Document:

exv4w1

 

Exhibit 4.1

THE BON-TON STORES, INC. AMENDED AND RESTATED

2000 STOCK INCENTIVE AND PERFORMANCE-BASED AWARD
PLAN

(Amended and Restated as of June 20, 2006)

         
1.     Purpose. The Bon-Ton
Stores, Inc. (the “Company”) hereby adopts The Bon-Ton
Stores, Inc. Amended and Restated 2000 Stock Incentive and
Performance-Based Award Plan (the “Plan”), effective
as of June 20, 2006. The Plan, as herein amended and
restated, is intended to recognize the contributions made to the
Company by employees (including employees who are members of the
Board of Directors), directors, consultants and advisors of the
Company or any Affiliate, to provide such persons with
additional incentive to devote themselves to the future success
of the Company or an Affiliate, to improve the ability of the
Company or an Affiliate to attract, retain, and motivate
individuals upon whom the Company’s sustained growth and
financial success depend, by providing such persons with an
opportunity to acquire or increase their proprietary interest in
the Company through receipt of rights to acquire the
Company’s Common Stock, par value $.01 per share (the
“Common Stock”), and to permit Awards of Restricted
Stock that may be characterized as “performance-based”
compensation for purposes of Section 162(m) of the Code. No
Performance-Based Award shall become vested unless the Plan, as
herein amended and restated, including the provisions of
Section 16, has been disclosed to and approved by the
Company’s shareholders.

         
2.     Definitions. Unless the
context clearly indicates otherwise, the following terms shall
have the following meanings:

			
	 	          A.	
    “Affiliate” means a corporation that is a parent
    corporation or a subsidiary corporation with respect to the
    Company within the meaning of Section 424(e) or (f) of
    the Code.
	 
	 	          B.	
    “Award” means an award of Restricted Stock, granted
    under the Plan, designated by the Committee at the time of such
    grant as an Award, and containing the terms specified herein for
    Awards.
	 
	 	          C.	
    “Award Document” means the document described in
    Section 9 that sets forth the terms and conditions of each
    grant of an Award.
	 
	 	          D.	
    “Board of Directors” means the Board of Directors of
    the Company.

			
	 	          E.	
    “Change of Control” shall have the meaning as set
    forth in Section 10.
	 
	 	          F.	
    “Code” means the Internal Revenue Code of 1986, as
    amended.

			
	 	          G.	
    “Committee” shall have the meaning set forth in
    Section 3.A.

			
	 	          H.	
    “Company” means The Bon-Ton Stores, Inc., a
    Pennsylvania corporation.

			
	 	          I.	
    “Disability” shall have the meaning set forth in
    Section 22(e)(3) of the Code.

			
	 	          J.	
    “Fair Market Value” shall have the meaning set forth
    in Section 8.B.

			
	 	          K.	
    “Grantee” means a person who is granted Restricted
    Stock.

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	 	          L.	
    “ISO” means an Option granted under the Plan that is
    intended to qualify as an “incentive stock option”
    within the meaning of Section 422(b) of the Code.

			
	 	          M.	
    “Non-qualified Stock Option” means an Option granted
    under the Plan that is not intended to qualify, or otherwise
    does not qualify, as an “incentive stock option”
    within the meaning of Section 422(b) of the Code.

			
	 	          N.	
    “Option” means either an ISO or a Non-qualified Stock
    Option granted under the Plan.
	 
	 	          O.	
    “Optionee” means a person to whom an Option has been
    granted under the Plan, which Option has not been exercised and
    has not expired or terminated.

			
	 	          P.	
    “Option Document” means the document described in
    Section 8 that sets forth the terms and conditions of each
    grant of Options.

			
	 	          Q.	
    “Option Price” means the price at which Shares may be
    purchased upon exercise of an Option, as calculated pursuant to
    Section 8.B.

			
	 	          R.	
    “Performance-Based Award” means an Award granted
    pursuant to Section 16.
	 
	 	          S.	
    “Performance-Based Award Limitation” means the
    limitation on the number of Shares that may be granted pursuant
    to Performance-Based Awards to any one Participant, as set forth
    in Section 16.F.

			
	 	          T.	
    “Performance Period” means any period designated by
    the Committee as a period of time during which a Performance
    Target must be met for purposes of Section 16.

			
	 	          U.	
    “Performance Target” means the performance target
    established by the Committee for a particular Performance
    Period, as described in Section 16.B.

			
	 	          V.	
    “Restricted Stock” means Shares issued to a person
    pursuant to an Award.

			
	 	          W.	
    “Shares” means the shares of Common Stock that are the
    subject of Options or Awards.

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

         
3.     Administration of the
Plan.

			
	 	          A.	
    Committee. The Plan shall be administered by the Board of
    Directors, or, in the discretion of the Board of Directors, by a
    committee composed of two (2) or more of the members of the
    Board of Directors. To the extent possible, and to the extent
    the Board of Directors deems it necessary or appropriate, each
    member of the Committee shall be a “Non- Employee
    Director” (as such term is defined in
    Rule 16b-3
    promulgated under the Exchange Act) and an “Outside
    Director” (as such term is defined in Treasury Regulations
    Section 1.162-27 promulgated under the Code); however, the
    Board of Directors may designate two or more committees to
    operate and administer the Plan in its stead. Any of such
    committees designated by the Board of Directors is referred to
    as the “Committee,” and, to the extent that the Plan
    is administered by the Board of Directors, “Committee”
    shall also refer to the Board of Directors as appropriate in the
    particular context. The Board of Directors may from time to time
    remove members from, or add members

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    to, the Committee. Vacancies on the Committee, however caused,
    shall be filled by the Board of Directors.
	 
	 	          B.	
    Meetings. The Committee shall hold meetings at such times
    and places as it may determine. Acts approved at a meeting by a
    majority of the members of the Committee or acts approved in
    writing by the unanimous consent of the members of the Committee
    shall be the valid acts of the Committee.
	 
	 	          C.	
    Grants. The Committee shall from time to time at its
    discretion direct the Company to grant Options or Awards
    pursuant to the terms of the Plan. The Committee shall have
    plenary authority to (i) determine the Optionees and
    Grantees to whom and the times at which Options and Awards shall
    be granted, (ii) determine the price at which Options shall
    be granted, (iii) determine the type of Option to be
    granted and the number of Shares subject thereto,
    (iv) determine the number of Shares to be granted pursuant
    to each Award and (v) approve the form and terms and
    conditions of the Option Documents and of each Award; all
    subject, however, to the express provisions of the Plan. In
    making such determinations, the Committee may take into account
    the nature of the Optionee’s or Grantee’s services and
    responsibilities, the Optionee’s or Grantee’s present
    and potential contribution to the Company’s success and
    such other factors as it may deem relevant. The interpretation
    and construction by the Committee of any provisions of the Plan
    or of any Option or Award granted under it shall be final,
    binding and conclusive.
	 
	 	          D.	
    Exculpation. No member of the Committee shall be
    personally liable for monetary damages as such for any action
    taken or any failure to take any action in connection with the
    administration of the Plan or the granting of Options or Awards
    thereunder unless (i) the member of the Committee has
    breached or failed to perform the duties of his or her office
    within the meaning of subchapter B of Chapter 17 of the
    Pennsylvania Business Corporation Law of 1988, as amended, and
    (ii) the breach or failure to perform constitutes
    self-dealing, willful misconduct or recklessness; provided,
    however, that the provisions of this Section 3.D shall
    not apply to the responsibility or liability of a member of the
    Committee pursuant to any criminal statute or to the liability
    of a member of the Committee for the payment of taxes pursuant
    to local, state or federal law.

			
	 	          E.	
    Indemnification. Service on the Committee shall
    constitute service as a member of the Board of Directors. Each
    member of the Committee shall be entitled without further act on
    his or her part to indemnity from the Company to the fullest
    extent provided by applicable law and the Company’s
    Articles of Incorporation and/or Bylaws in connection with or
    arising out of any action, suit or proceeding with respect to
    the administration of the Plan or the granting of Options or
    Awards thereunder in which he or she may be involved by reason
    of his or her being or having been a member of the Committee,
    whether or not he or she continues to be such member of the
    Committee at the time of the action, suit or proceeding.

         
4.     Grants of Options under the
Plan. Grants of Options under the Plan may be in the form of
a Non-qualified Stock Option, an ISO or a combination thereof,
at the discretion of the Committee.

