if requested by the
Lender, with respect to Borrower, a Compliance Certificate, in form and content
satisfactory to the Lender.

      
        
           

        

        
          22

          
            

          

        

        
           

        

      

      (d) Promptly after their
preparation, copies of  all registration statements and annual or
quarterly reports that Borrower is required to file with the SEC on Form 10-K or
10-Q (or any successor form) which Borrower files with the Securities and
Exchange Commission.

       

      (e) Such additional
information as the Lender may from time to time reasonably request regarding the
financial and business affairs of Borrower.

       

      5.3    Notice.  Promptly notify the
Lender in writing of  (a) any pending or proposed audits of Borrower’s
federal income tax returns by the Internal Revenue Service when Borrower has
knowledge thereof, and the results of each such audit after its completion and
(b) any default by Borrower under any material agreement, or any modification of
a material agreement,  that in either case,  would be
reasonably expected to have a Material Adverse Effect.

      

      5.4    Taxes.   Promptly pay and
discharge all of its taxes, assessments and other governmental charges
(including any charged or assessed on the issuance of the Revolving Note) prior
to the date on which penalties are attached thereto, establish adequate reserves
for the payment of taxes and assessments and make all required withholding and
other tax deposits; provided, however, that nothing herein contained shall be
interpreted to require the payment of any tax, assessment or charge so long as
its validity is being contested in good faith and by appropriate proceedings
diligently conducted.

      

      5.5    Insurance. 
 (a) Keep all of Borrower’s property insured at all times with responsible
insurance carriers against fire, theft and other risks in reasonable coverage,
form and amount satisfactory to the Lender; (b) keep adequately insured at
all times in reasonable amounts with responsible insurance carriers against
liability on account of damage to persons or property, including, without
limitation, coverage against liability based on products liability and under all
applicable worker’s compensation laws; (c) promptly deliver to the Lender
certificates of insurance or the insurance policies required to be carried by
Borrower pursuant hereto, with appropriate endorsements designating the Lender
as a named insured and loss payee; and (d) cause each such insurance policy
to contain a thirty (30) day mandatory notice of cancellation provision
satisfactory to the Lender.

      

      5.6    Litigation.  Promptly notify the
Lender in writing as soon as Borrower has knowledge thereof, of the institution
or filing of any litigation, action, suit, claim, counterclaim, or
administrative proceeding against, or investigation of, Borrower as to which
Borrower is a party by or before any regulatory body or governmental
agency:  (i) the outcome of which might reasonably be expected to
have a Material Adverse Effect, or (ii) which questions the validity of
this Agreement, the Revolving Note, or any Collateral Document, or any action
taken or to be taken pursuant to the foregoing; and furnish or cause to be
furnished to the Lender such information regarding the same as the Lender may
request.

      

      5.7    Corporate
Standing. 
Maintain its corporate existence in good standing and remain or become
duly licensed or qualified and in good standing in each jurisdiction in which
the conduct of its business requires such qualification or licensing except
where failure to become so licensed or qualified is not reasonably likely to
have a Material Adverse Effect.

      
        
           

        

        
          23

          
            

          

        

        
           

        

      

      

      5.8    Books and
Records. 
Keep proper books and records in accordance with GAAP consistently
applied, and keep such books and records in the location where they are kept on
the date of this Agreement unless the Lender is given thirty (30) days prior
written notice of any relocation of such books and records.

      

      5.9    Compliance
with Law. Comply
in material respects with all applicable laws and governmental rules and
regulations, except where the failure to so comply would not be reasonably
expected to have a Material Adverse Effect.

      

      5.10   Pension
Report. With
respect to each Pension Plan, the Borrower will furnish, or cause to be
furnished, the following to the Lender:

      

      (a) as soon as possible
and in any event within thirty days after Borrower knows or has reason to
know that any Reportable Event with respect to such Pension Plan has occurred,
the statement of the President or Chief Financial Officer of Borrower setting
forth the details of such Reportable Event and the action , if any, Borrower
proposes to take with respect thereto; and

       

      (b) promptly after the
filing thereof with the Secretary of Labor, the Pension Benefit Guaranty
Corporation or the Internal Revenue Service, copies of reports (including,
without limitation, notices of Reportable Events and annual reports in the
Form 5500 Series) filed with respect to each Pension Plan if the Lender has
specifically requested copies of such reports.

       

      5.11   Environmental
Compliance

      

      (a) Comply with all
Environmental Laws, except  where the failure to comply would not be
reasonably expected to have a Material Adverse Effect.

       

      (b) Not suffer, cause or
permit any material Disposal of Hazardous Substances at any property owned,
leased or operated by it except in compliance with applicable Environmental Laws
or except where such Disposal would not be reasonably expected to have a
Material Adverse Effect.

