Document:

Exhibit 10.37

 

AMENDMENT
NO. 4 TO SECOND AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT

 

This AMENDMENT NO. 4 TO SECOND AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT (this “Amendment”)
is made and entered into as of June 14, 2004 by and among CASELLA WASTE SYSTEMS, INC., a Delaware
corporation (the “Parent”), and each of its Subsidiaries listed on Schedule
1 to the Credit Agreement referred to below (other than the Excluded
Subsidiaries) (the Parent and such Subsidiaries herein collectively referred to
as the “Borrowers”), FLEET NATIONAL
BANK (“Fleet”) and the other financial institutions party to
the Credit Agreement executing this Amendment (as defined below), and Fleet as
administrative agent for itself and the other Lenders (in such
capacity, the “Administrative Agent”). Capitalized terms used
herein without definition shall have the respective meanings provided therefor
in the Credit Agreement.

 

WHEREAS, the Borrowers, the Administrative Agent and the financial institutions
referred to therein as Lenders (the “Lenders”), are parties to a Second
Amended and Restated Revolving Credit and Term Loan Agreement, dated as of
January 24, 2003, as amended by an Amendment No. 1 and Release to Second
Amended and Restated Revolving Credit and Term Loan Agreement, dated as of
April 30, 2003, an Amendment No. 2 to Second Amended and Restated Revolving
Credit and Term Loan Agreement, dated as of August 26, 2003, and an Amendment
No. 3 and Consent to Certain Acquisitions to Second Amended and Restated
Revolving Credit and Term Loan Agreement, dated as of November 21, 2003 (as
otherwise amended and restated and in effect from time to time, the “Credit
Agreement”), pursuant to which the Lenders have extended credit to the
Borrowers on the terms set forth therein;

 

WHEREAS, the Borrowers
have requested that the Administrative Agent and the Required Lenders amend the
Credit Agreement as provided more fully herein below;

 

NOW,
THEREFORE, in consideration of the foregoing, and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:

 

§1.          Amendments
to Credit Agreement. The Credit Agreement is hereby amended as
follows:

 

§1.1        Amendments
to Section 1.1.

 

(a) The definition of “Consolidated Adjusted Net Income” in Section 1.1
is hereby amended in its entirety to read as follows:

“Consolidated Adjusted Net Income.  For any period, the Consolidated Net Income
(or Loss) of the Parent and its Subsidiaries determined in accordance with
GAAP, plus, to the extent deducted and without duplication, (a)
adjustments for non-cash write-offs attributable to the use of a fair value
methodology for recognition and measurement of impairment of goodwill not
identified with impaired assets in accordance with Financial Accounting
Standards Board Statement No. 142 up to an aggregate amount of $62,825,000, (b)
charges incurred by the Borrowers in connection with the early termination of
interest rate hedging contracts up to an aggregate amount of $4,000,000, (c)
adjustments for non-cash, non-recurring charges related to losses from asset
impairment charges or resulting from sales of the Specified Entities or their
assets up to an aggregate amount of $15,000,000, and cash charges related to losses
from such asset impairment charges or sales up to $1,000,000, (d) the
non-recurring, non-cash write-off of debt issuance expenses related to the
refinancing of 

 

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Indebtedness under the Existing Credit
Agreement, such write-off not to exceed $4,000,000, (e) non-cash charges
relating to asset write-offs up to an aggregate of $1,200,000 and (f) charges
incurred by the Borrowers in connection with unsuccessful landfill developments
up to an aggregate of $3,000,000.”

 

(b) The definition of “Generally Accepted Accounting
Principles or GAAP” in Section 1.1. is hereby amended in its entirety to read
as following

“Generally  Accepted  Accounting
Principles  or  GAAP. 
When used in general, Generally Accepted Accounting Principles means
principles that are consistent with the principles promulgated or adopted by
the Financial Accounting Standards Board and its predecessors, in effect for
the fiscal year ended on the April 30, 2004, as shall be concurred in by independent
certified public accountants of recognized standing whose report expresses an
unqualified opinion (other than a qualification regarding changes in Generally
Accepted Accounting Principles) as to financial statements in which such
principles have been applied; and when used with reference to the Borrowers,
such principles shall include (to the extent consistent with such principles)
the accounting practices reflected in the consolidated financial statements for
the year ended on the April 30, 2004.”

 

(c) Schedule 3 (EBITDA),
referred to in the definition of Consolidated  EBITDA in Section
1.1. of the Credit Agreement is updated by the Schedule 3 (EBITDA) as attached
hereto.

 

                2.  Amendment
Fee.  The Borrowers shall
pay to the Administrative Agent for the account of each Lender and its Lender
Affiliates party to the Credit Agreement (collectively, the “Financial
Institutions”) which has executed a counterpart signature page to this
Amendment, a work fee (“the Amendment Fee”) in the aggregate amount equal
to 0.125% on their Commitment or Term Loan.

 

                3.  Conditions to Effectiveness.  This
Amendment shall become effective when (a) the Administrative Agent shall have
received a counterpart signature page to this Amendment duly executed and
delivered by each of the Borrowers and the Required Lenders and (b)  and the payment of the Amendment Fee.

 

                4.  Representations and Warranties.  Each of the Borrowers represents and warrants to the Lenders and the
Administrative Agent as follows:

 

(a)           The execution, delivery and
performance of each of this Amendment and the performance by the Borrowers of
their obligations and agreements under this Amendment and the Credit Agreement
as amended hereby and thereby are within the corporate or equivalent company
power and authority of such Borrower and have been or will be authorized by
proper corporate or equivalent company proceedings, and do not (i) require any
consent or approval of the equity holders of such Borrower which has not been
obtained, (ii) contravene any provision of the constituent documents of such
Borrower or any law, rule or regulation applicable to such Borrower, or (iii)
contravene any provision of, or constitute an event of default or event which,
but for the requirement that time elapse or notice be given, or both, would
constitute an event of default under, any other material agreement, instrument
or undertaking binding on such Borrower.

 

(b)           This
Amendment and all of the terms and provisions hereof and thereof are the legal,
valid and binding obligations of such Borrower enforceable in accordance with
their respective terms except as limited by bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of
creditors’ rights generally, and except as the remedy of 

 

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specific performance or of injunctive relief is
subject to the discretion of the court before which any proceeding therefor may
be brought.

 

(c)           The
execution, delivery and performance of this Amendment does not require any
approval or consent of, or filing or registration with, any governmental or
other agency or authority, or any other party.

(d)           The
representations and warranties contained in Section 6 of the Credit Agreement
are true and correct in all material respects as of the date hereof as though
made on and as of the date hereof (except to the extent of
changes resulting from transactions contemplated or permitted by the Credit
Agreement as amended by this Amendment and changes occurring in the ordinary
course of business which singly or in the aggregate are not materially adverse,
and to the extent that such representations and warranties relate expressly to
an earlier date).

 

(e)           After giving effect to this Amendment, no Default or Event
of Default under the Credit Agreement will occur or be continuing.

 

                5.  Ratification, etc.  Except as expressly amended
hereby, the Credit Agreement, the other Loan Documents and all documents,
instruments and agreements related thereto are hereby ratified and confirmed in
all respects and shall continue in full force and effect. This Amendment and
the Credit Agreement shall hereafter be read and construed together as a single
document, and all references in the Credit Agreement or any related agreement
or instrument to the Credit Agreement shall hereafter refer to the Credit
Agreement as amended by this Amendment.

 

                6.
No Implied Waiver.  Except as expressly set forth in this Amendment, this Amendment shall not,
by implication or otherwise, limit, impair, constitute a waiver of or otherwise
affect any rights or remedies of the Administrative Agent or the Lenders under
the Credit Agreement or the other Loan Documents, nor alter, modify, amend or
in any way affect any of the terms, obligations or covenants contained in the
Credit Agreement or the Loan Documents, all of which shall continue in full
force and effect.  Nothing in this
Amendment shall be construed to imply any willingness on the part of the
Administrative Agent or the Lenders to grant any similar or future consent or
waiver of any of the terms and conditions of the Credit Agreement or the other
Loan Documents.

 

7.  Counterparts;
Governing Law.  This Amendment may be executed in any number of counterparts and by
different parties hereto on separate counterparts, each of such when so
executed and delivered shall be an original, but all of such counterparts shall
together constitute but one and the same agreement.  THIS CONSENT SHALL BE GOVERNED BY AND INTERPRETED AND DETERMINED
AS AN INSTRUMENT UNDER SEAL IN ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS, WITHOUT REFERENCE TO CONFLICTS OF LAW. This Amendment, to the
extent signed and delivered by means of a facsimile machine or other electronic
transmission in which the actual signature is evident, shall be treated in all
manner and respects as an original agreement or instrument and shall be
considered to have the same binding legal effect as if it were the original
signed version thereof delivered in person. At the request of any party hereto,
each other party hereto or thereto shall re-execute original forms hereof and
deliver them to all other parties.  No
party hereto shall raise the use of a facsimile machine or other electronic
transmission in which the actual signature is evident to deliver a signature or
the fact that any signature or agreement or instrument was transmitted or
communicated through the use of a facsimile machine or other electronic
transmission in which the actual signature is evident as a defense to the
formation of a contract and each party forever waives such defense.

 

 

IN WITNESS WHEREOF, each of the undersigned have duly executed this Amendment under seal as
of the date first set forth above.

 

	
   

  	
  FLEET NATIONAL BANK

  
	
   

  	
  individually and as Administrative Agent

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Maria
  F. Meia

  
	
   

  	
  Name:

  	
  Maria F. Meia

  
	
   

  	
  Title:

  	
  Managing Director

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Bank of America, NA

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Thomas F. Farley

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Thomas F. Farley

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Sr. Credit Products Manager

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  LASALLE BANK NATIONAL ASSOCIATION

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Shaun Kleinman

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Shaun Kleinman

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Citizens Bank of Massachusetts

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Cindy Chan

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Cindy Chan

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title: Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Merrill Lynch Capital, a division of Merrill

  Lynch business Financial services Inc.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Julia F. Maslanka

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Julia F. Maslanka

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  BANKNORTH, N.A.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   E. Kirke Hart

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  E. Kirke Hart

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Regional Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Comerica Bank

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Claudia M. Cassa

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Claudia M. Cassa

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
  Clydesdale CLO 2001-1, Ltd.

  
	
   

  	
  NOMURA CORPORATE RESEARCH 

  	
   

  	
   

  
	
   

  	
  AND ASSET MANAGEMENT INC.

  	
   

  	
  By:

  	
   /s/ Elizabeth Mackean

  
	
   

  	
  AS

  	
   

  	
   

  	
  Name:
  Elizabeth Mackean

  
	
   

  	
  COLLATERAL MANAGER

  	
   

  	
   

  	
  Title:   Director

  

 

 

 

	
   

  	
  By:

  	
  UFJ Trust Bank Limited

  	
  Nomura Bond and Loan Fund

  
	
   

  	
   

  	
  as Trustee

  	
   

  
	
   

  	
  By:

  	
  Nomura Corporate Research and

  	
  By:

  	
   /s/ Elizabeth Mackean

  
	
   

  	
   

  	
  Asset Management Inc.

  	
   

  	
  Name:
  Elizabeth Mackean

  
	
   

  	
   

  	
  Attorney in Fact

  	
   

  	
  Title: Director

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Flagship CLO 2001-1

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Mark S. Pelletier

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Mark S. Pelletier

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:    Director

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Flagship CLO II

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Mark S. Pelletier

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Mark S. Pelletier

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Director

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  SEMINOLE FUNDING LLC

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Diana M. Himes

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  DIANA M. HIMES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   ASSISTANT VICE PRESIDENT

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  HARBOUR TOWN FUNDING LLC

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Diana M. Himes

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  DIANA M. HIMES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   ASSISTANT VICE PRESIDENT

  

 

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/ Diane J. Exter

  
	
   

  	
  Manager
  for Race Point II CLO,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  Limited, as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for Castle Hill I - INGOTS,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  Ltd., as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for Castle Hill II - INGOTS,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  Ltd., as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for Great Point CLO 1999-1

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  LTD., as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for AVERY POINT CLO,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  LTD., as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for Race Point CLO, Limited,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Sankaty Advisors, LLC as Collateral

  	
   

  	
  By:

  	
  /s/  Diane J. Exter

  
	
   

  	
  Manager
  for Castle Hill III CLO,

  	
   

  	
   

  	
  Name:
  DIANE J. EXTER

  
	
   

  	
  Limited, as Term Lender

  	
   

  	
   

  	
  Title:   MANAGING DIRECTOR

              PORTFOLIO
  MANAGER

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Columbus Loan Funding Ltd.

  By: Travelers Asset Management International Company

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Ronald Carter

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Ronald Carter

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Fidelity Advisor Series II: Fidelity Advisor

  
	
   

  	
   

  	
   

  	
   

  	
  Floating Rate High Income Fund

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Frank Knox

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Frank Knox

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   ASS'T TREASURER

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  ELT LTD.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Diana M. Himes

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  DIANA M. HIMES

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   AUTHIRIZED AGENT

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Citigroup Investments Corporate Loan fund Inc.

  By: Travelers Asset Management International Company LLC –

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Ronald Carter

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Ronald Carter

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:  Vice President

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Landmark CDO Limited

  By: Aladdin capital Management LLC

               as
  Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Authorized Signatory

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Landmark II CDO Limited

  By: Aladdin capital Management LLC

               as
  Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Authorized Signatory

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Landmark III CDO Limited

  By: Aladdin capital Management LLC

               as
  Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
  /s/ Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Joseph Moroney, CFA

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Authorized Signatory

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  LCM I Limited Partnership

  By: Lyon Capital Management LLC,

               as
  Collateral Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ F. Tavanger

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  LYON
  CAPITAL MANAGEMENT LLC

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Farboud Tavanger

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Senior Portfolio Manager

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  CLAYON NEW YORK BRANCH

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Dianne M. Scott

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Dianne M. Scott

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title: Managing Director

  

 

	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   F. Frank Herrera

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  F. Frank Herrera

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Director

  

 

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  Venture II CDO, Limited

  
	
   

  	
   

  	
   

  	
   

  	
  By: its Investment Advisor
  MIX Asset

  Management LLC

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /s/ Martin Davey

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Martin Davey

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Managing Director

  

 

 

 

	
   

  	
   

  	
   

  	
   

  	
  THE TRAVELERS INSURANCE COMPANY

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By:

  	
   /S/ Denise T. Duffce

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Name:
  Denise T. Duffce

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
  Title:   Investment Officer

  

 

 

	
   

  	
  BORROWERS:

  
	
   

  	
  CASELLA
  WASTE SYSTEMS, INC.

  
	
   

  	
  ALL
  CYCLE WASTE, INC.

  
	
   

  	
  ALTERNATE
  ENERGY, INC.

  
	
   

  	
  ATLANTIC
  COAST FIBERS, INC.

  
	
   

  	
  B.
  AND C. SANITATION CORPORATION

  
	
   

  	
  BLASDELL
  DEVELOPMENT GROUP, INC.

  
	
   

  	
  BRISTOL
  WASTE MANAGEMENT, INC.

  
	
   

  	
  CASELLA
  TRANSPORTATION, INC.

  
	
   

  	
  CASELLA
  WASTE MANAGEMENT OF MASSACHUSETTS, INC.

  
	
   

  	
  CASELLA
  WASTE MANAGEMENT OF N.Y., INC.

  
	
   

  	
  CASELLA
  WASTE MANAGEMENT OF PENNSYLVANIA, INC.

  
	
   

  	
  CASELLA
  WASTE MANAGEMENT, INC.

  
	
   

  	
  CV
  LANDFILL, INC.

  
	
   

  	
  DATA
  DESTRUCTION SERVICES, INC.

  
	
   

  	
  FAIRFIELD
  COUNTY RECYCLING, INC.

  
	
   

  	
  FCR
  CAMDEN, INC.

  
	
   

  	
  FCR
  FLORIDA, INC.

  
	
   

  	
  FCR
  GREENSBORO, INC.

  
	
   

  	
  FCR
  GREENVILLE, INC.

  
	
   

  	
  FCR
  MORRIS, INC.

  
	
   

  	
  FCR
  REDEMPTION, INC.

  
	
   

  	
  FCR
  TENNESSEE, INC.

  
	
   

  	
  FCR,
  INC.

  
	
   

  	
  FOREST
  ACQUISITIONS, INC.

  
	
   

  	
  GRASSLANDS
  INC.

  
	
   

  	
  HAKES
  C & D DISPOSAL, INC.

  
	
   

  	
  HARDWICK
  LANDFILL, INC.

  
	
   

  	
  HIRAM
  HOLLOW REGENERATION CORP.

  
	
   

  	
  K-C
  INTERNATIONAL, LTD.

  
	
   

  	
  KTI
  BIO FUELS, INC.

  
	
   

  	
  KTI
  ENVIRONMENTAL GROUP, INC.

  
	
   

  	
  KTI
  NEW JERSEY FIBERS, INC.

  
	
   

  	
  KTI
  OPERATIONS INC.

  
	
   

  	
  KTI
  RECYCLING OF NEW ENGLAND, INC.

