Document:

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                                 EXHIBIT 4.1
                                 -----------

                         PEABODY ENERGY CORPORATION

                         DEFERRED COMPENSATION PLAN

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

                         EFFECTIVE OCTOBER 23, 2001

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PEABODY ENERGY CORPORATION DEFERRED COMPENSATION PLAN
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PEABODY ENERGY CORPORATION establishes, effective as of October 23, 2001, an
unfunded, deferred compensation plan on behalf of certain selected
management or highly compensated employees of Peabody Energy Corporation.
This document defines the provisions of such plan and will be known as the
"Peabody Energy Corporation Deferred Compensation Plan."

This plan is intended in part to be an unfunded, deferred compensation plan
for a select group of management or highly compensated employees, as
described in sections 201(2), 301(a)(3), and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Pursuant to
applicable regulations adopted by the Secretary of Labor under Section 110
of ERISA, appropriate notification of the adoption of this Plan will be
filed with the Department of Labor within one hundred and twenty (120) days
following the date on which this Plan becomes subject to Title I of ERISA.

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<TABLE>
                                    Table of Contents
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ARTICLE I
      DEFINITIONS....................................................................1
         1.1      Account............................................................1
         1.2      Base Salary........................................................1
         1.3      Beneficiary........................................................1
         1.4      Board..............................................................1
         1.5      Bonus..............................................................1
         1.6      Change in Control..................................................1
         1.7      Committee..........................................................2
         1.8      Company............................................................2
         1.9      Company Stock......................................................2
         1.10     Compensation.......................................................2
         1.11     Crediting Rate.....................................................2
         1.12     Deferral Election or Election......................................2
         1.13     Deferral Election Form.............................................3
         1.14     Deferral Percentage................................................3
         1.15     Deferrals..........................................................3
         1.16     Disability or Disabled.............................................3
         1.17     Effective Date.....................................................3
         1.18     Eligible Employee..................................................3
         1.19     Employee...........................................................3
         1.20     ERISA..............................................................3
         1.21     Internal Revenue Code or Code......................................3
         1.22     Notice Date........................................................3
         1.23     Participant........................................................4
         1.24     Person.............................................................4
         1.25     Plan...............................................................4
         1.26     Plan Year..........................................................4
         1.27     Retirement.........................................................4
         1.28     Spouse.............................................................4
         1.29     Termination of Employment..........................................4
         1.30     Valuation Date.....................................................4

ARTICLE II
      PARTICIPATION..................................................................5
         2.1      Eligibility........................................................5
         2.2      Participation......................................................5

                                      i

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ARTICLE III
      PARTICIPANT DEFERRAL ELECTIONS.................................................6
         3.1      Employee Deferral Election.........................................6
         3.2      Election Procedures................................................6
         3.3      Election to Modify or Terminate Future Contributions...............6
         3.4      Vesting............................................................6

ARTICLE IV
      DEFERRALS AND ACCOUNTS.........................................................7
         4.1      Deferrals..........................................................7
         4.2      Valuation of Accounts..............................................7
         4.3      Designation of Investment Alternative..............................7
         4.4      Fund Transfers.....................................................8
         4.5      Credits to Deferral Account Balance................................8
         4.6      Statement of Account...............................................8

ARTICLE V
      WITHDRAWALS....................................................................9
         5.1      Withdrawals for Hardship...........................................9
         5.2      Other Premature Withdrawals........................................9
         5.3      Withdrawal Processing..............................................9

ARTICLE VI
      DISTRIBUTIONS.................................................................11
         6.1      Distribution of Account Balance...................................11
         6.2      Form of Payment...................................................11
         6.3      Distribution Amount...............................................11
         6.4      Death Benefit.....................................................11
         6.5      Redeferral Election...............................................11

ARTICLE VII
      BENEFICIARY...................................................................13
         7.1      Beneficiary Designation...........................................13
         7.2      Proper Beneficiary................................................13
         7.3      Minor or Incompetent Beneficiary..................................13
         7.4      No Beneficiary Designation........................................13

ARTICLE VIII
      ADMINISTRATION OF THE PLAN....................................................14
         8.1      Majority Vote.....................................................14
         8.2      Claims Procedure..................................................14
         8.3      Finality of Determination.........................................14
         8.4      Certificates and Reports..........................................14
         8.5      Indemnification and Exculpation...................................14
         8.6      Expenses..........................................................15

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ARTICLE IX
      NATURE OF COMPANY'S OBLIGATION................................................16
         9.1      Company's Obligation..............................................16
         9.2      Creditor Status...................................................16

ARTICLE X
      AMENDMENT AND TERMINATION.....................................................17
         10.1     Prior to a Change in Control......................................17
         10.2     After a Change in Control.........................................17
         10.3     Termination.......................................................17

ARTICLE XI
      MISCELLANEOUS PROVISIONS......................................................18
         11.1     Corporate Action..................................................18
         11.2     Interests not Transferable........................................18
         11.3     Effect on Other Benefit Plans.....................................18
         11.4     Legal Fees and Expenses...........................................18
         11.5     Right to Offset...................................................18
         11.6     Deduction of Taxes from Amounts Payable...........................18
         11.7     Facility of Payment...............................................19
         11.8     Merger............................................................19
         11.9     Gender and Number.................................................19
         11.10    Invalidity of Certain Provisions..................................19
         11.11    Headings..........................................................19
         11.12    No Right to Employment............................................19
         11.13    Notice and Information Requirements...............................19
         11.14    Governing Law.....................................................19
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                                    iii

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ARTICLE I
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                                 DEFINITIONS
                                 -----------

         The following sections of this Article I provide basic definitions
of terms used throughout this Plan, and whenever used herein in a
capitalized form, except as otherwise expressly provided, the terms will be
deemed to have the following meanings:

         1.1      "Account" means the record of a Participant's interest in
                   -------
this Plan represented by the Deferrals, with all earnings thereon credited to
such Account on behalf of the Participant under this Plan and all losses,
expenses, withdrawals and distributions thereon debited from such Account.

         1.2      "Base Salary" means a Participant's base salary for the Plan
                   -----------
Year, as specified by the Company prior to each Plan Year, and as may be
adjusted from time to time.

         1.3      "Beneficiary" means the person or persons designated pursuant
                   -----------
to Article VII herein, by a Participant to receive such payments as may
become due hereunder after the death of a Participant.

         1.4      "Board" means the board of directors of the Company.
                   -----

         1.5      "Bonus" means the additional compensation payment in cash to
                   -----
the Participant under the terms of the Company's Management Annual Incentive
Compensation Plan or any other performance compensation plan, program or
arrangement under which the Company pays an amount of cash remuneration to a
Participant above such Participant's Base Salary, including any cash-based
long-term incentive plan.

         1.6      "Change in Control" means any one of the following:
                   -----------------

                  (a)      any Person (other than a Person holding
securities representing 10% or more of the combined voting power of the
Company's outstanding securities as of May 22, 2001, the Company, any
trustee or other fiduciary holding securities under any employee benefit
plan of the Company, or any company owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company), becomes the beneficial owner, directly
or indirectly, of securities of the Company, representing 50% or more of the
combined voting power of the Company's then-outstanding securities;

                  (b)      during any period of twenty-four consecutive
months (not including any period prior to May 22, 2001), individuals who at
the beginning of such period constitute the Board, and any new director
(other than (A) a director nominated by a Person who has entered into an
agreement with the Company to effect a transaction described in paragraph
1.6(a), (c) or (d), or (B) a director nominated by any Person (including the
Company) who publicly announces an intention to take or to consider taking
actions (including, but not limited to, an actual or threatened proxy
contest) which

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if consummated would constitute a Change in Control) whose election by the
Board or nomination for election by the Company's shareholders was approved by
a vote of at least three-fourths (3/4) of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof;

                  (c)      the consummation of any merger, consolidation,
plan of arrangement, reorganization or similar transaction or series of
transactions in which the Company is involved, other than such a transaction
or series of transactions which would result in the shareholders of the
Company immediately prior thereto continuing to own (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) more than 50% of the combined voting power of the securities of the
Company or such surviving entity (or the parent, if any) outstanding
immediately after such transactions(s) in substantially the same proportions
as their ownership immediately prior to such transactions(s); or

                  (d)      the shareholders of the Company approve a plan of
complete liquidation of the Company or the sale or disposition by the
Company of all or substantially all of the Company's assets, other than a
liquidation of the Company into a wholly owned subsidiary.

         1.7      "Committee" means the committee appointed by the Board to
                   ---------
manage and control the operation and administration of this Plan; provided,
however, that after the occurrence of a Change in Control, the members of
the Committee will have the sole and exclusive power to appoint their
successors by a majority vote of such Committee members.

         1.8      "Company" means PEABODY ENERGY CORPORATION, or any successor
                   -------
entity by operation of law or any successor entity which affirmatively
adopts the Plan, the trust, if any, and the obligations of Peabody Energy
Corporation with respect to the Plan.

         1.9      "Company Stock" means common stock issued by the Company.
                   -------------

         1.10     "Compensation" means the Base Salary and Bonus earned, or
                   ------------
to be earned, by a Participant during a Plan Year.

         1.11     "Crediting Rate" means an interest rate determined by
                   --------------
reference to one or more of the investment alternatives designated by a
Participant in accordance with Article IV of this Plan. The amount of
interest credited on each Valuation Date (or deducted in the case of a loss
by the designated investment alternatives) will equal the interest,
dividends, increase or decrease in market value and other earnings or losses
that would have been credited to the Account if the Account had actually
been invested in the designated investment alternative for that month.

         1.12     "Deferral Election" or "Election" means an irrevocable
                   -------------------------------
election made by an Eligible Employee in accordance with the requirements of
the Plan to reduce such Employee's Base Salary and/or Bonus for a Plan Year
by an amount equal to the

                                      2

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product of such Employee's Deferral Percentage and such Employee's Base Salary
and/or Bonus subject to the Deferral.

         1.13     "Deferral Election Form" means the form established from time
                   ----------------------
to time by the Committee that an Eligible Employee completes, signs and
returns to the Committee to make a Deferral Election.

         1.14     "Deferral Percentage" means the percentage of a Participant's
                   -------------------
Base Salary or Bonus for a Plan Year which, pursuant to such Participant's
Deferral Election, is to be deferred in accordance with this Plan.

         1.15     "Deferrals" means that portion of a Participant's
                   ---------
Compensation to be paid during a Plan Year which a Participant elects to have
and is deferred for any one Plan Year. In the event of a Participant's
Termination of Employment prior to the end of a Plan Year, such year's
Deferral will be the actual amount deferred and withheld prior to such event.

         1.16     "Disability" or "Disabled" means the total and permanent
                   ------------------------
disability of a Participant under the terms of the long-term disability plan
of the Company, or, in the absence of a long-term disability plan, as
determined by the Board, in its sole and absolute discretion.

         1.17     "Effective Date" means October 23, 2001.
                   --------------

         1.18     "Eligible Employee" means each Employee who is a member of
                   -----------------
select group of management or highly compensated employees, as described in
sections 201(2), 301(a)(3), and 401(a)(1) of ERISA, and is selected by the
Committee to participate in this Plan pursuant to Article II hereof.

         1.19     "Employee" means any person who renders services as a common
                   --------
law employee to the Company, or any of its subsidiaries or affiliates.

         1.20     "ERISA" means the Employee Retirement Income Security Act of
                   -----
1974, as amended from time to time.

         1.21     "Internal Revenue Code" or "Code" means the Internal Revenue
                   -------------------------------
Code of 1986, as amended from time to time.

         1.22     "Notice Date" means the date established by the Committee as
                   -----------
the deadline for it to receive a Deferral Election or any other notification
with respect to an administrative matter in order to be effective under this
Plan. Notwithstanding anything to the contrary, the Notice Date with respect
to a Deferral Election will be such date as will be determined by the
Committee (1) before January 1 of the year during which Compensation to be
deferred is earned by the Participant, or (2) with respect to any Bonus
payable under a cash-based long-term incentive plan, at least ninety (90)
days before the expiration of any applicable performance period under such
plan; provided that, in the year in which the Plan becomes effective,
Eligible Employees may make a Deferral Election within thirty (30) days
after the Effective Date, and in the year in which

                                      3

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an Eligible Employee first becomes eligible to participate in the Plan, such
Employee may make a Deferral Election within thirty (30) days after the date
on which such Employee becomes eligible for participation.

         1.23     "Participant" means an Eligible Employee who begins to
                   -----------
participate in this Plan after completing the eligibility requirements and
properly filing a Deferral Election Form. An individual will remain a
Participant until the distribution of the balance of all of such
Participant's Account.

         1.24     "Person" has the meaning as such term is used for purposes
                   ------
of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended
(or any successor section thereto).

         1.25     "Plan" means the Peabody Energy Corporation Deferred
                   ----
Compensation Plan, as it may be validly amended from time to time.

         1.26     "Plan Year" means the annual accounting period of this Plan
                   ---------
which ends on each December 31.

         1.27     "Retirement" means a Participant's Termination of Employment
                   ----------
in accordance with the terms of the applicable Company retirement plan, or
if a Participant is not covered by any such plan, the Termination of
Employment of the Participant on or after the earliest to occur of the
following:

                  (a)      the later to occur of the attainment by the
Participant of the age of 65 or the achievement of five years of employment
or service with the Company or any of its subsidiaries or affiliates; or

                  (b)      the attainment by the Participant of the age of
55 and 10 years of employment or service with the Company or any of its
subsidiaries or affiliates.