       

      (c) Promptly notify the
Lender in the event of the Disposal of any Hazardous Substance in violation of
any Environmental Law at any property owned, leased or operated by Borrower, or
in the event of any Release, or threatened Release, of a Hazardous Substance in
violation of any Environmental Law from any such property, except where
such  Disposal, Release or threatened Release would not be reasonably
expected to have a Material Adverse Effect.

       

      (d) Deliver promptly to
the Lender (i) copies of any documents received from the United States
Environmental Protection Agency or any state, county or municipal environmental
or health agency concerning a violation or alleged violation by Borrower of any
Environmental Law; and (ii) copies of any non-routine documents submitted
by Borrower to the United States Environmental Protection Agency or any state,
county or municipal environmental or health agency concerning the operations of
Borrower..

      
        
           

        

        
          24

          
            

          

        

        
           

        

      

      5.12   Examinations. Borrower shall at all
reasonable times and from time to time permit the Lender or its agents during
Borrower’s regular business hours to inspect the Collateral and to examine and
make extracts from, or copies of, any of Borrower’s books, ledgers, reports,
correspondence, and other records.  The Lender shall have the right, in
connection with any collateral examination or after the occurrence and during
the continuation of any Event of Default, to verify the Collateral in any manner
and through any means that the Lender considers appropriate.  Borrower
agrees to furnish all assistance and information, and perform any acts, which
the Lender may reasonably require in connection therewith.

      

      5.13   Future
Subsidiaries.

      

      (a) Borrower shall cause
to be furnished to Lender, at such time as any entity becomes a Domestic
Subsidiary of the Borrower after the date of this Agreement, an executed
guaranty and security agreement from any such Domestic Subsidiary, in each case, in form
reasonably acceptable to the Lender.  The Borrower will provide the Lender
with prompt written notice of the incorporation or organization of any such
Subsidiary.

       

      (b) With respect to the
creation or acquisition of a first-tier Foreign Subsidiary of Borrower or a
Domestic Subsidiary, Borrower shall deliver to Lender, all of the share
certificates (or other evidence of equity) owned by Borrower or such Domestic
Subsidiary  pursuant to the terms of a pledge agreement executed by
the appropriate party; provided that no Person shall be required to deliver or
pledge more than sixty-five percent (65%) of the outstanding voting shares or
other voting ownership interest of any Foreign Subsidiary.

       

      5.14   Other
Acts. Execute and
deliver, or cause to be executed and delivered, to the Lender all further
documents and perform all other acts and things which the Lender deems necessary
or appropriate to protect or perfect any security interests in any property
directly or indirectly securing payment of any Indebtedness of Borrower to the
Lender.

      

      ARTICLE
VI.   NEGATIVE
COVENANTS

       

      During
the term of this Agreement and so long thereafter as any of the Indebtedness of
Borrower to the Lender, including any Indebtedness for fees and expenses, shall
remain unpaid, Borrower, without the prior written consent of the Lender, will
not:

      

      6.1    Sale of
Assets.
  Convey, sell, transfer, lease, or sell and lease back any
portion of its property, assets or business except for (i)  the sale
of Inventory in the ordinary course of business , (ii) assets sold, leased.
transferred  or otherwise disposed of for full and adequate
consideration in the reasonable judgment of Borrower which Borrower has
determined to be worn out or obsolete or not useful in the ordinary course of
its business, and (iii) assets sold, leased,  transferred or otherwise
disposed of in the ordinary course of business provided that Borrower receives
full and adequate consideration in the reasonable judgment of Borrower in
exchange for such assets  sold leased transferred or disposed of
..

      

      6.2    Change
Name. 
Change the jurisdiction of formation of Borrower or the name of Borrower
without:

      
        
           

        

        
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      (a) giving the Lender
prior notice of such intent to change name;

       

      (b) providing to the
Lender, promptly upon the filing thereof, copies of all name change
documentation; and

       

      (c) executing and
delivering to the Lender, upon the Lender’s request, such other and further
documentation as the Lender may reasonably request to maintain the perfection of
the Security Interests or appropriately document the Credit.

      

      6.3    Minimum
Tangible Net Worth. Permit Borrower’s
Tangible Net Worth to be less than (i) $19,000,000 as of December 31, 2010 and
(ii) as of the end of each Fiscal Year of the Borrower thereafter, an amount
equal to the minimum Tangible Net Worth required as of the end of the
immediately preceding Fiscal Year plus 50% of the Net Income for such Fiscal
Year.

      

      6.4    Current
Ratio. Permit the Current Ratio of the Borrower to be less than 1.30 to
1.00 as of June 30, 2010 and as of the end of each fiscal quarter
thereafter.