  
	
   

  	
  KTI
  SPECIALTY WASTE SERVICES, INC.

  
	
   

  	
  KTI,
  INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
   

  	
  Name:  Richard A. Norris

  
	
   

  	
  Title:
  Vice President and Treasurer

  

 

 

 

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

 

 

	
   

  	
  MECKLENBURG
  COUNTY RECYCLING, INC.

  
	
   

  	
  NATURAL
  ENVIRONMENTAL, INC.

  
	
   

  	
  NEW
  ENGLAND WASTE SERVICES OF MASSACHUSETTS, INC.

  
	
   

  	
  NEW
  ENGLAND WASTE SERVICES OF ME, INC.

  
	
   

  	
  NEW
  ENGLAND WASTE SERVICES OF N.Y., INC.

  
	
   

  	
  NEW
  ENGLAND WASTE SERVICES OF VERMONT, INC.

  
	
   

  	
  NEW
  ENGLAND WASTE SERVICES, INC.

  
	
   

  	
  NEWBURY
  WASTE MANAGEMENT, INC.

  
	
   

  	
  NORTH
  COUNTRY ENVIRONMENTAL SERVICES, INC.

  
	
   

  	
  NORTHERN
  PROPERTIES CORPORATION OF PLATTSBURGH

  
	
   

  	
  NORTHERN
  SANITATION, INC.

  
	
   

  	
  PERC,
  INC.

  
	
   

  	
  PINE
  TREE WASTE, INC.

  
	
   

  	
  R.A.
  BRONSON INC.

  
	
   

  	
  RESOURCE
  RECOVERY OF CAPE COD, INC.

  
	
   

  	
  RESOURCE
  RECOVERY SYSTEMS OF SARASOTA, INC.

  
	
   

  	
  RESOURCE
  RECOVERY SYSTEMS, INC.

  
	
   

  	
  RESOURCE
  TRANSFER SERVICES, INC.

  
	
   

  	
  RESOURCE
  WASTE SYSTEMS, INC.

  
	
   

  	
  SCHULTZ
  LANDFILL, INC.

  
	
   

  	
  SUNDERLAND
  WASTE MANAGEMENT, INC.

  
	
   

  	
  U.S.
  FIBER, INC.

  
	
   

  	
  WASTE-STREAM
  INC.

  
	
   

  	
  WESTFIELD
  DISPOSAL SERVICE, INC.

  
	
   

  	
  WINTERS
  BROTHERS, INC.

  
	
   

  	
  WOOD
  RECYCLING, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
   

  	
  Name:  Richard A. Norris

  
	
   

  	
  Title: Vice President and Treasurer

  

 

 

 

[SIGNATURES CONTINUED ON FOLLOWING PAGE]

 

	
  CASELLA
  NH INVESTORS CO., LLC

  
	
   

  
	
  By:
  KTI, Inc., its sole member

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Vice President and
  Treasurer

  
	
   

  
	
   

  
	
   

  
	
  CASELLA NH POWER CO., LLC

  
	
   

  
	
  By:
  KTI, Inc., its sole member

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Vice President and
  Treasurer

  
	
   

  
	
   

  
	
   

  
	
  CASELLA
  RTG INVESTORS CO., LLC

  
	
   

  
	
  By:
  Casella Waste Systems, Inc., its sole member

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Chief Financial
  Officer and Treasurer

  
	
   

  
	
   

  
	
   

  
	
  CWM
  ALL WASTE LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  GROUNDCO
  LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  [SIGNATURES
  CONTINUED ON FOLLOWING PAGE]

  
	
   

  

 

	
   

  
	
   

  
	
  THE
  HYLAND FACILITY ASSOCIATES

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title: Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  NEW
  ENGLAND LANDFILL SOLUTIONS, LLC

  
	
   

  
	
  By:
  Rochester Environmental Park, LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  NEWSME
  LANDFILL OPERATIONS LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  ROCKINGHAM
  SAND & GRAVEL, LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
   

  
	
  TEMPLETON
  LANDFILL LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:
  Duly Authorized Agent

  
	
   

  
	
   

  
	
  [SIGNATURES
  CONTINUED ON FOLLOWING PAGE]

  

 

	
  MAINE
  ENERGY RECOVERY COMPANY, LIMITED PARTNERSHIP

  
	
   

  
	
  By:
  KTI Environmental Group, Inc., general partner

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Vice President and
  Treasurer

  
	
   

  
	
   

  
	
   

  
	
  PERC MANAGEMENT COMPANY
  LIMITED PARTNERSHIP

  
	
   

  
	
  By:
  PERC, Inc., general partner

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Vice President and
  Treasurer

  
	
   

  
	
   

  
	
   

  
	
  ROCHESTER
  ENVIRONMENTAL PARK, LLC

  
	
   

  
	
  By:

  	
   /s/ Richard A. Norris

  	
   

  
	
  Name:  Richard A. Norris

  
	
  Title:  Duly Authorized AgentSECURITIES PURCHASE

                                    AGREEMENT

                            DATED AS OF JUNE 24, 2004

                                      AMONG

                                AXM PHARMA, INC.

                                       AND

                       THE PURCHASERS LISTED ON EXHIBIT A

<PAGE>

<TABLE>

<CAPTION>

                                TABLE OF CONTENTS

                                                                                                  PAGE
<S>                                                                             <C>               <C>

ARTICLE I         Purchase and Sale of Preferred Stock and Warrants..................................1

         Section 1.1       Purchase and Sale of Preferred Stock and Warrants.........................1
         Section 1.2       Purchase Price and Closing................................................1
         Section 1.3       Warrants..................................................................2
         Section 1.4       Escrow....................................................................2
         Section 1.5       Conversion Shares and Warrant Shares......................................2

ARTICLE II        Representations and Warranties.....................................................2

         Section 2.1       Representations and Warranties of the Company.............................2
         Section 2.2       Representations and Warranties of the Purchasers.........................14

ARTICLE III         Covenants.......................................................................16

         Section 3.1       Disclosure of Transactions and Other Material Information................16
         Section 3.2       Registration and Listing.................................................16
         Section 3.3       Securities Compliance....................................................17
         Section 3.4       Inspection Rights........................................................17
         Section 3.5       Complaince with Laws.....................................................17
         Section 3.6       Keeping of Records and Books of Account..................................17
         Section 3.7       Other Agreements.........................................................17
         Section 3.8       Reservation of Shares....................................................17
         Section 3.9       Non-public Information...................................................17
         Section 3.10      Disposition of Assets....................................................18
         Section 3.11      Preemptive Rights........................................................18
         Section 3.12      Pledge of Securities.....................................................20
         Section 3.13      Reporting Requirements...................................................20
         Section 3.14      Status of Dividends......................................................21
         Section 3.15      Lock-up..................................................................21
         Section 3.16      Transfer Agent Instructions..............................................22

ARTICLE IV          Conditions......................................................................22

         Section 4.1       Conditions Precedent to the Obligation of the Company to
                           Close and to Sell the Shares and Warrants................................22
         Section 4.2       Conditions Precedent to the Obligation of the Purchasers to
                           Close and to Purchase the Shares and Warrants............................23

ARTICLE V           Certificate of Legend...........................................................25

         Section 5.1       Legend...................................................................25

                                      -i-
<PAGE>

ARTICLE VI          Termination.....................................................................27

         Section 6.1       Termination by Mutual Consent............................................27
         Section 6.2       Effect of Termination....................................................27

ARTICLE VII         Indemnification.................................................................27

         Section 7.1       General Indemnity........................................................27
         Section 7.2       Indemnification Procedure................................................27

ARTICLE VIII        Miscellaneous...................................................................24

         Section 8.1       Fees and Expenses........................................................28
         Section 8.2       Specific Enforcement; Consent to Jurisdiction............................29
         Section 8.3       Entire Agreement; Amendment..............................................29
         Section 8.4       Notices..................................................................30
         Section 8.5       Waivers..................................................................31
         Section 8.6       Headings.................................................................31
         Section 8.7       Successors and Assigns...................................................31
         Section 8.8       No Third Party Beneficiaries.............................................31
         Section 8.9       Governing Law............................................................31
         Section 8.10      Survival.................................................................31
         Section 8.11      Counterparts.............................................................31
         Section 8.12      Publicity................................................................32
         Section 8.13      Severability.............................................................32
         Section 8.14      Further Assurances.......................................................32

</TABLE>

                                      -ii-
<PAGE>

                          SECURITIES PURCHASE AGREEMENT

         This SECURITIES PURCHASE AGREEMENT this ("Agreement"), dated as of June
18, 2004, by and among AXM Pharma,  Inc., a Nevada  corporation (the "Company"),
and  the  entities   listed  on  Exhibit  A  hereto  (each  a  "Purchaser"   and
collectively, the "Purchasers"),  for the purchase and sale to the Purchasers of
shares of the Company's  Series C Convertible  Preferred  Stock, par value $.001
per share (the  "Preferred  Stock"),  and  warrants  to  purchase  shares of the
Company's common stock, par value $.001 per share (the "Common Stock").

         The parties hereto agree as follows:

                                   ARTICLE I
                PURCHASE AND SALE OF PREFERRED STOCK AND WARRANTS

         Section 1.1 Purchase and Sale of Preferred Stock and Warrants. Upon the
following  terms  and  conditions,  the  Company  shall  issue  and  sell to the
Purchasers,  and the Purchasers  shall purchase from the Company,  shares of its
Preferred  Stock (the  "Shares")  at a price per share  equal to  $100,000  (the
"Stated  Value")  for an  aggregate  purchase  price of up to  $10,000,000  (the
"Purchase  Price"),  and  warrants  to  purchase  shares  of  Common  Stock,  in
substantially  the form  attached  hereto  as  Exhibit B (the  "Warrants").  The
Preferred  Stock  shall  be  convertible   into  a  number  of  fully  paid  and
nonassessable  shares of the Company's Common Stock equal to the quotient of (i)
the  Stated  Value of the shares of Series C  Preferred  Stock  being  converted
divided  by (ii) $4.25 (the  "Fixed  Conversion  Price").  The  Company  and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption  from  securities  registration  afforded by Section
4(2)  of the  U.S.  Securities  Act of  1933,  as  amended,  and the  rules  and
regulations  promulgated thereunder (the "Securities Act"), including Regulation
D  ("Regulation  D"),  and/or upon such other  exemption  from the  registration
requirements  of the  Securities  Act as may be available with respect to any or
all of the investments to be made hereunder. The Preferred Stock shall have such
powers,   preferences  and  rights,  and  the  qualifications,   limitations  or
restrictions  thereof,  as set forth in the Certificate of Designation of Rights
and  Preferences of Series C Preferred  Stock attached  hereto as Exhibit D (the
"Certificate of Designation"), subject to the applicable terms and conditions of
this Agreement and the Registration Rights Agreement (as defined below).

         Section 1.2 Purchase Price and Closing. The Company agrees to issue and
sell to the Purchasers and, in consideration of and in express reliance upon the
representations,  warranties, covenants, terms and conditions of this Agreement,
the  Purchasers,  severally  but not  jointly,  agree to purchase  the number of
Shares and Warrants set forth opposite their  respective names on Exhibit A. The
closing of the  purchase  and sale of the Shares and  Warrants to be acquired by
the  Purchasers  from the Company under this  Agreement  shall take place at the
offices of the Company  located at 3960 Howard  Hughes  Parkway,  Suite 500, Las
Vegas, Nevada 89109 (the "Closing") at 10:00 a.m., Pacific Time (i) on or before
June 18,  2004,  provided,  that all of the  conditions  set forth in Article IV
hereof and  applicable  to the Closing  shall have been  fulfilled  or waived in

                                       1
<PAGE>

accordance herewith, or (ii) at such other time and place or on such date as the
Purchasers and the Company may agree upon (the "Closing Date").

         Section 1.3  Warrants.  At the Closing,  the Company shall issue to the
Purchasers  Warrants to  purchase an  aggregate  of fifty  percent  (50%) of the
number of shares of Common Stock  underlying  the  Preferred  Stock based on the
Fixed  Conversion  Price.  The Warrants shall be exercisable for three (3) years
from the date of issuance  and shall have an  exercise  price equal to $5.50 per
share.

         Section 1.4 Escrow.  On or prior to the Closing  Date,  each  Purchaser
shall fund its portion of the Purchase Price into an escrow  account  maintained
by Jenkens & Gilchrist  Parker Chapin LLP as escrow agent (the "Escrow  Agent").
Upon the  Closing  and  delivery  to the Escrow  Agent of  written  instructions
executed by the Company and the placement agent, the Escrow Agent shall promptly
wire  transfer the funds  according to such written  instructions  to an account
designated by the Company.

         Section  1.5  Conversion  Shares and  Warrant  Shares.  The Company has
authorized and reserved and covenants to continue to reserve, free of preemptive
rights  and  other  similar  contractual  rights  of  stockholders,  out  of its
authorized  but unissued  Common  Stock or its Common Stock held in treasury,  a
number  of shares of Common  Stock  equal to the  aggregate  number of shares of
Common Stock  necessary to effect the  conversion of the Shares and the exercise
of the Warrants.  The Company shall,  from time to time, in accordance  with the
Nevada Corporation Law, increase the authorized amount of its Common Stock if at
any time the authorized amount of its Common Stock remaining  unissued shall not
be  sufficient to permit the  conversion of all Shares at the time  outstanding,
subject,  however,  to  stockholder  approval.  If any  shares of  Common  Stock
required to be reserved for issuance  upon  conversion of the Shares or exercise
of  the  Warrants  hereunder  require  registration  with  or  approval  of  any
governmental  authority  under any federal or state law before the shares may be
issued, the Company will cause the shares to be so registered and approved.  All
shares of Common Stock  delivered  upon  conversion of the Shares or exercise of
the Warrants shall, upon delivery,  be duly authorized and validly issued, fully
paid and  nonassessable,  free from all taxes, liens and charges with respect to
the issue thereof.  Any shares of Common Stock  issuable upon  conversion of the
Shares (and such shares when issued) are herein  referred to as the  "Conversion
Shares".  Any shares of Common Stock issuable upon exercise of the Warrants (and
such shares when  issued) are herein  referred to as the "Warrant  Shares".  The
Shares, the Conversion Shares, the Warrants and the Warrant Shares are sometimes
collectively referred to herein as the "Securities".

                                   ARTICLE II

                         REPRESENTATIONS AND WARRANTIES

         Section 2.1  Representations and Warranties of the Company. In order to
induce the  Purchasers  to enter into this  Agreement and to purchase the Shares
and  Warrants,  the  Company  hereby  makes the  following  representations  and
warranties to the Purchasers:

                                       2
<PAGE>

            (a)  Organization,  Good  Standing  and  Power.  The  Company  is  a
corporation duly  incorporated,  validly existing and in good standing under the
laws of the State of Nevada and has the requisite  corporate power to own, lease
and operate its  properties  and assets and to conduct its business as it is now
being  conducted.  The  Company  does not have any  Subsidiaries  (as defined in
Section 2.1(g)) or own securities of any kind in any other entity, except as set
forth on Schedule  2.1(g) hereto.  The Company and each such  Subsidiary is duly
qualified as a foreign  corporation  to do business  and is in good  standing in
every  jurisdiction  in which the nature of the  business  conducted or property
owned by it makes such qualification  necessary,  except for any jurisdiction(s)
(alone or in the  aggregate)  in which the failure to be so  qualified  will not
have a Material  Adverse Effect.  For the purposes of this Agreement,  "Material
Adverse  Effect" means any adverse effect on the business,  operations,  assets,
prospects or financial condition of the Company or its Subsidiaries and which is
material to such entity or other  entities  controlling  or  controlled  by such
entity or the Company or which is likely to materially hinder the performance by
the  Company  of its  obligations  hereunder  and under  the  other  Transaction
Documents (as defined in Section 2.1(b) hereof).

            (b)  Authorization;  Enforcement.  The  Company  has  the  requisite
corporate  power and  authority  to enter into and perform this  Agreement,  the
Certificate of Designation, the Registration Rights Agreement, the Warrants, the
Irrevocable  Transfer Agent  Instructions  (as defined in Section 3.16) attached
hereto as Exhibit F and the other agreements and documents  contemplated  hereby
and  thereby  and  executed  by the  Company  or to which the  Company  is party
(collectively,  the "Transaction  Documents"),  and to issue and sell the Shares
and the Warrants in accordance  with the terms hereof.  The execution,  delivery
and performance of the Transaction Documents by the Company and the consummation
by it of the  transactions  contemplated  thereby  have  been  duly and  validly
authorized  by all  necessary  corporate  action,  and,  except  as set forth in
Schedule 2.1(b), no further consent or authorization of the Company or its Board
of Directors or stockholders is required.  This Agreement has been duly executed
and delivered by the Company.  The other  Transaction  Documents  will have been
duly  executed  and  delivered  by the  Company  at  the  Closing.  Each  of the
Transaction  Documents  constitutes,  or  shall  constitute  when  executed  and
delivered, a valid and binding obligation of the Company enforceable against the
Company in  accordance  with its  terms,  except as such  enforceability  may be
limited  by  applicable  bankruptcy,  reorganization,  moratorium,  liquidation,
conservatorship,   receivership  or  similar  laws  relating  to,  or  affecting
generally the  enforcement  of,  creditor's  rights and remedies or by equitable
principles or remedies of general application.