         1.28     "Spouse" means the person to whom a Participant is validly
                   ------
married under the laws of the State of the Participant's primary residence;
provided however, if the Participant is legally separated from a person who
would otherwise be such Participant's Spouse (but for this proviso), then
such person will cease to be such Participant's Spouse. For this purpose, a
common law spouse is a Spouse only if the Participant resides in a State
that legally recognizes common law marriages. A person to whom a Participant
was formerly married is not a Spouse.

         1.29     "Termination of Employment" occurs when a person ceases to be
                   -------------------------
an Employee as determined by the personnel policies of the Company; provided
however, that transfer of employment from the Company, or from one affiliate
of the Company, to another affiliate of the Company, or to the Company, will
not constitute a Termination of Employment for purposes of this Plan.

         1.30     "Valuation Date" means every regular business day.
                   --------------

                                      4

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ARTICLE II
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                                PARTICIPATION
                                -------------

         2.1      Eligibility. The Committee in its sole discretion will select
                  -----------
and notify those Employees who will be Eligible Employees for any particular
Plan Year. An Eligible Employee will remain eligible to participate in the Plan
with respect to each Plan Year following such Eligible Employee's initial
selection by the Committee, unless removed as an Eligible Employee with
respect to a Plan Year (or Plan Years) by action of the Committee in its sole
discretion. If the Committee determines that participation in the Plan by a
Participant will cause the Plan to be subject to Parts 2, 3 or 4 of Title I of
ERISA, the Committee may, in its discretion, immediately pay to the
Participant the value of his Account hereunder.

         2.2      Participation. Each Eligible Employee may elect to become a
                  -------------
Participant under the Plan by completing, signing and returning to the
Committee a Deferral Election Form provided for that purpose by the Committee,
no later than the designated Notice Date.

                                      5

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ARTICLE III
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                       PARTICIPANT DEFERRAL ELECTIONS
                       ------------------------------

         3.1      Employee Deferral Election. An Eligible Employee may elect to
                  --------------------------
defer a portion of such Eligible Employee's Compensation for a Plan Year until
a specific year or until the year following Retirement. An Eligible Employee
who desires to make a Deferral will file a Deferral Election Form pursuant to
procedures specified by the Committee (1) specifying the applicable Deferral
Percentage(s) and the date as of which the amounts so deferred will become
payable unless otherwise provided in this Plan, and (2) authorizing such
Eligible Employee's Compensation payable for a Plan Year to be reduced and
deferred hereunder.

The applicable Deferral Percentage(s) selected by an Eligible Employee under
this Section 3.1, for any Plan Year, will not exceed fifty percent (50%) of
such Eligible Employee's Base Salary and one hundred percent (100%) of such
Eligible Employee's Bonus; provided that the Committee may, without amending
this Plan, determine that the maximum applicable Deferral Percentage will be
greater or lesser than the percentages set forth herein. Otherwise, the
maximum Deferral Percentage as provided herein will apply.

         3.2      Election Procedures. If properly received by the Committee on
                  -------------------
or before the relevant Notice Date, a Deferral Election will be effective only
with respect to Compensation paid with respect to the Plan Year to which the
Deferral Election applies pursuant to the terms of this Plan. Future Deferrals
will be terminated automatically for any Participant who is deemed by the
Committee to no longer be eligible for participation in the Plan. Consistent
with the above, the Committee may establish rules and procedures governing
when a Deferral Election will be effective and what Compensation will be
deferred by the Deferral Election; provided such rules and procedures are not
more permissive than the terms and provisions of this Plan.

         3.3      Election to Modify or Terminate Future Contributions. Subject
                  ----------------------------------------------------
to the provisions of Sections 5.1, 5.2 and 6.1 hereof, all Deferrals hereunder,
to the extent previously contributed to the Plan, are irrevocable. A
Participant who desires to modify or terminate the amount of future
Compensation being deferred under the Plan must, by the relevant Notice Date,
notify the Committee in writing on a Deferral Election Form provided by the
Committee. Elections to decrease or terminate Deferrals of future Compensation
will become effective as soon as administratively possible.

         3.4      Vesting. A Participant will be fully vested at all times in
                  -------
his or her Account.

                                      6

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ARTICLE IV
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                           DEFERRALS AND ACCOUNTS
                           ----------------------

         4.1      Deferrals. A Participant's Deferrals under Article IV herein
                  ---------
will be credited to an Account maintained for each Participant. A Participant's
Deferrals will be credited to the Participant's Account as of the date on
which the Participant's Compensation would otherwise have been paid to the
Participant had it not been deferred. All amounts credited to a Participant's
Account will be treated as a reduction of Compensation otherwise payable to
such Participant. Distributions pursuant to Articles V and VI will be debited
against a Participant's Account.

         4.2      Valuation of Accounts. A Participant's Account is a
                  ---------------------
bookkeeping account, the value of which will be based upon such Participant's
Deferrals and the applicable Crediting Rate. The Committee will, in its sole
and absolute discretion, select one or more funds of a mutual fund group which
may be designated by each Participant for purposes of calculating the
applicable Crediting Rate; provided, however, that as of the Effective Date, a
Company Stock fund will be available to Participants as an investment
alternative. Deferrals will be credited to the Account in the form of units,
each reflecting one share of the elected fund. Fractional units will also be
credited to such account, if applicable. The number of such credited units
will be determined by dividing the value of the Compensation deferred into the
elected fund by the net asset value of such fund as of the close of business
on the day on which such Compensation would have been made had it not been
deferred. All dividends paid with respect to an elected fund of the Account
will be deemed to be immediately reinvested in such fund. Prior to any
distribution of a Participant's Account under Articles V or VI herein, the
Company will credit the Account with interest on each Valuation Date, at the
Crediting Rate. Notwithstanding the foregoing, the terms of this Plan place no
obligation upon the Company to invest or to continue to invest any portion of
the amounts in the Participant's Account, to invest in or to continue to
invest in any specific asset, to liquidate any particular investment, or to
apply in any specific manner the proceeds from the sale, liquidation, or
maturity of any particular investment. It is understood and agreed that the
Company assumes no risk of any decrease in the value of any investments or the
Participant's Account, and the Company's sole obligations are to maintain the
Participant's Account and make payments to the Participant as herein provided.

        4.3       Designation of Investment Alternative. Subject to the
                  -------------------------------------
restrictions hereunder, if a Deferral Election is made and investment
alternatives are made available by the Committee hereunder, a Participant may
designate the investment alternatives for purposes of determining the
Crediting Rate by completion of a Deferral Election Form in accordance with
Section 3.1 herein. A designation of investment alternative will continue in
effect unless and until amended with the submission of a new designation in
accordance with Section 4.4 herein. Each successive designation for an Account
established in any particular Plan Year will be applicable both to future
contributions to, and the cumulative balance of, that Account balance.

                                      7

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        4.4       Fund Transfers. Amounts deferred into an Account may be
                  --------------
transferred among eligible funds of the selected mutual fund family pursuant
to an election which may be made daily. Such election must be made by the
close of business for application to the succeeding business day, and will be
effective, and the associated transfer will be based upon the net asset values
of the applicable mutual funds as of the close of business on the business day
the election is received, if received by 3:00 p.m. Central Time of that day.
If received later than 3:00 p.m., the election will be effective as of the
close of business on the following business day.

        4.5       Credits to Deferral Account Balance. Credits to a
                  -----------------------------------
Participant's Account in accordance with this Article IV will continue until
the Account balance is paid in full to the Participant or the Participant's
Beneficiary.

        4.6       Statement of Account. The Company will provide periodically
                  --------------------
to each Participant (but not less frequently than once each calendar quarter)
a statement setting forth the Account balance of such Participant, including
any balance in such Participant's designated investment alternatives for each
Plan Year in which the Participant has made a Deferral hereunder.

                                      8

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ARTICLE V
------------------------------------------------------------------------------

                                 WITHDRAWALS
                                 -----------

        5.1       Withdrawals for Hardship. A Participant may request the
                  ------------------------
withdrawal of such portion of such Participant's Account (not in excess of the
balance of such Account) as is needed to satisfy an unforeseeable financial
need (plus any appropriate taxes). A financial need for this purpose is a
severe, unanticipated hardship (including, but not limited to, uninsured
medical expenses or casualty loss for the Participant or the Participant's
dependents and other similar extraordinary and unforeseeable circumstances),
the occurrence of which is beyond the Participant's control and for which the
amount needed to satisfy the hardship is determined only after the Participant
has used other readily available funds or resources.

        5.2       Other Premature Withdrawals. A Participant may request the
                  ---------------------------
withdrawal of all or part of such Participant's Account (not in excess of the
balance of such Account), prior to the time otherwise specified in any
applicable Deferral Election of in this Plan, for reasons other than a
financial need. The Participant will acknowledge and agree that in
consideration for the current payment of the relevant portion of the
Participant's Account, the Participant will forfeit ten percent (10%) of the
total pre-withdrawal value of such portion of the Participant's Account. In
addition, the Participant will be precluded from further participation in the
Plan for a period of twelve (12) months following the month during which the
Participant's withdrawal request is received by the Committee.

        5.3       Withdrawal Processing.
                  ---------------------

                  (a)      Minimum Amount. There is no minimum payment for any
                           --------------
type of withdrawal under this Article V.

                  (b)      Application by Participant. To apply for any type of
                           --------------------------
withdrawal under this Article V, a Participant must submit to the Committee a
withdrawal request, in accordance with such uniform and nondiscriminatory
procedure as will be established by the Committee.

                  (c)      Approval by Committee. The Committee is responsible
                           ---------------------

for determining that a withdrawal request conforms to the requirements
described in this Article V and notifying the Company of any payments to be
made in a timely manner. With respect to any withdrawal request under Section
5.1, the Committee's decision to allow a Participant to withdraw all or part
of such Participant's Account in connection with an unforeseeable financial
need will be based on the facts and circumstances of each case. However, in no
event will the amount withdrawn exceed the lesser of the amount which the
Committee deems necessary to satisfy such financial need (plus any appropriate
taxes) and the balance of such Participant's Account. Any request to make a
withdrawal by a member of the Committee may be approved only by disinterested
members of the Committee, or if none, by the Board.

                                      9

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                  (d)      Time of Processing. The Company will make payment
                           ------------------
to the Participant as soon as is administratively feasible following approval
of the withdrawal request under this Article V; provided, however, if such
payment will result in any portion of the payment (or any other amount paid to
such Participant during the same Plan Year) not being deductible by reason of
Code section 162(m), the Committee may defer payment to a later payment date
designated by it and the Participant's Account will continue to earn
investment returns measured under this Plan.

                  (e)      Medium and Form of Payment. The medium of payment
                           --------------------------
for withdrawals under this Article V is cash. The form of payment for
withdrawals under this Article V will be a single-sum cash payment.

                                      10

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ARTICLE VI
------------------------------------------------------------------------------

                                DISTRIBUTIONS
                                -------------

        6.1       Distribution of Account Balance. Any distribution of the
                  -------------------------------
value of a Participant's Account balance for any Plan Year in which the
Participant made a Deferral will be made as soon as administratively feasible
after (1) the Participant's Termination of Employment, or, if earlier, (2) the
date selected by the Participant in the relevant Deferral Election. Any such
distribution will be in a lump sum or in annual installments over a period of
time not less than two (2) nor more than ten (10) years, as specified by the
Participant on the Deferral Election Form for that Plan Year provided,
however, that distributions made in connection with a Participant's
Termination of Employment other than as a result of Retirement will be made in
a lump sum. If the timing of distribution or a payment form is not specified
on a Deferral Election Form for any particular Plan Year in which the
Participant made a Deferral, the Participant's Account balance for that Plan
Year will be distributed in a lump sum upon the Participant's Termination of
Employment. Notwithstanding the foregoing, if any distribution will result in
any portion of the payment (or any other amount paid to such Participant
during the same Plan Year) not being deductible by reason of Code section
162(m), the Committee may defer payment to a later payment date designated by
it and such Account will continue to earn investment returns measured under
this Plan.

        6.2       Form of Payment. Distributions of a Participant's Account
                  ---------------
balance with respect to each Plan Year will be made in cash.

        6.3       Distribution Amount. Lump sum distributions will be made in
                  -------------------
an amount equal to the value of the Participant's Account balance, as of the
distribution date, for the Plan Year in which the Participant made the
Deferral, less applicable withholding taxes. Annual installments will be paid
in an amount determined by multiplying (i) the balance of the Account
attributable to the Plan Year for which such election was made, by (ii) a
fraction, the numerator of which is one (1) and the denominator of which is a
number equal to the remaining unpaid annual installments, less applicable
withholding taxes.

        6.4       Death Benefit. Upon the death of a Participant, the remaining
                  -------------
balance in such Participant's Account will be paid to the Participant's
Beneficiary in a lump sum cash payment as soon as administratively feasible
after the Participant's death; provided, however, that if any distribution
will result in any portion of the payment (or any other amount paid to such
Beneficiary during the same Plan Year) not being deductible by reason of Code
section 162(m), the Committee may defer payment to a later payment date
designated by it and such Account will continue to earn investment returns
measured under this Plan.

        6.5       Redeferral Election. Notwithstanding the foregoing, a
                  -------------------
Participant will be permitted to timely elect to delay the beginning date of
distribution and/or increase the number of annual installments (up to the
maximum permitted under Section 6.1 herein) for previous Deferrals, provided
that the redeferral election must be made at least one

                                      11

<PAGE>
<PAGE>

full calendar year prior to the date on which such distribution would
otherwise have been made, or payment of such annual installments would
otherwise have begun, in the absence of such redeferral, and must be made in
such manner as is provided for by the Committee.