         
5.     Eligibility. All
employees (including employees who are members of the Board of
Directors or its Affiliates), directors, consultants and
advisors of the Company or its Affiliates shall be eligible to
receive Options or Awards hereunder; provided, that only
employees of the Company or its Affiliates shall be eligible to
receive ISOs. The Committee, in its sole discretion, shall
determine whether an individual qualifies as an employee of the
Company or its Affiliates.

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6.     Shares Subject to Plan.
The aggregate maximum number of Shares for which Options or
Awards may be granted pursuant to the Plan is two million six
hundred thousand (2,600,000) adjusted as provided in
Section 11. The Shares shall be issued from authorized and
unissued Common Stock or Common Stock held in or hereafter
acquired for the treasury of the Company. If an Option
terminates or expires without having been fully exercised for
any reason, or if Restricted Stock is canceled or forfeited
pursuant to the terms of an Award, the Shares for which the
Option was not exercised or that were canceled or forfeited
pursuant to the Award may again be the subject of an Option or
Award granted pursuant to the Plan.

         
7.     Term of the Plan. No
Option or Award may be granted under the Plan after
March 2, 2010.

         
8.     Option Documents and
Terms. Each Option granted under the Plan shall be a
Non-qualified Stock Option unless the Option shall be
specifically designated at the time of grant to be an ISO.
Options granted pursuant to the Plan shall be evidenced by the
Option Documents in such form as the Committee shall from time
to time approve, which Option Documents shall comply with and be
subject to the following terms and conditions and such other
terms and conditions as the Committee shall from time to time
require that are not inconsistent with the terms of the Plan.

			
	 	          A.	
    Number of Option Shares. Each Option Document shall state
    the number of Shares to which it pertains. An Optionee may
    receive more than one Option, which may include Options that are
    intended to be ISOs and Options that are not intended to be
    ISOs, but only on the terms and subject to the conditions and
    restrictions of the Plan. The maximum number of Shares for which
    Options may be granted to any single Optionee in any fiscal
    year, adjusted as provided in Section 11, shall be four
    hundred thousand (400,000) Shares.
	 
	 	          B.	
    Option Price. Each Option Document shall state the Option
    Price that, for all ISOs, shall be at least 100% of the Fair
    Market Value of the Shares at the time the Option is granted as
    determined by the Committee in accordance with this
    Section 8.B; provided, however, that if an ISO is
    granted to an Optionee who then owns, directly or by attribution
    under Section 424(d) of the Code, shares of capital stock
    of the Company possessing more than 10% of the total combined
    voting power of all classes of stock of the Company or an
    Affiliate, then the Option Price shall be at least 110% of the
    Fair Market Value of the Shares at the time the Option is
    granted. If the Common Stock is traded in a public market, then
    the Fair Market Value per Share shall be, if the Common Stock is
    listed on a national securities exchange or included in the
    NASDAQ National Market System, the last reported sale price per
    share thereof on the relevant date, or, if the Common Stock is
    not so listed or included, the mean between the last reported
    “bid” and “asked” prices per share thereof,
    as reported on NASDAQ or, if not so reported, as reported by the
    National Daily Quotation Bureau, Inc., or as reported in a
    customary financial reporting service, as applicable and as the
    Committee determines, on the relevant date. If the Common Stock
    is not traded in a public market on the relevant date, the Fair
    Market Value shall be as determined in good faith by the
    Committee.
	 
	 	          C.	
    Exercise. No Option shall be deemed to have been
    exercised prior to the receipt by the Company of written notice
    of such exercise and of payment in full of the Option Price for
    the Shares to be purchased. Each such notice shall specify the
    number of Shares to be purchased and shall (unless the Shares
    are covered by a then current registration statement or a
    Notification under Regulation A under the Securities Act of
    1933, as amended (the “Act”)), contain the
    Optionee’s acknowledgment in form and substance
    satisfactory to the Company that (i) such Shares

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    are being purchased for investment and not for distribution or
    resale (other than a distribution or resale that, in the opinion
    of counsel satisfactory to the Company, may be made without
    violating the registration provisions of the Act), (ii) the
    Optionee has been advised and understands that (A) the
    Shares have not been registered under the Act and are
    “restricted securities” within the meaning of
    Rule 144 under the Act and are subject to restrictions on
    transfer and (B) the Company is under no obligation to
    register the Shares under the Act or to take any action that
    would make available to the Optionee any exemption from such
    registration, (iii) such Shares may not be transferred
    without compliance with all applicable federal and state
    securities laws, and (iv) an appropriate legend referring
    to the foregoing restrictions on transfer and any other
    restrictions imposed under the Option Documents may be endorsed
    on the certificates. Notwithstanding the foregoing, if the
    Company determines that issuance of Shares should be delayed
    pending (I) registration under federal or state securities
    laws, (II) the receipt of an opinion that an appropriate
    exemption from such registration is available, (III) the
    listing or inclusion of the Shares on any securities exchange or
    in an automated quotation system or (IV) the consent or
    approval of any governmental regulatory body whose consent or
    approval is necessary in connection with the issuance of such
    Shares, the Company may defer exercise of any Option granted
    hereunder until any of the events described in this
    Section 8.C has occurred.
	 
	 	          D.	
    Medium of Payment. An Optionee shall pay for Shares
    (i) in cash, (ii) by certified check payable to the
    order of the Company, or (iii) by such other mode of
    payment as the Committee may approve, including, without
    limitation, payment through a broker in accordance with
    procedures permitted by Regulation T of the Federal Reserve
    Board. Furthermore, the Committee may provide in an Option
    Document that payment may be made in whole or in part in shares
    of Common Stock held by the Optionee for at least six months. If
    payment is made in whole or in part in shares of Common Stock,
    then the Optionee shall deliver to the Company certificates
    registered in the name of such Optionee representing the shares
    of Common Stock owned by such Optionee, free of all liens,
    claims and encumbrances of every kind and having an aggregate
    Fair Market Value on the date of delivery that is at least as
    great as the Option Price of the Shares (or relevant portion
    thereof) with respect to which such Option is to be exercised by
    the payment in shares of Common Stock, accompanied by stock
    powers duly endorsed in blank by the Optionee. Notwithstanding
    the foregoing, the Committee may impose from time to time such
    limitations and prohibitions on the use of shares of Common
    Stock to exercise an Option as it deems appropriate.

         
          E.     Termination
of Options.

		
	 	         
    1.     No Option shall be exercisable
    after the first to occur of the following:

			
	 	(a)	
    Expiration of the Option term specified in the Option Document,
    which shall not exceed (i) ten years from the date of
    grant, or (ii) five years from the date of grant of an ISO
    if the Optionee on the date of grant owns, directly or by
    attribution under Section 424(d) of the Code, shares of
    capital stock of the Company possessing more than ten percent
    (10%) of the total combined voting power of all classes of
    capital stock of the Company or of an Affiliate;
	 
	 	(b)	
    Expiration of ninety (90) days from the date the
    Optionee’s employment or service with the Company or its
    Affiliate terminates for any reason other

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    than Disability or death or as otherwise specified in
    Section 8.E.1(d) or Section 10 below;

			
	 	(c)	
    Expiration of one year from the date the Optionee’s
    employment or service with the Company or its Affiliate
    terminates due to the Optionee’s Disability or death;

			
	 	(d)	
    A finding by the Committee, after full consideration of the
    facts presented on behalf of both the Company and the Optionee,
    that the Optionee has breached his or her employment or service
    contract with the Company or an Affiliate, or has been engaged
    in any sort of disloyalty to the Company or an Affiliate,
    including, without limitation, fraud, embezzlement, theft,
    commission of a felony or proven dishonesty in the course of his
    or her employment or service, or has disclosed trade secrets or
    confidential information of the Company or an Affiliate. In such
    event, in addition to immediate termination of the Option, the
    Optionee shall automatically forfeit all Shares for which the
    Company has not yet delivered the share certificates upon refund
    by the Company of the Option Price of such Shares.
    Notwithstanding anything herein to the contrary, the Company may
    withhold delivery of share certificates pending the resolution
    of any inquiry that could lead to a finding resulting in a
    forfeiture; or

			
	 	(e)	
    The date, if any, set by the Board of Directors as an
    accelerated expiration date pursuant to Section 10 hereof.

			
	 	2.	
    Notwithstanding the foregoing, the Committee may extend the
    period during which an Option may be exercised to a date no
    later than the date of the expiration of the Option term
    specified in the Option Documents, as they may be amended,
    provided that any change pursuant to this Section 8.E.2
    that would cause an ISO to become a Non-qualified Stock Option
    may be made only with the consent of the Optionee.
	 