            (c) Capitalization.  The authorized capital stock of the Company and
the shares thereof  currently  issued and  outstanding as of May 1, 2004 are set
forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the Company's
Common  Stock and any other  security of the Company  have been duly and validly
authorized. Except as set forth on Schedule 2.1(c), no shares of Common Stock or
any  other  security  of the  Company  are  entitled  to  preemptive  rights  or
registration  rights  and there are no  outstanding  options,  warrants,  scrip,
rights to subscribe to, call or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the
Company.  Furthermore,  except as set forth on Schedule  2.1(c) hereto or in any

                                       3
<PAGE>

Commission  Documents  (as defined in Section  2.1(f)  below) and except for the
Transaction Documents, there are no contracts,  commitments,  understandings, or
arrangements  by which the  Company is or may become  bound to issue  additional
shares of the  capital  stock of the Company or  options,  securities  or rights
convertible  into shares of capital  stock of the Company.  Except for customary
transfer  restrictions  contained in  agreements  entered into by the Company in
order to sell restricted securities or as provided on Schedule 2.1(c) hereto and
except as in any Commission Documents, the Company is not a party to or bound by
any agreement or understanding  granting registration or anti-dilution rights to
any person with respect to any of its equity or debt  securities.  Except as set
forth on Schedule 2.1(c) or disclosed in any Commission  Documents,  the Company
is not a party to, and it has no knowledge  of, any  agreement or  understanding
restricting  the voting or transfer  of any shares of the  capital  stock of the
Company.  Except as set forth on  Schedule  2.1(c)  hereto or  disclosed  in any
Commission  Documents,  the offer  and sale of all  capital  stock,  convertible
securities,  rights,  warrants,  or options of the Company  issued  prior to the
Closing  complied with all applicable  federal and state securities laws, and to
the best knowledge of the Company,  no holder of such  securities has a right of
rescission or has made or  threatened to make a claim for  rescission or damages
with respect thereto which could have a Material Adverse Effect. The Company has
furnished or made  available to the  Purchasers  true and correct  copies of the
Company's  Articles  of  Incorporation  as in  effect  on the date  hereof  (the
"Articles"),  and the  Company's  Bylaws as in effect  on the date  hereof  (the
"Bylaws").

            (d) Issuance of Securities. The Shares and the Warrants to be issued
at the Closing have been duly authorized by all necessary  corporate action and,
when paid for or issued in accordance with the terms hereof, the Shares shall be
validly issued and outstanding,  fully paid and nonassessable and free and clear
of all  liens,  encumbrances  and  rights of first  refusal  of any kind and the
holders shall be entitled to all rights accorded to a holder of Preferred Stock.
When the  Conversion  Shares  are  issued  in  accordance  with the terms of the
Preferred Stock, such shares will be duly authorized by all necessary  corporate
action and validly issued and outstanding,  fully paid and  nonassessable,  free
and clear of all liens, encumbrances and rights of first refusal of any kind and
the  holders  shall be  entitled  to all rights  accorded  to a holder of Common
Stock.  When the Warrant  Shares are issued and paid for in accordance  with the
terms of this  Agreement and as set forth in the  Warrants,  such shares will be
duly  authorized  by all  necessary  corporate  action  and  validly  issued and
outstanding,  fully  paid  and  nonassessable,  free  and  clear  of all  liens,
encumbrances  and rights of first  refusal of any kind and the holders  shall be
entitled to all rights accorded to a holder of Common Stock.

            (e) No Conflicts.  The  execution,  delivery and  performance of the
Transaction  Documents by the Company and the consummation by the Company of the
transactions contemplated hereby and thereby do not and will not (i) violate any
provision  of the  Articles  or Bylaws or any  Subsidiary's  comparable  charter
documents,  (ii) conflict  with, or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of  termination,  amendment,  acceleration  or  cancellation  of, any
agreement,  mortgage,  deed of trust,  indenture,  note,  bond,  license,  lease
agreement,  instrument  or  obligation  to  which  the  Company  or  any  of its
Subsidiaries  is a party or by which  the  Company  or any of its  Subsidiaries'

                                       4
<PAGE>

respective  properties  or  assets  are  bound,  (iii)  create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property
or asset of the Company or any of its  Subsidiaries  under any  agreement or any
commitment  to which the  Company  or any of its  Subsidiaries  is a party or by
which the Company or any of its  Subsidiaries  is bound or by which any of their
respective  properties or assets are bound, or (iv) result in a violation of any
federal,  state, local or foreign statute, rule, regulation,  order, judgment or
decree (including federal and state securities laws and regulations)  applicable
to the Company or any of its  Subsidiaries  or by which any property or asset of
the Company or any of its  Subsidiaries  is bound or  affected,  except,  in all
cases other than  violations  pursuant  to clauses (i) or (iv) (with  respect to
federal  and  state  securities  laws)  above,  for  such  conflicts,  defaults,
terminations,  amendments,  acceleration,  cancellations and violations as would
not,  individually  or in the aggregate,  have a Material  Adverse  Effect.  The
business of the Company and its Subsidiaries is not being conducted in violation
of any laws,  ordinances or regulations of any governmental  entity,  except for
possible  violations,  which  singularly or in the aggregate do not and will not
have a Material Adverse Effect.  Neither the Company nor any of its Subsidiaries
is required  under federal,  state,  foreign or local law, rule or regulation to
obtain  any  consent,   authorization  or  order  of,  or  make  any  filing  or
registration with, any court or governmental  agency in order for it to execute,
deliver or perform any of its  obligations  under the  Transaction  Documents or
issue and sell the Shares,  the Conversion  Shares,  the Warrants or the Warrant
Shares in  accordance  with the terms hereof or thereof  (other than any filings
which may be required to be made by the Company with the Securities and Exchange
Commission (the "Commission") or state securities  administrators  subsequent to
the Closing, or any registration statement which may be filed pursuant hereto or
thereto).

            (f) Commission Documents;  Commission Filings; Financial Statements.
The Common Stock is currently  registered pursuant to Section 12(b) and 12(g) of
the  Securities  Exchange Act of 1934,  as amended (the  "Exchange  Act"),  and,
except as disclosed on Schedule 2.1(f) hereto,  the Company has timely filed all
reports,  schedules,  forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing,  including filings incorporated by reference therein,
being  referred to herein as the  "Commission  Documents").  The Company has not
provided  to  the  Purchasers  any  material  non-public  information  or  other
information which, according to applicable law, rule or regulation,  should have
been  disclosed  publicly by the  Company  but which has not been so  disclosed,
other than with respect to the transactions  contemplated by this Agreement.  At
the time of its  filing,  the  Company's  Form  10-QSB for the fiscal year ended
March 31, 2004 (the "Form  10-Q")  complied in all  material  respects  with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated  thereunder  and other  federal,  state and  local  laws,  rules and
regulations applicable to such documents,  and the Form 10-Q did not contain any
untrue statement of a material fact or omitted to state a material fact required
to be stated  therein or necessary in order to make the statements  therein,  in
light of the  circumstances  under which they were made, not  misleading.  As of
their respective dates, the financial  statements of the Company included in the
Commission  Documents  complied  as  to  form  in  all  material  respects  with
applicable  accounting  requirements  and the published rules and regulations of

                                       5
<PAGE>

the Commission or other  applicable  rules and regulations with respect thereto.
Such  financial  statements  have been  prepared in  accordance  with  generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods  involved  (except (i) as may be otherwise  indicated in such  financial
statements  or the  Notes  thereto,  or (ii) in the  case of  unaudited  interim
statements,  to the extent they may not include footnotes or may be condensed or
summary  statements),  and fairly present in all material respects the financial
position  of the Company and its  Subsidiaries  as of the dates  thereof and the
results of operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments).

            (g) Subsidiaries.  Schedule 2.1(g) hereto sets forth each Subsidiary
of the Company,  showing the  jurisdiction of its  incorporation or organization
and showing the percentage of each person's  ownership of the outstanding  stock
or other  interests  of such  Subsidiary.  For the  purposes of this  Agreement,
"Subsidiary"  shall  mean any  corporation  or other  entity of which at least a
majority of the securities or other  ownership  interest  having ordinary voting
power  (absolutely  or  contingently)  for the  election of  directors  or other
persons  performing  similar  functions  are  at  the  time  owned  directly  or
indirectly  by the  Company  and/or  any of its other  Subsidiaries.  All of the
outstanding shares of capital stock of each Subsidiary have been duly authorized
and  validly  issued,  and  are  fully  paid  and  nonassessable.  There  are no
outstanding  preemptive,  conversion  or  other  rights,  options,  warrants  or
agreements  granted or issued by or binding upon any Subsidiary for the purchase
or  acquisition  of any shares of capital  stock of any  Subsidiary or any other
securities  convertible  into,  exchangeable  for or  evidencing  the  rights to
subscribe  for any shares of such  capital  stock.  Neither  the Company nor any
Subsidiary is subject to any obligation  (contingent or otherwise) to repurchase
or otherwise acquire or retire any shares of the capital stock of any Subsidiary
or any convertible securities, rights, warrants or options of the type described
in the preceding sentence except as set forth on Schedule 2.1(g) hereto.  Except
as set forth on Schedule  2.1(g) hereto,  neither the Company nor any Subsidiary
is party to, nor has any knowledge of, any agreement  restricting  the voting or
transfer of any shares of the capital stock of any Subsidiary.

            (h) No Material  Adverse  Change.  Since March 31, 2004, the Company
has not experienced or suffered any Material Adverse Effect, except as disclosed
on Schedule 2.1(h) hereto.

            (i) No  Undisclosed  Liabilities.  Except as  disclosed  on Schedule
2.1(i)  hereto,  neither  the  Company  nor  any of  its  Subsidiaries  has  any
liabilities,  obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured,  absolute,  accrued,  contingent or otherwise)  other than
those set forth on the  balance  sheet  included in the Form 10-Q or incurred in
the ordinary course of the Company's or its Subsidiaries  respective  businesses
since March 31, 2004, and which,  individually  or in the  aggregate,  do not or
would not have a Material Adverse Effect on the Company or its Subsidiaries.

            (j) No Undisclosed  Events or  Circumstances.  Since March 31, 2004,
except as disclosed on Schedule  2.1(j)  hereto,  no event or  circumstance  has

                                       6
<PAGE>

occurred or exists  with  respect to the  Company or its  Subsidiaries  or their
respective businesses, properties, prospects, operations or financial condition,
which,  under applicable law, rule or regulation,  requires public disclosure or
announcement  by the  Company but which has not been so  publicly  announced  or
disclosed.

            (k)  Indebtedness.  Schedule 2.1(k) hereto sets forth as of the date
hereof all outstanding secured and unsecured  Indebtedness of the Company or any
Subsidiary,  or for which the Company or any Subsidiary has  commitments,  which
Indebtedness is not disclosed in any Commission  Documents.  For the purposes of
this Agreement, "Indebtedness" shall mean (i) any liabilities for borrowed money
in excess of  $100,000  (other  than  trade  accounts  payable  incurred  in the
ordinary  course  of  business),  (ii) all  guaranties,  endorsements  and other
contingent  obligations  in  respect  of  Indebtedness  of  others  in excess of
$100,000,  whether or not the same are or should be reflected  in the  Company's
balance  sheet (or the Notes  thereto),  except  guaranties  by  endorsement  of
negotiable  instruments for deposit or collection or similar transactions in the
ordinary  course of business,  and (iii) the present value of any lease payments
in excess of $100,000 due under leases  required to be capitalized in accordance
with  GAAP.  Except  as  disclosed  on  Schedule  2.1(k)  or in  any  Commission
Documents,  neither the Company nor any Subsidiary is in default with respect to
any Indebtedness.

            (l) Title to Assets.  Each of the Company and the  Subsidiaries  has
good and  marketable  title to all of its real and personal  property,  free and
clear of any mortgages,  pledges,  charges,  liens,  security interests or other
encumbrances  of any nature  whatsoever,  except for those indicated on Schedule
2.1(l)  hereto  or  disclosed  in  any   Commission   Documents  or  such  that,
individually or in the aggregate,  do not have a Material  Adverse  Effect.  All
material  leases  of the  Company  and each of its  Subsidiaries  are  valid and
subsisting and in full force and effect.

            (m) Actions Pending. Except as set forth in the Commission Documents
or Schedule  2.1(m)  hereto,  there is no action,  suit,  claim,  investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the  knowledge  of the  Company,  threatened  against  the Company or any
Subsidiary  which  questions the validity of this  Agreement or any of the other
Transaction Documents or any of the transactions  contemplated hereby or thereby
or any action  taken or to be taken  pursuant  hereto or thereto.  Except as set
forth in any Commission  Document or on Schedule 2.1(m) hereto:  (i) there is no
action, suit, claim,  investigation,  arbitration,  alternate dispute resolution
proceeding  or other  proceeding  pending or, to the  knowledge  of the Company,
threatened  against or involving  the Company,  any  Subsidiary  or any of their
respective  properties or assets, which individually or in the aggregate,  would
have a  Material  Adverse  Effect,  and (ii)  there are no  outstanding  orders,
judgments,   injunctions,   awards  or  decrees  of  any  court,  arbitrator  or
governmental  or  regulatory  body against the Company or any  Subsidiary or any
officers or directors of the Company or any  Subsidiary  in their  capacities as
such,  which  individually,  or in the aggregate,  would have a Material Adverse
Effect.

            (n)  Compliance  with  Law.  The  business  of the  Company  and the
Subsidiaries  has been and is presently  being  conducted in accordance with all

                                       7
<PAGE>

applicable  federal,  state and local governmental laws, rules,  regulations and
ordinances,  except  as set forth in the  Commission  Documents  or on  Schedule
2.1(n) hereto or such that, individually or in the aggregate,  the noncompliance
therewith would not have a Material Adverse Effect.  The Company and each of its
Subsidiaries  have  all  franchises,   permits,  licenses,  consents  and  other
governmental  or  regulatory  authorizations  and  approvals  necessary  for the
conduct of its  business  as now being  conducted  by it unless  the  failure to
possess such franchises,  permits, licenses,  consents and other governmental or
regulatory authorizations and approvals, individually or in the aggregate, could
not reasonably be expected to have a Material Adverse Effect.

            (o) Taxes.  Except as set forth on Schedule  2.1(o) hereto or in the
Commission  Documents,  the Company and each of the  Subsidiaries has accurately
prepared and filed all federal,  state and other tax returns  required by law to
be filed by it, has paid or made  provisions  for the payment of all taxes shown
to be due and all additional assessments,  and adequate provisions have been and
are  reflected in the financial  statements of the Company and the  Subsidiaries
for all current taxes and other  charges to which the Company or any  Subsidiary
is subject and which are not currently  due and payable.  Except as disclosed on
Schedule 2.1(o) hereto, none of the federal income tax returns of the Company or
any  Subsidiary  have been audited by the Internal  Revenue  Service.  Except as
disclosed  in the  Commission  Documents,  the Company has no  knowledge  of any
additional assessments, adjustments or contingent tax liability (whether federal
or state) of any nature  whatsoever,  whether pending or threatened  against the
Company  or any  Subsidiary  for any  period,  nor of any  basis  for  any  such
assessment, adjustment or contingency.

            (p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, the
Company has not employed any broker or finder or incurred any  liability for any
brokerage or investment banking fees,  commissions,  finders'  structuring fees,
financial advisory fees or other similar fees in connection with the Transaction
Documents.

            (q) Disclosure. To the best of the Company's knowledge, neither this
Agreement nor any other documents,  certificates or instruments furnished to the
Purchasers by or on behalf of the Company or any  Subsidiary in connection  with
the transactions contemplated by this Agreement contains any untrue statement of
a material fact or omits to state a material fact necessary in order to make the
statements made herein or therein, in the light of the circumstances under which
they were made herein or therein, not misleading.

            (r) Intellectual  Property.  Schedule 2.1(r) contains a complete and
correct  list  of  all  patents,  trademarks,   domain  names  (whether  or  not
registered) and any patentable  improvements or  copyrightable  derivative works
thereof,  websites and intellectual  property rights relating  thereto,  service
marks, trade names, copyrights, licenses and authorizations, and all rights with
respect  to the  foregoing  held  by  the  Company  or  any of its  Subsidiaries
(collectively,   the  "Proprietary   Rights").  The  Company  and  each  of  the
Subsidiaries  owns or possesses all the  Proprietary  Rights which are necessary
for the conduct of its business as now  conducted  without any conflict with the
rights of others.  Except as disclosed in the  Commission  Documents or Schedule
2.1(r) hereto, (i) as of the date of this Agreement, neither the Company nor any

                                       8
<PAGE>

of its Subsidiaries has received any written notice that any Proprietary  Rights
have  been  declared   unenforceable  or  otherwise  invalid  by  any  court  or
governmental agency, and (ii) as of the date of this Agreement, there is, to the
knowledge  of  the  Company,  no  material  existing  infringement,   misuse  or
misappropriation  of any Proprietary Rights by others that could have a Material
Adverse Effect.  From December 31, 2003, to the date of this Agreement,  neither
the Company nor any of its Subsidiaries has received any written notice alleging
that the  operation  of the  business of the Company or any of its  Subsidiaries
infringes  in any  material  respect upon the  intellectual  property  rights of
others.

