Document:

Prepared by MerrillDirect

 

SERIES A PREFERRED STOCK AND
WARRANT PURCHASE AGREEMENT

between

TERAGLOBAL COMMUNICATIONS CORP.

and

WALLERSUTTON 2000, L.P.

 

TABLE OF CONTENTS

 

	SECTION
  1.	Issuance
  and Sale of Series A Preferred Stock and Warrants.	 
	1.1	The Purchases	 
	1.2	Initial
  Closing	 
	1.3	Subsequent
  Sale of Series A Preferred Stock	 
	1.4	Conditions to
  the Initial Closing.	 
	1.5	Additional
  Issuances, Purchase Price Adjustment.	 
	1.6	Purchase Price Allocation	 
	1.7	Conditions to the
  Subsequent Closing	 
	 	 	 
	SECTION
  2.	Representations
  and Warranties of the Company.	 
	2.1	Organization
  and Good Standing; Power and Authority; Qualifications	 
	2.2	Authorization of the
  Documents	 
	2.3	Capitalization	 
	2.4	Authorization
  and Issuance of Capital Stock	 
	2.5	SEC Reports	 
	2.6	Financial
  Statements	 
	2.7	Absence of Material
  Changes	 
	2.8	No Conflict	 
	2.9	Agreements	 
	2.10	Intellectual Property
  Rights	 
	2.11	Equity Investments;
  Subsidiaries	 
	2.12	Title to
  Assets and Properties, Insurance	 
	2.13	Employee
  Benefit Plans	 
	2.14	Labor Relations, Employees	 
	2.15	Litigation,
  Orders	 
	2.16	Compliance with Laws,
  Permits	 
	2.17	Offering
  Exemption	 
	2.18	Disclosure	 
	2.19	Taxes	 
	2.20	Consents	 
	2.21	Brokers	 
	2.22	Suppliers
  and Customers	 
	2.23	Accounts
  Payable and Current Liabilities	 

 

	2.24	Transfer
  Restrictions	 
	2.25	Efforts in Completing
  Schedules	 
	2.26	Certain
  Subsidiaries	 
	SECTION
  3.	Representations
  and Warranties of the Purchaser	 
	SECTION 4.	Certain
  Covenants.	 
	4.1	Access to
  Records	 
	4.2	Financial
  Reports	 
	4.3	Affirmative
  Covenants.	 
	4.4	Use of Proceeds	 
	4.5	Insurance	 
	4.6	Merger, etc	 
	4.7	Transactions with
  Affiliates	 
	4.8	Notice of
  Breach	 
	4.9	Matters Related to
  Directors.	 
	4.10	Rights
  of First Offer	 
	4.11	Subsidiary
  Stock	 
	4.12	Limitation
  on Convertible Securities and Debt	 
	4.13	Payment of Taxes
  and Other Charges	 
	4.14	Dividends	 
	4.15	Investments	 
	4.16	Changes
  in Capital Stock	 
	4.17	Filing of
  Certificate of Designations	 
	4.18	NASDAQ Filing	 
	4.19	Closing of
  Bridge	 
	SECTION 5.	Transfer Taxes.	 
	SECTION
  6.	Survival
  of Representations, Warranties, Agreements and Covenants, etc.	 
	SECTION
  7.	Expenses.	 
	SECTION 8.	Indemnification.	 
	8.1	General
  Indemnification	 
	8.2	Indemnification Principles	 
	8.3	Claim Notice	 
	SECTION
  9.	Events
  of Default and Remedies.	 

 

	9.1	Events of
  Default	 
	9.2	Remedy for Event of Default	 
	9.3	Waiver	 
	SECTION 10.	Other Remedies.	 
	SECTION 11.	Further
  Assurances.	 
	SECTION 12.	Successors
  and Assigns.	 
	SECTION 13.	Entire Agreement.	 
	SECTION
  14.	Notices.	 
	SECTION
  15.	Amendments.	 
	SECTION 16.	Counterparts.	 
	SECTION
  17.	Headings.	 
	SECTION 18.	Nouns and
  Pronouns.	 
	SECTION
  19.	Arbitration.	 
	SECTION
  20.	Publicity.	 
	SECTION 21.	Severability.	 