	 	3.	
    During the period in which an Option may be exercised after the
    termination of the Optionee’s employment or service with
    the Company or any Affiliate, such Option shall only be
    exercisable to the extent it was exercisable immediately prior
    to such Optionee’s termination of service or employment,
    except to the extent specifically provided to the contrary in
    the applicable Option Document.

			
	 	          F.	
    Transfers. No Option may be transferred except by will or
    by the laws of descent and distribution. During the lifetime of
    the person to whom an Option is granted, such Option may be
    exercised only by him or her. Notwithstanding the foregoing, a
    Non-qualified Stock Option may be transferred pursuant to the
    terms of a “qualified domestic relations order” within
    the meaning of Sections 401(a)(13) and 414(p) of the Code
    or within the meaning of Title I of the Employee Retirement
    Income Security Act of 1974, as amended.

			
	 	          G.	
    Holding Period. No Option may be exercised unless six
    months, or such greater period of time as may be specified in
    the Option Documents, have elapsed from the date of grant.

			
	 	          H.	
    Limitation on ISO Grants. In no event shall the aggregate
    Fair Market Value of the Shares (determined at the time the ISO
    is granted) with respect to which an ISO is exercisable for the
    first time by the Optionee during any calendar year (under all
    incentive stock option plans of the Company or its Affiliates)
    exceed $100,000.

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	 	          I.	
    Other Provisions. The Option Documents shall contain such
    other provisions including, without limitation, provisions
    authorizing the Committee to accelerate the exercisability of
    all or any portion of an Option, additional restrictions upon
    the exercise of the Option or additional limitations upon the
    term of the Option, as the Committee shall deem advisable.

			
	 	          J.	
    Amendment. The Committee shall have the right to amend
    Option Documents issued to an Optionee, subject to the
    Optionee’s consent if such amendment is not favorable to
    the Optionee, except that the consent of the Optionee shall not
    be required for any amendment made under Section 10.

         
9.     Award Documents and
Terms. Awards shall be evidenced by an Award Document in
such form as the Committee shall from time to time approve,
which Award Document shall comply with and be subject to the
following terms and conditions and such other terms and
conditions as the Committee shall from time to time require that
are not inconsistent with the terms of the Plan. A Grantee shall
not have any rights with respect to an Award until and unless
such Grantee shall have executed an Award Document containing
the terms and conditions determined by the Committee.

			
	 	          A.	
    Number of Shares and Price. Each Award Document shall
    state the number of Shares of Restricted Stock to which it
    pertains. No cash or other consideration shall be required to be
    paid by the Grantee for an Award.
	 
	 	          B.	
    Certificates. Each Grantee shall be issued a certificate
    in respect of Shares subject to an Award. Such certificate shall
    be registered in the name of the Grantee and shall bear an
    appropriate legend referring to the terms, conditions and
    restrictions applicable to such Award. The Company may require
    that the certificate evidencing such Shares be held by the
    Company until all restrictions on such Shares have lapsed.
	 
	 	          C.	
    Restrictions. Subject to the provisions of the Plan and
    the Award Documents, during a period set by the Committee
    commencing with the date of such Award, which period shall
    extend for at least six months from the date of such Award
    (except as provided by Section 9.G), the Grantee shall not
    be permitted to sell, transfer, pledge, assign, or otherwise
    dispose of the Restricted Stock awarded under the Plan.
	 
	 	          D.	
    Lapse of Restrictions. Subject to the provisions of the
    Plan and the Award Document, restrictions upon Restricted Stock
    shall lapse at such time or times and on such terms and
    conditions as the Committee may determine and set forth in the
    Award Document; provided, however, that the restrictions
    upon such Shares shall lapse only if the Grantee on the date of
    such lapse is, and has continuously been an employee of the
    Company or its Affiliate from the date such Award was granted.
    The Award Document may provide for the lapse of restrictions in
    installments, as determined by the Committee. In the event that
    a Grantee’s employment terminates as a result of the
    Grantee’s death or Disability, all remaining restrictions
    with respect to such Grantee’s Restricted Stock shall
    immediately lapse, unless otherwise provided in the Award
    Document.

			
	 	          E.	
    Rights of the Grantee. Grantees may have such rights with
    respect to the Shares subject to an Award as may be determined
    by the Committee and set forth in the Award Document, including,
    without limitation, the right to vote such Shares and the right
    to receive dividends paid with the respect to such Shares.

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	 	          F.	
    Dividends. The Committee may, in its sole discretion,
    provide in an Award Document that an amount equivalent to any
    dividends payable with respect to the number of Shares of
    Restricted Stock granted, but not yet delivered, be invested and
    reinvested in additional Shares of Restricted Stock, which shall
    be subject to the same restrictions as Restricted Stock to which
    the dividends relate. Such Shares of Restricted Stock shall be
    reflected in accordance with the terms of the Award Document by
    the credit of additional full or fractional Shares, calculated
    to the thousandth of a Share, in an amount equal to the value of
    the declared dividend divided by the Fair Market Value of a
    Share on the date of payment of the dividend. Any arrangements
    for the credit of additional Shares of Restricted Stock shall
    terminate if, and to the extent that, under the terms of the
    Award Document the right to receive the Restricted Stock to
    which the dividends relate shall terminate or lapse.

			
	 	          G.	
    Forfeiture of Restricted Stock. In the event that a
    Grantee’s employment with the Company terminates for any
    reason other than because of death or Disability, any Restricted
    Stock held by such Grantee shall be forfeited by the Grantee and
    reacquired by the Company. The Company may, in its sole
    discretion, waive, in whole or in part, any remaining
    restrictions with respect to such Grantee’s Restricted
    Stock.

			
	 	          H.	
    Delivery of Shares. When the restrictions imposed on
    Restricted Stock expire or have been canceled with respect to
    one or more Shares (whether issued as an Award or as additional
    Restricted Stock pursuant to Section 9.F), the Company
    shall notify the Grantee that such restrictions no longer apply
    with respect to such Shares, and shall deliver to the Grantee
    (or the person to whom ownership rights in such Restricted Stock
    may have passed by will or the laws of descent and distribution)
    a certificate for the number of Shares for which restrictions
    have been canceled or have expired, without any legend or
    restrictions (except those that may be imposed by the Committee
    in its sole judgment to ensure compliance with the then existing
    requirements of the Act and the Exchange Act). The right to
    payment for any fractional Shares that may have accrued shall be
    satisfied in cash based on the Fair Market Value of a Share on
    the date the restriction with respect to such fractional Share
    lapsed or terminated.

         
10.     Change of Control. In
the event of a Change of Control, the Committee may take
whatever action with respect to Options and Awards outstanding
as it deems necessary or desirable, including, without
limitation, accelerating the expiration or termination date or
the date of exercisability in any Option Documents, or removing
any restrictions from or imposing any additional restrictions on
any outstanding Awards.

         
A “Change of Control” shall be deemed to have occurred
upon the earliest to occur of the following events: (i) the
date the shareholders of the Company (or the Board of Directors,
if shareholder action is not required) approve a plan or other
arrangement pursuant to which the Company will be dissolved or
liquidated, or (ii) the date the shareholders of the
Company (or the Board of Directors, if shareholder action is not
required) approve a definitive agreement to sell or otherwise
dispose of substantially all of the assets of the Company, or
(iii) the date the shareholders of the Company (or the
Board of Directors, if shareholder action is not required) and
the holders of voting securities of the other constituent entity
(or its board of directors or similar governing body if security
holder action is not required) have approved a definitive
agreement to merge or consolidate the Company with or into such
other entity, other than, in either case, a merger or
consolidation of the Company in which holders of shares of the
Company’s Common Stock or other common voting stock
immediately prior to the merger or consolidation will hold at

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least 50% of the voting power of the outstanding voting
securities of the surviving entity immediately after the merger
or consolidation, which voting securities are to be held in the
same proportion to one another as such holders’ ownership
of Common Stock or other common voting stock of the Company
immediately before the merger or consolidation, or (iv) the
date any entity, person or group (within the meaning of
Section 13(d)(3) or Section 14(d)(2) of the Exchange
Act) other than M. Thomas Grumbacher, members of his family, his
lineal descendants, or entities of which such persons are the
beneficial owners of at least fifty percent (50%) of the voting
interests, the Company or any of its Affiliates, or any employee
benefit plan (or related trust) sponsored or maintained by the
Company or any of its Affiliates, shall have become the
beneficial owner of, or shall have obtained voting control over,
outstanding shares of the Company’s voting stock
representing more than fifty percent (50%) of the voting power
of all of the Company’s outstanding voting stock, or
(v) the first day after the date this Plan is effective
when directors constituting a majority of the Board of Directors
shall have been members of the Board of Directors for less than
twelve (12) months, unless the nomination for election of
each new director who was not a director at the beginning of
such twelve (12) month period was approved by a vote of at
least two-thirds of the directors then still in office who were
directors at the beginning of such period.