            (s) Environmental Compliance. Except as disclosed on Schedule 2.1(s)
hereto or the  Commission  Documents,  the Company and each of its  Subsidiaries
have obtained all material  approvals,  authorization,  certificates,  consents,
licenses, orders and permits or other similar authorizations of all governmental
authorities, or from any other person, that are required under any Environmental
Laws. Schedule 2.1(s) hereto sets forth all material permits, licenses and other
authorizations  issued  under  any  Environmental  Laws  to the  Company  or its
Subsidiaries.  "Environmental  Laws"  shall mean all U.S.  Federal or state laws
applicable to the Company or any of its Subsidiaries  relating to the protection
of the environment including, without limitation, all requirements pertaining to
reporting,  licensing,  permitting,  controlling,  investigating  or remediating
emissions,  discharges, releases or threatened releases of hazardous substances,
chemical substances, pollutants,  contaminants or toxic substances, materials or
wastes, whether solid, liquid or gaseous in nature, into the air, surface water,
groundwater or land, or relating to the manufacture,  processing,  distribution,
use,  treatment,   storage,   disposal,   transport  or  handling  of  hazardous
substances, chemical substances,  pollutants,  contaminants or toxic substances,
material or wastes,  whether solid,  liquid or gaseous in nature.  Except as set
forth on Schedule  2.1(s)  hereto,  the Company has all  necessary  governmental
approvals  required under all Environmental  Laws and used in its business or in
the business of any of its Subsidiaries,  except for such instances as would not
individually or in the aggregate have a Material Adverse Effect. The Company and
each of its  Subsidiaries  are also in  compliance  with all other  limitations,
restrictions,  conditions,  standards,  requirements,  schedules and  timetables
required or imposed under all Environmental Laws where non-compliance could have
a Material  Adverse Effect.  Except for such instances as would not individually
or in the  aggregate  have a  Material  Adverse  Effect or as  disclosed  in the
Commission  Documents,   there  are  no  past  or  present  events,  conditions,
circumstances,  incidents,  actions  or  omissions  relating  to or in  any  way
affecting  the  Company or its  Subsidiaries  that  violate or may  violate  any
Environmental  Law after the Closing or that may give rise to any  Environmental
Liabilities,  or otherwise form the basis of any claim,  action,  demand,  suit,
proceeding,  hearing, study or investigation (i) under any Environmental Law, or
(ii) based on or  related to the  manufacture,  processing,  distribution,  use,
treatment, storage (including,  without limitation,  underground storage tanks),
disposal,  transport  or  handling,  or  the  emission,  discharge,  release  or
threatened release of any hazardous substance. "Environmental Liabilities" means
all liabilities of a person (whether such liabilities are owed by such person to
governmental authorities,  third parties or otherwise) currently in existence or
arising hereafter and which arise under or relate to any Environmental Law.

                                       9
<PAGE>

            (t) Books and  Records;  Internal  Accounting  Controls.  The books,
records and documents of the Company and its Subsidiaries  accurately reflect in
all material  respects the  information  relating to the business of the Company
and the  Subsidiaries,  the location and  collection  of their  assets,  and the
nature of all transactions giving rise to the obligations or accounts receivable
of the  Company or any  Subsidiary.  The  Company  and each of its  Subsidiaries
maintain a system of internal accounting controls sufficient, in the judgment of
the  Company's  board of directors,  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 actions are taken with respect to any differences.

            (u) Material Agreements.  Except for the Transaction Documents or as
set forth on Schedule  2.1(u) hereto,  or those that are included as exhibits to
the Commission  Documents,  neither the Company nor any Subsidiary is a party to
any written or oral contract,  instrument,  agreement,  commitment,  obligation,
plan or  arrangement,  a copy of which  would be  required  to be filed with the
Commission if the Company or any Subsidiary were  registering  securities  under
the Securities Act (collectively, "Material Agreements"). Except as set forth in
the  Commission  Documents or on Schedule  2.1(u)  hereto,  the Company and each
Subsidiary has in all material respects  performed all the obligations  required
to be performed by them to date under the foregoing agreements, have received no
notice  of  default  and,  to the best of the  Company's  knowledge,  are not in
default under any Material  Agreement  now in effect,  the result of which could
cause a  Material  Adverse  Effect.  No written  or oral  contract,  instrument,
agreement  (other  than the  Certificate  of  Designation  with  respect  to the
Preferred  Stock,  this  Agreement  or  any  other   Transaction   Document(s)),
commitment, obligation (other than any obligation imposed by state law), plan or
arrangement  of the  Company  or of any  Subsidiary  limits  or shall  limit the
payment of dividends on its Common Stock.

            (v) Transactions  with  Affiliates.  Except as set forth on Schedule
2.1(v)  hereto or disclosed  in any of the  Commission  Documents,  there are no
loans, leases, agreements,  contracts, royalty agreements,  management contracts
or arrangements or other continuing  transactions  between (i) the Company,  any
Subsidiary or any of their  respective  its  customers or suppliers,  on the one
hand, and (ii) on the other hand, any officer, employee,  consultant or director
of the Company,  or any of its  Subsidiaries,  or any person  owning any capital
stock of the Company or any Subsidiary or any member of the immediate  family of
such officer, employee,  consultant,  director or stockholder or any corporation
or other entity controlled by such officer,  employee,  consultant,  director or
stockholder.

            (w) Securities Act of 1933.  Assuming the accuracy and  completeness
of the  representations,  warranties and covenants of the  Purchasers  contained
herein, the Company has complied and will comply with all applicable federal and
state  securities  laws in connection  with the offer,  issuance and sale of the
Shares,  the Conversion  Shares,  the Warrants and the Warrant Shares hereunder.

                                       10
<PAGE>

Neither the Company nor anyone acting on its behalf, directly or indirectly, has
or will sell,  offer to sell or solicit offers to buy any of the Securities,  or
similar  securities  to, or solicit  offers with respect  thereto from, or enter
into any preliminary  conversations  or negotiations  relating thereto with, any
person,  or has taken or will take any action so as to require  registration  of
the issuance and sale of any of the Securities under the registration provisions
of the Securities Act and applicable state securities laws.  Neither the Company
nor any of its  affiliates,  nor any person acting on its or their  behalf,  has
engaged in any form of general  solicitation or general  advertising (within the
meaning of Regulation D under the Securities  Act) in connection  with the offer
or sale of any of the Securities.

            (x) Governmental  Approvals.  Except as set forth on Schedule 2.1(x)
hereto,  and  except for the filing of any  notice  prior or  subsequent  to the
Closing that may be required under  applicable  state and/or federal  securities
laws (which if required,  shall be filed on a timely basis),  no  authorization,
consent, approval,  license, exemption of, filing or registration with any court
or   governmental   department,    commission,    board,   bureau,   agency   or
instrumentality,  domestic  or  foreign,  is or will  be  necessary  for,  or in
connection  with, the execution or delivery of the Shares and the Warrants,  or,
except as set forth in this Agreement or any other Transaction Document, for the
performance by the Company of its obligations under the Transaction Documents.

            (y)  Employees.  Neither  the  Company  nor any  Subsidiary  has any
collective bargaining  arrangements or agreements covering any of its employees.
Except as set forth in the  Commission  Documents or on Schedule  2.1(y) hereto,
neither the Company nor any Subsidiary has any  employment  contract,  agreement
regarding proprietary information,  non-competition agreement,  non-solicitation
agreement,   confidentiality   agreement,  or  any  other  similar  contract  or
restrictive  covenant,  relating  to the  right  of  any  officer,  employee  or
consultant  to be employed or engaged by the Company or such  Subsidiary.  Since
September 30, 2003, no officer, consultant or key employee of the Company or any
Subsidiary whose  termination,  either  individually or in the aggregate,  could
have a Material  Adverse  Effect,  has  terminated  or, to the  knowledge of the
Company,  has any present  intention of  terminating  his or her  employment  or
engagement with the Company or any Subsidiary.

            (z)  Absence  of  Certain  Developments.  Except as set forth in the
Commission  Documents or on Schedule  2.1(z)  hereto,  since  December 31, 2003,
neither the Company nor any Subsidiary has:

                 (i) issued any stock,  bonds or other  corporate  securities or
any rights, options or warrants with respect thereto;

                 (ii)  borrowed any amount or incurred or become  subject to any
liabilities  (absolute or contingent) except current liabilities incurred in the
ordinary  course of business  which are  comparable  in nature and amount to the
current  liabilities  incurred in the  ordinary  course of  business  during the
comparable  portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's or such Subsidiary's business;

                                       11
<PAGE>

                 (iii)  discharged or satisfied any material lien or encumbrance
or  paid  a  material  amount  of  any  obligation  or  liability  (absolute  or
contingent),  other than  current  liabilities  paid in the  ordinary  course of
business;

                 (iv)  declared or made any payment or  distribution  of cash or
other  property to  stockholders  with  respect to its stock,  or  purchased  or
redeemed,  or made any  agreements  so to purchase or redeem,  any shares of its
capital stock;

                 (v) sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;

                 (vi)  sold,   assigned  or   transferred   any  patent  rights,
trademarks, trade names, copyrights, trade secrets or other intangible assets or
intellectual  property  rights,  which sale,  assignment  or transfer  has had a
Material Adverse Effect, or disclosed any proprietary  confidential  information
to any person except in the ordinary  course of business or to the Purchasers or
their representatives;

                 (vii) suffered any  substantial  losses or waived any rights of
material value,  whether or not in the ordinary course of business,  or suffered
the loss of any material amount of prospective business; (viii) made any changes
in  employee  compensation  except  in  the  ordinary  course  of  business  and
consistent with past practices;

                 (ix) made capital  expenditures  or  commitments  therefor that
aggregate  in excess of $25,000;  (x) entered into any other  transaction  other
than in the  ordinary  course of business,  or entered  into any other  material
transaction, whether or not in the ordinary course of business;

                 (xi) made  charitable  contributions  or  pledges  in excess of
$25,000;  (xii)  suffered any material  damage,  destruction  or casualty  loss,
whether or not covered by insurance;

                 (xiii)   experienced  any  material   problems  with  labor  or
management in connection with the terms and conditions of their employment; or

                 (xiv) entered into an agreement,  written or otherwise, to take
any of the foregoing actions.

                                       12
<PAGE>

              (aa) Use of Proceeds. Except as set forth on Schedule 2.1(aa), the
proceeds  from  the  sale of the  Shares  and the  Warrants  will be used by the
Company  for  working  capital  purposes  and,  except as set forth on  Schedule
2.1(aa), shall not be used to repay any outstanding Indebtedness or any loans to
any officer, director, affiliate or insider of the Company.

              (bb) Public Utility Holding Company Act and Investment Company Act
Status.  The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public  Utility  Holding  Company Act of 1935,  as
amended.  The Company is not,  and as a result of and  immediately  upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.

              (cc)  ERISA.  No  liability  to  the  Pension   Benefit   Guaranty
Corporation  has been incurred with respect to any Plan by the Company or any of
its  Subsidiaries  which  is or  would  cause a  Material  Adverse  Effect.  The
execution  and delivery of this  Agreement  and the issue and sale of the Shares
and the  Warrants  will not  involve  any  transaction  which is  subject to the
prohibitions  of Section 406 of ERISA or in connection with which a tax could be
imposed  pursuant  to Section  4975 of the  Internal  Revenue  Code of 1986,  as
amended (the "Code");  provided that, if any Purchaser,  or any person or entity
that owns a  beneficial  interest  in any  Purchaser,  is an  "employee  pension
benefit  plan"  (within  the meaning of Section  3(2) of ERISA) with  respect to
which the Company is a "party in interest"  (within the meaning of Section 3(14)
of ERISA),  the  requirements  of  Sections  407(d)(5)  and 408(e) of ERISA,  if
applicable, are met. As used in this Section 2.1(cc), the term "Plan" shall mean
an "employee  pension  benefit plan" (as defined in Section 3 of ERISA) which is
or has been  established or maintained,  or to which  contributions  are or have
been made, by the Company or any Subsidiary or by any trade or business, whether
or not  incorporated,  which,  together with the Company or any  Subsidiary,  is
under common control, as described in Section 414(b) or (c) of the Code.

              (dd) Dilutive  Effect.  The Company  understands and  acknowledges
that the number of Conversion  Shares issuable upon conversion of the Shares and
the Warrant  Shares  issuable  upon  exercise of the Warrants  will  increase in
certain  circumstances.  The Company further acknowledges that its obligation to
issue  Conversion  Shares upon  conversion of the Shares in accordance with this
Agreement and the  Certificate of Designation  and its  obligations to issue the
Warrant  Shares  upon the  exercise  of the  Warrants  in  accordance  with this
Agreement  and the  Warrants,  is,  in each  case,  absolute  and  unconditional
regardless  of the dilutive  effect that such issuance may have on the ownership
interest of other stockholders of the Company.

              (ee) Independent  Nature of Purchasers.  The Company  acknowledges
that the  obligations  of each  Purchaser  under the  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 the Transaction Documents. The Company acknowledges
that the  decision of each  Purchaser  to purchase  Securities  pursuant to this
Agreement has been made by such  Purchaser  independently  of any other purchase
and  independently of any information,  materials,  statements or opinions as to

                                       13
<PAGE>

the business, affairs, operations, assets, properties,  liabilities,  results of
operations, condition (financial or otherwise) or prospects of the Company or of
its  Subsidiaries  which may have made or given by any other Purchaser or by any
agent or employee of any other Purchaser,  and no Purchaser or any of its agents
or employees  shall have any  liability to any  Purchaser  (or any other person)
relating  to or arising  from any such  information,  materials,  statements  or
opinions.  The Company  acknowledges  that nothing  contained  herein, or in any
Transaction  Document,  and no action taken by any Purchaser  pursuant hereto or
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.  The Company  acknowledges  that 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. The Company
acknowledges   that  for  reasons  of   administrative   convenience  only,  the
Transaction  Documents  have been prepared by counsel for one of the  Purchasers
and such  counsel  does  not  represent  all of the  Purchasers  but  only  such
Purchaser and the other  Purchasers  have retained their own individual  counsel
with respect to the transactions  contemplated  hereby. The Company acknowledges
that  it 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.  The Company acknowledges that
such  procedure  with respect to the  Transaction  Documents in no way creates a
presumption  that the  Purchasers are in any way acting in concert or as a group
with  respect to the  Transaction  Documents  or the  transactions  contemplated
hereby or thereby.

              (ff) No Integrated  Offering.  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 the  offering  of the
Securities  pursuant to this Agreement to be integrated  with prior offerings by
the Company for purposes of the  Securities  Act which would prevent the Company
from selling the Shares  pursuant to Rule 506 under the  Securities  Act, or any
applicable  exchange-related  stockholder  approval  provisions,  nor  will  the
Company or any of its affiliates or  subsidiaries  take any action or steps that
would cause the offering of the Shares to be  integrated  with other  offerings.
Other than the Company's  registration  statement on Form SB-2  (commission file
no. 333-109117), which is currently effective but which may be amended to report
material changes,  the Company does not have any registration  statement pending
before the Commission or currently under the Commission's review.

              (gg) Sarbanes-Oxley Act. The Company is in substantial  compliance
with  the  applicable   provisions  of  the  Sarbanes-Oxley  Act  of  2002  (the
"Sarbanes-Oxley  Act"),  and the rules and regulations  promulgated  thereunder,
that are effective  and intends to comply  substantially  with other  applicable
provisions of the Sarbanes-Oxley Act, and the rules and regulations  promulgated
thereunder, upon the effectiveness of such provisions.

                                       14
<PAGE>

         Section  2.2    Representations and Warranties of the Purchasers.  Each
of the Purchasers hereby makes the following  representations  and warranties to
the  Company  with  respect  solely to itself and not with  respect to any other
Purchaser:

            (a)  Organization and Standing of the Purchasers.  If the  Purchaser
is an entity,  such Purchaser is a  corporation,  limited  liability  company or
partnership  duly  incorporated  or  organized,  validly  existing  and in  good
standing  under  the  laws  of  the   jurisdiction  of  its   incorporation   or
organization.