INDEX OF DEFINED TERMS

	Accredited
  Investor	19
	Additional
  Common Stock Amount	5
	Additional
  Preferred Stock Amount	5
	Adversely
  Affected Holders	32
	Ancillary
  Documents	3
	Benefit
  Plan	14
	Board	4
	Bridge
  Conversion	26
	Bridge
  Document	26
	Business	1
	By–Laws	4
	Certificate
  of Designation	3
	Certificate
  of Incorporation	3
	Claim
  Notice	28
	Closing	2
	Code	15
	Commission	9
	Common
  Stock	1
	Common
  Stock Equivalents	8
	Company	1
	Company
  Excluded Subsidiaries	18
	Company
  Excluded Subsidiary	18
	Contract	11
	Conversion
  Shares	9
	Employee	14
	Employee
  Agreement	14
	Encumbrances	14
	Environmental
  Laws	16
	ERISA	14
	Event
  of Default	28
	Exchange
  Act	9
	Excluded
  Securities	26
	GAAP	9
	Initial
  Closing	2
	Initial
  Designees	4
	Initial
  Purchase	1
	Intellectual
  Property	13
	Investment	26
	Issuer	1
	Losses	28
	Maintenance
  Amount	24
	Management
  Letter	20
	Material
  Adverse Effect	7
	NASDAQ	26
	Notice	24
	Permits	16
	Permitted
  Encumbrances	11
	Proposed
  Securities	24
	Purchase
  Price	2
	Purchaser	1
	Purchaser
  Designees	23
	Purchaser
  Entity	27
	Purchases	1
	Quarterly
  Financials	20
	Registration
  Rights Agreement	3
	SEC
  Reports	9
	Securities
  Act	17
	Series A
  Preferred Stock	1
	Software	13
	Strategic
  Partner	2
	Subsequent
  Closing	2
	Subsequent
  Purchase	1
	Subsidiaries	7
	Taxes	17
	Third
  Party Software	13
	Total
  Purchase Price	2
	WallerSutton	1
	Warrant
  Shares	1
	Warrants	1

 

TERAGLOBAL COMMUNICATIONS CORP.

PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT

AGREEMENT, dated as of June 28, 2001, by
and between TERAGLOBAL COMMUNICATIONS CORP., a Delaware corporation (the “Company”
or “Issuer”),
and WALLERSUTTON 2000, L.P., a Delaware limited partnership (“WallerSutton”
or the “Purchaser”).

W I T N E S S E T H:

             WHEREAS,
the Company is engaged in the business of developing, marketing, servicing and
supporting an advance networking software that enables real-time, two way
integration of voice, video and data communication and collaboration, as such
business is further described in the SEC Reports (the “Business”).

             WHEREAS,
the Company wishes to sell to WallerSutton and WallerSutton wishes to purchase
from the Company (i) shares of Convertible Redeemable Series A
Preferred Stock, par value $0.001 per share, containing the rights and
privileges as more fully set forth in the Certificate of Designations referred
to in Section 1.4(b)(iv) hereof (the “Series A Preferred Stock”),
convertible into shares of the Company’s Common Stock, par value $0.001 per
share (the “Common Stock”)
and (ii) warrants, substantially in the form of Exhibit A hereto (the “Warrants”),
to purchase shares of Common Stock (such shares of Common Stock referred to as
the “Warrant Shares”).

             NOW,
THEREFORE in consideration of the mutual covenants and agreements set forth
herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledge, the parties agree as follows:

             SECTION 1.    Issuance
and Sale of Series A Preferred Stock and Warrants.

             1.1        The Purchases. Upon the terms and subject to the conditions
set forth in this Agreement, at the Initial Closing and the Subsequent Closing,
WallerSutton shall purchase from the Company, and the Company shall sell to
WallerSutton, the number of shares of Series A Preferred Stock and
Warrants set forth opposite its name on Exhibit B-1
(the “Initial Purchase”)
and Exhibit B-2 (the “Subsequent
Purchase”),
respectively (collectively, the “Purchases”),
at the purchase price set forth opposite WallerSutton’s name on each
exhibit.  The aggregate purchase price to be paid by WallerSutton, based on
$.536 per share of Series A Preferred Stock, for the Series A Preferred
Stock and Warrants purchased by it hereunder
is set forth on Exhibit B-1
and B-2, as the case may be, as “Total
Purchase Price” (collectively, the “Purchase
Price”).  No further payment shall be required from
WallerSutton in connection with the Purchases.

             1.2        Initial Closing. The
closing of the Initial Purchase (the “Initial Closing”)
shall take place at the offices of Cadwalader, Wickersham & Taft, the
parties intending such Initial Closing to occur at
12:30 p.m. on June 28, 2001 or on such other date as shall be mutually agreed
by the Company and the Purchaser, but in no event later than July 6, 2001.

             1.3        Subsequent Sale of
Series A Preferred Stock. The closing of the Subsequent Purchase (the “Subsequent
Closing”
and, together with the Initial Closing, the “Closing”)
shall take place at the location and time of day referred to in
Section 1.2 above upon Company reaching definitive financial commitments
in a minimum amount of $1 million in sales revenues, license fees,
development fees or equity contribution in form and substance satisfactory to
WallerSutton from one or more Strategic Partners. For purposes of this
Agreement, a “Strategic Partner”
shall mean an entity that has entered into a formal or informal agreement with
the Company to provide product development, integration, resale or service
support, provided, however, that in the event the Subsequent
Closing has not occurred on or before June 30, 2002 for any reason,
WallerSutton may elect, upon written notice to the Company, not to consummate
the Subsequent Purchase.  At each of the
Closings, the Company shall deliver to Purchaser a certificate representing the
shares of Series A Preferred Stock and the Warrants, registered in the
name of the Purchaser or its nominee. Delivery of such certificates of shares
of Series A Preferred Stock and Warrants to Purchaser shall be made
against receipt at each of the Closings by the Company from Purchaser of the
purchase price therefor, which shall be paid by wire transfer to an account
designated at least two business days prior to each of the Closings by the
Company.  The account designated by the
Company for the Initial Closing, and associated wiring instructions, is set forth
on Schedule 1.3 hereto.