                                      12

<PAGE>
<PAGE>

ARTICLE VII
------------------------------------------------------------------------------

                                 BENEFICIARY
                                 -----------

        7.1       Beneficiary Designation. A Participant will designate a
                  -----------------------
Beneficiary to receive benefits under the Plan on the Deferral Election Form
provided by the Committee. If more than one Beneficiary is named, the share
and/or precedence of each Beneficiary will be indicated. A Participant will
have the right to change the Beneficiary at any time by submitting to the
Committee a new Deferral Election Form.

        7.2       Proper Beneficiary. If the Committee has any doubt as to the
                  ------------------
proper Beneficiary to receive payments hereunder, the Committee will have the
right to withhold such payments until the matter is finally adjudicated.
However, any payment made by the Committee, in good faith and in accordance
with this Plan, will fully discharge the Company from all further obligations
with respect to that payment.

        7.3       Minor or Incompetent Beneficiary. In making any payments to
                  --------------------------------
or for the benefit of any minor or an incompetent Beneficiary, the Committee,
in its sole and absolute discretion, may make a distribution to a legal or
natural guardian or other relative of a minor or court appointed committee of
such incompetent. Alternatively, it may make a payment to any adult with whom
the minor or incompetent temporarily or permanently resides. The receipt by a
guardian, committee, relative or other person will be a complete discharge to
the Company. Neither the Company nor the Committee will have any
responsibility to see to the proper application of any payments so made.

        7.4       No Beneficiary Designation. If a Participant fails to
                  --------------------------
designate a Beneficiary as provided in Section 7.1 above, or if all designated
Beneficiaries predecease the Participant or die prior to complete distribution
of the Participant's benefits, then the Participant's designated Beneficiary
will be deemed to be his or her surviving Spouse. If the Participant has no
surviving Spouse, the benefits remaining under the Plan to be paid to a
Beneficiary will be payable to the executor or personal representative on
behalf of the Participant's estate.

                                      13

<PAGE>
<PAGE>

ARTICLE VIII
------------------------------------------------------------------------------

                         ADMINISTRATION OF THE PLAN
                         --------------------------

        8.1       Majority Vote. All resolutions or other actions taken by the
                  -------------
Committee will be by vote of a majority of those present at a meeting at which
a majority of the members are present, or in writing by all the members at the
time in office if they act without a meeting. Such resolutions or actions will
be confirmed in writing by a Board resolution.

        8.2       Claims Procedure. The Committee will make all determinations
                  ----------------
as to the rights of any person to a benefit under this Plan. Any denial by the
Committee of a claim for benefits under this Plan by a Participant will be
stated in writing by the Committee and will set forth the specific reasons for
the denial. In addition, the Committee will afford a reasonable opportunity to
any Participant whose claim for benefits has been denied for a review of the
decision denying the claim.

        8.3       Finality of Determination. Subject to the Plan, the Committee
                  -------------------------
will, from time to time, establish rules, forms and procedures for the
administration of the Plan. Except as herein otherwise expressly provided, the
Committee will have the exclusive right and discretion to interpret the Plan
and to decide any and all matters arising thereunder or in connection with the
administration of the Plan, and it will endeavor to act, whether by general
rules or by particular decisions, so as not to discriminate in favor of or
against any person. The interpretations, decisions, actions and records of the
Committee will be conclusive and binding upon the Company and all persons
having or claiming to have any right or interest in or under the Plan, and
cannot be overruled by a court of law unless arbitrary or capricious.

        8.4       Certificates and Reports. The members of the Committee and
                  ------------------------
the officers and directors of the Company will be entitled to rely on all
certificates and reports made by any duly appointed accountants, and on all
opinions given by any duly appointed legal counsel, which legal counsel may be
counsel for the Company.

        8.5       Indemnification and Exculpation. The Company will indemnify
                  -------------------------------
and hold harmless each current and former member of the Committee and each
current and former member of the Board against any and all expenses and
liabilities (to the extent not indemnified under any liability insurance
contract or other indemnification agreement) which the person incurs on
account of any act or failure to act in connection with the good faith
administration of the Plan. Expenses against which a member of the Committee
will be indemnified hereunder will include, without limitation, the amount of
any settlement or judgment, costs, counsel fees, and related charges
reasonably incurred in connection with a claim asserted, or a proceeding
brought or settlement thereof. The foregoing right of indemnification will be
in addition to any other rights to which any such member of the Committee may
be entitled as a matter of law, but will be conditioned upon the person's
notifying the Company of the claim of liability within 60 days of the notice
of that claim and offering the Company the right to participate in and control
the settlement and defense of the claim. The foregoing provision will not be

                                      14

<PAGE>
<PAGE>

applicable to any person if the loss, cost, liability, or expense is due to
such person's gross negligence or willful misconduct.

        8.6       Expenses. The expenses of administering the Plan will be
                  --------
borne by the Company.

                                      15

<PAGE>
<PAGE>

ARTICLE IX
------------------------------------------------------------------------------

                       NATURE OF COMPANY'S OBLIGATION
                       ------------------------------

        9.1       Company's Obligation. The Company's obligations under this
                  ---------------------
Plan will be an unfunded and unsecured promise to pay. The Company will not be
obligated under any circumstances to fund its financial obligations under this
Plan.

        9.2       Creditor Status. Any assets which the Company may acquire
                  ---------------
or set aside to help cover its financial liabilities are and must remain
general assets of the Company subject to the claims of its creditors. Neither
the Company nor this Plan gives a Participant or Beneficiary any beneficial
ownership interest in any asset of the Company. In the event that the Company
elects to invest funds to pay the Account Balance under the terms of this
Plan, title to and beneficial ownership of such assets will at all times
remain with the Company. All Plan Participants and Beneficiaries will not have
any property interest in any specific assets of the Company, which will at all
times remain subject to the claims of the Company's general creditors, and
will be unsecured general creditors of the Company. In particular, the Company
may establish a separate irrevocable grantor trust for the benefit of all
Participants, which trust will be subject to the claims of the general
creditors of the Company in the event of insolvency, to be used as a reserve
for the discharge of the Company's obligations under this Plan to such
Participants (or Beneficiaries). Any payments made to a Participant (or
Beneficiary) under the separate trust for the Participant's (or Beneficiary's)
benefit will reduce dollar for dollar the amount payable to the Participant
(or Beneficiary) from the general assets of the Company. The amounts payable
under this Plan will be reflected on the accounting records of the Company but
will not be construed to create or require the creation of a trust, custodial,
or escrow account, except as described above in this section. No Participant
(of Beneficiary) will have any right, title or interest whatever in or to any
investment reserves, accounts or funds that the Company may purchase,
establish or accumulate to aid in providing benefits under this Plan. Nothing
contained in this Plan, and no action taken pursuant to its provisions, will
create a trust or fiduciary relationship of any kind between the Company or
the Committee and a Participant, Beneficiary or any other person.

                                      16

<PAGE>
<PAGE>

ARTICLE X
------------------------------------------------------------------------------

                          AMENDMENT AND TERMINATION
                          -------------------------

        10.1      Prior to a Change in Control. The Company reserves the right
                  ----------------------------
to amend this Plan from time to time by action of the Board. No such action
may reduce or relieve the Company of any obligation with respect to the
balance of an Account maintained under this Plan with respect to a Participant
(or Beneficiary) as of the date of such amendment, without the written consent
of such affected Participant (or Beneficiary).

        10.2      After a Change in Control. After a Change in Control, the
                  -------------------------
Company may amend this Plan solely for the purpose of ceasing Deferral
Elections.

        10.3      Termination. The Company, by action of the Board, reserves
                  -----------
the right to prospectively terminate this Plan, provided the Company pays to
each Participant and Beneficiary, the single-sum value of the Participant's
Account (or of the Beneficiary's unpaid Death Benefit) as of the date of
termination. Such payment will be paid as soon as administratively possible,
but not later than 90 days following the date of termination. Notwithstanding
the foregoing, if any distribution in connection with the termination of this
Plan will result in any portion of the payment (or any other amount paid to
such Beneficiary during the same Plan Year) not being deductible by reason of
Code section 162(m), the Committee may defer payment to a later payment date
designated by it and the relevant Accounts will continue to earn investment
returns measured under this Plan.

                                      17

<PAGE>
<PAGE>

ARTICLE XI
------------------------------------------------------------------------------

                          MISCELLANEOUS PROVISIONS
                          ------------------------

        11.1      Corporate Action. Any action required of or permitted by the
                  -----------------
Company under this Plan will be by resolution of its Board, the Committee or
any person or persons authorized by resolution of the Committee.

        11.2      Interests not Transferable. Except insofar as prohibited by
                  --------------------------
applicable law, no sale, transfer, alienation, assignment, pledge,
collateralization or attachment of any benefits under this Plan will be valid
or recognized by the Company. Neither the Participant, spouse, or designated
Beneficiary will have any power to hypothecate, mortgage, commute, modify, or
otherwise encumber in advance any of the benefits payable hereunder, nor will
any of said benefits be subject to seizure for the payment of any debts,
judgments, alimony maintenance, owed by the Participant or Beneficiary, or be
transferable by operation of law in the event of bankruptcy, insolvency, or
otherwise.

        11.3      Effect on Other Benefit Plans. The treatment under other
                  -----------------------------
employee benefits plans maintained by the Company of amounts credited or paid
under this Plan will be determined pursuant to the provisions of such plans.

        11.4      Legal Fees and Expenses. After a Change in Control, the
                  -----------------------
Company will pay all reasonable legal fees and expenses which the Participant
or a Beneficiary may incur as a result of the Company's contesting the
validity, enforceability, or the Participant's (or the Beneficiary's)
interpretation of, or determinations made under, this Plan.

        11.5      Right to Offset. Prior to a Change in Control, any amount
                  ---------------
owed to the Company by a Participant of whatever nature may be offset by the
Company from the value of any benefit otherwise payable hereunder, and no
benefit hereunder will be distributed to the Participant unless and until all
disputes between the Company and the Participant have been fully and finally
resolved and the Participant has waived all claims against the Company in a
manner that is acceptable to the Committee in its sole and unrestricted
discretion.

        11.6      Deduction of Taxes from Amounts Payable.
                  ---------------------------------------

                  (a)      Distribution. The Company will deduct from the
                           ------------
amount to be distributed such amount as the Company, in its sole discretion,
deems proper to protect the Company against liability for the payment of
death, succession, inheritance, income, or other taxes, and out of money so
deducted, the Company may discharge any such liability and pay the amount
remaining to the Participant, the Beneficiary or the deceased Participant's
estate, as the case may be.

                  (b)      Withholding. No later than the date as of which an
                           -----------
amount first becomes includible in the gross income of the Participant for
Federal income tax purposes, Federal employment tax purposes, or for purposes
of any other taxing authority with respect to any Account under the Plan, the
Participant will pay to the

                                      18

<PAGE>
<PAGE>

Company, or make arrangements satisfactory to the Company regarding the
payment of, any Federal, State, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. The obligations of the Company
under the Plan will be conditional on such payment or arrangements, and the
Company and its affiliates will, to the extent permitted by law, have the
right to deduct any such taxes from any payment otherwise due to the
Participant.

        11.7      Facility of Payment. If a Participant or Beneficiary is
                  -------------------
declared an incompetent or is a minor and a conservator, guardian, or other
person legally charged with his or her care has been appointed, any benefits
to which such Participant or Beneficiary is entitled will be payable to such
conservator, guardian, or other person legally charged with his or her care.
The decision of the Committee in such matters will be final, binding, and
conclusive upon the Company and upon each Participant, Beneficiary, and every
other person or party interested or concerned. The Company and the Committee
will not be under any duty to see to the proper application of such payments.

        11.8      Merger. This Plan will be binding and enforceable with
                  ------
respect to the obligation of the Company against any successor to the Company
by operation of law or by express assumption of the Plan, and such successor
will be substituted hereunder for the Company.

        11.9      Gender and Number. Except when the context indicates to the
                  -----------------
contrary, when used herein, masculine terms will be deemed to include the
feminine, and singular the plural.

        11.10     Invalidity of Certain Provisions. If any provision of this
                  --------------------------------
Plan will be held invalid or unenforceable, such invalidity or
unenforceability will not affect any other provisions hereof and this Plan
will be construed and enforced as if such provisions, to the extent invalid or
unenforceable, had not been included.

        11.11     Headings. The headings or articles are included solely for
                  --------
convenience of reference, and if there is any conflict between such headings
and the text of this Plan, the text will control.

        11.12     No Right to Employment. Neither the creation of this Plan
                  ----------------------
nor anything contained herein will be construed as giving any Participant in
this Plan any right to remain in the employ of the Company.

        11.13     Notice and Information Requirements. Except as otherwise
                  -----------------------------------
provided in this Plan or as otherwise required by law, the Company will have
no duty or obligation to affirmatively disclose to any Participant or
Beneficiary, nor will any Participant or Beneficiary have any right to be
advised of, any material information regarding the Company.

        11.14     Governing Law. This Plan will be governed by the laws of the
                  -------------
State of Delaware, without regard to the conflicts-of-law rules of such State,
to the extent not preempted by the laws of the United States of America.

                                      19

<PAGE>
<PAGE>

         IN WITNESS WHEREOF, the Company has caused this Plan to be signed
by its duly authorized officer, and adopted on the 23rd day of October 2001.