         
11.     Adjustments on Changes in
Capitalization. The aggregate number of Shares and class of
Shares as to which Options and Awards may be granted hereunder,
the limitation as to grants to individuals set forth in
Section 8.A hereof, the number of Shares covered by each
outstanding Option or Award, and the Option Price for each
related outstanding Option, shall be appropriately adjusted in
the event of a stock dividend, stock split, recapitalization or
other change in the number or class of issued and outstanding
equity securities of the Company resulting from a subdivision or
consolidation of the Common Stock and/or, if appropriate, other
outstanding equity securities or a recapitalization or other
capital adjustment (not including the issuance of Common Stock
on the conversion of other securities of the Company that are
convertible into Common Stock) affecting the Common Stock which
is effected without receipt of consideration by the Company. The
Committee shall have authority to determine the adjustments to
be made under this Section, and any such determination by the
Committee shall be final, binding and conclusive; provided,
however, that no adjustment shall be made that will cause an
ISO to lose its status as such without the consent of the
Optionee, except for adjustments made pursuant to
Section 10 hereof.

         
12.     Amendment of the Plan.
The Board of Directors of the Company may amend the Plan from
time to time in such manner as it may deem advisable.
Nevertheless, the Board of Directors of the Company may not:
(i) change the class of individuals eligible to receive an
ISO, (ii) increase the maximum number of Shares as to which
Options or Awards may be granted, or (iii) make any other
change or amendment as to which shareholder approval is required
in order to satisfy the conditions set forth in
Rule 16b-3
promulgated under the Exchange Act, in each case without
obtaining approval, within twelve months before or after such
action, by (A) vote of a majority of the votes cast at a
duly called meeting of the shareholders at which a quorum
representing a majority of all outstanding voting stock of the
Company is, either in person or by proxy, present and voting on
the matter, or (B) a method and in a degree that would be
treated as adequate under applicable state law for actions
requiring shareholder approval, including, without limitation,
by written consent of shareholders constituting a majority of
the voting power of all shares of outstanding voting stock of
the Company entitled to vote. No amendment to the Plan shall
adversely affect any outstanding Option or Award, however,
without the consent of the Optionee or Grantee.

         
13.     No Commitment to Retain.
The grant of an Option or Award shall not be construed to imply
or to constitute evidence of any agreement, express or implied,
on the part of the Company or any Affiliate to retain the
Optionee or Grantee in the employ of the Company or an Affiliate
and/or as a member of the Company’s Board of Directors or
in any other capacity.

9

 

         
14.     Withholding of Taxes.
Whenever the Company proposes or is required to deliver or
transfer Shares in connection with an Award or the exercise of
an Option, the Company shall have the right to (a) require
the recipient to remit or otherwise make available to the
Company an amount sufficient to satisfy any federal, state
and/or local withholding tax requirements prior to the delivery
or transfer of any certificate or certificates for such Shares
or (b) take whatever other action it deems necessary to
protect its interests with respect to tax liabilities. The
Company’s obligation to make any delivery or transfer of
Shares shall be conditioned on the Optionee’s or
Grantee’s compliance, to the Company’s satisfaction,
with any withholding requirement.

         
15.     Interpretation. The Plan
is intended to enable transactions under the Plan with respect
to directors and officers (within the meaning of
Section 16(a) under the Exchange Act) to satisfy the
conditions of
Rule 16b-3
promulgated under the Exchange Act; any provision of the Plan
that would cause a conflict with such conditions shall be deemed
null and void to the extent permitted by applicable law and in
the discretion of the Board of Directors.

         
16.     Special Rules for
Performance-Based Awards.

			
	 	            A.	
    Performance-Based Awards. The Committee may grant Awards
    of Restricted Stock pursuant to the terms of this
    Section 16, and consistent with Section 9, above,
    which shall include vesting requirements based specifically on
    the attainment of one or more Performance Targets applicable to
    any such Award, as set forth in this Section 16. In the
    event a Participant who has been granted a Performance-Based
    Award terminates his or her employment with the Company prior to
    the date on which the applicable Performance Target or Targets
    have been met or prior to the satisfaction of any other
    applicable conditions or requirements have been met or
    satisfied, such Performance-Based Award shall be immediately
    forfeited. In addition, the Committee shall have the authority
    to cause a Performance-Based Award to be forfeited, in whole or
    in part, at any time prior to the Committee’s determination
    that such Performance-Based Award has become vested by reason of
    attainment of one or more of the applicable Performance Targets,
    at the Committee’s sole discretion. Such absolute right to
    reduce or eliminate a Performance-Based Award shall be exercised
    by the Committee in light of the Committee’s review of all
    facts and circumstances the Committee deems to be relevant. The
    Committee shall have no authority to cause any Performance-Based
    Award to become vested in the absence of the achievement of any
    applicable Performance Target(s).

		
	 	         
    B.     Establishment of Performance
    Targets.

			
	 	          1.	
    The Committee shall establish one or more Performance Targets
    for each Performance Period, which Performance Targets may vary
    for different Participants who may be granted Performance-Based
    Awards.
	 
	 	          2.	
    In all cases, the Performance Target(s) established with respect
    to any Performance Period shall be established within the first
    90 days of the Performance Period or, if shorter, within
    the first twenty five percent (25%) of such Performance Period.
	 
	 	          3.	
    Each Performance Target established under the Plan shall
    constitute a goal as to which an objective method or methods is
    available for determining whether such Performance Target has
    been achieved. In addition, the Committee shall establish in
    connection with the Performance Targets applicable to a
    Performance Period an objective method for computing the

10

 

			
	 		
    portion of a particular Performance-Based Award that may be
    treated as vested as a result of attaining such Performance
    Target(s).

			
	 	C.	
    Vesting of Performance-Based Awards. Vesting of
    Performance-Based Awards shall be determined at the time (or
    times) and in the manner established by the Committee for a
    Performance Period; provided, however, that no portion of
    a Performance-Based Award shall become vested unless and until
    (i) the Plan (including the provisions of this
    Section 16 of the Plan) is approved by the Company’s
    shareholders (and such shareholder approval is still effective
    for purposes of the rules on performance-based compensation
    applicable in connection with Code Section 162(m), as
    required under Section 16.D), and (ii) the Committee
    has certified in writing that each Performance Target for the
    particular Performance Period for which a Performance-Based
    Award is granted has been achieved.
	 
	 	D.	
    Subsequent Shareholder Approval. The Plan (including the
    provisions of this Section 16) shall again be disclosed to
    the Company’s shareholders for approval at the time or
    times required under Code Section 162(m) and/or Treasury
    Regulations promulgated thereunder in order for the
    Performance-Based Awards granted under the Plan to continue to
    qualify as performance-based compensation that is exempt from
    the limitations on deductibility by the Company of compensation
    under Code Section 162(m). No Performance-Based Awards
    shall become vested if such required shareholder approval has
    not been obtained.

			
	 	E.	
    Criteria to be Used in Establishing Performance Targets.
    In establishing any Performance Target under the Plan, the
    Committee shall establish an objective target based upon one or
    more of the following business criteria (which may be determined
    for these purposes by reference to (i) the Company as a
    whole, (ii) any of the Company’s subsidiaries,
    operating divisions, business segments or other operating units,
    or (iii) any combination thereof): earnings before
    interest, taxes, depreciation, and amortization; profit before
    taxes; stock price; market share; gross revenue; net revenue;
    pretax income; net operating income; cash flow; earnings per
    share; return on equity; return on invested capital or assets;
    cost reductions and savings; return on revenues or productivity;
    loss ratio; expense ratio; combined ratio; product spread; or
    any variations or combinations of the preceding business
    criteria, which may also be modified at the discretion of the
    Committee, to take into account extraordinary items or which may
    be adjusted to reflect such costs or expense as the Committee
    deems appropriate.
	 
	 	F.	
    Performance-Based Award Limitation. Notwithstanding
    anything to the contrary herein, no Participant shall receive a
    Performance-Based Award for Shares having a Fair Market Value,
    as of the date of grant, in excess of $3,000,000.