             1.4        Conditions to the
Initial Closing.

             (a)         The obligations of the Company and the
Purchaser to consummate the transactions contemplated hereby at the Initial
Closing are subject to the satisfaction of the following conditions: no
temporary restraining order, preliminary or permanent injunction or other order
or decree which prevents the consummation of the transactions contemplated
hereby shall have been issued and remain in effect, and no statutes, rule or
regulation shall have been enacted by any governmental authority (of the United
States or otherwise) which prevents the consummation of the transactions
contemplated hereby; provided, however, that the parties shall
use their reasonable best efforts to cause any such decree, ruling, injunction
or other order to be vacated or lifted.

             (b)        The obligations of the Purchaser to
consummate the transactions contemplated hereby at the Initial Closing is
subject to the satisfaction or waiver, on or prior to the date of the Initial
Closing, of the following conditions:

             (i)          the
representations and warranties of the Company set forth in Section 2 of
this Agreement shall be true and correct in all material respects as of the
date when made and (unless made as of a specified date) as of the date of the
Initial Closing; any and all documents or other materials provided to the
Purchaser shall not contain any material misstatements or fail to contain any
material fact; and the Company shall have performed in all material respects
its covenants set forth in this Agreement to be performed prior to the date of
the Initial Closing and shall not have taken any action which (if any shares of
Series A Preferred Stock were outstanding) would violate any provision of
the Certificate of Incorporation (including the Certificate of Designation) or
this Agreement or the Ancillary Documents, as the case may be (and at the
Initial Closing the Company shall deliver to the Purchaser an officer’s
certificate certifying as to the Company’s compliance with the conditions set
forth in this clause (i), in the form of the officers certificate attached
hereto in Schedule 1.4(b)(i));

             (ii)         The Company and the Purchaser shall have entered into the
Registration Rights Agreement in the form of Exhibit C
hereto (the “Registration Rights Agreement”),
the Stockholders Agreement (discussed in Section 2.24 hereof) and, together
with all other contracts, agreements, schedules, certificates and other
documents (including, but not limited to, the Certificate of Designation, and
the Warrants) being delivered pursuant to or in connection with this Agreement
by any party hereto at or prior to the Initial Closing, the “Ancillary
Documents”).

             (iii)        The Company shall have delivered to the Purchaser
certificates of good standing from the jurisdictions set forth on
Schedule 1.4(b)(iii) with respect to the Company and its Subsidiaries
dated as of a date no earlier than ten days prior to the Initial Closing.

             (iv)       The Certificate of Incorporation of the Company shall have
been amended and supplemented by a Certificate of Designation substantially in
the form of Exhibit D hereto setting forth the rights and preferences of
the Series A Preferred Stock (the “Certificate of Designation”),
and the Certificate of Designation shall have been filed with the Secretary of
State of the State of Delaware (the Certificate of Incorporation, as amended,
including such Certificate of Designation, the “Certificate of Incorporation”).  The Series A Preferred Stock will have all
of the rights, priorities and terms set forth in the Certificate of
Designations;

             (v)        Intentionally
Left Blank.

             (vi)       The Company shall have delivered to the Purchaser a
certificate duly executed by its Secretary certifying (i)(a) a copy of its
organizational documents including the Certificate of Incorporation and the
By-Laws of the Company (the “By-Laws”),
and (b) resolutions authorizing the transaction, in the form attached as
Schedule 1.4(b)(vi)(i) hereto, and (ii) incumbency matters, in the
form attached as Schedule 1.4(b)(vi)(ii) hereto.

             (vii)      Pursuant to the terms of the Certificate of Designation, the
Purchaser shall designate two persons (the “Initial Designees”)
to serve on the Board of Directors of the Company (the “Board”),
such designees shall have been elected to the Board effective, without any
further action, as of the date of the Initial Closing.

             (viii)     The Board of the Company shall have amended the By-Laws of the
Company to reflect that the size of the Board shall be fixed at six members
(including the Initial Designees) with a maximum of 10 directors.  A copy of such by-laws is attached hereto as
Schedule 1.4(b)(vi)(i).

             (ix)        The Company shall have obtained, with financially sound and
reputable insurers, directors’ and officers’ liability insurance in an amount
of at least $5,000,000 or a binder with respect to such insurance in form
satisfactory to WallerSutton and its counsel.

             (x)         Without
limiting the generality of Section 1.4(b)(i), no Material Adverse Effect
shall have occurred since the date hereof nor shall any event or events have
occurred since May 3, 2001 which could reasonably be expected to have a
Material Adverse Effect nor shall a Material Adverse Change have occurred
(i) in the finances, operations, prospects, facts and information
regarding the Business, the Company and its Subsidiaries, (ii) in the
assets and liabilities of the Business, the Company and its Subsidiaries, and
(iii) in any agreements, laws, rules and regulations pertaining to the
Business, the Company and its Subsidiaries.