      

      6.5    New
Locations.
Establish any new Inventory locations or transfer any equipment to a new
location if such equipment or Inventory has a value exceeding $250,000 in the
aggregate (when taken together with the value of equipment and Inventory at all
other new locations), without first providing to the Lender thirty
(30) days prior written notice of such impending action, and executing and
delivering to the Lender a satisfactory landlord waiver, if requested by the
Lender, and appropriate Financing Statements regarding each such location for
which the Lender does not have a landlord waiver or has not obtained Financing
Statements.

      

      6.6    Notice of
Event of Default.
Provide to the Lender written notice of the occurrence of any Event of
Default under this Agreement, within 5 Business Days after Borrower becomes
aware of such an Event of Default.

      

      ARTICLE
VII.   EVENTS OF
DEFAULT

       

      7.1    Events of
Default.  The occurrence of any one or more of the following events
shall constitute an event of default (individually, “Event of Default”, or,
collectively, “Events of Default”):

      

      (a) Nonpayment. 
Nonpayment when due whether by acceleration or otherwise of principal of, or
interest on, the Revolving Note, any fee, cost, expense or premium provided for
hereunder or under any other Loan Document or any other Indebtedness owing
hereunder.

       

      (b) Negative
Covenants.  Default by the Borrower in the observance of any of the
covenants or agreements contained in Article VI of this
Agreement.

      
        
           

        

        
          26

          
            

          

        

        
           

        

      

      (c) Other
Covenants.  Default by the Borrower in the observance of any of the
covenants or agreements contained in this Agreement, other than in
Article VI or Section 5.1, which is not remedied within thirty (30)
days after notice thereof by the Lender to the Borrower.

       

      (d) Voluntary
Insolvency Proceedings.  If Borrower (i) shall file a petition
or request for liquidation, reorganization, arrangement, adjudication as a
bankrupt, relief as a debtor or other relief under the bankruptcy, insolvency or
similar laws of the United States of America or any state or territory thereof,
now or hereafter in effect; (ii) shall make a general assignment for the
benefit of creditors; (iii) shall consent to the appointment of a receiver
or trustee for Borrower or any of Borrower’s assets including, without
limitation, the appointment of or taking possession by a “custodian” as defined
in the federal Bankruptcy Code; (iv) shall make any, or send notice of any
intended, bulk sale; or (v) shall execute a consent to any other type of
insolvency proceeding (under the federal Bankruptcy Code or otherwise) or any
formal or informal proceeding for the dissolution or liquidation of, or
settlement of claims against or winding up of affairs of, Borrower.

       

      (e) Involuntary
Insolvency Proceedings.  The appointment of a receiver, trustee,
custodian or officer performing similar functions for Borrower or any of
Borrower’s assets including, without limitation, the appointment of or taking
possession by a “custodian” as defined in the federal Bankruptcy Code; or the
filing against Borrower of a request or petition for liquidation,
reorganization, arrangement, adjudication as a bankrupt or other relief under
the bankruptcy, insolvency or similar laws of the United States of America or
any state or territory thereof, now or hereafter in effect; or the institution
against Borrower of any other type of insolvency proceeding (under the federal
Bankruptcy Code or otherwise) or of any formal or informal proceeding for the
dissolution or liquidation of, settlement of claims against or winding up of
affairs of Borrower, and the failure to have such appointment vacated or such
petition or proceeding dismissed within 60 days after such appointment, filing
or institution.

       

      (f) Representations. 
If any certificate, written statement, representation, warranty or financial
statement furnished by or on behalf of Borrower pursuant to or in connection
with this Agreement, or any Loan Document (including, without limitation,
representations and warranties contained herein) or as an inducement to the
Lender to enter into this Agreement or any other lending agreement with Borrower
shall prove to have been false in any material respect at the time as of which
the facts therein set forth were certified, or to have omitted any substantial
contingent or unliquidated liability or claim against Borrower.

       

      (g) Other
Indebtedness and Agreements.  Nonpayment by Borrower of any
Indebtedness owing by Borrower when due, which singly or in the aggregate total
$250,000 or more, including, whether such Indebtedness shall become due by
scheduled maturity, by required prepayment, by acceleration, by demand or
otherwise, or failure to perform any material term, covenant or agreement on its
part to be performed under any agreement or instrument (other than this
Agreement) evidencing or securing or relating to any Indebtedness owing by
Borrower, involving singly or in the aggregate $250,000 or more, including
without limitation, any Collateral Document when required to be performed if the
effect of such failure is to permit the holder to accelerate the maturity of
such Indebtedness.