			
	 	          1.	
    The limitation set forth in this Section 16.F shall be
    applied with respect to Performance-Based Awards that relate to
    a Performance Period longer than one year by multiplying that
    limitation by a fraction equal to the number of full calendar
    months in the Performance Period divided by twelve (12).
	 
	 	          2.	
    If a Performance Period is less than a full year, the limitation
    of this Section 16.F shall apply without adjustment;
    provided, however, that any

11

 

			
	 		
    such short Performance Period shall be treated as though it were
    a Performance Period that extends until the end of the one year
    period that starts as of the first day of the short Performance
    Period, and any other Performance Periods that overlap such one
    year period will be subject to further limitations as though
    such Performance Periods were overlapping Performance Periods,
    as described in subsection 16.F.3.
	 
	 	          3.	
    If Performance-Based Awards with overlapping Performance Periods
    are granted to any one employee, the limitations of this
    Section 16.F shall be reduced with respect to any such
    overlapping Performance Periods so that the aggregate value of
    such multiple Performance-Based Awards does not exceed the
    limitation set forth in the first sentence of this
    Section 16.F, multiplied by a fraction, the numerator of
    which is the number of full calendar months occurring during the
    period commencing as of the first day of the first to start of
    such overlapping Performance Periods, and the last day of which
    is the last day of the last to end of such overlapping
    Performance Periods, and the denominator of which is twelve (12).

         
The intent of subsections 1 through 3 of this Section 16.F
is to cause each Performance-Based Award to satisfy the
limitation of this Section 16.F as if such Award were the
only Performance-Based Award granted, and to cause, in addition,
the aggregate value of Performance-Based Awards granted for
overlapping Performance Periods to comply with the limitation of
this Section 16.F as though such multiple Performance-Based
Awards constituted a single Performance-Based Award.

12<PAGE>

                          SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this "Agreement") is dated as of
May 15, 2006, among Edentify, Inc., a Nevada corporation with its principal
address at 74 West Broad Street, Bethlehem, Pennsylvania 18018 (the "Company"),
and each purchaser identified on the signature pages hereto (each, including its
successors and assigns, a "Purchaser" and collectively the "Purchasers").

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

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

                                   ARTICLE I.
                                   DEFINITIONS

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

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

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

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

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

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

<PAGE>

          "Commission" means the Securities and Exchange Commission.

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

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

          "Company Counsel" means Flamm Boroff & Bacine, PC.

          "Debentures" means, the 6% Senior Secured Convertible Debentures, in
     the form of Exhibit A, due, subject to the terms therein.

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

          "Effective Date" means the date that the initial registration
     statement filed by the Company pursuant to the Registration Rights
     Agreement is first declared effective by the Commission.

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

          "Exempt Issuance" means the issuance of (a) shares of Common Stock or
     options to employees, officers or directors of the Company pursuant to any
     stock or option plan duly adopted by a majority of the non-employee members
     of the Board of Directors of the Company or a majority of the members of a
     committee of non-employee directors established for such purpose, (b)
     securities upon the exercise of or conversion of any securities issued
     hereunder, convertible securities, options or warrants issued and
     outstanding on the date of this Agreement, provided that such securities
     have not been amended since the date of this Agreement to increase the
     number of such securities and (c) securities issued pursuant to
     acquisitions or strategic transactions, provided any such issuance shall
     only be to a Person which is, itself or through its subsidiaries, an
     operating company in a business synergistic with the business of the
     Company and in which the Company receives benefits in addition to the
     investment of funds, but shall not include a transaction in which the
     Company is issuing securities primarily for the purpose of raising capital
     or to an entity whose primary business is investing in securities.

          "FW" means Feldman Weinstein LLP with offices at 420 Lexington Avenue,
     Suite 2620, New York, New York 10170-0002.

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

                                       -2-

<PAGE>

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

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

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

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

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

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

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

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

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

          "Proceeding" means an action, claim, suit, investigation or proceeding
     (including, without limitation, an investigation or partial proceeding,
     such as a deposition), whether commenced or threatened.

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

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

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

          "Required Minimum" means, as of any date, the maximum aggregate number
     of shares of Common Stock then issued or potentially issuable in the future
     pursuant to the Transaction Documents, including any Underlying Shares
     issuable upon exercise of all Debentures and Warrants, ignoring any
     exercise limits set forth therein.

          "Rule 144" means Rule 144 promulgated by the Commission pursuant to
     the Securities Act, as such Rule may be amended from time to time, or any
     similar rule or

                                       -3-

<PAGE>

     regulation hereafter adopted by the Commission having substantially the
     same effect as such Rule.

          "Securities" means the Debentures, the Conversion Shares, the Warrants
     and the Underlying Shares.

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

          "Security Agreement" means the Security Agreement, dated the date
     hereof, among the Company and the Purchasers, in the form of Exhibit E
     attached hereto.

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

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

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

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

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

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

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

          "Underlying Shares" means the Conversion Shares, the Warrant Shares
     and the shares issuable pursuant to the Debentures in lieu of cash payments
     for interest.

          "Warrants" means collectively the Common Stock purchase warrants, in
     the form of Exhibit C delivered to the Purchasers at the Closing in
     accordance with Section 2.2 hereof, which Warrants shall be exercisable
     immediately and have a term of exercise equal to 5 years.

          "Warrant Exercise Price" shall mean $0.50 per Warrant Share.

                                       -4-

<PAGE>

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

                                   ARTICLE II.
                                PURCHASE AND SALE

     2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, $800,000
principal amount of the Debentures. Each Purchaser shall deliver to the Company
via wire transfer or a certified check immediately available funds equal to
their Subscription Amount and the Company shall deliver to each Purchaser their
respective Debenture and Warrants as determined pursuant to Section 2.2(a) and
the other items set forth in Section 2.2 issuable at the Closing. Upon
satisfaction of the conditions set forth in Section 2.2, the Closing shall occur
at the offices of Company Counsel, or such other location as the parties shall
mutually agree.

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

                    (i) this Agreement duly executed by the Company;

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

                    (iii) a Warrant registered in the name of such Purchaser to
               purchase up to such Purchaser's pro-rata share of 2,100,000
               shares of Common Stock on a fully diluted basis exercisable at
               the Warrant Exercise Price; and

                    (iv) the Security Agreement along with all Security
               Documents.

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

                    (i) this Agreement duly executed by such Purchaser;

                    (ii) such Purchaser's Subscription Amount by wire transfer
               to the account as specified in writing by the Company;

                    (iii) the Registration rights Agreement, duly executed by
               such Purchaser; and

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

                                      -5-

<PAGE>

     2.3 Closing Conditions.

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

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

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

                    (iii) the Registration rights Agreement, duly executed by
               such Purchaser; and

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

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

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

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

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

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

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. Except as set forth in
any reports filed by the Company with the United States Securities Exchange
Commission, the Company hereby makes the representations and warranties set
forth below to each Purchaser.

          (a) Subsidiaries. All of the direct and indirect subsidiaries of the
     Company are set forth in the most recent annual or quarterly report filed
     by the Company with the Commission. The Company owns, directly or
     indirectly, all of the capital stock or other equity interests of each
     Subsidiary free and clear of any Liens, and all the issued and outstanding
     shares of capital stock of each Subsidiary are validly issued and are fully
     paid, non-assessable and free of preemptive and similar rights to subscribe
     for or

                                      -6-

<PAGE>

     purchase securities. If the Company has no subsidiaries, then references in
     the Transaction Documents to the Subsidiaries will be disregarded.

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

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

          (d) No Conflicts. The execution, delivery and performance of the
     Transaction Documents by the Company and the consummation by the Company of
     the other transactions contemplated thereby do not and will not: (i)
     conflict with or violate any provision of the Company's or any Subsidiary's
     certificate or articles of incorporation, bylaws or other organizational or
     charter documents, or (ii) conflict with, or constitute a default (or an
     event that with notice or lapse of time or both would become a default)
     under, result in the creation of any Lien upon any of the properties or
     assets of the Company or any Subsidiary, or give to others any rights of
     termination, amendment, acceleration or cancellation (with or without
     notice, lapse of time or both) of, any

                                      -7-

<PAGE>

     agreement, credit facility, debt or other instrument (evidencing a Company
     or Subsidiary debt or otherwise) or other understanding to which the
     Company or any Subsidiary is a party or by which any property or asset of
     the Company or any Subsidiary is bound or affected, or (iii) conflict with
     or result in a violation of any law, rule, regulation, order, judgment,
     injunction, decree or other restriction of any court or governmental
     authority to which the Company or a Subsidiary is subject (including
     federal and state securities laws and regulations), or by which any
     property or asset of the Company or a Subsidiary is bound or affected;
     except in the case of each of clauses (ii) and (iii), such as could not
     have or reasonably be expected to result in a Material Adverse Effect.