             (xi)        The Purchaser shall have satisfactorily completed its legal,
technical, and other due diligence with respect to the Company.

             (xii)       The Company shall have received all permits, authorizations,
consents and approvals of or by, and any notification of or filing with, any
person (governmental or private), as set forth on Schedule 2.20 and the Company
shall have provided an officers certificate set forth in Schedule 1.4(b)(xii)
to Purchaser certifying as to the Company’s compliance with this Section.

             1.5        Additional Issuances,
Purchase Price Adjustment.

             (a)         In addition to and without limitation
of all other indemnities and remedies in this Agreement, in the event that at
any time on or after the Initial Closing or the Subsequent Closing, as the case
may be, the representation and warranty set forth in the last sentence of
Section 2.3 is determined not to have been true when made, the Company
shall issue to the Purchaser (on a pro rata basis based on the number of shares
of Series A Preferred Stock purchased hereunder by such Purchaser), at no
cost to the Purchaser, and as an adjustment to the Purchase Price paid by the
Purchaser for the Series A Preferred Stock and Warrants, an additional
amount of Series A Preferred Stock such that, if such issuance of
additional Series A Preferred Stock were made at the Initial Closing or
the Subsequent Closing, as the case may be, such representation and warranty
would have been true and accurate in all respects when made.

             (b)        If at the time of any required Purchase
Price adjustment pursuant to Section 1.5(a) all shares of Series A
Preferred Stock have been mandatorily converted into shares of Common Stock
pursuant to Section 5(b) of the Company’s Certificate of Designation, the
Company shall promptly issue to the Purchaser (on a pro rata basis based on the
number of shares of Series A Preferred Stock purchased hereunder by such Purchaser),
at no cost to the Purchaser and as an adjustment to the Purchase Price paid by
the Purchaser for the Series A Preferred Stock and Warrants, an additional
amount and kind of Common Stock equal to the amount and kind of Common Stock
(such amount, the “Additional Common Stock Amount”)
issuable upon the conversion (based on the conversion price in effect at the
time the last shares of Series A Preferred Stock were converted into
shares of Common Stock) of the amount of Series A Preferred Stock which
would have been issued with respect to such Purchase Price adjustment pursuant
to Section 1.5(a) if such Purchase Price adjustment had been made
immediately prior to the time the last shares of Series A Preferred Stock
were converted into shares of Common Stock.

             (c)         Any additional shares of Series A
Preferred Stock and Common Stock issued to the Purchaser pursuant to this
Section 1.5 shall be treated as if they were issued on the date hereof or
on the date of the Subsequent Closing, as the case may be, and shall reflect or
be accompanied by any dividends or other distributions which would have accrued
or have been payable with respect to, and the application of any antidilution,
ratable treatment or similar provisions (as set forth in the Company’s
Certificate of Incorporation, applicable law or otherwise) which would have
been applicable to, such shares of Series A Preferred Stock and Common
Stock had they been issued on the date hereof or on the date of the Subsequent
Closing, as the case may be.

             (d)        In connection with (i) any issuance
of Series A Preferred Stock pursuant to Section 1.5(a) (with respect
to any such issuance, the amount of Series A Preferred Stock so issued
referred to as the “Additional Preferred Stock Amount”),
the Company shall promptly issue to the Purchaser (on a pro rata basis based on
the number of shares of Series A Preferred Stock purchased hereunder by
such Purchaser), at no cost to the Purchaser and as an adjustment to the
Purchase Price paid by the Purchaser for the Series A Preferred Stock and
the Warrants, an additional number of Warrants having the right to purchase an
amount of Common Stock equal to the number of shares of Common Stock issuable
upon conversion of the Additional Preferred Stock Amount times .4845 and
(ii) any issuance of Common Stock pursuant to Section 1.5(b), the
Company shall promptly issue to the Purchaser (on a pro rata basis based on the
number of shares of Series A Preferred Stock purchased hereunder by such
Purchaser), at no cost to the Purchaser and as an adjustment to the Purchase
Price paid by the Purchaser for the Series A Preferred Stock and the
Warrants, an additional number of Warrants having the right to purchase an amount
of Common Stock equal to the Additional Common Stock Amount in respect of such
issuance times .4845.  The Warrants
issuable pursuant to subsections 1.5(d) (i) and (ii) shall have an exercise
price equal to $0.536.

             (e)         In connection with any issuance of
Series A Preferred Stock and/or Warrants pursuant to this
Section 1.5, the Company shall reserve a sufficient number of shares of
(i) Common Stock for issuance to the Purchaser upon exercise of the
Warrants so issued and (ii) Common Stock for issuance to the Purchaser
upon the conversion of the shares of Series A Preferred Stock so issued.
Any shares of Series A Preferred Stock or Common Stock issued to the
Purchaser pursuant to this Section 1.5 shall, when issued, be validly
issued and fully paid and nonassessable with no personal liability attaching to
the ownership thereof and free and clear of all Encumbrances.