            (b)  Authorization and Power. Each Purchaser has the requisite power
and authority to enter into and perform this Agreement,  the Registration Rights
Agreement,  the Warrants,  and the other  agreements and documents  contemplated
hereby and thereby and executed by the  Purchaser  or to which the  Purchaser is
party (collectively,  the "Purchaser Transaction Documents") and to purchase the
Shares and Warrants  being sold to it  hereunder.  The  execution,  delivery and
performance  of the Purchaser  Transaction  Documents by each  Purchaser and the
consummation  by it of the  transactions  contemplated  hereby  have  been  duly
authorized  by all necessary  corporate or  partnership  action,  and no further
consent  or   authorization  of  such  Purchaser  or  its  Board  of  Directors,
stockholders,  or partners, as the case may be, is required.  This Agreement has
been duly  authorized,  executed and  delivered by each  Purchaser.  Each of the
Purchaser Transaction Documents  constitutes,  or shall constitute when executed
and  delivered,  valid and binding  obligations  of each  Purchaser  enforceable
against  such   Purchaser  in  accordance   with  its  terms,   except  as  such
enforceability   may  be   limited   by   applicable   bankruptcy,   insolvency,
reorganization,   moratorium,  liquidation,  conservatorship,   receivership  or
similar laws relating to, or affecting  generally the enforcement of, creditor's
rights  and  remedies  or  by  equitable   principles  or  remedies  of  general
application.

            (c)  Acquisition  for  Investment.  Each Purchaser is purchasing the
Shares and acquiring the Warrants  solely for its own account for the purpose of
investment  and  not  with  a  view  to or  for  sale  in  connection  with  any
distribution  thereof.  Each Purchaser does not have a present intention to sell
any of  the  Securities,  nor a  present  arrangement  (whether  or not  legally
binding) or intention to effect any  distribution of any of the Securities to or
through  any  person  or  entity;   provided,   however,   that  by  making  the
representations  herein and subject to Section 2.2(e) below, each Purchaser does
not agree to hold any of the  Securities  for any minimum or other specific term
and  reserves  the  right to  dispose  of any of the  Securities  at any time in
accordance with federal and state securities laws applicable to such disposition
provided that the Company  receives an opinion of its counsel to the effect that
such disposition  complies with such laws. Each Purchaser  acknowledges  that it
(i) has such  knowledge and  experience  in financial and business  matters such
that such  Purchaser  is  capable  of  evaluating  the  merits  and risks of its
investment in the Company,  (ii) is able to bear the financial risks  associated
with an  investment in the  Securities,  and (iii) has been given full access to
such  records of the Company  and the  Subsidiaries  and to the  officers of the
Company  and the  Subsidiaries  as it has deemed  necessary  or  appropriate  to
conduct its due diligence investigation.

                                       15
<PAGE>

            (d)  Rule 144.  Each Purchaser understands that the  Securities must
be held indefinitely  unless such Securities are registered under the Securities
Act or an exemption from registration is available.  Each Purchaser acknowledges
that  it is  familiar  with  Rule  144  of  the  rules  and  regulations  of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such  Purchaser  has been  advised  that Rule 144 permits  resales only
under certain circumstances.  Each Purchaser understands that to the extent that
Rule 144 is not available,  such Purchaser will be unable to sell any Securities
without either registration under the Securities Act or the existence of another
exemption from such registration requirement, provided that the Company receives
an opinion  of its  counsel  to the  effect  that such sale is exempt  from such
registration requirement.

            (e) General.  Each  Purchaser  understands  that the  Securities are
being  offered  and  sold in  reliance  on a  transactional  exemption  from the
registration  requirements of federal and state  securities laws and the Company
is relying upon the truth,  accuracy and  completeness  of the  representations,
warranties, agreements, acknowledgments and understandings of such Purchaser set
forth  herein  and in the  other  Purchaser  Transaction  Documents  in order to
determine the  applicability  of such  exemptions  and the  suitability  of such
Purchaser to acquire the Securities.  Each Purchaser  understands that no United
States  federal or state agency or any  government  or  governmental  agency has
passed upon or made any recommendation or endorsement with respect to any of the
Securities.

            (f)  Opportunities  for  Additional   Information.   Each  Purchaser
acknowledges that such Purchaser has had the opportunity to ask questions of and
receive  answers  from, or obtain  additional  information  from,  the executive
officers  of the  Company  concerning  the  financial  and other  affairs of the
Company,  and to the extent deemed  necessary by such Purchaser in light of such
Purchaser's  personal  knowledge of the Company's  affairs,  such  Purchaser has
asked such  questions  and  received  answers to the full  satisfaction  of such
Purchaser, and such Purchaser desires to invest in the Company.

            (g) No General  Solicitation.  Each Purchaser  acknowledges that the
Securities were not offered to such Purchaser by means of any form of general or
public   solicitation   or  general   advertising,   or  publicly   disseminated
advertisements or sales literature,  including (i) any  advertisement,  article,
notice or other communication  published in any newspaper,  magazine, or similar
media,  or broadcast over television or radio, or (ii) any seminar or meeting to
which  such   Purchaser   was  invited  by  any  of  the   foregoing   means  of
communications.

            (h) Accredited  Investor.  Each Purchaser is an accredited  investor
(as defined in Rule 501 of Regulation D), and such Purchaser has such experience
in business and financial  matters that it is capable of  evaluating  the merits
and risks of an investment in the Securities.  Each Purchaser  acknowledges that
an investment in the  Securities  is  speculative  and involves a high degree of
risk.

            (i) Independent Investment.  No Purchaser has agreed to act with any
other  Purchaser for the purpose of acquiring,  holding,  voting or disposing of

                                       16
<PAGE>

the  Securities  purchased  hereunder  for  purposes of Section  13(d) under the
Exchange  Act, and each  Purchaser is acting  independently  with respect to its
investment in the Securities.

                                  ARTICLE III

                                    COVENANTS

         The parties  covenant with one another as follows,  which covenants are
for the  benefit of each  respective  covenantee  and its  respective  permitted
assignees.

         Section 3.1  Disclosure of Transactions and Other Material Information.
The Company shall issue a press  release  describing  the material  terms of the
transactions  contemplated  hereby (the "Press  Release") as soon as practicable
after the Closing  but in no event  later than three (3) Trading  Days after the
Closing,  the Company shall issue the Press Release. The Company shall also file
with the Commission a Current Report on Form 8-K (the "Form 8-K") describing the
material  terms  of the  transactions  contemplated  hereby  (and  attaching  as
exhibits   thereto  this  Agreement,   the   Certificate  of  Designation,   the
Registration  Rights  Agreement and the form of Warrant) as soon as  practicable
following  the  Closing  Date but in no event more than three (3)  Trading  Days
following the Closing Date, which Press Release and Form 8-K shall be subject to
prior review and comment by Jenkens & Gilchrist  Parker  Chapin LLP. The Company
shall not,  and shall cause each of its  Subsidiaries  and its and each of their
respective  officers,  directors,  employees  and  agents  not to,  provide  the
Purchasers with any material, nonpublic information regarding the Company or any
of its  Subsidiaries  from  and  after  the  filing  of the  Form  8-K  with the
Commission  without the express written consent of the Purchaser.  "Trading Day"
means any day during  which the  American  Stock  Exchange  (or other  principal
exchange on which the Common Stock is traded) shall be open for trading.

         Section 3.2   Registration and Listing.  The  Company  will  cause  its
Common Stock to continue to be  registered  under  Section 12(b) or 12(g) of the
Exchange  Act,  will  comply  in all  respects  with its  reporting  and  filing
obligations under the Exchange Act, will comply with all requirements related to
any registration  statement filed pursuant to this Agreement,  and will not take
any action or file any document  (whether or not permitted by the Securities Act
or the rules  promulgated  thereunder) to terminate or suspend such registration
or to  terminate  or suspend  its  reporting  and filing  obligations  under the
Exchange Act or Securities  Act,  except as permitted  herein.  The Company will
promptly file the "Listing Application" for, or in connection with, the issuance
and delivery of the Conversion Shares and the Warrant Shares.

         Section  3.3  Securities  Compliance.  The  Company  shall  notify  the
Commission in accordance with their rules and  regulations,  of the transactions
contemplated by any of the Transaction Documents, including filing a Form D with
respect  to the  Shares,  Warrants,  Conversion  Shares  and  Warrant  Shares as
required  under  Regulation  D, and shall  take all other  necessary  action and
proceedings  as may be  required  and  permitted  by  applicable  law,  rule and
regulation,  for the legal and valid issuance of the Shares,  the Warrants,  the
Conversion  Shares  and the  Warrant  Shares  to the  Purchasers  or  subsequent
holders.

                                       17
<PAGE>

         Section 3.4   Inspection  Rights.  The  Company  shall  permit,  during
normal  business  hours and upon  reasonable  request and reasonable  notice,  a
Purchaser or any employees,  agents or representatives  thereof that are parties
to an effective confidentiality agreement with the Company of appropriate scope,
so long as a Purchaser  shall be  obligated  hereunder to purchase the Shares or
shall  beneficially  own the Shares or Conversion  Shares,  or shall own Warrant
Shares or the Warrants which, in the aggregate,  represent more than two percent
(2%)  of  the  total  combined  voting  power  of  all  voting  securities  then
outstanding,  to examine and make  reasonable  copies of and  extracts  from the
records and books of account of, and visit and  inspect,  during the term of the
Warrants, the properties, assets, operations and business of the Company and any
Subsidiary, and to discuss the affairs, finances and accounts of the Company and
any  Subsidiary  with  any of its  officers,  consultants,  directors,  and  key
employees.

         Section 3.5  Compliance  with Laws. The Company shall comply, and cause
each  Subsidiary to comply,  with all applicable  laws,  rules,  regulations and
orders, the noncompliance with which could have a Material Adverse Effect.

         Section 3.6   Keeping of Records  and  Books  of  Account.  The Company
shall keep and cause  each  Subsidiary  to keep  adequate  records  and books of
account,  in  which  complete  entries  will  be made in  accordance  with  GAAP
consistently applied.

         Section  3.7  Other Agreements.  The  Company  shall not enter into any
agreement  containing  any provision that would violate the terms of, or cause a
default under, any material term of any Transaction Document.

         Section 3.8   Reservation of Shares.  So long as the Shares or Warrants
remain outstanding,  the Company shall take all action necessary to at all times
have authorized, and reserved for the purpose of issuance, the maximum number of
shares of Common Stock to effect the  conversion  of the Shares and the exercise
of the Warrants.

         Section 3.9   Non-public Information.  The Company covenants and agrees
that neither it nor any other  person  acting on its behalf has provided or 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.  Neither the Purchasers
nor any of their  affiliates,  officers  or agents  will  solicit  any  material
non-public information from the Company.

         Section 3.10  Preemptive Rights.

            (a) Until the first  anniversary of the Closing Date and for so long
as any  Purchaser or its assigns shall own any Shares (any  Purchaser,  for such
purpose,  an "Eligible  Purchaser"),  the Company hereby grants to each Eligible

                                       18
<PAGE>

Purchaser a right (the  "Preemptive  Right") to purchase all or any part of such
Eligible  Purchaser's  pro rata  share of any "New  Securities"  (as  defined in
Section  3.10(b)) that the Company may,  from time to time,  propose to sell and
issue.  The pro rata share for each  Eligible  Purchaser,  for  purposes  of the
Preemptive Right, is the ratio of (x) the number of shares of Series C Preferred
Stock then held by such Eligible Purchaser  immediately prior to the issuance of
the New  Securities  (assuming  the full  conversion  of the Shares and the full
exercise  of the  Warrants),  to (y) the  total  number  of  shares  of Series C
Preferred Stock of the Company outstanding  immediately prior to the issuance of
the New Securities (after giving effect to the full conversion of the Shares and
the full exercise of the Warrants). The Preemptive Right granted herein shall be
pari pasu with the preemptive  rights  currently held by the Company's  Series A
Stockholders.

            (b) For purposes of this Section 3.10, "New  Securities"  shall mean
fifty percent (50%) any Common Stock or Preferred Stock of the Company,  whether
or not  authorized  on the date  hereof,  and  rights,  options or  warrants  to
purchase  Common Stock or Preferred  Stock and securities of any type whatsoever
that are,  or may become,  convertible  into Common  Stock or  Preferred  Stock;
provided, however, that "New Securities" does not include the following:

                 (i)  shares  of  capital  stock of the  Company  issuable  upon
conversion  or exercise of any currently  outstanding  securities or any Shares,
Warrants or New Securities  issued in accordance with this Agreement  (including
the Warrant Shares);

                 (ii) shares or options or warrants for Common Stock  granted to
officers,  directors and employees of, and consultants to, the Company  pursuant
to stock option or purchase plans or other compensatory  agreements  approved by
the Compensation Committee of the Board of Directors;

                 (iii)  shares  of Common  Stock or  Preferred  Stock  issued in
connection  with any pro rata stock  split or stock  dividend  in respect of any
series or class of  capital  stock of the  Company  or  recapitalization  by the
Company;

                 (iv)  shares of  capital  stock,  or  options  or  warrants  to
purchase  capital  stock,  issued to a strategic  investor in connection  with a
strategic commercial agreement as determined by the Board of Directors;

                 (v) shares of capital stock, or options or warrants to purchase
capital stock, issued pursuant to commercial borrowing, secured lending or lease
financing transaction approved by the Board of Directors;

                 (vi)  shares of  capital  stock,  or  options  or  warrants  to
purchase   capital  stock,   issued  pursuant  to  the  acquisition  of  another
corporation or entity by the Company by consolidation,  merger,  purchase of all
or substantially all of the assets, or other reorganization in which the Company
acquires,  in a single  transaction  or series of related  transactions,  all or
substantially  all of the  assets of such other  corporation  or entity or fifty
percent (50%) or more of the voting power of such other corporation or entity or

                                       19
<PAGE>

fifty percent (50%) or more of the equity ownership of such other corporation or
entity;

                 (vii)   shares  of  capital   stock   issued  in  a  bona  fide
underwritten  public securities  offering  pursuant to a registration  statement
filed under the Securities Act;

                 (viii)  shares of capital  stock,  or options  or  warrants  to
purchase capital stock, issued to current or prospective  customers or suppliers
of  the  Company   approved  by  the  Board  of  Directors  as  compensation  or
accommodation  in lieu of other payment,  compensation or  accommodation to such
customer or supplier;

                 (ix) shares of capital stock,  or warrants to purchase  capital
stock,  issued to any person or entity that provides  services to the Company as
compensation  therefor  pursuant  to an  agreement  approved  by  the  Board  of
Directors;

                 (x) shares of capital stock, or options or warrants to purchase
capital stock, offered in a transaction where purchase of such securities by any
Purchaser would cause such transaction to fail to comply with applicable federal
or  state  securities  laws  or  would  cause  an  applicable   registration  or
qualification  exemption  to  fail to be  available  to the  Company;  provided,
however,  that this clause (x) shall apply only to the  Purchaser or  Purchasers
who would cause any such failure, and not to any of the other Purchasers;

                 (xi)  shares of  capital  stock,  or  options  or  warrants  to
purchase  capital  stock,  , or options or warrants to purchase  capital  stock,
purchased or to be purchased by the holders of the Company's  Series A Preferred
Stock pursuant to existing  preemptive  rights.

                 (xii)  securities  issuable upon  conversion or exercise of the
securities set forth in paragraphs (i) - (xi) above.

In the  event  that  the  Company  proposes  to  undertake  an  issuance  of New
Securities,  it shall give each Eligible Purchaser written notice (the "Notice")
of its intention,  describing  the type of New  Securities,  the price,  and the
general terms upon which the Company  proposes to issue the same.  Each Eligible
Purchaser  shall have twenty (20)  Business Days after receipt of such notice to
agree  to  purchase  all or any  portion  of its pro  rata  share  of  such  New
Securities  at the price and upon the terms  specified  in the  notice by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased.  In the event that any New Securities subject to the Preemptive
Right are not  purchased  by the  Eligible  Purchaser  within  the  twenty  (20)
Business Day period  specified  above,  the Company  shall have ninety (90) days
thereafter to sell (or enter into an agreement pursuant to which the sale of New
Securities that had been subject to the Preemptive Right shall be closed,  if at
all,  within sixty (60) days from the date of said agreement) the New Securities
with respect to which the rights of the Purchaser  were not exercised at a price
and upon terms, including manner of payment, no more favorable to the purchasers
thereof than specified in the Notice.  In the event the Company has not sold all
offered  New  Securities  within such ninety (90) day period (or sold and issued

                                       20
<PAGE>

New Securities in accordance with the foregoing  within sixty (60) days from the
date of such agreement),  the Company shall not thereafter issue or sell any New
Securities,  without first complying again with the procedures set forth in this
Section 3.10.

         Section 3.11  Pledge of Securities. The Company acknowledges and agrees
that the Securities may be pledged by a Purchaser in connection with a bona fide
margin  agreement or other loan or financing  arrangement that is secured by the
Common  Stock.  The pledge of Common Stock shall not be deemed to be a transfer,
sale or assignment of the Common Stock hereunder,  and no Purchaser  effecting a
pledge of Common  Stock shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other  Transaction  Document;  provided  that a Purchaser and its pledgee
shall be required to comply with the  provisions of Article V hereof in order to
effect a sale,  transfer or assignment  of Common Stock to such pledgee.  At the
Purchasers'  expense,  the Company  hereby  agrees to execute  and deliver  such
documentation  as a pledgee  of the  Common  Stock  may  reasonably  request  in
connection with a pledge of the Common Stock to such pledgee by a Purchaser.