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

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

          (g) Capitalization. The capitalization of the Company is as described
     in the most recent annual or quarterly report filed by the Company with the
     Commission. No Person has any right of first refusal, preemptive right,
     right of participation, or any similar right to participate in the
     transactions contemplated by the Transaction Documents. All of the
     outstanding shares of capital stock of the Company are validly issued,
     fully paid and nonassessable, have been issued in compliance with all
     federal and state securities laws, and none of such outstanding shares was
     issued in violation of any preemptive rights or similar rights to subscribe
     for or purchase securities. No further approval or authorization of any
     stockholder, the Board of Directors of the Company or others is required
     for the issuance and sale of the Securities.

          (h) Financial Statements. The audited financial statements of the
     Company are as attached to the most recent annual or quarterly report filed
     by the Company with the Commission. Such financial statements have been
     prepared in accordance with United States generally accepted accounting
     principles applied on a consistent basis during the periods involved
     ("GAAP"), except as may be otherwise specified in such financial statements
     or the notes thereto and except that unaudited financial statements may not
     contain all footnotes required by GAAP, and fairly present in all material
     respects the financial position of the Company and its consolidated
     subsidiaries as of and for the dates

                                      -8-

<PAGE>

     thereof and the results of operations and cash flows for the periods then
     ended, subject, in the case of unaudited statements, to normal, immaterial,
     year-end audit adjustments.

          (i) Material Changes. Since the date of the most recent annual or
     quarterly report filed by the Company with the Commission, (i) there has
     been no event, occurrence or development that has had or that could
     reasonably be expected to result in a Material Adverse Effect, (ii) the
     Company has not incurred any liabilities (contingent or otherwise) other
     than (A) trade payables and accrued expenses incurred in the ordinary
     course of business consistent with past practice and (B) liabilities not
     required to be reflected in the Company's financial statements pursuant to
     GAAP or required to be disclosed in filings made with the Commission, (iii)
     the Company has not altered its method of accounting, (iv) the Company has
     not declared or made any dividend or distribution of cash or other property
     to its stockholders or purchased, redeemed or made any agreements to
     purchase or redeem any shares of its capital stock and (v) the Company has
     not issued any equity securities to any officer, director or Affiliate,
     except pursuant to existing Company stock option plans. The Company does
     not have pending before the Commission any request for confidential
     treatment of information.

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

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

          (l) Compliance. Neither the Company nor any Subsidiary (i) is in
     default under or in violation of (and no event has occurred that has not
     been waived that, with notice or lapse of time or both, would result in a
     default by the Company or any Subsidiary under), nor has the Company or any
     Subsidiary received notice of a claim that it is in default under or that
     it is in violation of, any indenture, loan or credit agreement or any other
     agreement or instrument to which it is a party or by which it or any of its
     properties is bound (whether or not such default or violation has been
     waived), (ii) is in violation of any order of any court, arbitrator or
     governmental body, or (iii) is or has been in violation

                                      -9-

<PAGE>

     of any statute, rule or regulation of any governmental authority, including
     without limitation all foreign, federal, state and local laws applicable to
     its business except in each case as could not have a Material Adverse
     Effect.

          (m) Regulatory Permits. The Company and the Subsidiaries possess all
     certificates, authorizations and permits issued by the appropriate federal,
     state, local or foreign regulatory authorities necessary to conduct their
     respective businesses as described in the Company's most recent annual or
     quarterly report filed by the Company with the Commission, except where the
     failure to possess such permits could not have or reasonably be expected to
     result in a Material Adverse Effect ("Material Permits"), and neither the
     Company nor any Subsidiary has received any notice of proceedings relating
     to the revocation or modification of any Material Permit.

          (n) Title to Assets. The Company and the Subsidiaries have good and
     marketable title to all mineral rights, interests that, individually or in
     the aggregate, are material to the business of the Company and the
     Subsidiaries and good and marketable title in fee simple to all real
     property owned by them that is material to the business of the Company and
     the Subsidiaries and good and marketable title in all personal property
     owned by them that is material to the business of the Company and the
     Subsidiaries, in each case free and clear of all Liens. Any real property
     and facilities held under lease by the Company and the Subsidiaries are
     held by them under valid, subsisting and enforceable leases of which the
     Company and the Subsidiaries are in compliance.

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

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

                                      -10-

<PAGE>

          (q) Transactions With Affiliates and Employees. Except as set forth in
     the most recent annual or quarterly report filed by the Company with the
     Commission, none of the officers or directors of the Company and, to the
     knowledge of the Company, none of the employees of the Company are
     presently a party to any transaction with the Company or any Subsidiary
     (other than for services as employees, officers and directors), including
     any contract, agreement or other arrangement providing for the furnishing
     of services to or by, providing for rental of real or personal property to
     or from, or otherwise requiring payments to or from any officer, director
     or such employee or, to the knowledge of the Company, any entity in which
     any officer, director, or any such employee has a substantial interest or
     is an officer, director, trustee or partner, in each case in excess of
     $60,000 other than (i) for payment of salary or consulting fees for
     services rendered, (ii) reimbursement for expenses incurred on behalf of
     the Company and (iii) for other employee benefits, including stock option
     agreements under any stock option plan of the Company.

          (r) Internal Accounting Controls. The Company and the Subsidiaries
     maintain a system of internal accounting controls sufficient to provide
     reasonable assurance that (i) transactions are executed in accordance with
     management's general or specific authorizations, (ii) transactions are
     recorded as necessary to permit preparation of financial statements in
     conformity with GAAP and to maintain asset accountability, (iii) access to
     assets is permitted only in accordance with management's general or
     specific authorization, and (iv) the recorded accountability for assets is
     compared with the existing assets at reasonable intervals and appropriate
     action is taken with respect to any differences.

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

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

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

          (v) Application of Takeover Protections. The Company and its Board of
     Directors have taken all necessary action, if any, in order to render
     inapplicable any

                                      -11-

<PAGE>

     control share acquisition, business combination, poison pill (including any
     distribution under a rights agreement) or other similar anti-takeover
     provision under the Company's Certificate of Incorporation (or similar
     charter documents) or the laws of its state of incorporation that is or
     could become applicable to the Purchasers as a result of the Purchasers and
     the Company fulfilling their obligations or exercising their rights under
     the Transaction Documents, including without limitation as a result of the
     Company's issuance of the Securities and the Purchasers' ownership of the
     Securities.

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

          (x) No Integrated Offering. Assuming the accuracy of the Purchasers'
     representations and warranties set forth in Section 3.2, neither the
     Company, nor any of its affiliates, nor any Person acting on its or their
     behalf has, directly or indirectly, made any offers or sales of any
     security or solicited any offers to buy any security, under circumstances
     that would cause this offering of the Securities to be integrated with
     prior offerings by the Company for purposes of the Securities Act or any
     applicable shareholder approval provisions.

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

                                      -12-

<PAGE>

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

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

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

          (cc) Accountants. The Company's accountants are set forth on Schedule
     3.1(cc) of the Disclosure Schedule. To the Company's knowledge, such
     accountants, who the Company expects will express their opinion with
     respect to the financial statements to be included in the Company's
     upcoming financial statements, are a registered public accounting firm as
     required by the Securities Act.

          (dd) Indebtedness. As of the Closing Date, the Company has no
     indebtedness.

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

          (ff) Acknowledgment Regarding Purchasers' Purchase of Securities. The
     Company acknowledges and agrees that each of the Purchasers is acting
     solely in the capacity of an arm's length purchaser with respect to the
     Transaction Documents and the transactions contemplated hereby. The Company
     further acknowledges that no Purchaser is acting as a financial advisor or
     fiduciary of the Company (or in any similar capacity) with respect to this
     Agreement and the transactions contemplated hereby and any advice given by
     any Purchaser or any of their respective representatives or agents in
     connection with this Agreement and the transactions contemplated hereby is
     merely incidental to the

                                      -13-

<PAGE>

     Purchasers' purchase of the Securities. The Company further represents to
     each Purchaser that the Company's decision to enter into this Agreement has
     been based solely on the independent evaluation of the transactions
     contemplated hereby by the Company and its representatives.