      
        
           

        

        
          27

          
            

          

        

        
           

        

      

      (h) Judgments. 
If any judgment or judgments in excess of $100,000 for any one such judgment or
all judgments in the aggregate (other than any judgment for which it is fully
insured) against Borrower remains unpaid, unstayed on appeal, undischarged,
unbonded or undismissed for a period of 30 days.

       

      (i) Pension
Default.  Any of the following shall occur and shall have or would
be reasonably expected to have a Material Adverse Effect: Any Reportable Event,
which the Lender reasonably determines constitutes grounds for the termination
of any Pension Plan by the Pension Benefit Guaranty Corporation or for the
appointment by an appropriate United States district court of a trustee to
administer any such Pension Plan, shall have occurred and continued 30 days
after written notice thereof to the Borrower by the Lender; or the Pension
Benefit Guaranty Corporation shall institute proceedings to terminate any such
Pension Plan or to appoint a trustee to administer any such Pension Plan; or a
trustee shall be appointed by an appropriate United States district court to
administer any such Pension Plan; or any such Pension Plan shall be terminated;
or Borrower withdraws from a Pension Plan in a complete withdrawal or a partial
withdrawal; or the Borrower shall fail to pay to any Pension Plan any
contribution which it is obligated to pay under the terms of such plan or any
agreement, or which is required to meet statutory minimum funding
standards.

       

      (j) Change of
Control.  If there occurs a Change in Control.

       

      (k) Non-perfection
or Loss of Priority.  If at any time, any of the Collateral
Documents shall cease to be in effect, or if any security interest in favor of
the Lender in any of the collateral shall cease to be enforceable or cease to
have a first-priority Lien position (subject to Permitted Encumbrances), or if
title to any material collateral is not satisfactory to the Lender by reason of
any unpermitted Lien or title condition and the Lender reasonably determines
that such defect in title could impair the Lender’s ability to collect the
Obligations, and any of the foregoing conditions continues for more than 20 days
after notice thereof from the Lender to the Borrower.

       

      7.2    Effects of an Event of
Default.

      

      (a) Upon the happening of
one or more Events of Default (except a default under either Section 7.1(d)
or 7.1(e) hereof), the Lender may declare any commitments of Lender to lend
money to the Borrower (“Lender’s Obligations”) to be canceled and the principal
of the Revolving Note then outstanding to be immediately due and payable,
together with all interest thereon and fees and expenses accruing under this
Agreement and under any Loan Document.  Upon such declaration, the Lender’s
Obligations shall be immediately canceled and the Loans evidenced by the
Revolving Note shall become immediately due and payable without presentation,
demand or further notice of any kind to the Borrower.

       

      (b) Upon the happening of
one or more Events of Default under Section 7.1(d) or 7.1(e) hereof, the
Lender’s Obligations shall be canceled immediately, automatically and without
notice, and the Revolving Note shall become immediately due and payable without
presentation, demand or notice of any kind to Borrower.

      
        
           

        

        
          28

          
            

          

        

        
           

        

      

       

      ARTICLE
VIII.   EXPENSES

       

      8.1    Expenses.
The Borrower shall reimburse the Lender for any out-of pocket expenses,
including reasonable counsel fees and expenses, incident to the negotiation,
documentation and administration of this Agreement, including any amendments
thereto, and the documents in connection herewith and for preservation of any of
the Lender’s rights under, or enforcement of any provision of, this Agreement,
the Revolving Note, the Collateral Documents, the Loan Documents or any
documents executed in connection therewith.

      

      8.2    Indemnification. Borrower shall indemnify and
hold harmless the Lender and each of their directors, officers, employees,
agents and advisors (each an “Indemnified Party”) from and against any and all
claims, damages, liabilities and reasonable fees, expenses and disbursements of
counsel, demands, losses, costs, fines or liabilities of whatever kind or
nature, including, without limitation, arising from personal injury or property
damage, in any way related to any environmental condition on, above, within, in
the vicinity of, related to or affected by property owned or leased by the
Borrower or in connection with or arising out of any investigation, litigation
or proceeding arising out of, related to or in connection with this Agreement or
the Loans or any taxes, liabilities, claims or damages relating to the
collateral under the Collateral Documents or the liens of the Lender therein
(other than litigation between Borrower and the Lender in which Borrower is the
prevailing party), whether or not an Indemnified Party is a party to such
investigation, litigation or proceeding except to the extent such claim, damage,
loss, liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from such Indemnified Party’s own gross
negligence or willful misconduct.  In addition to, and without limiting the
generality of, the foregoing, Borrower agrees to reimburse and indemnify all
Indemnified Parties on demand for any reasonable fees and expenses of counsel
which may be incurred in any action, claim or proceeding between Borrower, any
Subsidiary or any Affiliate of the Borrower and an Indemnified Party in which
such Indemnified Party is successful.  The obligations of Borrower under
this indemnity shall survive any expiration or termination hereof, and shall
apply each to any and all such claims, expenses, demands, losses, costs, fines
or liabilities of whatever kind or nature, notwithstanding the discharge of the
Security Interests, or the payment of the Indebtedness hereunder or under the
Loan Documents.  Borrower agrees not to institute or participate in any
proceeding seeking to establish a position contrary to the terms of this
indemnification.