                                     PEABODY ENERGY CORPORATION

                                     By:
                                          ------------------------------------

                                     Title:  Vice President Human Resources
                                             ------------------------------

                                      20Prepared by MERRILL CORPORATION

COMMON STOCK AND WARRANT PURCHASE AGREEMENT

This Common Stock and

Warrant Purchase Agreement (this “Agreement”) is made as of December 4, 2001

between Axonyx Inc., a Nevada corporation (the “Company”), and the investors

listed on Exhibit A hereto, each of which is herein referred to as an

“Investor” and collectively, the “Investors”.

RECITALS:

WHEREAS, the Investors

desire to purchase from the Company, and the Company desires to sell to the

Investors, shares of the Company’s common stock, par value $0.001 per share

(the “Common Stock”), and warrants to purchase shares of Common Stock, upon the

terms and subject to the conditions set forth herein;

NOW, THEREFORE, in

consideration of the premises and mutual covenants contained herein, the

parties hereto agree as follows:

1.             PURCHASE AND SALE OF SHARES AND

WARRANT.

1.1           Purchase and Sale of Shares and

Warrants.  Upon the terms and

subject to the conditions of this Agreement, at the Closing (as defined below),

the Company agrees to sell to the Investors, and each Investor agrees to

purchase from the Company (a) the number of shares of the Company’s Common

Stock set forth opposite such Investor’s name on Exhibit A hereto (the

“Shares”) at the per share purchase price of $3.26 (“Per Share Purchase

Price”), and (b) a warrant in substantially the form attached hereto as Exhibit

B to purchase a number of shares of the Company’s Common Stock equal to

fifty percent (50%) of the total Shares purchased by such Investor pursuant to

this Agreement (each a “Warrant” and collectively for all Investors, the

“Warrants”).  All dollar amounts set

forth in this Agreement shall be in United States Dollars.

1.2           Closing.  The closing of the purchase and sale of the

Shares and the Warrants (the “Closing”) shall take place at the offices of

Brobeck, Phleger & Harrison LLP at 10:00 a.m., Eastern time on December 4,

2001, or such other location, time or date as the parties shall mutually agree,

but only after the satisfaction or waiver of each of the conditions set forth

in Sections 7 and 8 (the “Closing Date”).

1.3           Deliveries.  At the Closing, the Company shall deliver to

each Investor a Warrant and a certificate or certificates, registered in the

name of the Investor, representing the Warrant and the Shares purchased by such

Investor, and each Investor shall deliver to the Company an amount equal to the

product of Shares to be purchased by such Investor and the Per Share Purchase

Price (the “Purchase Price”), by certified check payable to “Axonyx Inc.

Corporate Account” or by wire transfer of immediately available funds to the

following account of the Company:

Chase Manhattan Bank NYC

ABA Routing #:021000021

FBO Salomon Smith Barney

A/C # 066-198038

For further credit

to: Axonyx, Inc. A/C #204-90314-1-8-501

2.             REPRESENTATIONS AND WARRANTIES OF

THE COMPANY.

For purposes of this

Section, all references to “Company” in Sections 2.1, 2.4 (excluding clause (a)

thereof), 2.7, 2.9 through 2.12, and 2.14 through 2.20 shall be deemed to be a

reference to the Company and all of its direct and indirect subsidiaries.  The Company hereby represents and warrants

to each Investor that, except as set forth on a Schedule of Exceptions (the

“Company Schedule of Exceptions”) attached hereto as Schedule A, which

exceptions shall be deemed to be representations and warranties as if made

hereunder:

2.1           Corporate Organization.  The Company is a corporation duly organized,

validly existing and in good standing under the laws of its state of

incorporation, and has the requisite corporate power and authority to own or lease

its properties and to carry on its business as now being conducted.  The Company is duly qualified as a foreign

corporation to do business and is in good standing in every jurisdiction in

which the property owned or leased by it or the nature of the business

conducted by it makes such qualification necessary, except to the extent that

the failure to be so qualified or in good standing would not have, individually

or in the aggregate, a Material Adverse Effect.  For purposes of this Agreement, “Material Adverse Effect” shall

mean, as to any entity, any material adverse effect on the business,

operations, conditions (financial or otherwise), assets, results of operations

or prospects of that entity individually or of the Company and its subsidiaries

as a whole.

2.2           Capitalization; Organizational

Documents.

(a)           The authorized capital stock of the

Company will consist immediately prior to the Closing of 75,000,000 shares of

Common Stock, of which as of the date hereof, 15,277,371shares are issued and

outstanding, and 15,000,000 shares of preferred stock of the Company, of which,

as of the date hereof, no shares are issued or outstanding.  All of the outstanding shares have been duly

and validly issued and are fully paid and nonassessable and have been issued in

accordance with all applicable federal and state securities laws.  No shares of Common Stock are subject to

preemptive rights or any other similar rights or any liens suffered or

permitted by the Company.  Except as

disclosed in the Company’s Form 10-KSBA for the fiscal year ended December 31,

2000, as amended, its Form 10-Q for the fiscal quarters ended March 31, 2001,

June 30, 2001, as amended, and September 30, 2001 (the “SEC Filings”), and

except for the Warrants and the shares issuable upon exercise of the Warrants

(the “Warrant Shares” and, collectively with the Shares and the Warrants, the

“Securities”), as of the date hereof, there are no outstanding options,

warrants, scrips, rights to subscribe to, calls or commitments of any character

whatsoever relating to, or securities or rights convertible into, any shares of

capital stock of the Company, or contracts, commitments, understandings or

arrangements by which the Company is or may become bound to issue additional

shares of capital stock.  There are no

preemptive rights or rights of first refusal or similar rights which are

binding on the Company permitting any person to subscribe for or purchase from

the Company shares of its capital stock pursuant to any provision of law, the

Certificate of Incorporation (as defined below) or the Company’s By-laws or by

agreement or otherwise.  There are no

securities or instruments containing anti-dilution or similar provisions that

will be triggered by the issuance of any of the Securities as described in this

Agreement.  The Company has made

available to each Investor true and correct copies of the Company’s Certificate

of Incorporation, as amended and as in effect on the date hereof (the

“Certificate of Incorporation”), and the Company’s By-laws, as in effect on the

date hereof (the “By-laws”).  The

designations, powers, preferences, rights, qualifications, limitations and

restrictions in respect of each class and series of authorized capital stock of

the Company are as set forth in the Certificate of Incorporation, and all such

designations, powers, preferences, rights, qualifications, limitations and

restrictions are valid, binding and enforceable against the Company and in

accordance with all applicable laws, rules and regulations.

(b)           Upon issuance of the Shares and the

Warrants and payment of the Purchase Price therefor in accordance with the

terms of this Agreement, the Shares and the Warrants will be duly authorized,

validly issued, fully paid and nonassessable, and free and clear of any

restrictions on transfer and any taxes, claims, liens, pledges, options,

security interests, purchase rights, preemptive rights, trusts, encumbrances or

other rights or interests of any other person (other than any restrictions

under the Securities Act of 1933, as amended (the “Securities Act”).  The Warrant Shares, when issued in

accordance with the terms of the Warrants, will be duly authorized, validly

issued, fully paid and non-assessable, and free and clear of any restrictions

on transfer and any taxes, claims, liens, pledges, options, security interests,

purchase rights, preemptive rights, trusts, encumbrances or other rights or

interests of any other person (other than any restrictions under the Securities

Act).

2.3           Authorization; Enforcement.  (a) The Company has the requisite corporate

power and authority to enter into and perform its obligations under this

Agreement and to issue, sell and perform its obligations with respect to the

Securities in accordance with the terms hereof, (b) the execution and delivery

of this Agreement by the Company and the consummation by it of the transactions

contemplated hereby have been duly authorized by the Company’s Board of

Directors and no further consent or authorization is required by the Company,

its Board of Directors or its stockholders, and (c) this Agreement has been

duly executed and delivered by the Company. 

No other corporate proceedings on the part of the Company are necessary

to approve and authorize the execution and delivery of this Agreement and the

issuance of the Securities.  This

Agreement, when executed and delivered by the Company, constitutes a valid and

binding obligation of the Company enforceable against the Company in accordance

with its terms, except as such enforceability may be limited by general

principles of equity or applicable bankruptcy, insolvency, reorganization,

moratorium, liquidation or similar laws relating to, or affecting generally,

the enforcement of creditors’ rights and remedies.

2.4           No

Conflicts.  The execution, delivery

and performance of this Agreement by the Company, and the consummation by the

Company of the transactions contemplated hereby, will not (a) result in a

violation of the Certificate of Incorporation or By-laws of the Company, or

(b) violate or conflict with, or result in a breach of, any provision of,

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, or result in the creation of any

lien on or against any of the properties of the Company, any note, bond,

mortgage, agreement, license indenture or instrument to which the Company is a

party, or result in a violation of any statute, law, rule, regulation, writ,

injunction, order, judgment or decree applicable to the Company or by which any

property or asset of the Company is bound or affected, except where such

violation, conflict, breach or other consequence would not have a Material

Adverse Effect.  Except as disclosed in

the SEC Filings, the Company is not in violation of any term of or in default

under its Certificate of Incorporation or By-laws or in violation of any

material term of, or in default under, any material contract, agreement,

mortgage, indebtedness, indenture, instrument, judgment, decree or order or any

statute, rule or regulation applicable to the Company.  Except as specifically contemplated by this

Agreement, the Company is not required to obtain any consent, authorization or

order of, or make any filing or registration with, any court or governmental or

regulatory or self-regulatory agency in order for it to execute, deliver or

perform any of its obligations under or contemplated by this Agreement in

accordance with the terms hereof.  All

consents, authorizations, orders, filings and registrations that the Company is

required to obtain pursuant to the preceding sentence have been obtained or

effected on or prior to the date hereof.

2.5           SEC Documents; Financial

Statements.  The Common Stock is

registered pursuant to Section 12(g) of the Exchange Act and the Company has

filed all reports, schedules, forms, statements and other documents required to

be filed by it with the Securities and Exchange Commission (the “SEC”) pursuant

to the reporting requirements of the Securities Exchange Act of 1934, as

amended (the “Exchange Act”) (all of the foregoing, and all other documents and

registration statements heretofore filed by the Company with the SEC being

hereinafter referred to as the “SEC Documents”).  The Common Stock is currently listed or quoted on The Nasdaq

National Market.  The Company has

delivered or made available to each Investor true and complete copies of the

SEC Documents.  As of their respective

dates, the SEC Documents complied in all material respects with the

requirements of the Securities Act, and the Exchange Act and the rules and

regulations of the SEC promulgated thereunder applicable to the SEC Documents,

and none of the SEC Documents, at the time they were filed with the SEC (except

those SEC Documents that were subsequently amended), contained any untrue

statement of a material fact or omitted to state a material fact required to be

stated therein or necessary in order to make the statements therein, in light

of the circumstances under which they were made, not misleading.  As of their respective dates, the financial

statements of the Company and its subsidiaries included (or incorporated by

reference) in the SEC Documents complied as to form in all material respects

with applicable accounting requirements and the published rules and regulations

of the SEC or other applicable rules and regulations with respect thereto.  Such financial statements have been prepared

in accordance with generally accepted accounting principles applied on a

consistent basis during the periods involved (except (a) as may be otherwise

indicated in such financial statements or the notes thereto, or (b) in the case

of unaudited interim statements, to the extent they may exclude footnotes or

may be condensed or summary statements) and fairly present the financial

position of the Company and its subsidiaries as of the dates thereof and the

results of its operations and cash flows for the periods then ended (subject,

in the case of unaudited statements, to normal year-end audit adjustments).  As of the date hereof, the Company has, on a

timely basis, made all filings required to be made by the Company with the SEC

and the Company is eligible to file a registration statement on Form S-3 with

respect to outstanding shares of its Common Stock to be offered for sale for

the account of any person other than the Company.

2.6           Securities

Law Exemption.  Assuming the truth

and accuracy of each Investor’s representations set forth in this Agreement,

the offer, sale and issuance of the Shares and Warrants as contemplated by this

Agreement are exempt from the registration requirements of the Securities Act

and applicable state securities laws, and neither the Company nor any

authorized agent acting on its behalf has taken or will take any action hereafter

that would cause the loss of such exemption.

2.7           Litigation.  All actions, suits, arbitrations or other

proceedings or, to the Company’s knowledge, investigations pending or

threatened against the Company that would have a Material Adverse Effect on the

Company, are disclosed in the SEC Filings. 

There is no action, suit, proceeding or, to the Company’s knowledge,

investigation that questions this Agreement or the right of the Company to

execute, deliver and perform under same.

2.8           Use of Proceeds.  The net proceeds from the sale of the Shares

and Warrants shall be used solely for general corporate purposes.  The proceeds from the sale of the Shares and

Warrants may not be used to redeem, repurchase or otherwise acquire any shares

of preferred stock, common stock or other equity securities issued by the

Company.

2.9           Intellectual Property.  The Company owns, or has the contractual

right to use, sell or license all intellectual property necessary or required

for the conduct of its business as presently conducted and as proposed to be

conducted, including, without limitation, all trade secrets, processes, source

code, licenses, trademarks, service marks, trade names, logos, brands,

copyrights, patents, franchises, domain names and permits.  The Company has not received any

communications alleging that the Company has violated or, by conducting its

business presently conducted or as proposed to be conducted, violates or will

violate any intellectual property rights of any other person or entity.

2.10         Title to Property and Assets.  The Company has good and marketable title to

or, in the case of leases and licenses, has valid and subsisting leasehold

interests or licenses in, all of its properties and assets (whether real or

personal, tangible or intangible) free and clear of any liens or other

encumbrances, except for liens or other encumbrances that do not, individually

or in the aggregate, have a Material Adverse Effect.  With respect to property leased by the Company, the Company has a

valid leasehold interest in such property pursuant to leases which are in full

force and effect, and the Company is in compliance in all material respects

with the provisions of such leases.