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

          (a) Authority. Such Purchaser has full right and authority to enter
     into and to consummate the transactions contemplated by the Transaction
     Documents and otherwise to carry out its obligations thereunder. Each
     Transaction Documents to which it is a party has been duly executed by such
     Purchaser, and when delivered by such Purchaser in accordance with the
     terms hereof, will constitute the valid and legally binding obligation of
     such Purchaser, enforceable against it in accordance with its terms, except
     (i) as limited by general equitable principles and applicable bankruptcy,
     insolvency, reorganization, moratorium and other laws of general
     application affecting enforcement of creditors' rights generally, (ii) as
     limited by laws relating to the availability of specific performance,
     injunctive relief or other equitable remedies and (iii) insofar as
     indemnification and contribution provisions may be limited by applicable
     law.

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

          (c) Purchaser Status. At the time such Purchaser was offered the
     Securities, it was, and at the date hereof it is, and on each date on which
     it exercises any Warrants it will be an "accredited investor" as defined in
     Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act.
     Such Purchaser is not required to be registered as a broker-dealer under
     Section 15 of the Exchange Act.

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

                                      -14-

<PAGE>

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

     The Company acknowledges and agrees that each Purchaser does not make or
has not made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.2.

                                   ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

     4.1 Transfer Restrictions.

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

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

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

                                      -15-

<PAGE>

     A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

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

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

          (d) In addition to such Purchaser's other available remedies, the
     Company shall pay to a Purchaser, in cash, as partial liquidated damages
     and not as a penalty, for each $500 of Underlying Shares (based on the
     closing bid price of the Common Stock on the then principal Trading Market
     on the date such Securities are submitted to the Company's transfer agent)
     delivered for removal of the restrictive legend and subject to this Section
     4.1(c), $5 per Business Day (increasing to $10 per Business Day 5 Business

                                      -16-

<PAGE>

     Days after such damages have begun to accrue) for each Business Day after
     the Legend Removal Date until such certificate is delivered without a
     legend. Nothing herein shall limit such Purchaser's right to pursue actual
     damages for the Company's failure to deliver certificates representing any
     Securities as required by the Transaction Documents, and such Purchaser
     shall have the right to pursue all remedies available to it at law or in
     equity including, without limitation, a decree of specific performance
     and/or injunctive relief.

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

          (f) Until the date that each Purchaser holds less than 20% of the
     Debentures initially purchased hereunder by such Purchaser, the Company
     shall not undertake a reverse or forward stock split or reclassification of
     the Common Stock without the prior written consent of the Purchasers
     holding a majority in principal amount outstanding of the Debentures.

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

     4.3 Furnishing of Information. If after the date hereof the Company becomes
subject to the rules and regulations of the Exchange Act and as long as any
Purchaser owns Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
the Exchange Act. As long as any Purchaser owns Securities, if the Company is
not required to file reports pursuant to the Exchange Act, it will prepare and
furnish to the Purchasers and make publicly available in accordance with Rule
144(c) such information as is required for the Purchasers to sell the Securities
under Rule 144. The Company further covenants that it will take such further
action as any holder of Securities may reasonably request, all to the extent
required from time to time to enable such Person to sell such Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144.

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

                                      -17-

<PAGE>

registration under the Securities Act of the sale of the Securities to the
Purchasers or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market.

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

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

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

     4.8 Use of Proceeds. The Company shall use the net proceeds from the sale
of Securities hereunder as set forth on Schedule 4.8 attached hereto.

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

                                      -18-

<PAGE>

liability to the Company or any Person asserting claims on behalf of or in right
of the Company solely as a result of acquiring the Securities under this
Agreement.

     4.10 Indemnification of Purchasers. Subject to the provisions of this
Section 4.10, the Company will indemnify and hold the Purchasers and their
directors, officers, shareholders, partners, employees and agents (each, a
"Purchaser Party") harmless from any and all losses, liabilities, obligations,
claims, contingencies, damages, costs and expenses, including all judgments,
amounts paid in settlements, court costs and reasonable attorneys' fees and
costs of investigation that any such Purchaser Party may suffer or incur as a
result of or relating to (a) any breach of any of the representations,
warranties, covenants or agreements made by the Company in this Agreement or in
the other Transaction Documents or (b) any action instituted against a
Purchaser, or any of them or their respective Affiliates, by any stockholder of
the Company who is not an Affiliate of such Purchaser, with respect to any of
the transactions contemplated by the Transaction Documents (unless such action
is based upon a breach of such Purchaser's representation, warranties or
covenants under the Transaction Documents or any agreements or understandings
such Purchaser may have with any such stockholder or any violations by the
Purchaser of state or federal securities laws or any conduct by such Purchaser
which constitutes fraud, gross negligence, willful misconduct or malfeasance).
If any action shall be brought against any Purchaser Party in respect of which
indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
promptly notify the Company in writing, and the Company shall have the right to
assume the defense thereof with counsel of its own choosing. Any Purchaser Party
shall have the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Purchaser Party except to the extent that (i)
the employment thereof has been specifically authorized by the Company in
writing, (ii) the Company has failed after a reasonable period of time to assume
such defense and to employ counsel or (iii) in such action there is, in the
reasonable opinion of such separate counsel, a material conflict on any material
issue between the position of the Company and the position of such Purchaser
Party. The Company will not be liable to any Purchaser Party under this
Agreement (i) for any settlement by a Purchaser Party effected without the
Company's prior written consent, which shall not be unreasonably withheld or
delayed; or (ii) to the extent, but only to the extent that a loss, claim,
damage or liability is attributable to any Purchaser Party's breach of any of
the representations, warranties, covenants or agreements made by the Purchasers
in this Agreement or in the other Transaction Documents.

     4.11 Reservation and Listing of Securities.

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

          (b) If, on any date, the number of authorized but unissued (and
     otherwise unreserved) shares of Common Stock is less than the Required
     Minimum on such date, then the Board of Directors of the Company shall use
     commercially reasonable efforts to amend the Company's certificate or
     articles of incorporation to increase the number of

                                      -19-

<PAGE>

     authorized but unissued shares of Common Stock to at least the Required
     Minimum at such time, as soon as possible and in any event not later than
     the 75th day after such date.

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

     4.12 Participation in Future Financing. From the date hereof until the one
year anniversary of the Effective Date, upon any financing by the Company or any
of its Subsidiaries of Common Stock or Common Stock Equivalents (a "Subsequent
Financing"), each Purchaser shall have the right to participate in up to 50% of
the Subsequent Financing (the "Participation Maximum"). At least 5 Business Days
prior to the closing of the Subsequent Financing, the Company shall deliver to
each Purchaser a written notice of its intention to effect a Subsequent
Financing ("Pre-Notice"), which Pre-Notice shall ask such Purchaser if it wants
to review the details of such financing (such additional notice, a "Subsequent
Financing Notice"). Upon the request of a Purchaser, and only upon a request by
such Purchaser, for a Subsequent Financing Notice, the Company shall promptly,
but no later than 1 Business Day after such request, deliver a Subsequent
Financing Notice to such Purchaser. The Subsequent Financing Notice shall
describe in reasonable detail the proposed terms of such Subsequent Financing,
the amount of proceeds intended to be raised thereunder, the Person with whom
such Subsequent Financing is proposed to be effected, and attached to which
shall be a term sheet or similar document relating thereto. If by 5:30 p.m. (New
York City time) on the 5th Business Day after all of the Purchasers have
received the Pre-Notice, notifications by the Purchasers of their willingness to
participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the Subsequent
Financing, then the Company may effect the remaining portion of such Subsequent
Financing on the terms and to the Persons set forth in the Subsequent Financing
Notice. If the Company receives no notice from a Purchaser as of such 5th
Business Day, such Purchaser shall be deemed to have notified the Company that
it does not elect to participate. The Company must provide the Purchasers with a
second Subsequent Financing Notice, and the Purchasers will again have the right
of participation set forth above in this Section 4.12, if the Subsequent
Financing subject to the initial Subsequent Financing Notice is not consummated
for any reason on the terms set forth in such Subsequent Financing Notice within
15 Business Days after the date of the initial Subsequent Financing Notice. In
the event the Company receives responses to Subsequent Financing Notices from
Purchasers seeking to purchase more than the aggregate amount of the Subsequent
Financing, each such Purchaser shall have the right to purchase their Pro Rata
Portion (as defined below) of the Participation Maximum. "Pro Rata Portion" is
the ratio of (x) the Subscription Amount of Securities purchased by a
participating Purchaser and (y) the sum of the aggregate Subscription Amount of
all participating Purchasers. Notwithstanding the foregoing, this Section 4.12
shall not apply in

                                      -20-

<PAGE>

respect of an Exempt Issuance (not including subsection (c) within the
definition of Exempt Issuance).