         Section 3.12  Reporting Requirements.  If the Commission  ceases making
periodic reports filed under Section 13 of the Exchange Act available via EDGAR,
then at a  Purchaser's  request the Company  shall furnish the following to such
Purchaser so long as such Purchaser shall be obligated hereunder to purchase the
Shares or shall  beneficially  own any Shares,  or shall own  Conversion  Shares
which,  in the aggregate,  represent  more than 2% of the total combined  voting
power of all voting securities then outstanding:

            (b) Quarterly  Reports  filed with the  Commission on Form 10-QSB as
soon as practical  after the document is filed with the  Commission,  and in any
event  within  fifty-five  (55) days  after  the end of each of the first  three
fiscal quarters of the Company;

            (c) Annual  Reports filed with the Commission on Form 10-KSB as soon
as practical after the document is filed with the  Commission,  and in any event
within one  hundred  five (105)  days after the end of each  fiscal  year of the
Company; and

            (d)  Copies  of  all  notices  and  information,  including  without
limitation  notices and proxy  statements in connection with any meetings,  that
are provided to holders of shares of Common  Stock,  contemporaneously  with the
delivery of such notices or information to such holders of Common Stock.

         Section 3.13  Distributions.  So long as any Shares or Warrants  remain
outstanding,  the  Company  agrees  that it  shall  not (i)  declare  or pay any
dividends  or make any  distributions  to any  holder(s) of Common Stock or (ii)
purchase or  otherwise  acquire for value,  directly or  indirectly,  any Common
Stock or other equity security of the Company.

         Section 3.14  Status of Dividends.  The Company  covenants  and  agrees
that (i) no Federal  income tax return or claim for refund of Federal income tax
or other  submission to the Internal  Revenue Service will adversely  affect the

                                       21
<PAGE>

Shares,  any other series of its preferred  stock, or the Common Stock,  and any
deduction shall not operate to jeopardize the  availability to Purchasers of the
dividends  received  deduction  provided by Section 243(a)(1) of the Code or any
successor  provision,  (ii) in no report to shareholders or to any  governmental
body having  jurisdiction over the Company or otherwise will it treat the Shares
other  than as equity  capital  or the  dividends  paid  thereon  other  than as
dividends paid on equity capital unless required to do so by a governmental body
having jurisdiction over the accounts of the Company or by a change in generally
accepted   accounting   principles   required  as  a  result  of  action  by  an
authoritative  accounting  standards setting body, and (iii) other than pursuant
to this  Agreement or the  Certificate  of  Designation,  it will take no action
which would result in the dividends paid by the Company on the Shares out of the
Company's  current or accumulated  earnings and profits being ineligible for the
dividends  received  deduction  provided by Section  243(a)(1) of the Code.  The
preceding  sentence shall not be deemed to prevent the Company from  designating
the Preferred Stock as "Convertible Preferred Stock" in its annual and quarterly
financial  statements in accordance  with its prior  practice  concerning  other
series of preferred  stock of the Company.  Notwithstanding  the foregoing,  the
Company  shall not be  required to restate or modify its tax returns for periods
prior to the Closing  Date.  In the event that the  Purchasers  have  reasonable
cause to believe  that  dividends  paid by the  Company on the Shares out of the
Company's  current or  accumulated  earnings  and profits will not be treated as
eligible for the dividends  received  deduction provided by Section 243(a)(1) of
the Code,  or any  successor  provision,  the Company  will,  at the  reasonable
request  of the  Purchasers  of 51% of the  outstanding  Shares,  join  with the
Purchasers  in the  submission  to the  Service of a request  for a ruling  that
dividends  paid on the  Shares  will  be so  eligible  for  Federal  income  tax
purposes,  at the Purchasers expense.  In addition,  the Company will reasonably
cooperate with the Purchasers (at Purchasers' expense) in any litigation, appeal
or other  proceeding  challenging  or contesting any ruling,  technical  advice,
finding or  determination  that  earnings  and profits are not  eligible for the
dividends  received  deduction provided by Section 243(a)(1) of the Code, or any
successor  provision  to the extent  that the  position  to be taken in any such
litigation,  appeal, or other proceeding is not contrary to any provision of the
Code or incurred in connection with any such submission,  litigation,  appeal or
other proceeding.  Notwithstanding the foregoing, nothing herein contained shall
be deemed to preclude the Company from claiming a deduction with respect to such
dividends  if (i) the  Code  shall  hereafter  be  amended,  or  final  Treasury
regulations  thereunder are issued or modified, to provide that dividends on the
Shares or  Conversion  Shares  should not be treated as  dividends  for  Federal
income tax purposes or that a deduction  with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or (ii) in
the  absence  of  such  an  amendment,  issuance  or  modification  and  after a
submission of a request for ruling or technical  advice,  the service shall rule
or advise that  dividends on the shares  should not be treated as dividends  for
Federal  income  tax  purposes.  If the  Service  determines  that the Shares or
Conversion  Shares  constitute debt, the Company may file protective  claims for
refund.

         Section 3.15  Lock-up.  Each Purchaser agrees to sell, in each calendar
month during the six-month  period  beginning on the Closing Date, not more than
1/6 of the aggregate number of Conversion  Shares and Warrant Shares issuable to
such Purchaser pursuant to the Transaction Documents; provide, however, that the

                                       22
<PAGE>

number of such  Conversion  Shares and Warrant  Shares that can be sold shall be
cumulative  and shall begin to  accumulate  on the day following the date of the
Closing.

         Section 3.16  Transfer  Agent  Instructions.  The  Company  shall issue
irrevocable  instructions  to its transfer  agent,  and any subsequent  transfer
agent,  to issue  certificates,  registered in the name of each Purchaser or its
respective nominee(s),  for the Conversion Shares and the Warrant Shares in such
amounts as  specified  from time to time by each  Purchaser  to the Company upon
conversion  of the Shares or exercise  of the  Warrants in the form of Exhibit F
attached  hereto  (the  "Irrevocable  Transfer  Agent  Instructions").  Prior to
registration  of  the  Conversion  Shares  and  the  Warrant  Shares  under  the
Securities  Act,  all  such  certificates  shall  bear  the  restrictive  legend
specified  in  Section  5.1 of this  Agreement.  The  Company  warrants  that no
instruction other than the Irrevocable  Transfer Agent Instructions  referred to
in this Section 3.16 will be given by the Company to its transfer agent and that
the Shares shall  otherwise be freely  transferable  on the books and records of
the Company, except as otherwise provided in this Agreement and the Registration
Rights  Agreement.  Nothing in this  Section  3.16 shall  affect in any way each
Purchaser's  obligations  and agreements set forth in Section 5.1 to comply with
all  applicable  prospectus  delivery  requirements,  if any, upon resale of the
Shares.  If a Purchaser  provides the Company  with an opinion of counsel,  in a
generally  acceptable  form,  to the effect that a public  sale,  assignment  or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Shares
can be sold  pursuant to Rule 144 without  any  restriction  as to the number of
securities  acquired as of a particular date that can then be immediately  sold,
the Company shall,  except as otherwise  limited by the terms of this Agreement,
permit the transfer,  and, in the case of the Conversion  Shares and the Warrant
Shares,  promptly  instruct its transfer agent to issue one or more certificates
in such  name and in such  denominations  as  specified  by such  Purchaser  and
without any restrictive legend. The Company  acknowledges that a breach by it of
its  obligations  under this  Section  3.16 will cause  irreparable  harm to the
Purchasers by vitiating the intent and purpose of the  transaction  contemplated
hereby.  Accordingly,  the  Company  acknowledges  that the  remedy at law for a
breach of its obligations under this Section 3.16 will be inadequate and agrees,
in the event of a breach or threatened  breach by the Company of the  provisions
of this Section 3.16, that the Purchasers shall be entitled,  in addition to all
other available remedies,  to an order and/or injunction  restraining any breach
and requiring immediate issuance and transfer,  without the necessity of showing
economic loss and without any bond or other  security  being  required.

                                   ARTICLE IV

                                   CONDITIONS

         Section 4.1  Conditions  Precedent to the  Obligation of the Company to
Close and to Sell the Shares  and  Warrants.  The  obligation  hereunder  of the
Company  to close  and  issue  and  sell  the  Shares  and the  Warrants  to the
Purchasers on the Closing Date is subject to the  satisfaction or waiver,  at or
before the Closing,  of the conditions set forth below. These conditions are for
the  Company's  sole benefit and may be waived by the Company at any time in its
sole discretion.

                                       23
<PAGE>

            (a)  Accuracy of the Purchasers' Representations and Warranties. The
representations and warranties of each Purchaser  Transaction Documents shall be
true and correct in all material respects as of the date when made and as of the
Closing  Date as  though  made at that  time,  except  for  representations  and
warranties that are expressly made as of a particular  date, which shall be true
and correct in all material respects as of such date.

            (b)  Performance  by  the  Purchasers.  Each  Purchaser  shall  have
performed,  satisfied and complied in all material  respects with all covenants,
agreements and conditions required by this Agreement to be performed,  satisfied
or complied with by the Purchasers at or prior to the Closing Date.

            (c) No Injunction.  No statute, rule,  regulation,  executive order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent jurisdiction which
prohibits  the  consummation  of any of the  transactions  contemplated  by this
Agreement.

            (d)  Delivery of Purchase Price.  The Purchase  Price for the Shares
and Warrants shall have been delivered to the Company at the Closing.

            (e)  Delivery of  Purchaser  Transaction  Documents.  The  Purchaser
Transaction  Documents  shall  have  been duly  executed  and  delivered  by the
Purchasers to the Company.

         Section 4.2  Conditions Precedent to the  Obligation of the  Purchasers
to Close and to Purchase the Shares and Warrants.  The  obligation  hereunder of
the   Purchasers  to  purchase  the  Shares  and  Warrants  and  consummate  the
transactions  contemplated  by this Agreement is subject to the  satisfaction or
waiver,  at or before the Closing,  of each of the  conditions  set forth below.
These  conditions are for the Purchasers'  sole benefit and may be waived by the
Purchasers at any time in their sole discretion.

            (a)  Accuracy of the Company's Representations and Warranties.  Each
of the  representations  and  warranties of the Company in this Agreement and in
each of the  Transaction  Documents  shall be true and  correct in all  material
respects as of the Closing Date, except for  representations and warranties that
are expressly made as of a particular  date,  which shall be true and correct in
all material respects as of such date.

            (b)  Performance by the Company.  The Company shall have  performed,
satisfied  and  complied in all  respects  with all  covenants,  agreements  and
conditions  required by this  Agreement to be  performed,  satisfied or complied
with by the Company at or prior to the Closing Date.

            (c) No Suspension,  Etc. Trading in the Company's Common Stock shall
not have been suspended by the American Stock Exchange or the Commission (except
for any  suspension  of trading of limited  duration  agreed to by the  Company,

                                       24
<PAGE>

which  suspension  shall be terminated  prior to the Closing),  and, at any time
prior to the  Closing  Date,  trading in  securities  generally  as  reported by
Bloomberg  Financial  Markets  ("Bloomberg")  shall not have been  suspended  or
limited,  or minimum prices shall not have been  established on securities whose
trades are  reported  by  Bloomberg,  nor shall a banking  moratorium  have been
declared  either by the United  States or Nevada  State  authorities,  nor shall
there have  occurred  any national or  international  calamity or crisis of such
magnitude in its effect on any  financial  market  which,  in each case,  in the
reasonable judgment of the Purchasers,  makes it impracticable or inadvisable to
purchase the Shares.

            (d)  No Injunction.  No statute, rule,  regulation, executive order,
decree,  ruling or injunction shall have been enacted,  entered,  promulgated or
endorsed by any court or governmental  authority of competent jurisdiction which
prohibits  the  consummation  of any of the  transactions  contemplated  by this
Agreement.

            (e)  No Proceedings  or  Litigation.  No action,  suit or proceeding
before any arbitrator or any  governmental  authority shall have been commenced,
and no investigation  by any governmental  authority shall have been threatened,
against the Company or any  Subsidiary,  or any of the  officers,  directors  or
affiliates  of the Company or any  Subsidiary,  seeking to restrain,  prevent or
change the  transactions  contemplated by this Agreement,  or seeking damages in
connection with such transactions.

            (f) Opinion of Counsel,  Etc. The Purchasers  shall have received an
opinion of counsel to the Company, dated the Closing Date,  substantially in the
form of  Exhibit C hereto,  and such other  certificates  and  documents  as the
Purchasers or their counsel shall reasonably require incident to the Closing.

            (g)  Warrants and Shares.  The Company  shall have  delivered to the
Purchasers  the  originally  executed  Warrants (in such  denominations  as each
Purchaser  may  request but in no event in  denominations  of less than 100) and
shall have delivered certificates representing the Shares (in such denominations
as each Purchaser may request) being acquired by the Purchasers at the Closing.

            (h)  Resolutions.  The Board of Directors of the Company  shall have
adopted  resolutions  consistent with Section 2.1(b) hereof in a form reasonably
acceptable to the Purchasers (the "Resolutions").

            (i) Certificate of Designation.  As of the Closing Date, the Company
shall have filed with the Nevada Secretary of State a Certificate of Designation
authorizing the Preferred Stock in substantially  the Form of Exhibit D attached
hereto.

            (j) Reservation of Shares. As of the Closing Date, the Company shall
have reserved out of its authorized and unissued Preferred Stock, solely for the
purpose of affecting the issuance of the Shares, a number of shares of Preferred
Stock equal to the aggregate  number of the Shares.  As of the Closing Date, the

                                       25
<PAGE>

Company shall have  reserved out of its  authorized  and unissued  Common Stock,
solely  for the  purpose  of  effecting  the  conversion  of the  Shares and the
exercise of the Warrants, a number of shares of Common Stock equal to the number
of Conversion  Shares and the number of Warrant Shares  issuable upon conversion
of the Preferred Stock and the exercise of the Warrants, respectively,  assuming
the  Warrants  are  exercised  and the Shares are  converted on the Closing Date
(assuming the Warrants are fully exercisable and the Shares fully convertible on
such date  regardless of any limitation on the timing or amount of such exercise
or conversion).

            (k)  Transfer  Agent Instructions.  The  Irrevocable  Transfer Agent
Instructions,  in the  form of  Exhibit  F  attached  hereto,  shall  have  been
delivered to the Company's transfer agent.

            (l)  Secretary's Certificate.  The Company shall  have delivered  to
the  Purchasers a secretary's  certificate,  dated as of the Closing Date, as to
(i) the Resolutions,  (ii) the Articles,  (iii) the Bylaws, each as in effect at
the  Closing,  and (iv) the  authority  and  incumbency  of the  officers of the
Company executing the Transaction  Documents and any other documents required to
be executed or delivered in connection therewith.

            (m) Officer's  Certificate.  On the Closing Date,  the Company shall
have delivered to the  Purchasers a certificate  of an executive  officer of the
Company,  dated as of the Closing Date, confirming the accuracy of the Company's
representations,  warranties and covenants  contained  herein and in each of the
other Transaction Documents as of the Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section 4.2 as of
the Closing Date.

            (n) Fees and Expenses. As of the Closing Date, all fees and expenses
required  to be  paid  by  the  Company  in  connection  with  the  transactions
contemplated by this Agreement shall have been, or authorized to be, paid by the
Company.

            (o)  Registration  Rights  Agreement.  As of the Closing  Date,  the
parties shall have entered into the Registration Rights Agreement in the Form of
Exhibit E attached hereto.

            (p) Material  Adverse Effect.  No Material Adverse Effect shall have
occurred.

                                   ARTICLE V

                               CERTIFICATE LEGEND

         Section 5.1  Legend.  Each  certificate  representing  the Shares,  the
Conversion  Shares,  the  Warrants  and the Warrant  Shares  shall be stamped or
otherwise  imprinted  with a  legend  substantially  in the  following  form (in
addition to any legend  required by  applicable  state  securities or "blue sky"
laws):

                                       26
<PAGE>

         THE SECURITIES  REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE
         NOT BEEN  REGISTERED  UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
         "SECURITIES  ACT") OR ANY  STATE  SECURITIES  LAWS AND MAY NOT BE SOLD,
         TRANSFERRED  OR  OTHERWISE  DISPOSED  OF  UNLESS  REGISTERED  UNDER THE
         SECURITIES  ACT  AND  UNDER  APPLICABLE  STATE  SECURITIES  LAWS OR AXM
         PHARMA,  INC.  SHALL  HAVE  RECEIVED  AN OPINION  OF ITS  COUNSEL  THAT
         REGISTRATION OF SUCH SECURITIES  UNDER THE SECURITIES ACT AND UNDER THE
         PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.

         Each  certificate  representing  any  Shares  shall  also be stamped or
otherwise imprinted with a legend substantially in the following form:

         AXM  PHARMA,  INC.  WILL  FURNISH  TO  EACH  HOLDER  OF  ITS  SERIES  C
         CONVERTIBLE  PREFERRED  STOCK WHO SO REQUESTS  WITHOUT CHARGE A COPY OF
         THE CERTIFICATE OF DESIGNATION SETTING FORTH THE POWERS,  DESIGNATIONS,
         PREFERENCES  AND  RELATIVE,  PARTICIPATING,  OPTIONAL OR OTHER  SPECIAL
         RIGHTS  OF SUCH  STOCK AND ANY OTHER  CLASS OR SERIES  THEREOF  AND THE
         QUALIFICATIONS,  LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
         RIGHTS.