2.11         Compliance

with Laws.  The Company is and has

been in compliance with all laws, rules, regulations, orders, judgments or

decrees that are applicable to the Company, the conduct of its business as

presently conducted and as proposed to be conducted, and the ownership of its

property and assets (including, without limitation, all Environmental Laws (as

defined below) and laws related to occupational safety, health, wage and hour,

and employment discrimination), and the Company is not aware of any state of

facts, events, conditions or occurrences which may now or hereafter constitute

or result in a violation of any of such laws, rules, regulations, orders,

judgments or decrees or which may give rise to the assertion of any such

violation, except where such violation or violations do not have a Material

Adverse Effect.  All required reports and

filings with governmental authorities have been properly made as and when

required, except where the failure to report or file would not, individually or

in the aggregate, have a Material Adverse Effect.  “Environmental Laws” means all federal, state, local and foreign

laws, ordinances, treaties, rules, regulations, guidelines and permit

conditions relating to contamination or pollution of the environment (including

ambient air, surface water, ground water, land surface or subsurface strata) or

the protection of human health and worker safety, including, without

limitation, laws and regulations relating to transportation, storage, use,

manufacture, disposal or release of, or exposure of employees or others to,

Hazardous Materials (as defined below) or emissions, discharges, releases or

threatened releases of Hazardous Materials. 

“Hazardous Materials” means any substance that has been designated by

any governmental entity or by applicable Environmental Laws to be radioactive,

toxic, hazardous or otherwise a danger to health or the environment, including,

without limitation, PCBs, asbestos, petroleum, urea formaldehyde and all

substances listed as hazardous substances pursuant to the Comprehensive

Environmental Response, Compensation, and Liability Act of 1980, as amended, or

defined as a hazardous waste pursuant to the Resource Conservation and Recovery

Act of 1976, as amended, and the regulations promulgated pursuant to

Environmental Laws, but excluding office and janitorial supplies maintained in

accordance with Environmental Laws.

2.12         Licenses and Permits.  The Company has obtained and maintains all

federal, state, local and foreign licenses, permits, consents, approvals,

registrations, memberships, authorizations and qualifications required to be

maintained in connection with the operations of the Company as presently

conducted and as proposed to be conducted, the lack of which could have a

Material Adverse Effect.  The Company is

not in default in any material respect under any of such licenses, permits,

consents, approvals, registrations, memberships, authorizations and

qualifications.

2.13         Related Entities.  Except for the Subsidiaries set forth on

Schedule 2.13, the Company does not presently own or control, directly or

indirectly, any interest in any other subsidiary, corporation, association or

other business entity.  The Company is

not a party to any joint venture, partnership or similar arrangement.

2.14         Changes.  Since September 30, 2001, the Company

has operated its business diligently and in the ordinary course of business

and, to the knowledge of the Company, there has not been, or the Company has

not (as the case may be):

(a)           any Material Adverse Effect;

(b)           any damage, destruction or loss,

whether or not covered by insurance, which would have a Material Adverse

Effect;

(c)           any waiver or compromise by the

Company of a valuable right or of a material debt owed it;

(d)           sold, encumbered, assigned or

transferred any material assets or properties of the Company, other than in the

ordinary course of business;

(e)           incurred

any liability, whether accrued, absolute, contingent or otherwise, and whether

due or to become due, other than (i) in the ordinary course of business or (ii)

liabilities that are not, individually or in the aggregate, material to the

business, operations, condition (financial or otherwise), assets, results of

operations or prospects of the Company;

(f)            created,

incurred, assumed or guaranteed any indebtedness or subjected any of its assets

to any lien or encumbrance, except for indebtedness, liens or encumbrances that

are not, individually or in the aggregate, material to the business,

operations, condition (financial or otherwise), assets, results of operations

or prospects of the Company;

(g)           declared, set aside or paid any

dividends or made any other distributions in cash or property on the Company’s

capital stock;

(h)           directly or indirectly redeemed,

purchased or otherwise acquired any shares of capital stock of the Company;

(i)            suffered any resignation or

termination of employment of any key officers or employees;

(j)            except in the ordinary course of

business of the Company, materially increased the compensation payable or to

become payable by the Company to any of its officers, employees or directors or

materially increased any bonus, insurance, pension or other employee benefit

plan, payment or arrangement made by the Company for or with any such officers,

employees or directors;

(k)           made any direct or indirect loan to

any stockholder, employee, officer or director of the Company, other than

advances made in the ordinary course of business;

(l)            changed any agreement to which the

Company is a party which would have a Material Adverse Effect; or

(m)          entered into any agreement or

commitment to do any of the things described in this Section 2.14.

2.15         Employee

Benefit Plans.  All “employee

benefit plans,” as such term is defined in the Employee Retirement Income

Security Act of 1974, as amended (“ERISA”), to which the Company has any

liability or obligation, contingent or otherwise, comply in all material

respects and have been maintained and administered in material compliance with

ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), and all

other statutes, orders and governmental rules and regulations applicable to such

employee benefit plans.  To the

Company’s knowledge, the Company has not incurred any liability pursuant to

ERISA or the penalty or excise tax provisions of the Code relating to employee

benefit plans (as defined in ERISA), and no event, transaction or condition has

occurred or exists that could reasonably be expected to result in the

incurrence of any such liability by the Company, or in the imposition of any

lien on any of the rights, properties or assets of the Company pursuant to

ERISA or to such penalty or excise tax provisions of the Code.  The Company does not maintain or contribute

to, and has not maintained or contributed to, any “multiemployer plan,” as such

term is defined in ERISA.

2.16         Taxes.  The Company has timely filed all tax returns and reports

(federal, state and local) required to be filed and these returns and reports

are true and correct in all material respects. 

The Company has paid all taxes and other assessments shown to be due on

such returns or reports.  Neither the

Internal Revenue Service nor any state or local taxing authority has, during

the past three (3) years, examined or informed the Company it is in the process

of examining any such tax returns and reports. 

The provision for taxes of the Company, as shown on the financial

statements included in the most recent SEC Filing, is adequate for taxes due or

accrued as of the date thereof and since that date the Company has provided

adequate accruals in accordance with generally accepted accounting principals

in its financial statements for any taxes incurred that have not been paid,

whether or not shown as being due on any tax returns.  The Company has not elected, pursuant to the Code, to be treated

as a collapsible corporation pursuant to Section 341(f) of the Code, nor has it

made any other elections pursuant to the Code (other than elections that relate

solely to methods of accounting, depreciation or amortization) that would have

a Material Adverse Effect.

2.17         Insurance.  The Company has in full force and effect

fire, casualty and liability insurance policies, with extended coverage,

sufficient in amount (subject to reasonable deductibles) to allow the Company

to replace any of its properties that might be damaged or destroyed to the

extent and in the manner customary for companies in similar business similarly

situated.

2.18         Employees.  The Company does not have any collective

bargaining agreements with any of its employees.  There is no labor union organizing activity pending or, to the

Company’s knowledge, threatened with respect to the Company.  To the Company’s knowledge, no officer or

key employee, or that any group of key employees, intends to terminate their

employment with the Company, nor does the Company have a present intention to

terminate the employment of any of the foregoing.

2.19         Material

Contracts.  All contracts,

agreements, instruments, leases, licenses, arrangements, understandings or

other documents filed with or required to be filed as exhibits to the SEC

Filings to which the Company therein is a party or by which it may be bound

have been so filed (the “Material Contracts”). 

The Material Contracts that have been filed as exhibits are complete and

correct copies of the contracts, agreements, instruments, leases, licenses,

arrangement, understanding or other documents of which they purport to be

copies.  The Material Contracts are

valid and in full force and effect as to the Company, and, to the Company’s

knowledge, to the other parties thereto. 

Except as otherwise disclosed herein, the Company is not in violation

of, or default under (and there does not exist any event or condition which,

after notice or lapse of time or both, would constitute such a default under),

the Material Contracts, except to the extent that such violations or defaults,

individually or in the aggregate, could not reasonably be expected to (a)

affect the validity of this Agreement, (b) have a Material Adverse Effect, or

(c) impair the ability of the Company to perform fully on a timely basis any

material obligation which the Company has or will have under this

Agreement.  To the Company’s knowledge,

none of the other parties to any Material Contract are in violation of or

default under any Material Contract in any material respect.  The Company has not received any notice of

cancellation or any written communication threatening cancellation of any

Material Contract by any other party thereto. 

The Company is not a party to and is not bound by any contract,

agreement or instrument, or subject to any restriction under the Certificate of

Incorporation, its bylaws or other governing documents that would have a

Material Adverse Effect.

2.20         Customers and Suppliers.  No customer or supplier that was material to

the Company during the previous twenty-four (24) months, has terminated,

materially reduced or threatened to terminate or material reduce its purchases

from or provision of products or services to the Company.

2.21         Brokers and Finders.  The Company has not employed any broker,

finder, consultant or intermediary in connection with the transactions

contemplated by this Agreement that would be entitled to a broker’s, finder’s

or similar fee or commission in connection herewith and therewith, with the

exception of AFO Capital, and in relation to a portion of the transactions

herein, Punk Ziegel & Company.

2.22         Nasdaq National Market.  The Company’s common stock is listed on the

Nasdaq National Market System, and there are no proceedings to suspend or

revoke such listing.

2.23         Disclosure.  This Agreement, Schedules and Exhibits

hereto and all other documents delivered to the Investors in connection

herewith or therewith at the Closing, do not contain any untrue statement of a

material fact, or omit to state a material fact necessary to make the

statements therein, in light of the circumstances under which they were made,

not misleading.  There are no facts

that, individually or in the aggregate, would have a Material Adverse Effect

that have not been disclosed to each Investor in this Agreement (including the

Schedules and Exhibits hereto), the SEC Filings or any other documents

delivered to each Investor in connection herewith or therewith at the Closing.

2.24         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 in any security or solicited any offers to buy any

security under circumstances that would require registration under the

Securities Act of the issuance of the Securities to the Investors.  The issuance of the Securities to the

Investors will not be integrated with any past issuance of the Company’s

securities for purposes of the Securities Act or any applicable rules of

Nasdaq.

3.             REPRESENTATIONS AND WARRANTIES OF INVESTOR.

Each of the Investors,

severally and not jointly, hereby represents and warrants to the Company as to

itself and not as to any other Investor, that:

3.1           Organization.  The Investor is a corporation, limited

liability company or limited partnership, as the case may be, duly organized,

validly existing and in good standing in the jurisdiction of its

formation.  The Investor has all

requisite power and authority to execute, deliver and perform all of its

obligations of this Agreement.

3.2           Authorization;

Enforcement.  (a) The Investor has

the requisite power and authority to enter into and perform its obligations

under this Agreement, (b) the execution and delivery of this Agreement by the

Investor and the consummation by it of the transactions contemplated hereby

have been duly authorized by all necessary corporate action on the part of the

Investor, and (c) this Agreement has been duly executed and delivered by the

Investor.  To the knowledge of the

Investor, no other proceedings on the part of the Investor are necessary to

approve and authorize the execution and delivery of this Agreement.  This Agreement, when executed and delivered,

constitutes a valid and binding obligation of the Investor, enforceable against

the Investor in accordance with its terms, except as such enforceability may be

limited by general principles of equity or applicable bankruptcy, insolvency,

reorganization, moratorium, liquidation or similar laws relating to, or

affecting generally, the enforcement of creditors’ rights and remedies.

3.3           No Conflicts.  The execution, delivery and performance of

this Agreement by the Investor, and the consummation by the Investor of the

transactions contemplated hereby will not (a) result in a violation of the

organizational documents of the Investor, or (b) result in a violation of

any statute, law, rule, regulation, writ, injunction, order, judgment or decree

applicable to the Investor, except where such violation, conflict, breach or

other consequence would not have a Material Adverse Effect.  The Investor is not required to obtain any

consent, authorization or order of, or make any filing or registration with,

any court or governmental or regulatory or self-regulatory agency in order for

it to execute, deliver or perform any of its obligations under or contemplated

by this Agreement in accordance with the terms hereof.

3.4           Investment Representations.

(a)           The Investor is an “accredited

investor”, as defined in Regulation D promulgated under the Securities Act, and

has such knowledge, sophistication and experience in financial and business

matters that the Investor is capable of evaluating the merits and risks of the

investment in the Securities.

(b)           The Investor (i) has adequate means

of providing for its current financial needs and possible contingencies, and

has no need for liquidity of investment in the Company, (ii) can afford to hold

unregistered securities for an indefinite period of time and sustain a complete

loss of the entire amount of the subscription, and (iii) has not made an

overall commitment to investments which are not readily marketable that is so

disproportionate as to cause such overall commitment to become excessive.

(c)           The

Investor agrees and understands that the Securities are being offered and sold

to the Investor in reliance upon specific exemptions from the registration

requirements of the Securities Act and the rules and regulations promulgated

thereunder and that, in order to determine the availability of such exemptions

and the eligibility of the Investor to acquire the Securities, the Company is

relying upon the truth and accuracy of the Investor’s representations and

warranties, and compliance with the Investor’s covenants and agreements, set

forth in this Agreement.  The Investor

further agrees with the Company that (i) no Securities were offered or sold to

the Investor by means of any form of general solicitation or general

advertising, and in connection therewith, the Investor did not (1) receive or

review any advertisement, article, notice or other communication published in a

newspaper or magazine or similar media or broadcast over television or radio,

whether closed circuit or generally available; or (2) attend any seminar

meeting or industry investor conference whose attendees were invited by any

general solicitation or general advertising. 