      

      ARTICLE
IX.   MISCELLANEOUS

       

      9.1    Amendments
and Waivers.  This Agreement is intended by the parties as the
final, complete and exclusive statement of the transactions evidenced by this
Agreement.  All prior or contemporaneous promises, agreements and
understandings, whether oral or written, are deemed to be superceded by this
Agreement, and no party is relying on any promise, agreement or understanding
not set forth in this Agreement.  No modification, rescission, waiver,
release or amendment of any provision of this Agreement shall be made except by
a written agreement subscribed by any authorized officers of the Borrower and
the Lender.

      
        
           

        

        
          29

          
            

          

        

        
           

        

      

      

      9.2    Delays
and Omissions. No
course of dealing and no delay or omission by the Lender in exercising any right
or remedy hereunder or with respect to any Indebtedness of Borrower shall
operate as a waiver thereof or of any other right or remedy, and no single or
partial exercise thereof shall preclude any other or further exercise thereof or
the exercise of any other right or remedy.  The Lender may remedy any
default by Borrower hereunder or with respect to any other Person, firm or
corporation in any reasonable manner without waiving the default remedied and
without waiving any other prior or subsequent default by Borrower and shall be
reimbursed for its expenses in so remedying such default.  All rights and
remedies of the Lender hereunder are cumulative.

      

      9.3    Assignments.

      

      (a) The Borrower shall
not assign or otherwise transfer any of Borrower’s rights pursuant to this
Agreement without the prior written consent of the Lender, and any such
assignment or other transfer without such prior written consent shall be
void.

       

      (b) The Lender may sell,
assign or participate all or a portion of its rights and obligations under this
Agreement to an Affiliate of the Lender or, with the Borrower’s consent to any
other Person, which consent shall not be unreasonably withheld; provided,
however, the consent of the Borrower shall not be required if, at the time of
such assignment, an Incipient Default or an Event of Default is in
existence.

       

      (c) The Lender may at any
time pledge or assign all or any portion of its rights under the Loan Documents
to any of the twelve (12) Federal Reserve Banks organized under Section 4 of the
Federal Reserve Act, 12 U.S.C. Section 341.  No such pledge or
assignment or enforcement thereof shall release the Lender from its obligations
under any of the Loan Documents.

       

      9.4    Successors
and Assigns.
Borrower and Lender as used herein shall include the legal
representatives, successors and assigns of those parties.

      

      9.5    Notices. 
Any notice or demand to be given hereunder shall be in writing, unless
otherwise expressly provided herein and shall be deemed to have been given or
made when delivered by hand or facsimile, and one (1) business day after being
delivered to a courier for express delivery, to the address below, or three (3)
business days after being deposited in an official depository maintained by the
United States Post Office for the collection of mail, registered or certified
mail, postage prepaid and addressed as follows:

        

      
        
          
            
              	
                      To
      the Borrower

                    	
                      -

                    	
                      Mod-Pac
      Corp.

                    
	 
      	 
      	
                      1801
      Elmwood Avenue

                    
	 
      	 
      	
                      Buffalo,
      New York 14207

                    
	 
      	 
      	
                      Attention:
      Daniel J. Geary,

                    
	 
      	 
      	
                      Vice
      President of
Finance

                    

            

          

        

      

      
        
           

        

        
          30

          
            

          

        

        
           

        

      

      

      
        
          	
                  With
      a copy to

                	
                  -

                	
                  Hodgson
      Russ, LLP

                
	
                  (which
      shall not

                	 
      	
                  28
      Church Street

                
	
                  constitute
      notice)

                	 
      	
                  Buffalo,
      New York

                
	 
      	 
      	
                  Attention:
      Victoria Saxon, Esq.

                
	 
      	 
      	 
      
	
                  To
      the Lender

                	
                  -

                	
                  Manufacturers
      and Traders Trust Company

                
	 
      	 
      	
                  One
      Fountain Plaza

                
	 
      	 
      	
                  Buffalo,
      New York  14203

                
	 
      	 
      	
                  Attn:  Michael
      Prendergast, Vice President

                
	 
      	 
      	 
      
	
                  With
      a copy to

                	
                  -

                	
                  Lippes
      Mathias Wexler Friedman LLP

                
	
                  (which
      shall not

                	 
      	
                  665
      Main St., Suite 300

                
	
                  constitute
      notice)

                	 
      	
                  Buffalo,
      New York 14203

                
	 
      	 
      	
                  Attn:  Brian
      J. Bocketti, Esq.