             1.6        Purchase Price
Allocation. Subject to any adjustments to the Purchase
Price provided for herein, the Purchase Price shall be allocated between the
Series A Preferred Stock and the Warrants as set forth in Exhibit E.

             1.7        Conditions to the Subsequent
Closing. The obligations of the Purchaser to
consummate the Subsequent Closing shall be subject to the satisfaction (or
waiver), on or prior to the date of the Subsequent Closing, of the following
conditions:

             (a)         The representations and warranties of
the Company set forth in Section 2 of this Agreement shall be true and
correct in all material respects as of the date when made and (unless made as
of a specified date) as of the date of the Subsequent Closing; any and all
documents or other materials provided to the Purchaser shall, in the sole
judgment and discretion of the Purchaser, not contain any material misstatement
or fail to contain any material fact; and the Company shall have performed in
all material respects its covenants set forth in this Agreement to be performed
prior to the date of the Subsequent Closing and shall not have taken any action
which (if any shares of Series A Preferred Stock were outstanding) would
violate any provision of the Certificate of Incorporation (including the
Certificate of Designation), this Agreement or the Ancillary Documents, as the
case may be (and, at the Subsequent Closing, the Company shall deliver to the Purchaser
an officer’s certificate certifying as to the Company’s compliance with the
conditions set forth in this clause (a), in the form of
Schedule 1.7(a) hereto);

             (b)        The Initial Closing shall have occurred;

             (c)         The Company shall have delivered to the
Purchaser long-form certificates of good standing from the jurisdictions set
forth on Schedule 1.4(b)(iii) with respect to the Company and its
Subsidiaries dated as of a date no earlier than ten days prior to the
Subsequent Closing;

             (d)        The Common Stock to be issued upon
conversion of the Series A Preferred Stock and the exercise of the Warrant
shall continue to be listed on the NASDAQ, or registered on the exchange or
other forum in which the Company’s common Stock is then traded;

             (e)         The Company shall have delivered to the
Purchaser a certificate executed by its Secretary, in form and substance
satisfactory to the Purchaser, dated as of the Subsequent Closing certifying
(i) a copy of its organizational documents including the Certificate of
Incorporation and the By–Laws, (ii) resolutions authorizing the
transaction and (iii) incumbency matters;

             (f)         No Material Adverse Effect shall have
occurred since the Initial Closing nor shall any event or events have occurred
since the Initial Closing which could reasonably be expected to have a Material
Adverse Effect nor shall a Material Adverse Change have occurred (i) in
the facts and information regarding the Business, including, but not limited
to, the Software and the Intellectual Property, the Company and its Subsidiaries,
(ii) in the assets of the Business, the Company and its Subsidiaries, and
(iii) in any agreements, laws, rules and regulations pertaining to the
Issuer, since May 3, 2001.

             SECTION 2.    Representations
and Warranties of the Company.

             The Company hereby represents and
warrants to the Purchaser as follows:

             2.1        Organization and Good
Standing; Power and Authority; Qualifications. Each of the Company and its subsidiaries, (“Subsidiaries”)
(i) is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization, except as set forth on Schedule 2.26 and (ii) has all requisite power and authority to
own, lease and operate its properties and to carry on its business as presently
conducted and as proposed to be conducted. 
The Company has all requisite power and authority to enter into and
carry out the transactions contemplated by this Agreement and the Ancillary
Documents to which it is a party.  Each
of the Company and its Subsidiaries is qualified
to
transact business as a foreign corporation in, and is in good standing under
the laws of, those jurisdictions listed on Schedule 2.1 under its name,
except as set forth on Schedule 2.26, which jurisdictions constitute all of the
jurisdictions wherein the character of the property owned or leased or the
nature of the activities conducted by it makes such qualification necessary and
where failure to so qualify would individually or in the aggregate have, or
would reasonably be expected to have,  a
material adverse effect on the properties, business, prospects, operations,
earnings, assets, liabilities, Intellectual Property, Software or the condition
(financial or otherwise) of the Company and its Subsidiaries taken as a whole
(a “Material Adverse Effect”).

             2.2        Authorization of the Documents. The execution, delivery and performance by the Company of this
Agreement and each of the Ancillary Documents to which it is a party has been
duly authorized by all requisite corporate action on the part of the Company
and the stockholders of the Company have approved and provided the requisite
consent to effectuate the Purchases, and each of this Agreement and the
Ancillary Documents constitutes a legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms except to
the extent that enforceability may be limited by bankruptcy, insolvency or
other similar laws affecting creditors’ rights generally.