The Investor hereby acknowledges that the offering of the Securities has

not been reviewed by the SEC or any state regulatory authority since the

offering of the Securities is intended to be exempt from the registration

requirements of Section 5 of the Securities Act pursuant to Regulation D

promulgated thereunder.  The Investor

understands that the Securities have not been registered under the Securities

Act and agrees not to sell or otherwise transfer the Securities unless they are

registered under the Securities Act or unless an exemption from such

registration is available.

(d)           The Securities are being purchased by

the Investor for its own account, for investment purposes only, not for the

account of any other person, or corporation and not with a view to

distribution, assignment or resale to others in whole or in part.  The Investor has no present intention of

selling, granting any participation in, or otherwise distributing the

Securities.  The Investor does not have

any contract, undertaking, agreement or arrangement with any person to sell,

transfer, pledge, hypothecate, grant any option to purchase or otherwise

dispose of any of the Securities. 

Nothing herein shall prevent the distribution of any Securities to any

subsidiary, member, partner, stockholder, affiliate or former member, partner,

stockholder or affiliate of the Investor in compliance with the Securities Act

and applicable state “blue sky” laws.

(e)           The Investor has been furnished with

and has carefully read the Company’s Annual Report on Form 10-KSBA for the

fiscal year ended December 31, 2000, as amended, and has had access to the

Company’s SEC Filings and other public filings.

(f)            With respect to corporate tax and

other economic considerations involved in an investment in the Securities, the

Investor is not relying on the Company. 

The Investor has carefully considered and has, to the extent the

Investor believes such discussion necessary, discussed with its professional

legal, tax, accounting and financial advisors the suitability of an investment

in the Securities for its particular tax and financial situation and has

determined that the Securities are a suitable investment for the Investor.

(g)           The Company has made available to the

Investor all documents and information that the Investor has requested relating

to an investment in the Securities.

(h)           Subject to the Company’s disclosures

in this Agreement and the SEC Filings, the Investor recognizes that the Company

has generated only limited revenues to date, is not expected to have any

products commercially available for a number of years, if at all, and that

investment in the Company involves substantial risks, including loss of the

entire amount of such investment and has taken full cognizance of and

understands all of the risk factors relating to the purchase of the Securities.

(i)            The Investor has not been formed for

the specific purpose of acquiring the Securities.

4.             COVENANTS.

4.1           Confidentiality.  Each Investor hereby acknowledges that

unauthorized disclosure of information regarding the offering of the Securities

pursuant to this Agreement may cause the Company to violate Regulation FD.

4.2           Restrictions on Transfer.

(a)           Each Investor hereby agrees,

severally and not jointly, that, except in accordance with a registration

statement filed pursuant to Section 5.2 of this Agreement, it will not dispose

of any of such Investor’s Shares or the Warrant Shares (other than pursuant to

Rule 144 promulgated under the Securities Act (“Rule 144”) or pursuant to a

registration statement filed with the SEC pursuant to the Securities Act)

unless and until such Investor shall have (A) notified the Company of the

proposed disposition and shall have furnished the Company with a statement of

the circumstances surrounding the proposed disposition and (B) if requested by

the Company, furnished the Company with an opinion of counsel, reasonably

satisfactory in form and substance to the Company and the Company’s counsel, to

the effect that such disposition will not require registration under the

Securities Act.  The restrictions on

transfer imposed by this Section 4.2 shall cease and terminate as to the Shares

and Warrant Shares held by an Investor when: 

(x) such Securities shall have been effectively registered under the

Securities Act and sold by the holder thereof in accordance with such

registration, or (y) on delivery of an opinion of the kind described in the

preceding sentence with respect to such Securities.  Each Warrant and each certificate evidencing the Securities shall

bear an appropriate restrictive legend as set forth in Section 4.2(c), except

that such legend shall not be required after a transfer is made in compliance

with Rule 144 or pursuant to a registration statement or if the opinion of

counsel referred to above is issued and provides that such legend is not

required in order to establish compliance with any provisions of the Securities

Act.

(b)           Notwithstanding the provisions of

Section 4.2(a), no registration statement or opinion of counsel shall be

necessary for a transfer by an Investor of the Securities to a subsidiary,

member, partner, stockholder or affiliate of that Investor, if the transferee

agrees in writing to be subject to the terms hereof to the same extent as if

such transferee were an Investor hereunder.

(c)           It is understood that, subject to

Sections 4.2(a) and 4.2(b), the Warrants and the certificates evidencing the

Securities will bear the following legends:

(i)            THESE SECURITIES HAVE NOT BEEN

REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) OR UNDER

APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE

DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE

SECURITIES LAWS OR PURSUANT TO AVAILABLE EXEMPTIONS FROM SUCH REGISTRATION,

PROVIDED THAT THE SELLER DELIVERS TO THE COMPANY AN OPINION OF COUNSEL (WHICH

OPINION IS REASONABLY SATISFACTORY TO THE COMPANY) CONFIRMING THE AVAILABILITY

OF SUCH EXEMPTION.

(ii)           Any

legend required by the laws of any other applicable jurisdiction.

4.3           Restrictions on Subsequent

Offerings.  The Company agrees that

during the period beginning on the date hereof and ending on and including the

date which is one hundred eighty (180) days after the Closing Date (the

“Limitation Period”), the Company will not issue and sell (i) shares of the

Company’s common stock at a price per share of less than the Per Share Purchase

Price, or (ii) any options, warrants or any other securities of the Company

convertible, exercisable or exchangeable into or for common stock of the

Company at a conversion or exercise price per share of less than $3.91 (each

such sale is referred to herein as a “Subsequent Dilutive Offering”).  In the event the Company shall, during the

Limitation Period, complete a Subsequent Dilutive Offering, the Company shall,

within ten (10) days of the closing of the Subsequent Dilutive Offering, pay to

each Investor in cash an amountequal to the number of shares of the

Company’s common stock purchased (or to be purchased) by such Investor

multiplied by (a) the difference between the Per Share Purchase Price and

purchase price per share of common stock (as of the date of sale) sold in the

Subsequent Dilutive Offering, in the case of issuance of common stock, or (b)

the difference between $3.91 and the conversion or exercise price per share (as

of the date sale) of options, warrants or any other securities of the Company

convertible, exercisable or exchangeable into or for common stock of the

Company issued or sold in such Subsequent Dilutive Offering, in the case of

issuance of such options, warrants and other securities.  Anything herein to the contrary

notwithstanding, the following issuances of securities by the Company shall be

deemed not to constitute a Subsequent Dilutive Offering: (i) the issuance of

securities upon exercise or conversion of the Company’s options, warrants or

other convertible securities outstanding as of the date hereof; (ii) the grant

of additional options or warrants, or the issuance of additional securities,

under any Company stock option plan, restricted stock plan or stock purchase plan

for the benefit of the Company’s employees, officers, directors or consultants;

and (iii) the grant of options or warrants or the issuance of shares of common

stock as part of a merger, acquisition or a licensing agreement concerning the

conveyance of or acquisition of intellectual property by the Company.

4.4           Legal Fees and Expenses.  The Company shall, within ten (10) days

after receipt of an invoice therefor, pay the legal fees and expenses of

Shartsis, Friese & Ginsburg LLP (“SF&G”) (legal counsel only for

Kilkenny Capital Management, L.L.C. and its affiliates (“Kilkenny”)), in an

amount not to exceed $20,000, incurred in connection with this Agreement and

the transactions contemplated hereby and thereby.  For the avoidance of doubt, the fees paid to SF&G pursuant to

this Section 4.6 do not include the payment to counsel for the Investors as

required to be made by the Company pursuant to Section 5.5 of this Agreement.

4.5           Securities Compliance.  The Company shall take all action necessary

to comply with any federal or state securities laws applicable to the

transactions contemplated hereunder.

5.             REGISTRATION RIGHTS.

5.1           Registrable

Securities.  As used herein the term

“Registrable Security” means (a) each of the Shares, the Warrant Shares and the

Coverage Warrants (as defined in Section 5.2 below), and (b) any Common Stock

of the Company issued as (or issuable on the conversion or exercise of any

warrant, right or other security that is issued as) a dividend or other

distribution with respect to, or in exchange for, or in replacement of, the

shares referenced in clauses (a) and (b) above; provided, however, that with

respect to any particular Registrable Security held by an Investor, such

security shall cease to be a Registrable Security when, as of the date of

determination, (a) it has been effectively registered under the Securities

Act and disposed of pursuant thereto, or (b) registration under the

Securities Act is no longer required for the immediate public distribution of

all Registrable Securities held by that Investor and its affiliates.  In the event of any merger, reorganization,

consolidation, recapitalization or other change in corporate structure

affecting the Common Stock, such adjustment shall be made in the definition of

“Registrable Security” as is appropriate in order to prevent any dilution or

enlargement of the rights granted pursuant to this Section 5.

5.2           Mandatory Registration.

(a)           Subject to Section 5.4(g), the

Company shall use best efforts to file, within thirty (30) days after the Closing

Date, for the benefit of the holders of the Registrable Securities (the

“Holders”) a registration statement on Form S-3 (or if Form S-3 is not then

available, on such form of registration statement that is then available to

effect a registration of all Registrable Securities, subject to consent of the

Holders) for purposes of registering under the Securities Act all the

Registrable Securities for resale by, and for the account of, the Holders as

selling stockholders thereunder (the “Registration Statement”).  The Company shall use its commercially

reasonable efforts to cause the Registration Statement to become effective as

promptly as possible and, if any stop order shall be issued by the SEC in

connection therewith, to obtain the removal of such order.  The Company shall use its commercially

reasonable efforts to keep such Registration Statement effective until the

earlier of (i) the date when all of the Registrable Securities registered

thereunder shall have been sold, (ii) such time as all the Registrable

Securities held by the Holders (and any affiliate of the Holder with whom such

Holder must aggregate its sales under Rule 144) can be sold pursuant to Rule

144(k), and (iii) the second anniversary of the date on which the Registration

Statement is declared effective (the “Registration Withdrawal Date”).

(b)           In the event the Company has not

filed the Registration Statement with the SEC within thirty (30) days after the

Closing, the Company shall issue to each Investor a warrant in the form

attached hereto as Exhibit B (each, a “Coverage Warrant” and,

collectively, the “Coverage Warrants”) to acquire that number of shares of

Common Stock of the Company equal to (i) one percent (1%) of the aggregate

amount of Shares sold to each such Investor pursuant to the this

Agreement.  The exercise price of each

such Coverage Warrant will be $3.91 per share of Common Stock issuable on

exercise of the Coverage Warrant (as adjusted for stock splits, stock

combinations, reorganizations and the like effected after the date of this

Agreement).

(c)           At the end of each three (3) business

day period, after the initial thirty day period referred to in Section 5.2(b)

that the Registration Statement has not been filed with the SEC, the Company

shall issue to each Investor a Coverage Warrant to acquire that number of

shares of Common Stock equal to (i) one percent (1%) of the aggregate amount of

Shares sold to each such Investor pursuant to this Agreement; provided,

however, that the number of shares subject to the Coverage Warrants

issued pursuant to Sections 5.6(b) and 5.6(c) hereof shall not in the aggregate

exceed ten percent (10%) of the total amount of Shares sold to each such

Investor pursuant to this Agreement. 

The exercise price of each such Coverage Warrant will be $3.91 per share

of Common Stock issuable on exercise of the Coverage Warrant (as adjusted for

stock splits, stock combinations, reorganizations and the like effected after

the date of this Agreement).

(d)           In

the event the Registration Statement has not been declared effective by the SEC

within ninety (90) days after the date such Registration Statement is filed

with the SEC, the Company shall issue to each Investor a Coverage Warrant to

acquire that number of shares of Common Stock of the Company equal to (i) five

percent (5%) of the aggregate amount of Shares sold to each such Investor

pursuant to this Agreement.  The

exercise price of each such Coverage Warrant will be $3.91 per share of Common

Stock issuable on exercise of the Coverage Warrant (as adjusted for stock

splits, stock combinations, reorganizations and the like effected after the

date of this Agreement).

(e)           At the end of each thirty-day period

(or a portion thereof), after the initial ninety (90) day period referred to in

Section 5.2(d), that the Registration Statement has not been declared effective

by the SEC, the Company shall issue to each Investor a Coverage Warrant to

acquire that number of shares of Common Stock equal to (i) five percent (5%) of

the aggregate amount of Shares sold to each such Investor pursuant to this

Agreement, multiplied by (ii) a fraction, the numerator of which is the number

of days during such thirty-day period before the date on which the Registration

Statement was declared effective by the SEC and the denominator of which is

thirty (30); provided, however, that the number of shares subject to the

Coverage Warrants issued pursuant to Sections 5.6(d) and 5.6(e) hereof shall

not in the aggregate exceed twenty percent (20%) of the total amount of Shares

sold to each such Investor pursuant to this Agreement.  The exercise price of each such Coverage

Warrant will be $3.91 per share of Common Stock issuable on exercise of the

Coverage Warrant (as adjusted for stock splits, stock combinations,

reorganizations and the like effected after the date of this Agreement).

(f)            The Company shall execute such other

and further certificates, instruments and other documents as may be reasonably

requested by a Holder or reasonably necessary or proper to implement, complete

and perfect the Holders rights under this Section 5.2 and to freely trade the

Registrable Securities without limitation or restriction imposed or created by

the Company or securities law.