                

        

      

      

      9.6    Governing
Law. This
Agreement, the transactions described herein and the obligations of the Lender
and the Borrower shall be construed under, and governed by, the internal laws of
the State of New York without regard to principles of conflicts of
laws.

      

      9.7    Counterparts.  This Agreement may be
executed in any number of counterparts and by the Lender and the Borrower on
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall together constitute one and the same
Agreement.

      

      9.8    Titles.  Titles to the sections
of this Agreement are solely for the convenience of the Lender and the Borrower,
and are not an aid in the interpretation of this Agreement or any part
thereof.

      

      9.9    Inconsistent
Provisions.  The terms of this Agreement and any related agreements,
instruments or other documents shall be cumulative except to the extent that
they are specifically inconsistent with each other, in which case the terms of
this Agreement shall prevail.

      

      9.10   Course of
Dealing. 
Without limitation of the foregoing, the Lender shall have the right, but
not the obligation, at all times to enforce the provisions of this Agreement and
all other documents executed in connection herewith in strict accordance with
their terms, notwithstanding any course of dealing or performance by the Lender
in refraining from so doing at any time and notwithstanding any custom in the
banking trade.  Any delay or failure by the Lender at any time or times in
enforcing its rights under such provisions in strict accordance with their terms
shall not be construed as having created a course of dealing or performance
modifying or waiving the specific provisions of this Agreement.

      

      9.11   USA
Patriot Act. 
The Lender hereby notifies the Borrower that pursuant to the requirements
of the USA Patriot Act (Title III of Pub. L. 107-56), the Lender
is required to obtain, verify and record information that identifies the
Borrower, which information includes the name and address of the Borrower and
other information that will allow the Lender to identify the Borrower in
accordance with the USA Patriot Act.

      
        
           

        

        
          31

          
            

          

        

        
           

        

      

      

      9.12   CONSENT
TO JURISDICTION. 
EACH OF THE BORROWER AND THE LENDER, AGREE THAT ANY ACTION OR PROCEEDING
TO ENFORCE OR ARISING OUT OF THIS AGREEMENT MAY BE COMMENCED IN THE SUPREME
COURT OF NEW YORK IN ERIE COUNTY, OR IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF NEW YORK SITTING IN ERIE COUNTY, NEW YORK.  BORROWER
WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT A SUMMONS AND COMPLAINT
COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED
AND SHALL CONFER PERSONAL JURISDICTION IF SERVED BY REGISTERED OR CERTIFIED MAIL
TO THE BORROWER, AT THE ADDRESS SET FORTH AT THE BEGINNING OF THIS AGREEMENT, OR
AS PROVIDED BY THE LAWS OF THE STATE OF NEW YORK OR THE UNITED
STATES.

      

      9.13   JURY
TRIAL WAIVER.EACH
OF THE BORROWER AND THE LENDER, HEREBY KNOWINGLY, VOLUNTARILY, AND INTENTIONALLY
WAIVE ANY RIGHT TO TRIAL BY JURY THEY MAY HAVE IN ANY ACTION OR PROCEEDING, IN
LAW OR IN EQUITY, IN CONNECTION WITH THIS AGREEMENT OR ANY LOAN DOCUMENT OR THE
TRANSACTIONS RELATED HERETO.  BORROWER REPRESENTS AND WARRANTS THAT NEITHER
ANY REPRESENTATIVE OF THE LENDER NOR THE LENDER HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT ANY LENDER WILL NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE
THIS JURY TRIAL WAIVER.  BORROWER ACKNOWLEDGES THAT THE LENDER HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE PROVISIONS OF
THIS SECTION.

      

      [Signature
Page To Follow]

      
        
           

        

        
          32

          
            

          

        

        
           

        

      

      

      IN WITNESS WHEREOF, the
parties hereto have caused this Agreement to be signed by their duly authorized
officers all as of the 9th day of June, 2010.

      

      
        
          
            
              
                
                  
                    
                      
                        	 
      	
                                MANUFACTURERS
      AND TRADERS TRUST
COMPANY

                              
	 
      	 
      	 
      
	 
      	
                                By: 

                              	
                                /s/ Michael Prendergast

                              
	 
      	 
      	
                                Name:  Michael
      Prendergast

                              
	 
      	 
      	
                                Title:    Vice
      President

                              
	 
      	 
      	 
      
	 
      	
                                MOD-PAC
      CORP.