             2.3        Capitalization. The authorized capitalization of the Company
immediately following the Initial Purchase will consist of (a) 13,000,000
shares of Preferred Stock, par value $0.001 per share, of which
(i) 13,000,000 shares have been designated Series A Preferred Stock and (ii) 7,468,661 shares of
Series A Preferred Stock are issued and outstanding and all such outstanding
shares are validly issued, fully paid and nonassessable and free and clear of
all Encumbrances, other than Encumbrances, if
any, arising as a result of actions taken by the Purchaser; and (b) 200,000,000 shares
of Common Stock, par value $0.001 per share, of which 26,906,982 shares are
issued and outstanding and all such outstanding shares are validly issued,
fully paid and nonassessable and free and clear of all Encumbrances.  Except as listed on Schedule 2.3
hereto, there are no outstanding options, warrants, subscription rights, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, shares of any
class of capital stock of the Company, or contracts, by which the Company or
its Subsidiaries is or may become bound to issue
additional shares of its capital stock or options, warrants
or other rights to purchase or acquire any shares of its capital stock. Except
as set forth in Schedule 2.3 hereto, since its inception, the Company has
not declared or paid any dividend or made any other distribution of cash, stock
or other property to its stockholders. 
Except as contemplated by this Agreement or the Ancillary Documents or
except for the right to vote its shares of Common Stock for the election of
directors, no person has the right to nominate or elect one or more directors
of the Company.  There are no voting
agreements, voting trusts, proxies or other agreements or understandings with
respect to the voting of any capital stock of the Company of which the Company
is a party, except as provided herein, in the Stockholders Agreement and the
Certificate of Designations.  The shares
of Common Stock issuable upon conversion of the Series A Preferred Stock
and exercise of the Warrants issued to Purchaser on the dates of the Initial
Closing and the Subsequent Closing under this Agreement represent, in the
aggregate, the percentages set forth on Schedule 2.3 of the outstanding Common
Stock of the Company on the date of the Initial Closing and the Subsequent
Closing, respectively, and the voting power of such issued shares represent, in
the aggregate, percentages set forth on Schedule 2.3 of the total number of
votes able to be cast on any
matter by all voting securities of the Company (other than any matter to be
voted on by the holders of shares of Series A Preferred Stock as a
separate class) on the date of the Initial Closing and the Subsequent Closing,
respectively (treating for purposes of these calculations (i) all
outstanding warrants, options, agreements, securities (including notes and debt securities)
or other commitments convertible, exercisable or exchangeable into shares of
capital stock or other equity securities of the Company or pursuant to which
the equity securities of the Company (“Common Stock Equivalents”) outstanding on the
date hereof (including the Warrants) as having been converted, exchanged or
exercised, (ii) any shares of Common Stock or Common Stock Equivalents
issuable pursuant to any Contract entered into by the Company on or prior to
the date hereof, or any preemptive right granted by the Company on or prior to
the date hereof, in each case, as having been issued on the date hereof and
(iii) up to an additional 2,000,000 shares of Common Stock issued under
the Company’s 1997 and 1999 stock option plans or their equivalents.

             2.4        Authorization and Issuance of
Capital Stock. The authorization, issuance, sale and
delivery of the Series A Preferred Stock and the Warrants pursuant to this
Agreement and the authorization, reservation, issuance, sale and delivery of
the shares of Series A Preferred Stock, the Warrants, the Conversion
Shares and the Warrant Shares have been duly authorized by all requisite
corporate action on the part of the Company, and when issued, sold and
delivered in accordance with this Agreement and/or any Ancillary Document, the
Series A Preferred Stock, the Warrants, the Conversion Shares and the
Warrant Shares will be validly issued and outstanding,
fully paid and nonassessable with no personal liability attaching to the
ownership thereof, free and clear of any Encumbrances, other than Encumbrances,
if any, arising as a result of actions taken by the Purchaser. The terms, designations,
powers, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions, of any series of Preferred Stock of the Company are as stated in
the Certificate of Incorporation. All stockholder approval required to
consummate the transaction contemplated hereunder and under the Ancillary
Documents has been received. The Board has unanimously approved the transactions
contemplated hereby for the purposes of Section 203 of the General
Corporation Law of the State of Delaware pursuant to Section 203(a)(1)
thereof (and the Company shall deliver to the Purchaser an officer’s
certificate certifying as to the Company’s compliance with the conditions
set forth in this sentence of Section 2.4, in the form of the officers
certificate attached hereto in Schedule 2.4, and attach
a copy of the written consent of all members of the Board
or minutes of a meeting of the Board authorizing and approving this Agreement
and the actions and agreements contemplated hereby).  The Company has reserved a sufficient number of shares of
(i) Common Stock for issuance upon conversion or exercise of the
Series A Preferred Stock and the Warrants, respectively, (ii) Common
Stock for the issuance of dividends on the Series A Preferred Stock
pursuant to the Certificate of Designation, and (iii) Common Stock for
issuance upon conversion or exercise of all other Common Stock Equivalents
outstanding on the date hereof.  The
shares of Common Stock issuable upon the conversion of the Series A
Preferred Stock issued or issuable to the Purchaser hereunder or under any
Ancillary Document shall be referred to collectively as the “Conversion
Shares.”