(g)           Notwithstanding Section 5.2(b)

through (e) above, the Company may, at its sole discretion, pay to all of the

Holders a cash penalty in lieu of the issuance of Coverage Warrants on each

penalty date.  If the Company elects to

make such cash payment on a penalty date, the Company must pay cash to all of

the Holders with respect to that penalty date and may not issue Coverage

Warrants to any of the Holders with respect to that penalty date.  If the Company elects to make such cash

payment, on each date on which Coverage Warrants or cash payments are due, the

cash payment to each Investor shall be an amount equal to (i) the one-half of

the applicable warrant coverage percentage on that date multiplied by (ii) such

Investor’s cash investment amount as set forth opposite such Investor’s name on

Exhibit A hereto.

(h)           The issuance of Coverage Warrants

(and/or the payment of cash) to the Investors pursuant to this Section 5.2

shall be in addition to, and not in lieu of, any other rights and remedies

available to the Investors pursuant to this Agreement at law or in equity.

(i)            From

and after the date of this Agreement, the Company shall not, without the prior

consent of the Holders of at least a majority of the Registrable Securities

then outstanding, enter into any agreement with any holder or prospective

holder of any securities of the Company that would allow such holder or

prospective holder to include such securities in any registration filed under

this Section 5.2, unless under the terms of such agreement, such holder or

prospective holder may include such securities in any such registration only to

the extent that the inclusion of such securities will not reduce the amount of

the Registrable Securities of the Holders that are included.

5.3           Piggyback Registration Rights.

(a)           If, at any time after the

Registration Withdrawal Date, the Company proposes to register any Common Stock

under the Securities Act, whether as a result of a primary or secondary

offering of Common Stock or pursuant to registration rights granted to holders

of other securities of the Company (whether as a demand registration right or a

Form S-3 registration right, but excluding in all cases any registrations to be

effected on Forms S-4 or S-8 or other applicable successor Forms), the Company

shall, each such time, give to the Holders holding Registrable Securities

written notice of its intent to do so. 

If, within twenty (20) days of giving such notice, the Company shall

receive from a Holder a written request to include its Registrable Securities

in such registration, the Company shall use commercially reasonable efforts to

cause to be included in such registration the Registrable Securities of such

selling Holder, to the extent requested to be registered; provided, however,

that (i) such selling Holder agrees to sell those of its Registrable Securities

to be included in such registration in the same manner and on the same terms

and conditions as the other shares of Common Stock which the Company proposes

to register and (ii) in the event (x) the registration is to include shares of

Common Stock to be sold for the account of the Company or any party exercising

registration rights pursuant to any other agreement with the Company and (y)

the proposed managing underwriter advises the Company that in its opinion the

inclusion of such selling Holder’s Registrable Securities (without any

reduction in the number of shares to be sold for the account of the Company or

such party exercising registration rights) is likely to affect materially and

adversely the success of the offering or the price that would be received for

any shares of Common Stock offered, then the rights of such selling Holder

shall be as provided in Section 5.3(b) hereof.

(b)           If a registration pursuant to Section

5.3(a) hereof involves an underwritten offering and the managing underwriter

shall advise the Company in writing that, in its opinion, the number of shares

of Registrable Securities requested by the Holder to be included in such

registration is likely to affect materially and adversely the success of the

offering or the price that would be received for any shares of Common Stock

offered in such offering, then, notwithstanding anything in Section 5.3(a) to

the contrary, the Company shall only be required to include in such

registration, to the extent of the number of shares of Common Stock which the

Company is so advised can be sold in such offering, (i) first, the number of

shares of Common Stock proposed to be included in such registration for the

account of the Company and/or any stockholders of the Company (other than the

Holders) that have exercised demand registration rights, in accordance with the

priorities, if any, then existing among the Company and/or such stockholders of

the Company with registration rights (other than the Holders), and (ii) second,

the shares of Common Stock requested to be included in such registration by all

other stockholders of the Company who have piggyback registration rights

(including, without limitation, the Holders), pro rata among such other

stockholders (including, without limitation, the Holders) on the basis of the

number of shares of Common Stock that each of them beneficially owns.

(c)           In

connection with any offering involving an underwriting of shares, the Company

shall not be required under Section 5.3 hereof or otherwise to include the

Registrable Securities of any Holder therein unless such Holder accepts and

agrees to the terms of the underwriting, which shall be reasonable and

customary, as agreed upon between the Company and the underwriters selected by

the Company.

(d)           The piggyback registration rights set

forth in this Section 5.3 shall terminate with respect to a Holder when all the

Registrable Securities held by that Holder (and any affiliate of the Holder

with whom such Holder must aggregate its sales under Rule 144) can be sold

pursuant to Rule 144(k).

5.4           Covenants of the Company With

Respect to Registration.

The Company covenants and agrees as follows:

(a)           Following the effective date of a

Registration Statement under Section 5.2 or 5.3, the Company shall, upon the

request of the Holders, forthwith supply such reasonable number of copies of

the Registration Statement, preliminary prospectus and prospectus meeting the

requirements of the Securities Act, and other documents necessary or incidental

to the public offering of the Registrable Securities, as shall be reasonably

requested by the Holders to permit the Holders to make a public distribution of

the Registrable Securities registered in connection with the Registration

Statement.

(b)           The Company shall prepare and file

with the SEC such amendments and supplements to such Registration Statement and

the prospectus used in connection with such Registration Statement as may be

necessary to comply with the Securities Act with respect to the disposition of

all securities covered by such Registration Statement during the period of time

such Registration Statement remains effective;

(c)           The Company shall use its best

efforts to register and qualify the securities covered by such Registration

Statement under such other securities or Blue Sky laws of such jurisdictions as

shall be reasonably requested by the Holders; provided that the Company shall

not be required in connection therewith or as a condition thereto to qualify to

do business or to file a general consent to service of process in any such

states or jurisdictions;

(d)           During the period of time such

Registration Statement remains effective, the Company shall notify each Holder

of Registrable Securities covered by such registration statement at any time

when a prospectus relating thereto is required to be delivered under the

Securities Act or the happening of any event as a result of which the

prospectus included in such Registration Statement, as then in effect, includes

an untrue statement of a material fact or omits to state a material fact

required to be stated therein or necessary to make the statements therein not

misleading in the light of the circumstances then existing;

(e)           The Company shall use its best

efforts to cause all such Registrable Securities registered hereunder to be

listed on each securities exchange on which securities of the same class issued

by the Company are then listed;

(f)            The

Company shall provide a transfer agent and registrar for all Registrable

Securities registered hereunder and a CUSIP number for all such Registrable

Securities, in each case not later than the effective date of such

registration; and

(g)           The obligations of the Company

hereunder with respect to the Registrable Securities are subject to the

Holders’ furnishing to the Company such appropriate information concerning the

Holders, the Registrable Securities and the terms of the Holders’ offering of

such Registrable Securities as the Company may reasonably request in writing.

5.5           Expenses.  All expenses incurred in effecting a

registration pursuant to this Agreement (including, without limitation, all

registration, qualification and filing fees, printing expenses, fees and

disbursements of counsel for the Company, blue sky fees and expenses and, in

connection with a registration pursuant to Section 5.2, the reasonable fees and

disbursements, up to $10,000, of one counsel for the selling Holders selected

by the Holders), other than any transfer taxes and underwriting discounts and

selling commissions applicable to the sale of the Registrable Securities, shall

be borne by the Company.  All transfer

taxes, underwriting discounts and selling commissions applicable to the sale of

the Registrable Securities shall be borne by the Holders thereof.

5.6           Indemnification.  In the event any Registrable Securities are

included in a Registration Statement under this Section 5:

(a)           To

the extent permitted by law, the Company will indemnify and hold harmless each

Holder, the partners, officers, directors, stockholders, members and managers

of such Holder, legal counsel and accountants for such Holder, any underwriter

(as defined in the Securities Act) for such Holder and each person, if any, who

controls such Holder or underwriter within the meaning of the Securities Act or

the Exchange Act, against any losses, claims, damages, or liabilities (joint or

several) to which they may become subject under the Securities Act, the

Exchange Act or other federal or state law, insofar as such losses, claims,

damages, or liabilities (or actions in respect thereof) arise out of or are

based upon any of the following statements, omissions or violations (each, a

“Violation”): (i) any untrue statement or alleged untrue statement of a

material fact contained in such Registration Statement, including any

preliminary prospectus or final prospectus contained therein or any amendments

or supplements thereto, (ii) the omission or alleged omission to state therein

a material fact required to be stated therein, or necessary to make the

statements therein not misleading, or (iii) any violation or alleged violation

by the Company of the Securities Act, the Exchange Act, any state securities

law or any rule or regulation promulgated under the Securities Act, the

Exchange Act or any state securities law; and the Company will pay to each such

Holder, underwriter or controlling person, as incurred, any legal or other

expenses reasonably incurred by them in connection with investigating or

defending any such loss, claim, damage, liability, or action; provided,

however, that the indemnity agreement contained in this Section

5.6(a) shall not apply to amounts paid in settlement of any such loss, claim,

damage, liability, or action if such settlement is effected without the consent

of the Company (which consent shall not be unreasonably withheld or delayed),

nor shall the Company be liable to any Holder, underwriter or controlling

person for any such loss, claim, damage, liability, or action to the extent

that it arises out of or is based upon a Violation which occurs in reliance

upon and in conformity with written information furnished expressly for use in

connection with such registration by any such Holder, underwriter or

controlling person.

(b)           To the extent permitted by law, each

selling Holder will indemnify and hold harmless the Company, each of its

directors, each of its officers who has signed the Registration Statement, each

person, if any, who controls the Company within the meaning of the Securities

Act, any underwriter, any other Holder selling securities in such Registration

Statement and any controlling person of any such underwriter or other Holder,

against any losses, claims, damages, or liabilities (joint or several) to which

any of the foregoing persons may become subject, under the Securities Act, the

Exchange Act or other federal or state law, insofar as such losses, claims,

damages, or liabilities (or actions in respect thereto) arise out of or are

based upon any Violation, in each case to the extent (and only to the extent)

that such Violation occurs in reliance upon and in conformity with written

information furnished by such Holder expressly for use in connection with such

registration; and each such Holder will pay, as incurred, any legal or other

expenses reasonably incurred by any person indemnified pursuant to this Section

5.6(b), in connection with investigating or defending any such loss, claim,

damage, liability, or action; provided, however, that the indemnity

agreement contained in this Section 5.6(b) shall not apply to amounts paid in

settlement of any such loss, claim, damage, liability or action if such settlement

is effected without the consent of the Holder (which consent shall not be

unreasonably withheld or delayed); provided further that in no event shall

any indemnity under this Section 5.6(b) exceed the net proceeds from the

offering received by such Holder.

(c)           Promptly after receipt by an

indemnified party under this Section 5.6 of notice of the commencement of any

action (including any governmental action), such indemnified party will, if a

claim in respect thereof is to be made against any indemnifying party under

this Section 5.6, deliver to the indemnifying party a written notice of the

commencement thereof and the indemnifying party shall have the right to

participate in, and, to the extent the indemnifying party so desires, jointly

with any other indemnifying party similarly noticed, to assume the defense

thereof with counsel mutually satisfactory to the parties; provided, however, that an

indemnified party (together with all other indemnified parties which may be

represented without conflict by one counsel) shall have the right to retain one

separate counsel, with the reasonable fees and expenses to be paid by the

indemnifying party, if representation of such indemnified party by the counsel

retained by the indemnifying party would be inappropriate due to actual or

potential differing interests between such indemnified party and any other

party represented by such counsel in such proceeding. The failure to deliver

written notice to the indemnifying party within a reasonable time after receipt

of notice of the commencement of any such action, if prejudicial to its ability

to defend such action, shall relieve such indemnifying party of any liability

to the indemnified party under this Section 5.6, but the omission so to deliver

written notice to the indemnifying party will not relieve it of any liability

that it may have to any indemnified party otherwise than under this Section

5.6.

(d)           If

the indemnification provided for in this Section 5.6 is held by a court of

competent jurisdiction to be unavailable to an indemnified party with respect

to any loss, liability, claim, damage or expense referred to therein, then the

indemnifying party, in lieu of indemnifying such indemnified party hereunder,

shall contribute to the amount paid or payable by such indemnified party as a

result of such loss, liability, claim, damage, or expense in such proportion as

is appropriate to reflect the relative fault of the indemnifying party on the

one hand and of the indemnified party on the other in connection with the statements

or omissions that resulted in such loss, liability, claim, damage or expense as

well as any other relevant equitable considerations; provided that in no event

shall any contribution by a Holder under this Section 5.6(d) exceed the net

proceeds from the offering received by such Holder.  The relative fault of the indemnifying party and of the

indemnified party shall be determined by reference to, among other things,

whether the untrue or alleged untrue statement of a material fact or the

omission to state a material fact relates to information supplied by the

indemnifying party or by the indemnified party and the parties’ relative

intent, knowledge, access to information, and opportunity to correct or prevent

such statement or omission.

(e)           Notwithstanding the foregoing, to the

extent that the provisions on indemnification and contribution contained in the

underwriting agreement entered into in connection with the underwritten public

offering are in conflict with the foregoing provisions, the provisions in the

underwriting agreement shall control.

(f)            The obligations of the Company and

Holders under this Section 5.6 shall survive the completion of any offering of

Registrable Securities in a registration statement and the termination of this

Agreement.