                              
	 
      	 
      	 
      
	 
      	
                                By:

                              	
                                /s/ Daniel J. Geary

                              
	 
      	 
      	
                                Name:  Daniel
      J. Geary

                              
	 
      	 
      	
                                Title:    Vice
      President of
Finance

                              

                      

                    

                  

                

              

            

          

        

      

      
        
           

        

        
          33

          
            

          

        

        
           

        

      

      

      EXHIBIT
A

       

      REVOLVING
CREDIT NOTE

        

      
        	
                $3,000,000.00

              	
                Buffalo,
      New York

              

      

      June
9, 2010      

      

      FOR VALUE RECEIVED, the
undersigned, MOD-PAC CORP.,
a New York corporation (“Borrower”) hereby
unconditionally promises to pay, on or before June 9, 2013, to the order of
MANUFACTURERS AND TRADERS TRUST
COMPANY (“Lender”) at Lender’s office at One Fountain Plaza, Buffalo, New
York 14203, or at the holder’s option, at such other place as may be
designated by the holder, in lawful money of the United States of America, a
principal sum equal to the lesser of THREE MILLION AND 00/100 DOLLARS
($3,000,000.00) or the aggregate unpaid principal amount of all Revolving
Loans made by Lender to the Borrower from time to time under a Revolving Credit
Agreement, dated of even date herewith, between the Borrower and the Lender, as
the same may from time to time be amended, supplemented or otherwise modified
(“Revolving Credit Agreement”) as evidenced by the inscriptions made on the
schedule attached hereto, or any continuation thereof (“Schedule”).  The
Borrower further promise to pay interest on the unpaid principal amount hereof
from time to time at the rates and on the dates determined in accordance with
the Revolving Credit Agreement.  All capitalized terms used herein and not
otherwise defined herein shall have the meanings specified in the Revolving
Credit Agreement.

      

      The Lender and each holder of this Note
are authorized to inscribe on the Schedule the type of Revolving Loan, the date
of the making of each Revolving Loan, the amount of each Revolving Loan, all
payments on account of principal and the aggregate outstanding principal balance
of this Note from time to time unpaid.  Each entry set forth on the
Schedule shall be prima facie evidence of the facts so set forth.  No
failure by the Lender or any holder of this Note to make, and no error in
making, any inscriptions on the Schedule shall affect Borrower’s obligation to
repay the full principal amount loaned to or for the account of the Borrower, or
the Borrower’s obligation to pay interest thereon at the agreed upon
rate.

      

      If any payment on this Note becomes due
and payable on a day other than a Business Day, the maturity thereof shall be
extended to the next succeeding Business Day, and the Borrower will pay interest
thereon at the then applicable rate until the date of actual receipt of such
installment by the holder of this Note.

      

      No failure by the holder to exercise,
and no delay in exercising, any right or power hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise by the holder of any
right or powers hereunder preclude any other or further exercise thereof or the
exercise of any other right or power.  The rights and remedies of the
holder as herein specified are cumulative and not exclusive of any other rights
or remedies which the holder may otherwise have.

      
        
           

        

        
          34

          
            

          

        

        
           

        

      

      

      No modification, rescission, waiver,
release or amendment of any provision of this Note shall be made except by a
written agreement subscribed by duly authorized officer of the Borrower and the
holder hereof.

      

      Borrower waives diligence, presentment,
protest and demand, and also notice of protest, demand, dishonor and nonpayment
of this Note.

      

      This Note evidences a borrowing under
the Revolving Credit Agreement to which reference is hereby made with respect to
collateral, interest rate options and periods, mandatory and voluntary
prepayments, and rights of acceleration of the principal hereof on the
occurrence of certain events.

      

      Borrower agrees to pay on demand all
reasonable costs and expenses incurred by the holder in enforcing this Note or
in collecting the indebtedness evidenced hereby, including, without limitation,
if the holder retains counsel for any such purpose, reasonable attorneys’ fees
and expenses.

      

      This Note shall be construed under, and
governed by, the internal laws of the State of New York without regard to
principles of conflicts of laws.

      

      
        
          	 
      	
                  MOD-PAC
      CORP.