     4.13 Future Priced Securities. From the date hereof until such time as no
Purchaser holds any of the Securities, the Company shall be prohibited from
effecting or entering into an agreement to effect any Subsequent Financing
involving a "Variable Rate Transaction" or an "MFN Transaction" (each as defined
below). The term "Variable Rate Transaction" shall mean a transaction in which
the Company issues or sells (i) any debt or equity securities that are
convertible into, exchangeable or exercisable for, or include the right to
receive additional shares of Common Stock either (A) at a conversion, exercise
or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after
the initial issuance of such debt or equity securities, or (B) with a
conversion, exercise or exchange price that is subject to being reset at some
future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related
to the business of the Company or the market for the Common Stock. The term "MFN
Transaction" shall mean a transaction in which the Company issues or sells any
securities in a capital raising transaction or series of related transactions
which grants to an investor the right to receive additional shares based upon
future transactions of the Company on terms more favorable than those granted to
such investor in such offering Any Purchaser shall be entitled to obtain
injunctive relief against the Company to preclude any such issuance, which
remedy shall be in addition to any right to collect damages. Notwithstanding the
foregoing, this Section 4.14 shall not apply in respect of an Exempt Issuance
(not including subsection (c) within the definition of Exempt Issuance), except
that no Variable Rate Transaction or MFN Transaction shall be an Exempt
Issuance.

     4.14 Equal Treatment of Purchasers. No consideration shall be offered or
paid to any person to amend or consent to a waiver or modification of any
provision of any of the Transaction Documents unless the same consideration is
also offered to all of the parties to the Transaction Documents. Further, the
Company shall not make any payment of principal or interest on the Debentures in
amounts which are disproportionate to the respective principal amounts
outstanding on the Debentures at any applicable time. For clarification
purposes, this provision constitutes a separate right granted to each Purchaser
by the Company and negotiated separately by each Purchaser, and is intended to
treat for the Company the Debenture holders as a class and shall not in any way
be construed as the Purchasers acting in concert or as a group with respect to
the purchase, disposition or voting of Securities or otherwise.

                                   ARTICLE V.
                                  MISCELLANEOUS

     5.1 Termination. This Agreement may be terminated by any Purchaser, by
written notice to the other parties, if the Closing has not been consummated on
or before December 15, 2005; provided that no such termination will affect the
right of any party to sue for any breach by the other party (or parties).

     5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse
Purchaser for its actual, reasonable, out-of-pocket legal fees and expenses. The
Company shall deliver,

                                      -21-

<PAGE>

prior to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. Except as expressly set forth in the Transaction
Documents to the contrary, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
issuance of any Securities.

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

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

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

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

     5.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and permitted assigns. The
Company may not assign this Agreement or any rights or obligations hereunder
without the prior written consent of each Purchaser. Any Purchaser may assign
any or all of its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees
in writing to be bound, with respect to the transferred Securities, by the
provisions hereof that apply to the "Purchasers".

                                      -22-

<PAGE>

     5.8 No Third-Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective successors and permitted
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other Person, except as otherwise set forth in Section 4.10.

     5.9 Governing Law. All questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party agrees that all legal proceedings concerning the interpretations,
enforcement and defense of the transactions contemplated by this Agreement and
any other Transaction Documents (whether brought against a party hereto or its
respective affiliates, directors, officers, shareholders, employees or agents)
shall be commenced exclusively in the state and federal courts sitting in the
City of New York. Each party hereby irrevocably submits to the exclusive
jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein (including with respect to the enforcement of any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is improper
or inconvenient venue for such proceeding. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof via registered or certified
mail or overnight delivery (with evidence of delivery) to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. The parties hereby waive all
rights to a trial by jury. If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys' fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.

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

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

     5.12 Severability. If any provision of this Agreement is held to be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties

                                      -23-

<PAGE>

will attempt to agree upon a valid and enforceable provision that is a
reasonable substitute therefor, and upon so agreeing, shall incorporate such
substitute provision in this Agreement.

     5.13 Rescission and Withdrawal Right. Notwithstanding anything to the
contrary contained in (and without limiting any similar provisions of) the
Transaction Documents, whenever any Purchaser exercises a right, election,
demand or option under a Transaction Documents and the Company does not timely
perform its related obligations within the periods therein provided, then such
Purchaser may rescind or withdraw, in its sole discretion from time to time upon
written notice to the Company, any relevant notice, demand or election in whole
or in part without prejudice to its future actions and rights.

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

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

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

     5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Documents. Notwithstanding any
provision to the contrary contained in any Transaction Documents, it is
expressly agreed and provided that the total liability of the Company under the
Transaction

                                      -24-

<PAGE>

Documents for payments in the nature of interest shall not exceed the maximum
lawful rate authorized under applicable law (the "Maximum Rate"), and, without
limiting the foregoing, in no event shall any rate of interest or default
interest, or both of them, when aggregated with any other sums in the nature of
interest that the Company may be obligated to pay under the Transaction
Documents exceed such Maximum Rate. It is agreed that if the maximum contract
rate of interest allowed by law and applicable to the Transaction Documents is
increased or decreased by statute or any official governmental action subsequent
to the date hereof, the new maximum contract rate of interest allowed by law
will be the Maximum Rate applicable to the Transaction Documents from the
effective date forward, unless such application is precluded by applicable law.
If under any circumstances whatsoever, interest in excess of the Maximum Rate is
paid by the Company to any Purchaser with respect to indebtedness evidenced by
the Transaction Documents, such excess shall be applied by such Purchaser to the
unpaid principal balance of any such indebtedness or be refunded to the Company,
the manner of handling such excess to be at such Purchaser's election.

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

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

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

                            (Signature Pages Follow)

                                      -25-

<PAGE>

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

EDENTIFY, INC.                          Address for Notice:

By:                                     74 WEST BROAD STREET
    ---------------------------------   SUITE 350
Name: Terrence DeFranco                 BETHLEHEM, PA 18018
Title: Chief Executive Officer

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

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

                                      -26-

<PAGE>

      [PURCHASER SIGNATURE PAGES TO EDENTIFY SECURITIES PURCHASE AGREEMENT]

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

Name of Investing Entity:
                          ------------------------------------------------------

Signature of Authorized Signatory of Investing Entity:
                                                       -------------------------
Name of Authorized Signatory:
                              --------------------------------------------------
Title of Authorized Signatory:
                               -------------------------------------------------
Email Address of Authorized Entity:
                                    --------------------------------------------

Address for Notice of Investing Entity:
                                        ----------------------------------------

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

--------------------------------------------------------------------------------

Subscription Amount:
                     -----------------------------------------------------------

                           [SIGNATURE PAGES CONTINUE]

Signatories:
Deborah Bruno
Bushido Capital Master Fund, L.P.
Business Systems Consultants, Ltd.
Thomas DeAngelis and Theresa DeAngelis
Eric DiGiacomo and Frances DiGiacomo
Falcon International Trading, LLC
Mark C. Gelnaw
Dr. Michael LaSalle
Michael H. Rieber

                                      -27-

<PAGE>

                                                                         ANNEX A

                                CLOSING STATEMENT

Pursuant to the attached Securities Purchase Agreement, dated as of the date
hereto, the purchasers shall purchase up to $800,000 of Debentures and
Warrants from Edentify, Inc., (the "Company"). All funds will be wired into the
account listed below. All funds will be disbursed in accordance with this
Closing Statement.

DISBURSEMENT DATE: May 15, 2006

I. PURCHASE PRICE

<TABLE>
<S>                                           <C>
     GROSS PROCEEDS TO BE RECEIVED IN TRUST   $

II. DISBURSEMENTS

                                              $
                                              $
                                              $
                                              $
                                              $

TOTAL AMOUNT DISBURSED:                       $
</TABLE>

WIRE INSTRUCTIONS:
Edentify, Inc.
74 West Broad Street
Suite 350
Bethlehem, PA 18018
610 814 6830

Bank of America
56 East 42nd Street
New York, NY 10017
Attn: Carlos Hernandez
212 907 5242

ABA #: 021200339
Account Number: 95059 26256

                                      -28-

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