5.7           Suspension of Sales.

(a)           With respect to the Registration

Statement filed pursuant to Section 5.2, the Company may suspend sales of

Registrable Securities under such Registration Statement for a period of not

more than thirty (30) days with respect to such Registration Statement if, at

any time the Company is engaged in confidential negotiations or other

confidential business activities, the disclosure of which would be required if

such sales were not suspended and the Board of Directors of the Company determines

in good faith that such suspension would be in the Company’s best interest at

such time, provided

that the Company shall not be permitted to suspend such sales for

more than sixty (60) days in any twelve (12) month period.  In order to suspend sales pursuant to this

Section 5.7(a), the Company shall promptly (but in any event within five (5)

days), upon determining to seek such suspension, deliver to each holder of

Registrable Securities a certificate signed by an executive officer of the

Company stating that the Company is suspending such filing pursuant to this

Section 5.7(a) and a general statement of the reason for such suspension and an

approximation of the anticipated delay. 

Each holder of Registrable Securities hereby agrees to keep confidential

any information disclosed to it in any such certificate (including the fact

that a certificate was delivered.

(b)           If

the Company suspends such Registration Statement pursuant to section 5.7(a)

above, the Company shall, as promptly as practicable following the termination

of the circumstances which entitled the Company to do so but in no event more

than seven (7) days thereafter, take such actions as may be necessary to file

or reinstate the effectiveness of such Registration Statement and/or give written

notice to the selling Holders authorizing them to resume sales pursuant to such

Registration Statement.  If, as a result

thereof, the prospectus included in such Registration Statement has been

amended to comply with the requirements of the Securities Act, the Company

shall enclose such revised prospectus with the notice to the selling Holders

given pursuant to this Section 5.7(b), and the selling Holders shall make no

offers or sales of securities pursuant to such Registration Statement other

than by means of such revised prospectus.

5.8           Transfer or Assignment of

Registration Rights.  The rights to

cause the Company to register Registrable Securities granted to a Holder by the

Company under this Section 5 may be transferred or assigned by a Holder to a

transferee or assignee of such Registrable Securities that (i) is a subsidiary,

parent, current or former partner, current or former limited partner, current

or former member, current or former manager or stockholder of a Holder, (ii) is

an entity controlling, controlled by or under common control, or under common

investment management, with a Holder, including without limitation a

corporation, partnership or limited liability company that is a direct or

indirect parent or subsidiary of the Holder, or (iii) is a transferee or

assignee of not less than 50,000 shares of Registrable Securities (as presently

constituted and subject to subsequent adjustments for stock splits, stock

dividends, reverse stock splits and the like), provided

that the Company is given written notice at the time of or within a reasonable

time after said transfer or assignment, stating the name and address of said

transferee or assignee and identifying the securities with respect to which

such registration rights are being transferred or assigned, and provided further that the transferee or

assignee of such rights assumes the obligations of such Holder under this

Section 5.

5.9           Reports under Exchange Act.  With a view to making available to the

Holders the benefits of Rule 144 promulgated under the Securities Act and any

other rule or regulation of the SEC that may at any time permit a Holder to

sell securities of the Company to the public without registration, the Company

agrees to:

(a)           Make and keep public information

available, as those terms are used in SEC Rule 144, at all times;

(b)           File with the SEC in a timely manner

all reports and other documents required of the Company under the Securities

Act and the Exchange Act;

(c)           Furnish to any Holder, so long as the

Holder owns any Registrable Securities, forthwith on request, (i) a written

statement by the Company that it has complied with the reporting requirements

of SEC Rule 144, the Securities Act and the Exchange Act, (ii) a copy of the

most recent annual or quarterly report of the Company and such other reports

and documents so filed by the Company, and (iii) such other information as may

be reasonably requested in availing any Holder of any rule or regulation of the

SEC that permits the selling of any such securities without registration; and

(d)           Undertake any additional actions

reasonably necessary to maintain the availability of the use of Rule 144.

5.10         Reserve

for Exercise Shares.  The Company

shall at all times reserve and keep available out of its authorized but

unissued shares of Common Stock such number of shares of Common Stock (the

“Exercise Shares”) as shall be sufficient to enable it to comply with its

exercise obligations with respect to the Shares and under the Warrants and

Coverage Warrants.  If at any time the

number of Exercise Shares shall not be sufficient to effect the exercise of the

Warrants, the Company will forthwith take such corporate action as may be

necessary to increase its authorized but unissued shares of Common Stock to

such number as will be sufficient for such purposes.  The Company will obtain authorization, consent, approval or other

action by, or make any filing with, any administrative body that may be

required under applicable state securities laws in connection with the issuance

of Exercise Shares.

5.11         Delay of Registration.  No Holder shall have any right to obtain or

seek an injunction restraining or otherwise delaying any registration as the

result of any controversy that might arise with respect to the interpretation

or implementation of this Section 5.

6.             CONDITIONS TO INVESTOR OBLIGATIONS AT CLOSING.

The obligations of

the Investors to purchase the Shares and the Warrants at the Closing are

subject to the fulfillment on or prior to the Closing of each of the following

conditions:

6.1           Representations and Warranties.  The representations and warranties of the

Company contained in Section 2 shall be true in all respects on and as of the

Closing Date with the same effect as though such representations and warranties

had been made on and as of the Closing Date, except that any representations

and warranties stated as being true and correct as of a date other than the

date hereof shall be true and correct as of such other date.

6.2           Performance.  The Company shall have performed and

complied with all agreements, obligations and conditions contained in this

Agreement that are required to be performed or complied with by it on or before

the Closing.

6.3           Qualifications.  All authorizations, approvals, or permits,

if any, of any governmental authority or regulatory body of the United States

or of any state of the United States that are required in connection with the

lawful issuance and sale of the Securities to the Investors pursuant to this

Agreement shall have been duly obtained and shall be effective on and as of the

Closing.

6.4           Proceedings and Documents.  All corporate and other proceedings

undertaken in connection with the transactions contemplated at the Closing and

all documents incident thereto shall be reasonably satisfactory in form and

substance to each Investor, and they shall have received all such counterpart

original and certified or other copies of such documents as they may reasonably

request.

6.5           Absence of Litigation.  No proceeding challenging this Agreement or

the transactions contemplated hereby or thereby, or seeking to prohibit, alter,

prevent or delay the Closing, shall have been instituted against the Company

before any court, arbitrator or governmental body, agency or official and shall

be pending.

6.6           Compliance Certificate.  The Company shall deliver to the Investors

at the Closing, relating to the Investors’ purchase of Shares and Warrants, a

certificate signed by the President of the Company stating that the Company has

complied with or satisfied each of the conditions to the Investors’ obligation

to consummate the Closing set forth in Sections 6.1 through 6.5, unless waived

in writing by the Investors.

6.7           Opinion of Counsel.  The Company shall deliver to the Investors

at the Closing two opinions of counsel for the Company, dated as of the

Closing, in the forms attached hereto as Exhibit C.

6.8           Legal

Prohibition.  The purchase of the

Shares and Warrants by the Investors shall not be prohibited by any law or

governmental order or regulation.

7.             CONDITIONS TO THE COMPANY’S OBLIGATIONS AT CLOSING.

The obligations of the Company under Section 1 of this

Agreement are subject to the fulfillment on or before the Closing of each of

the following conditions:

7.1           Representations and Warranties.  The representations and warranties of each Investor

contained in Section 3 shall be true in all respects on and as of the Closing

Date with the same effect as though such representations and warranties had

been made on and as of the Closing Date, except that any representations and

warranties stated as being true and correct as of a date other than the date

hereof shall be true and correct as of such other date.

7.2           Performance.  Each Investor shall have performed and

complied with all agreements, obligations and conditions contained in this

Agreement that are required to be performed or complied with by it on or before

the Closing.

7.3           Qualifications.  All authorizations, approvals, or permits,

if any, of any governmental authority or regulatory body of the United States

or of any state of the United States that are required in connection with the

lawful issuance and sale of the Securities to the Investors pursuant to this

Agreement shall have been duly obtained and shall be effective on and as of the

Closing.

7.4           Proceedings and Documents.  All corporate and other proceedings

undertaken in connection with the transactions contemplated by this Agreement

and all documents incident thereto shall be reasonably satisfactory in form and

substance to the Company and its counsel, and they shall have received all such

counterpart original and certified or other copies of such documents as they

may reasonably request.

8.             MISCELLANEOUS.

8.1           Survival of Warranties.  The warranties, representations, agreements,

covenants and undertakings of the Company or the Investors contained in or made

pursuant to this Agreement shall survive the execution and delivery of this

Agreement and the Closing and shall in no way be affected by any investigation

of the subject matter thereof made by or on behalf of the Investors or the Company.

8.2           Incorporation by Reference.  All Exhibits and Schedules appended to this

Agreement are herein incorporated by reference and made a part hereof.

8.3           Successor and Assignees.  All terms, covenants, agreements,

representations, warranties and undertakings in this Agreement made by and on

behalf of any of the parties hereto shall bind and inure to the benefit of the

respective successors and assigns of the parties hereto (including transferees

of any Shares) whether so expressed or not, subject to Section 5.8.

8.4           Amendments

and Waivers.  Neither this Agreement

nor any provision hereof shall be waived, modified, changed, discharged,

terminated, revoked or canceled except by an instrument in writing signed by

the party against whom any change, discharge or termination is sought.  Failure of either party to exercise any

right or remedy under this Agreement or any other agreement between the Company

and the Investors, or otherwise, or delay by the Company or the Investors in

exercising such right or remedy, will not operate as a waiver thereof, nor

shall any single or partial exercise thereof preclude any other or further

exercise thereof or the exercise of any other right, power or privilege.  The rights and remedies herein provided

shall be cumulative and not exclusive of any rights or remedies provided by

law.

8.5           Governing Law.  This Agreement shall be deemed a contract

made under the laws of the State of New York, without giving effect to the

conflicts of law principles thereof.

8.6           Notices.  All notices, requests, consents, demands,

notice or other communication required or permitted under this Agreement shall

be in writing and shall be deemed duly given and received when delivered

personally or transmitted by facsimile, or one business day after being

deposited for next-day delivery with a nationally recognized overnight delivery

service, or three days after being deposited as first class mail with the

United States Postal Services, all charges or postage prepaid, and properly

addressed:

to the Company at:

Axonyx Inc.

825 Third Avenue, 40th Floor

New York, New York 10022

Fax:  (212)

688-4843

Attention:

with a copy (which

shall not constitute notice) to:

Brobeck, Phleger &

Harrison LLP

1633 Broadway, 47th Floor

New York, New York 10019

Fax: (212) 586-7878

Attention: Luci Staller Altman

or the Investors

at the address set forth opposite each Investors name on Exhibit A hereto

or such other address as

may be furnished in writing by a party hereto.

8.7           Counterparts. This Agreement

may be executed in counterparts, all of which together shall constitute one and

the same instrument.

8.8           Effect of Headings.  The section and paragraph headings herein

are included for convenience only and shall not affect the construction hereof.

8.9           Entire

Agreement.  This Agreement and the

Exhibits and Schedules hereto and thereto constitute the entire agreement among

the Company and the Investors with respect to the subject matter hereof.  There are no representations, warranties,

covenants or undertakings with respect to the subject matter hereof other than

those expressly set forth herein.  This

Agreement supersedes all prior agreements between the parties with respect to

the Shares purchased hereunder and the subject matter hereof.

8.10         Publicity. Neither party shall

originate any publicity, news release or other public announcement, written or

oral, whether relating to the performance under this Agreement or the existence

of any arrangement between the parties, without the prior written consent of

the other party (which consent shall not be unreasonably withheld or delayed),

except where such publicity, news release or other public announcement is

required by law; provided that, in such event, each such party shall (a)

promptly consult the other party in connection with any such publicity, news

release or other public announcement prior to its release; (b) promptly provide

the other party a copy thereof; and (c) use commercially reasonable efforts to

ensure that such portions of such information as may reasonably be designated

by the other party are accorded confidential treatment by the applicable

governmental entity.

8.11         Severability.  If any provision of this Agreement is held

by a court of competent jurisdiction to be unenforceable under applicable law,

such provision shall be replaced with a provision that accomplishes, to the

extent possible, the original business purpose of such provision in a valid and

enforceable manner, and the balance of the Agreement shall be interpreted as if

such provision were so modified and shall be enforceable in accordance with its

terms.

8.12         Interpretation.  This Agreement shall be construed according

to its fair language.  The rule of

construction to the effect that any ambiguities are to be resolved against the

drafting party shall not be employed in the interpretation of this Agreement.

8.13         Exculpation Among Investors.  Each Investor acknowledges that it is not

relying upon any person, firm or corporation, other than the Company and its

officers and directors, in making its investment or decision to invest in the

Company.  Each Investor agrees that no

Investor nor the respective controlling person, officers, directors, partners,

agents or employees of any Investor shall be liable to any other Investor for

any action heretofore or hereafter taken or omitted to be taken by any of them

in connection with the purchase of the Shares, the Warrants or the execution of

or performance under this Agreement.

8.14         Representation.  Each party hereto acknowledges that (a)

Kilkenny has retained SF&G to represent Kilkenny in connection with this

Agreement and the transactions related hereto, (b) the interests of Kilkenny

may not necessarily coincide with the interests of the other Investors, (c)

SF&G does not represent any Investor other than Kilkenny, and (d) each

Investor has consulted with, or has had an opportunity to consult with, its own

legal counsel and has not relied on SF&G for legal counsel in connection

with this Agreement and the transactions related hereto.

[Signatures appear

on following page.]

Schedule A

 

COMPANY SCHEDULE OF

EXCEPTIONS

 

There are no scheduled exceptions.

 

Exhibit A

 

LIST OF INVESTORS

 

Exhibit B

 

FORM OF WARRANT

 

Exhibit C

 

FORM OF LEGAL OPINIONS

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