                
	 
      	 
      	 
      
	 
      	
                  By: 

                	
                    

                
	 
      	 
      	
                  Name:  Daniel
      J. Geary

                
	 
      	 
      	
                  Title:    Vice
      President of Finance

                

        

      

      
        
           

        

        
          35

          
            

          

        

        
           

        

      

      SCHEDULE

       

      LOANS AND PAYMENTS OF
PRINCIPAL

       

      
        
          
            	
                    TYPE OF

                    LOAN

                  	 
      	
                    DATE LOAN

                    MADE

                  	 
      	
                    AMOUNT OF LOAN

                  	 
      	
                    AMOUNT OF

                    PRINCIPAL

                    PAID OR

                    PREPAID

                  	 
      	
                    AGGREGATE

                    UNPAID

                    PRINCIPAL

                    BALANCE 

                  	 
      	
                    NOTATION

                    MADE BY AND

                    DATE

                  
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      	 
      

          

        

      

      
        
           

        

        
           

          
            

          

        

        
           

        

      

    EXHIBIT
B

     

    REQUEST
CERTIFICATE

     

    Revolving
Credit

     

    The undersigned as Borrower hereby
certifies to Manufacturers and Traders Trust Company in accordance with the
terms of the Revolving Credit Agreement between Mod-Pac Corp. and Manufacturers
and Traders Trust Company dated as of June__, 2010, as may be amended from time
to time, that:

    

    The undersigned requests or has
requested a Revolving Loan which will be a

    

    Libor Loan in the amount of
$_____________

    

    The
proposed loan is to be made on ____________, ____ .

    

    WITNESS the signature of the
undersigned authorized signatory of the Borrower this ____ day of _____________,
____.

    

    
      	 
      	
              MOD-PAC
      CORP.

            
	 
      	 
      	 
      
	 
      	
              By:

            	
                  

            
	 
      	 
      	
              (Title)    
      

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    EXHIBIT
C

    

    COMPLIANCE
CERTIFICATE

    

    The undersigned as Borrower hereby
certifies to Manufacturers and Traders Trust Company (the "Lender"), in
accordance with the terms of the Revolving Credit Agreement between Mod-Pac
Corp. and the Lender, dated as of June 9, 2010, as may be amended from time to
time (“Agreement”), that:

    

    1.           Capitalized
terms not defined herein shall have the meanings set forth in the
Agreement.

    

    2.           The
Borrower has complied in all material respects with all the terms, covenants and
conditions to be performed or observed by it contained in the Agreement and the
Loan Documents, and there exists no Event of Default or Incipient Default under
the Agreement.

    

    3.           The
representations and warranties contained in the Agreement, in any Loan Document
to which Borrower is a party and in any certificate, document or financial or
other statement furnished at any time thereunder are true, correct and complete
in all material respects with the same effect as though such representations and
warranties had been made on the date hereof, except to the extent that any such
representation and warranty relates solely to an earlier date (in which case
such representation and warranty shall be true, correct and complete on and as
of such earlier date).

    

    4.           Attached
hereto are the calculations required to establish compliance with the provisions
of Section 6.3 and 6.4.

    

    WITNESS the signature of the
undersigned authorized signatory of the Borrower this ____ day of _____________,
____.

    

    
      	 
      	
              MOD-PAC
      CORP.

            
	 
      	 
      	 
      
	 
      	
              By:

            	
                  

            
	 
      	 
      	
              (Title)    
      

            

    

     

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    

    Schedule
1

    Pension
Plans

    

    NONE

     

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    Schedule
4.3

    Permitted
Encumbrances

    

    Liens of
carriers, warehousemen, artisans, bailees, mechanics and materialmen incurred in
the ordinary course of business securing sums not overdue; (b) liens incurred in
the ordinary course of business in connection with workmen’s compensation,
unemployment insurance or other forms of governmental insurance or benefits,
relating to employees, securing sums (i) not overdue or (ii) being diligently
contested in good faith provided that adequate reserves with respect thereto are
maintained on the books and records of Borrower in conformity with generally
accepted accounting principles; (c) liens for taxes (i) not yet due or (ii)
being diligently contested in good faith by appropriate proceedings, provided
that adequate reserves with respect thereto are maintained on the books of
Borrower and (d) any judgment lien with respect to any judgment that does not
constitute an Event of Default under Section 7.1 (h)

    

    Those
security interests, perfected by the financing statements described in the UCC
Memorandum dated June 4, 2010, attached as Exhibit B to the General Security
Agreement, between Borrower and Lender, dated of even date
herewith.

    

    Key Bank
National Association – certificate of deposit securing Borrower’s reimbursement
obligation relating to existing letters of credit issued by KeyBank National
Association,  to be replaced with letters of credit issued by Lender
following the execution and delivery of this Agreement.

    

    Purchase
Money Security Interests

    
      
         

      

      
        1

        
          

        

      

      
         

      

    

    

    Schedule
4.4

    Material
Litigation

    

    NONE

    

    
      
        
           

        

        
          2

          
            

          

        

        
           

        

      

    

     

    Schedule 4.8

    Notices
of Assessments

    

    NONE

     

    
      
        
           

        

        
          1

          
            

          

        

        
           

        

      

    

    

    Schedule
4.9

    Subsidiaries
and Affiliates

    

    1803-1807
Elmwood Avenue LLC, a New York limited liability company

    
      
         

      

      
        1

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