         The  Company  agrees to reissue  certificates  representing  any of the
Securities, without the legend set forth above, if at such time, prior to making
any  transfer of any such  Securities,  such holder  thereof  shall give written
notice to the  Company  describing  the  manner and terms of such  transfer  and
removal as the  Company may  reasonably  request.  Such  proposed  transfer  and
removal will not be effected  until:  (a) either (i) the Company has received an
opinion of counsel  reasonably  satisfactory to the Company,  to the effect that
the  registration  of the  Conversion  Shares or the  Warrant  Shares  under the
Securities Act is not required in connection with such proposed transfer, (ii) a
registration   statement   under  the  Securities  Act  covering  such  proposed
disposition  has been filed by the Company  with the  Commission  and has become
effective  under the  Securities  Act,  (iii) the  Company  has  received  other
evidence  reasonably  satisfactory  to the Company  that such  registration  and
qualification  under  the  Securities  Act and  state  securities  laws  are not
required,  or (iv) the holder  provides the Company with  reasonable  assurances
that such  security can be sold pursuant to Rule 144 under the  Securities  Act;
and (b) either (i) the  Company has  received an opinion of counsel,  reasonably
satisfactory to the Company,  to the effect that  registration or  qualification
under  the  securities  or  "blue  sky"  laws of any  state is not  required  in
connection  with such proposed  disposition,  or (ii) compliance with applicable
state  securities  or "blue  sky" laws has been  effected  or a valid  exemption
exists with respect thereto.  The Company will respond to any such notice from a
holder  within five (5) days.  In the case of any proposed  transfer  under this
Section  5.1, the Company  will use  reasonable  efforts to comply with any such
applicable  state  securities  or  "blue  sky"  laws,  but  shall in no event be
required, in connection therewith,  to qualify to do business in any state where

                                       27
<PAGE>

it is not then  qualified or to take any action that would  subject it to tax or
to the general service of process in any state where it is not then subject. The
restrictions on transfer  contained in this Section 5.1 shall be in addition to,
and not by way of limitation of, any other restrictions on transfer contained in
any other section of this  Agreement.  Whenever a certificate  representing  the
Conversion  Shares or Warrant  Shares is  required  to be issued to a  Purchaser
without a legend, in lieu of delivering physical  certificates  representing the
Conversion  Shares or Warrant Shares,  provided the Company's  transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated  Securities
Transfer program, the Company shall use its reasonable best efforts to cause its
transfer  agent to  electronically  transmit  the  Conversion  Shares or Warrant
Shares to a Purchaser by crediting the account of such Purchaser's  Prime Broker
with DTC through its Deposit Withdrawal Agent Commission ("DWAC") system (to the
extent not inconsistent with any provisions of this Agreement).

                                   ARTICLE VI

                                   TERMINATION

         Section  6.1   Termination  by Mutual Consent.  This  Agreement  may be
terminated at any time prior to the Closing Date by the mutual  written  consent
of the Company and the Purchasers.

         Section 6.2    Effect of Termination.  In the event of  termination  by
the Company or the  Purchasers,  written notice thereof shall forthwith be given
to the other party and the transactions  contemplated by this Agreement shall be
terminated  without further action by any party. If this Agreement is terminated
as provided in Section 6.1 herein,  this  Agreement  shall become void and of no
further  force and  effect,  except for  Sections  8.1 and 8.2,  and Article VII
herein.  Nothing in this  Section  6.2 shall be deemed to release the Company or
any  Purchaser  from any liability  for any breach under this  Agreement,  or to
impair  the  rights  of  the  Company  or  such  Purchaser  to  compel  specific
performance by the other party of its obligations under this Agreement.

                                  ARTICLE VII

                                 INDEMNIFICATION

         Section 7.1  General Indemnity.  The Company  agrees to  indemnify  and
hold harmless each Purchaser (and its respective directors, officers, employees,
affiliates, agents, successors and assigns) from and against any and all losses,
liabilities,  deficiencies,  costs,  damages and  expenses  (including,  without
limitation,  reasonable attorneys' fees, charges and disbursements)  incurred by
each  Purchaser or any such person as a result of any inaccuracy in or breach of
the  representations,  warranties or covenants made by the Company  herein.  The
Purchasers  severally  but not jointly  agree to indemnify and hold harmless the
Company and its directors,  officers, employees,  affiliates, agents, successors
and assigns  from and against  any and all  losses,  liabilities,  deficiencies,

                                       28
<PAGE>

costs,   damages  and  expenses  (including,   without  limitation,   reasonable
attorneys' fees, charges and disbursements) incurred by the Company as result of
any inaccuracy in or breach of the representations, warranties or covenants made
by the  Purchasers  herein.  The maximum  aggregate  liability of each Purchaser
pursuant to its  indemnification  obligations  under this  Article VII shall not
exceed the portion of the Purchase Price paid by such Purchaser hereunder.

         Section  7.2   Indemnification   Procedure.   Any  party   entitled  to
indemnification  under  this  Article  VII (an  "indemnified  party")  will give
written notice to the  indemnifying  party of any matters giving rise to a claim
for  indemnification;  provided,  that the  failure  of any  party  entitled  to
indemnification  hereunder  to give notice as provided  herein shall not relieve
the indemnifying  party of its obligations  under this Article VII except to the
extent that the  indemnifying  party is actually  prejudiced  by such failure to
give  notice.  In case any  action,  proceeding  or claim is brought  against an
indemnified party in respect of which  indemnification is sought hereunder,  the
indemnifying  party  shall be  entitled  to  participate  in and,  unless in the
reasonable  judgment of the indemnified  party a conflict of interest between it
and the indemnifying party may exist with respect to such action,  proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified  party.  In  the  event  that  the  indemnifying  party  advises  an
indemnified  party  that  it  will  contest  such a  claim  for  indemnification
hereunder,  or fails,  within thirty (30) days of receipt of any indemnification
notice to notify such person in writing of the indemnifying  party's election to
defend,  settle  or  compromise,  at its sole  cost  and  expense,  any  action,
proceeding or claim (or  discontinues its defense at any time after it commences
such defense),  then the indemnified party may, at its option, defend, settle or
otherwise compromise or pay such action or claim. In any event, unless and until
the  indemnifying  party  elects in  writing  to assume  and does so assume  the
defense of any such claim,  proceeding or action, the indemnified  party's costs
and expenses  arising out of the defense,  settlement  or compromise of any such
action,   claim  or  proceeding  shall  be  losses  subject  to  indemnification
hereunder.  The indemnified  party shall  cooperate fully with the  indemnifying
party in connection  with any negotiation or defense of any such action or claim
by the  indemnifying  party  and shall  furnish  to the  indemnifying  party all
information  reasonably available to the indemnified party which relates to such
action or claim. The indemnifying  party shall keep the indemnified  party fully
apprised  at  all  times  as to the  status  of the  defense  or any  settlement
negotiations  with respect thereto.  If the indemnifying  party elects to defend
any such  action or claim,  then the  indemnified  party  shall be  entitled  to
participate  in such  defense  with  counsel  of its choice at its sole cost and
expense.  The  indemnifying  party shall not be liable for any settlement of any
action,  claim  or  proceeding  effected  without  its  prior  written  consent.
Notwithstanding  anything in this Article VII to the contrary,  the indemnifying
party shall not, without the indemnified  party's prior written  consent,  which
consent may not be  unreasonably  withheld,  settle or  compromise  any claim or
consent to entry of any  judgment in respect  thereof  which  imposes any future
obligation  on  the  indemnified  party  or  which  does  not  include,   as  an
unconditional  term thereof,  the giving by the claimant or the plaintiff to the
indemnified  party of a release from all liability in respect of such claim.  If
the  indemnifying  party fails or refuses to promptly  assume the defense of any
such claim,  proceeding  or action,  then the  indemnification  required by this
Article VII shall be made by periodic  payments of the amount thereof during the

                                       29
<PAGE>

course of investigation  or defense,  as and when bills are received or expense,
loss,  damage  or  liability  is  incurred,  so  long as the  indemnified  party
irrevocably  agrees to refund such moneys if it is  ultimately  determined  by a
court  of   competent   jurisdiction   that  such  party  was  not  entitled  to
indemnification.  The indemnity agreements contained herein shall be in addition
to (a) any cause of action or similar  rights of the  indemnified  party against
the indemnifying party or others, and (b) any liabilities the indemnifying party
may be subject to pursuant to applicable law.

                                  ARTICLE VIII

                                  MISCELLANEOUS

         Section  8.1   Fees and Expenses.  Each  party  shall  pay the fees and
expenses of its advisors,  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, providedthat
the  Company  shall  pay all  actual  attorneys'  fees and  expenses  (including
disbursements  and  out-of-pocket   expenses)  incurred  by  the  Purchasers  in
connection with (i) the preparation, negotiation, execution and delivery of this
Agreement,  the Registration Rights Agreement and the transactions  contemplated
thereunder,  which payment shall be made at Closing and shall not exceed $25,000
(exclusive of disbursements  and  out-of-pocket  expenses),  (ii) the filing and
declaration of effectiveness by the Commission of the Registration Statement (as
defined  in  the  Registration  Rights  Agreement)  and  (iii)  any  amendments,
modifications  or  waivers  of this  Agreement  or any of the other  Transaction
Documents or in connection  with the enforcement of this Agreement or any of the
other  Transaction  Documents,  including,  without  limitation,  all reasonable
attorneys' fees and expenses.

         Section 8.2    Specific Enforcement; Consent to Jurisdiction.

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

         (b)  The Company and each Purchaser (i) hereby  irrevocably  submit  to
the exclusive  jurisdiction  of the United States  District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York County for the purposes of any suit,  action or proceeding  arising out
of or relating to this  Agreement or any of the other  Transaction  Documents or
the  transactions  contemplated  hereby or thereby,  and (ii) hereby waive,  and
agree not to assert in any such suit, action or proceeding, any claim that it is
not personally  subject to the  jurisdiction of each such court,  that the suit,
action or  proceeding is brought in an  inconvenient  forum or that the venue of
the suit,  action or  proceeding  is  improper.  The Company and each  Purchaser
consent  to  process  being  served in any such suit,  action or  proceeding  by

                                       30
<PAGE>

mailing a copy  thereof to such party at the address in effect for notices to it
under this  Agreement  and agrees that such service  shall  constitute  good and
sufficient  service of process and notice  thereof.  Nothing in this Section 8.2
shall affect or limit any right to serve  process in any other manner  permitted
by law. The Company and the Purchasers hereby agree that the prevailing party in
any suit,  action or proceeding  arising out of or relating to the Shares,  this
Agreement,  the Registration Rights Agreement or the Warrants, shall be entitled
to reimbursement for reasonable legal fees from the non-prevailing party.

        Section 8.3  Entire Agreement; Amendment. This Agreement,
the Transaction  Documents and the Purchaser  Transaction  Documents contain the
entire  understanding  and  agreement of the parties with respect to the matters
covered  hereby and,  except as  specifically  set forth herein or in any of the
Transaction  Documents or Purchaser Transaction  Documents,  neither the Company
nor any Purchaser  make any  representation,  warranty,  covenant or undertaking
with respect to such matters. This Agreement,  the Transaction Documents and the
Purchaser   Transaction   Documents  supersede  all  prior   understandings  and
agreements with respect to said subject matter,  all of which are merged herein.
No provision of this  Agreement may be waived or amended other than by a written
instrument  signed by the Company and the Purchasers and their permitted assigns
owning of record at least a majority in interest of the then-outstanding Shares,
and no provision hereof may be waived other than by a written  instrument signed
by the party against whom enforcement of any such waiver is sought. No amendment
to this Agreement  shall be effective to the extent that it applies to less than
all of the holders of the Shares then  outstanding  or violates any provision of
the Nevada  Corporation  Law. 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  or holders of Shares,  as the
case may be.

         Section 8.4  Notices.  Any  notice,  demand,  request,  waiver or other
communication  required or permitted to be given  hereunder  shall be in writing
and shall be deemed  given and  received  (a) upon hand  delivery or delivery by
telecopy or facsimile at the address or number designated below (if delivered on
a  business  day  during  normal  business  hours  where  such  notice  is to be
received), or the first business day following such delivery (if delivered other
than on a business day during normal  business  hours where such notice is to be
received),  or (b) on the second  business day  following the date of mailing by
express  courier  service,  fully  prepaid,  addressed to such address,  or upon
actual receipt of such mailing,  whichever shall first occur.  The addresses for
such communications shall be:

If to the Company:                  AXM Pharma, Inc.
                                    3960 Howard Hughes Parkway
                                    Suite 500
                                    Las Vegas, Nevada 89109
                                    Attention:  Chet Howard, CFO
                                    Telecopier:  (702) 990-3501
                                    Telephone:  (702) 990-3659

                                       31
<PAGE>

with copies (which copies
shall not constitute notice
to the Company) to:                 Law Offices of Louis E. Taubman, P.C.
                                    225 Broadway, Suite 1200
                                    New York, New York  10007
                                    Attention:  Louis E. Taubman, Esq.
                                    Telecopier:  (212) 202-6380
                                    Telephone:  (212) 732-7184

If to any Purchaser:                At the address of such Purchaser set forth
                                    on Exhibit A to this Agreement.

with copies (which copies
shall not constitute notice
to any Purchaser to:                Jenkens & Gilchrist Parker Chapin LLP
                                    The Chrysler Building
                                    405 Lexington Avenue
                                    New York, NY 10174
                                    Attention: Christopher S. Auguste, Esq.
                                    Tel No.: (212) 704-6000
                                    Fax No.: (212) 704-6288

      Any party  hereto may from time to time change its address for  notices by
giving at least ten (10) days  written  notice of such  changed  address  to the
other party or parties hereto in accordance  with the provisions of this Section
8.4.

         Section 8.5   Waivers.  No waiver  by any  party  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  other
provision,  condition or requirement  hereof, nor shall any delay or omission of
any party to exercise any right  hereunder in any manner  impair the exercise of
any such right accruing to it thereafter.

         Section 8.6   Headings.  The article,  section and subsection  headings
in this  Agreement are for  convenience  only and shall not constitute a part of
this  Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.

         Section 8.7   Successors and Assigns.  This Agreement  shall be binding
upon and inure to the benefit of the parties and their  successors and permitted
assigns.  After the Closing,  the assignment by a party to this Agreement of any
rights  hereunder  shall not affect  the  obligations  of such party  under this
Agreement.

         Section 8.8   No Third Party Beneficiaries.  This Agreement is intended
for the benefit of the parties hereto and their respective  permitted successors

                                       32
<PAGE>

and  assigns  and is not for the  benefit  of, nor may any  provision  hereof be
enforced by, any other person (other than indemnified  parties,  as contemplated
by Article VII).

         Section 8.9   Governing Law.  This  Agreement  shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving  effect to any of the conflicts of law  principles  which would result in
the application of the substantive law of another  jurisdiction.  This Agreement
shall not be  interpreted or construed  with any  presumption  against the party
causing this Agreement to be drafted.

         Section  8.10  Survival.  The  representations  and  warranties  of the
Company  contained  in  Sections  2.1(o)  and  2.1(s)  shall  survive  until the
expiration of the applicable  statutes of  limitations,  and those  contained in
Article II, with the exception of Sections 2.1(o) and 2.1(s),  shall survive the
execution and delivery  hereof and the Closing until the date two (2) years from
the Closing Date, and the agreements and covenants set forth in Articles I, III,
V, VII and VIII of this  Agreement  shall  survive the  execution  and  delivery
hereof and the Closing hereunder.

         Section 8.11   Counterparts.   This Agreement  may be  executed in  any
number of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto,  it being  understood that
all parties need not sign the same counterpart.

         Section 8.12.  Publicity. The Company agrees that it will not disclose,
and will not  include in any public  announcement,  the names of the  Purchasers
without the consent of the  Purchasers  in  accordance  with Section 8.3,  which
consent shall not be unreasonably  withheld or delayed, or unless and until such
disclosure is required by law, rule or applicable  regulation,  and then only to
the extent of such requirement.

         Section  8.13  Severability.  The  provisions  of  this  Agreement  are
severable  and,  in the event  that any court of  competent  jurisdiction  shall
determine  that  any  one or more of the  provisions  or part of the  provisions
contained  in this  Agreement  shall,  for any  reason,  be held to be  invalid,
illegal  or  unenforceable  in  any  respect,  such  invalidity,  illegality  or
unenforceability  shall not affect any other provision or part of a provision of
this  Agreement  and this  Agreement  shall be reformed and construed as if such
invalid or illegal or unenforceable  provision,  or part of such provision,  had
never been contained herein,  so that such provisions would be valid,  legal and
enforceable to the maximum extent possible.