             2.5        SEC Reports. The Company has filed all proxy statements,
reports and other documents required to be filed by it with the Securities and
Exchange Commission (the “Commission”)
under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
from its inception; and the Company has furnished the Purchaser true and
complete copies of all annual reports, quarterly reports, proxy statements and
other reports under the Exchange Act filed by the Company from and after such
date, each as filed with the Commission, unless such
documents are available on the SEC’s EDGAR site at least 20 days prior to the
Initial Closing (collectively, the “SEC Reports”).  Each SEC Report was in compliance in all
material respects with the requirements of its respective report form and did
not on the date of filing contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, and as of the date hereof
there is no fact or facts not disclosed in the SEC Reports which relate to the
Company, its Subsidiaries, and their respective businesses, and which
individually or in the aggregate may have a Material Adverse Effect.

             2.6        Financial Statements. The
financial statements (including any related schedules and/or notes) included in
the SEC Reports have been prepared in accordance with generally accepted
accounting principles (“GAAP”)
consistently applied (except as indicated in the notes thereto) throughout the
periods involved and fairly present in all material respects the consolidated
financial condition, results of operations and changes in stockholders’ equity
of the Company as of the respective dates thereof and for the respective
periods then ended (in each case subject, as to interim statements, to changes
resulting from year-end adjustments, none of which were material in amount or
effect).  Except as set forth in Schedule 2.6(a), the Company has no liabilities or
obligations (whether accrued, absolute, contingent, unliquidated or otherwise,
whether or not known, whether due or to become due and regardless of when
asserted), except (i) liabilities and obligations in the respective
amounts reflected in or reserved against in the Company’s balance sheet or the
footnotes thereto as of December 31, 2000 included in the SEC Reports or
(ii) liabilities and obligations incurred after December 31, 2000 in the ordinary course of business consistent
(in amount and kind) with past practice (none of which is a liability resulting
from breach of contract, breach of warranty, tort, infringement,
claim or lawsuit) and that do not exceed $25,000 in the aggregate.  Since December 31, 2000, the Company has
operated its business only in the ordinary course and there has not been
individually or in the aggregate any change that would have a Material Adverse
Effect (a “Material Adverse Change”) other than changes disclosed in the
SEC Reports or otherwise set forth in Schedule 2.6(b) hereto.

             2.7        Absence of Material
Changes. Except as set forth on Schedule 2.7 and
except as otherwise expressly contemplated by this Agreement, since
December 31, 2000, the Business has been conducted in the ordinary course,
consistent with past practice and there has not been (a) any Material
Adverse Change, nor has any event or change occurred which could reasonably
result in a Material Adverse Change, in the condition (financial or otherwise),
results of operations, business, Intellectual Property, Software assets,
liabilities or prospects of the Business, the Company or its Subsidiaries or
any event or condition which could reasonably be expected to have a Material
Adverse Effect, (b) any waiver or cancellation of any valuable right of
the Business, the Company or its Subsidiaries, or the cancellation of any
material debt or claim held by the Business, the Company or its Subsidiaries,
(c) any payment, discharge or satisfaction of any claim, liability or
obligation of the Business, the Company or its Subsidiaries other than in the
ordinary course of business, (d) any Encumbrance upon the assets of the
Business, the Company or its Subsidiaries other than
any Permitted Encumbrance, (e) any declaration or payment of dividends on,
or other distribution with respect to, or any direct or indirect redemption or
acquisition of, any securities of the Company or its Subsidiaries, (f) any
issuance of any stock, bonds or other securities of the Company or its
Subsidiaries, (g) any sale, assignment or transfer of any tangible or
intangible assets of the Business, the Company or its Subsidiaries except in
the ordinary course of business, (h) any loan by the Company or its
Subsidiaries to any officer, director, employee, consultant or shareholder of
the Company or its Subsidiaries (other than advances to such persons in the ordinary
course of business in connection with travel and travel related expenses),
(i) any damage, destruction or loss (whether or not covered by insurance)
materially and adversely affecting the assets, property, condition (financial
or otherwise), results of operations or
prospects of the Business, the Company or its Subsidiaries, (j) any
increase,
direct
or indirect, in the compensation paid or payable to any officer or director of
the Company or its Subsidiaries and, other than in the ordinary course of
business, consistent with past practice, to any other employee, consultant or
agent of the Company or its Subsidiaries, provided, however, that in any event,
no such increase has been in an amount more than 15% from such person’s,
consultant’s or agent’s prior year’s compensation, (k) any change in the
accounting methods, practices or policies of the Business, the Company or its
Subsidiaries, (l) any indebtedness incurred for borrowed money by the
Business, the Company or its Subsidiaries other than in
the ordinary course of business, (m) any amendment to or termination of,
now or in the future, any material agreement to which the Business, the Company
or its Subsidiaries is a party other than the expiration of any such agreement
in accordance with its terms, (n) any change in the laws or regulations
governing the Business, the Company or its Subsidiaries,
(o) any Material Adverse Change in the manner of business or operations of
the Business, the Company or its Subsidiaries
(including, without limitation, any accelerations or deferral of the payment of
accounts payable or other current liabilities or deferral of the collection of
accounts or notes receivable), (p) any capital expenditures or commitments
therefor by
the Business, the Company or its Subsidiaries that aggregate in excess of
$25,000, (q) any amendment of the certificate of
incorporation, By–Laws or other organizational documents of the Company
or its Subsidiaries, (r) any transaction entered into by the Company other
than in the ordinary course of business or any other material transactions
entered into by the Business, the Company or its Subsidiaries whether or not in
the ordinary course of business or (s) any agreement or commitment
(contingent or otherwise) by the Business, the Company or
its
Subsidiaries to do any of the foregoing. 
For purposes of this Agreement, “Permitted Encumbrances”
shall mean (1) those consisting of zoning or planning restrictions,
easements, permits and other restrictions or limitations on the use of such
property or irregularities in title thereto that, individually and in the
aggregate, do not materially impair the use of such property, (ii) warehousemen’s,
mechanics’, carriers’, landlords’, repairmen’s or other similar Encumbrances
arising in the ordinary course of business and securing obligations not yet due
and payable and (iii) other Encumbrances which arise in the ordinary
course of business and which individually and in the aggregate do not
materially impair its use of such property or its ability to obtain financing
by using such asset as collateral or would otherwise individually or in the
aggregate have a Material Adverse Effect.