         Section  8.14  Further  Assurances.  From  and  after  the date of this
Agreement,  upon the request of the  Purchasers or the Company,  the Company and
each Purchaser shall execute and deliver such  instruments,  documents and other
writings as may be  reasonably  necessary  or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement,  the Warrants
and the Registration Rights Agreement.

                  [Remainder of page intentionally left blank.]

                                       33
<PAGE>

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

                                          AXM PHARMA, INC.

                                          By:__________________________________
                                               Name: Chet Howard
                                               Title:   Chief Financial Officer

                                          X

                                          By: _____________________________

                                          X

                                          By: _____________________________

                                       34
<PAGE>

<TABLE>

<CAPTION>

                                    EXHIBIT A
                                    ----------
                               LIST OF PURCHASERS

NAMES AND ADDRESSES OF               NUMBER OF SHARES     NUMBER OF WARRANTS     DOLLAR AMOUNT
PURCHASERS                             PURCHASED              PURCHASED          OF INVESTMENT
<S>                                  <C>                  <C>                    <C>

Excalibaur Limited Partnership              3.000                   35,294           $300,000
33 Prince Arthur Avenue
Toronto, ON M5R 1B2

SRG Capital, LLC                            3.000                   35,294           $300,000
120 Broadway, 40th Floor
New York, New York 10271

Greenwich Growth Fund Limited               1.000                   11,764           $100,000
14 Par-La-Wille Road
PO  Box HM
2257, Hamilton, Bermuda HM08

Whalehaven Fund Limited                     1.000                   11,764           $100,000
14 Par-La-Wille Road
PO Box HM 2257
Hamilton, Bermuda HM08

Cranshire Capital LP                        5.000                   58,823           $500,000

Iroquois Capital, LP                        4.000                   47,058           $400,000

Omicron Master Trust                        5.000                   58,823           $500,000
810 Seventh Avenue 39th Floor
New York, New York 10019

Stonestreet                                 4.000                   47,058           $400,000

Enable Growth Partners                      2.000                   23,529           $200,000
One Sansome, Suite 2900
San Francisco, CA 94105

Crescent International LTD                  2.000                   23,529           $200,000
c/o Greenlight (Switzerland) SA
84 Av. Louis-Casai, CH 1216 Cointrin
Geneva, Switzerland

Richard Mollinsky                           0.425                    5,000           $42,500

</TABLE>

                                      A-1
<PAGE>

                                    EXHIBIT B
                                    ---------
                                 FORM OF WARRANT

                                      B-1
<PAGE>

                                    EXHIBIT C
                                    ---------
                                 FORM OF OPINION

         1. The Company is a corporation duly incorporated, validly existing and
in good  standing  under the laws of the State of Nevada  and has the  requisite
corporate  power to own,  lease and operate its  properties  and assets,  and to
carry on its business as presently conducted. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the failure to so qualify would have a Material Adverse Effect.

         2. The Company has the requisite corporate power and authority to enter
into and perform its obligations  under the  Transaction  Documents and to issue
the Shares,  the Conversion  Shares,  the Warrants and the Warrant  Shares.  The
execution,  delivery and performance of each of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated thereby have
been duly and  validly  authorized  by all  necessary  corporate  action  and no
further  consent or  authorization  of the Company or its Board of  Directors is
required.  Each  of the  Transaction  Documents  have  been  duly  executed  and
delivered,  and the Shares and the Warrants have been duly executed,  issued and
delivered by the Company and each of the  Transaction  Documents  constitutes  a
legal,  valid and  binding  obligation  of the Company  enforceable  against the
Company in accordance  with its  respective  terms.  The Shares,  the Conversion
Shares and the Warrant Shares are not subject to any preemptive rights under the
Articles or the Bylaws.

         3. The Shares have been duly  authorized  and, when  delivered  against
payment in full as provided in the Purchase  Agreement,  will be validly issued,
fully paid and nonassessable.  The Conversion Shares,  have been duly authorized
and reserved for issuance,  and, when delivered  upon  conversion of the Shares,
will be validly issued,  fully paid and nonassessable.  The Warrant Shares, have
been duly  authorized  and reserved  for  issuance,  and,  when  delivered  upon
exercise or against payment in full as provided in the Warrants, will be validly
issued, fully paid and nonassessable.

         4. The execution,  delivery and  performance of and compliance with the
terms  of  the  Transaction  Documents  and  the  issuance  of the  Shares,  the
Conversion  Shares,  the Warrants and the Warrant  Shares do not (a) violate any
provision of the Articles or Bylaws,  (b) conflict with, or constitute a default
(or an event which with notice or lapse of time or both would  become a default)
under, or give to others any rights of termination,  amendment,  acceleration or
cancellation of, any material  agreement,  mortgage,  deed of trust,  indenture,
note,  bond,  license,  lease  agreement,  instrument or obligation to which the
Company is a party and which is known to us, (c) create or impose a lien, charge
or  encumbrance  on any  property  of the  Company  under any  agreement  or any
commitment  known to us to which the  Company is a party or by which the Company
is bound or by which any of its  respective  properties or assets are bound,  or
(d) result in a violation of any Federal, state, local or foreign statute, rule,
regulation,  order, judgment,  injunction or decree (including Federal and state
securities  laws and  regulations)  applicable  to the  Company  or by which any
property  or asset of the  Company is bound or  affected,  except,  in all cases
other than violations pursuant to clauses (a) and (d) above, for such conflicts,
default, terminations, amendments, acceleration, cancellations and violations as
would not, individually or in the aggregate, have a Material Adverse Effect.

                                      C-1
<PAGE>

         5. No consent, approval or authorization of or designation, declaration
or filing with any governmental authority on the part of the Company is required
under  Federal,  state or local law, rule or  regulation in connection  with the
valid execution,  delivery and performance of the Transaction Documents,  or the
offer, sale or issuance of the Shares,  the Conversion  Shares,  the Warrants or
the Warrant  Shares other than filings as may be required by applicable  Federal
and state securities laws and regulations.

         6. To our knowledge,  there is no action, suit, claim, investigation or
proceeding  pending or  threatened  against  the  Company  which  questions  the
validity of the Agreement or the transactions contemplated thereby or any action
taken  or to be  taken  pursuant  thereto.  There  is no  action,  suit,  claim,
investigation or proceeding pending, or to our knowledge, threatened, against or
involving the Company or any of its properties or assets and which, if adversely
determined,  is reasonably likely to result in a Material Adverse Effect.  There
are no  outstanding  orders,  judgments,  injunctions,  awards or decrees of any
court,  arbitrator or governmental or regulatory body against the Company or any
officers or directors of the Company in their capacities as such.

         7. The offer,  issuance and sale of the Shares and the Warrants and the
offer,  issuance  and  sale of the  Conversion  Shares  and the  Warrant  Shares
pursuant to the Agreement and the Warrants,  as applicable,  are exempt from the
registration requirements of the Securities Act of 1933, as amended.

         8. The Company is not, and as a result of and immediately  upon Closing
will not be, an "investment company" or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.

                                      C-2
<PAGE>
                                    EXHIBIT D
                                    ---------
                       FORM OF CERTIFICATE OF DESIGNATION

                                      D-1
<PAGE>

                                    EXHIBIT E
                                    ---------
                      FORM OF REGISTRATION RIGHTS AGREEMENT

<PAGE>

                                    EXHIBIT F
                                    ---------
                 FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

                                AXM PHARMA, INC.

                                                      as of June __, 2004

[Name and address of Transfer Agent]
Attn:  _____________

LADIES AND GENTLEMEN:

         Reference is made to that certain  Securities  Purchase  Agreement (the
"Purchase Agreement"),  dated as of May __, 2004, by and among AXM Pharma, Inc.,
a  Nevada  corporation  (the  "COMPANY"),   and  the  purchasers  named  therein
(collectively, the "PURCHASERS") pursuant to which the Company is issuing to the
Purchasers  shares of its Series C Convertible  Preferred Stock, par value $.001
per share,  (the "SHARES") and warrants (the  "WARRANTS") to purchase  shares of
the Company's common stock, par value $.001 per share (the "COMMON STOCK"). This
letter  shall  serve  as our  irrevocable  authorization  and  direction  to you
(provided  that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Shares (the  "CONVERSION  SHARES")
and exercise of the Warrants  (the  "WARRANT  SHARES") to or upon the order of a
Purchaser or assignee or  transferee  of a Purchaser  (a "HOLDER")  from time to
time  upon (i)  surrender  to you of a  properly  completed  and  duly  executed
Conversion  Notice or Exercise Notice,  as the case may be, in the form attached
hereto  as  Exhibit  I and  Exhibit  II,  respectively,  (ii) in the case of the
conversion of Shares, a copy of the certificates (with the original certificates
delivered to the Company) representing Shares being converted or, in the case of
Warrants being  exercised,  a copy of the Warrants  (with the original  Warrants
delivered to the Company) being exercised (or, in each case, an  indemnification
undertaking with respect to such share  certificates or the warrants in the case
of their loss, theft or destruction),  and (iii) delivery of a treasury order or
other  appropriate  order  duly  executed  by a duly  authorized  officer of the
Company. So long as you have previously  received (x) written  confirmation from
counsel to the Company that a  registration  statement  covering  resales of the
Conversion Shares or Warrant Shares, as applicable,  has been declared effective
by the Securities and Exchange  Commission  (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT"), and no subsequent notice by the Company or
its counsel of the suspension or termination of its effectiveness and (y) a copy
of such registration statement, and if the Holder represents in writing that the
Conversion  Shares or the Warrant Shares, as the case may be, were sold pursuant
to the Registration  Statement,  then  certificates  representing the Conversion
Shares and the  Warrant  Shares,  as the case may be,  shall not bear any legend
restricting  transfer of the Conversion  Shares and the Warrant  Shares,  as the
case may be, thereby and should not be subject to any stop-transfer restriction.
Provided,  however,  that  if you  have  not  previously  received  (i)  written
confirmation from counsel to the Company that a registration  statement covering
resales of the Conversion  Shares or Warrant  Shares,  as  applicable,  has been
declared  effective  by the SEC  under  the  1933  Act,  and (ii) a copy of such
registration statement,  then the certificates for the Conversion Shares and the
Warrant Shares shall bear the following legend:

                  "THE SECURITIES  REPRESENTED BY THIS  CERTIFICATE (THE
         "SECURITIES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
         OF  1933,  AS  AMENDED  (THE  "SECURITIES  ACT")  OR ANY  STATE
         SECURITIES  LAWS AND MAY NOT BE SOLD,  TRANSFERRED OR OTHERWISE

<PAGE>

         DISPOSED  OF UNLESS  REGISTERED  UNDER THE  SECURITIES  ACT AND
         UNDER  APPLICABLE  STATE  SECURITIES  LAWS OR AXM PHARMA,  INC.
         SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT REGISTRATION
         OF SUCH  SECURITIES  UNDER  THE  SECURITIES  ACT AND  UNDER THE
         PROVISIONS  OF  APPLICABLE   STATE   SECURITIES   LAWS  IS  NOT
         REQUIRED."

and,  provided  further,  that the  Company  may from time to time notify you to
place  stop-transfer  restrictions on the certificates for the Conversion Shares
and the  Warrant  Shares  in the event a  registration  statement  covering  the
Conversion Shares and the Warrant Shares is subject to amendment for events then
current.

         A form of  written  confirmation  from  counsel to the  Company  that a
registration statement covering resales of the Conversion Shares and the Warrant
Shares has been  declared  effective  by the SEC under the 1933 Act is  attached
hereto as Exhibit III.

         Please be advised that the  Purchasers  are relying upon this letter as
an inducement to enter into the Securities Purchase Agreement and,  accordingly,
each Purchaser is a third party beneficiary to these instructions.

         Please execute this letter in the space  indicated to acknowledge  your
agreement  to act in  accordance  with these  instructions.  Should you have any
questions concerning this matter, please contact me at ___________.

                                                 Very truly yours,

                                                 AXM PHARMA, INC.

                                                 By:
                                                      Name:
                                                      Title:

ACKNOWLEDGED AND AGREED:

[TRANSFER AGENT]

By:
Name:
Title:
Date:

<PAGE>

                                    EXHIBIT I

                                AXM PHARMA, INC.
                                CONVERSION NOTICE

Reference is made to the  Certificate of Designation of the Relative  Rights and
Preferences  of  the  Series  C  Preferred  Stock  of  AXM  Pharma,   Inc.  (the
"Certificate  of   Designation").   In  accordance  with  and  pursuant  to  the
Certificate of Designation,  the undersigned hereby elects to convert the number
of shares of Series C Preferred Stock, par value $.001 per share (the "Shares"),
of AXM Pharma, Inc., a Nevada corporation (the "Company"),  indicated below into
shares of Common Stock, par value $.001 per share (the "Common  Stock"),  of the
Company,  by tendering  the stock  certificate(s)  representing  the share(s) of
Shares specified below as of the date specified below.

         Date of Conversion:

         Number of Shares to be converted:

         Stock certificate no(s). of Shares to be converted:

         The Common Stock have been sold pursuant to the Registration  Statement
(as defined in the  Registration Rights Agreement):   YES ____          NO____

Please confirm the following information:

         Conversion Price:

         Number of shares of Common Stock to be issued:

Number of shares of Common  Stock  beneficially  owned or deemed  beneficially
owned by the Holder on the Date of Conversion: _________________________

Please issue the Common Stock into which the Shares are being  converted and, if
applicable,  any check drawn on an account of the Company in the following  name
and to the following address:

         Issue to:

         Facsimile Number:

         Authorization:
                                                              By:
                                                              Title:

         Dated:

<PAGE>

                                   EXHIBIT II

                             FORM OF EXERCISE NOTICE

                                  EXERCISE FORM

                                AXM PHARMA, INC.

The  undersigned  _______________,  pursuant  to the  provisions  of the  within
Warrant,  hereby elects to purchase  _____ shares of Common Stock of AXM Pharma,
Inc. covered by the within Warrant.

Dated: _________________            Signature    ___________________________

                                    Address      ___________________________

                                                 ___________________________

Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the date of Exercise: _________________________

                                   ASSIGNMENT

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

Dated: _________________            Signature    ___________________________

                                    Address      ___________________________

                                                 ___________________________

                               PARTIAL ASSIGNMENT

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

Dated: _________________            Signature    ___________________________

                                    Address      ___________________________

                                                 ___________________________

                           FOR USE BY THE ISSUER ONLY:

This Warrant No. W-_____  canceled (or  transferred or exchanged) this _____ day
of  ___________,  _____,  shares of Common Stock issued  therefor in the name of
_______________,  Warrant No.  W-_____ issued for ____ shares of Common Stock in
the name of _______________.

<PAGE>

                                   EXHIBIT III

                         FORM OF NOTICE OF EFFECTIVENESS
                            OF REGISTRATION STATEMENT

[Name and address of Transfer Agent]
Attn:  _____________

                  Re:      AXM PHARMA, INC.

Ladies and Gentlemen:

         We  are  counsel  to  AXM  Pharma,  Inc.,  a  Nevada  corporation  (the
"COMPANY"),  and are aware of that certain  Securities  Purchase  Agreement (the
"PURCHASE  AGREEMENT"),  dated as of May __, 2004,  by and among the Company and
the purchasers named therein (collectively,  the "PURCHASERS") pursuant to which
the  Company  issued  to the  Purchasers  shares  of its  Series  C  Convertible
Preferred  Stock,  par value $.001 per share,  (the  "SHARES") and warrants (the
"WARRANTS") to purchase  shares of the Company's  common stock,  par value $.001
per share (the "COMMON STOCK").  Pursuant to the Purchase Agreement, the Company
has also entered into a Registration  Rights  Agreement with the Purchasers (the
"REGISTRATION  RIGHTS  AGREEMENT"),  dated as of May __, 2004, pursuant to which
the Company agreed,  among other things, to register the Registrable  Securities
(as  defined in the  Registration  Rights  Agreement),  including  the shares of
Common  Stock  issuable  upon  conversion  of the  Shares  and  exercise  of the
Warrants,  under the  Securities  Act of 1933,  as amended (the "1933 ACT").  In
connection  with  the  Company's   obligations  under  the  Registration  Rights
Agreement, on ________________, 2004, the Company filed a Registration Statement
on Form SB-2 (File No.  333-________)  (the  "REGISTRATION  STATEMENT") with the
Securities  and Exchange  Commission  (the "SEC")  relating to the resale of the
Registrable  Securities which names each of the present  Purchasers as a selling
stockholder thereunder.

         In connection  with the  foregoing,  we advise you that a member of the
SEC's  staff has  advised  us by  telephone  that the SEC has  entered  an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF  EFFECTIVENESS]  on [ENTER DATE OF  EFFECTIVENESS]  and we have no knowledge,
after  telephonic  inquiry of a member of the SEC's  staff,  that any stop order
suspending its  effectiveness  has been issued or that any  proceedings for that
purpose are pending  before,  or  threatened  by, the SEC and  accordingly,  the
Registrable  Securities  are available for resale under the 1933 Act pursuant to
the Registration Statement.

                                                     Very truly yours,

                                                     [COMPANY COUNSEL]

                                                     By:

cc:      [LIST NAMES OF PURCHASERS]

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