             2.8        No Conflict. The
execution and delivery by the Company of the Agreement and the Ancillary
Documents to which it is a party and the consummation by the Company of the
transactions contemplated hereby and thereby and its compliance with the
provisions hereof and thereof (including, without limitation, the issuance,
sale and delivery by the Company of the Series A Preferred Stock, the
Warrants, the Warrant Shares and the Conversion Shares) will not
(a) violate any provision of any domestic (federal, state or local) or foreign
law, statute, rule or regulation, or any ruling, writ, injunction, order,
judgment or decree of any court, administrative agency or other governmental
body applicable to it, or any of its properties or assets, (b) conflict
with, or result in any violation or breach of, or constitute (with due notice
or lapse of time, or both) a default or loss of a benefit under, or cause or
permit the acceleration under, the terms, conditions or provisions of any
Contract to which it is a party or its properties or assets is subject, except
for defaults which would not individually or in the aggregate, have a Material
Adverse Effect, (c) result in the creation or imposition of any Encumbrance upon any of its properties or assets, except
for Permitted Encumbrances or (d) violate its organizational documents.

             2.9        Agreements. (a) Except as set forth on
Schedule 2.9, neither the Company nor its Subsidiaries is a party to, and
the Business is not bound or subject to, any indenture, mortgage, guaranty, lease, license or other
contract, agreement or understanding, written or oral (a “Contract”), other than any
Contract that (i) pursuant to its terms, has expired, been terminated or
fully performed by the parties, and in each case, under which neither the
Company, its Subsidiaries nor the Business have any liability, contingent or
otherwise, or (ii) involves monthly payments to or from the Company, its
Subsidiaries or the Business (as opposed to an indemnity agreement
or similar contract under which a party is not required to make fixed monthly payments) which monthly payments do not
aggregate on an annual basis $25,000 or more, and in each case, is not material
to the business, condition (financial or otherwise), operations or prospects of
the Business, the Company or its Subsidiaries. (b) Each of such
Contracts is, as of the date hereof, and will continue after the Closing to be,
as to the Company or its Subsidiaries, as the case may
be, legal, valid, binding and in full force and effect and enforceable in
accordance with its terms. There is no breach, violation or default by the
Company or its Subsidiaries (or, to the knowledge of the Company, any other
party) under any such Contract and no event (including, without limitation, the
consummation of the transactions contemplated by this agreement) which, with
notice or lapse of time or both, would (A) constitute a breach, violation
or default by the Company or its Subsidiaries (or, to the best knowledge of the
Company, any other party) under any such Contract or (B) give rise to any
lien or right of termination, modification, cancellation, prepayment,
suspension, limitation, revocation or acceleration against the Company or its
Subsidiaries under any such Contract. Except as set forth on Schedule 2.9,
neither the Company or its Subsidiaries nor, to the knowledge of the Company,
any other party to any of such Contracts (i) is in arrears in respect of
the performance or satisfaction of the terms and conditions on its part to be
performed or satisfied under any of such Contracts or (ii) has granted or
has been granted any waiver or indulgence under any of such Contracts or has
repudiated any provision thereof.

             2.10      Intellectual Property Rights. (a) Except as disclosed on Schedule 2.10 hereto,
(i) the Company owns or has the right to use pursuant to license,
sub-license, agreement or permission all of its Intellectual Property,
including all Intellectual Property used in the operation of the Business, as
presently conducted and as currently anticipated to be conducted, including, but in no way limited to, as set forth in the
SEC Reports and to the specifications as set forth therein and as demonstrated,
except where the absence of any thereof would not individually or in the
aggregate have a Material Adverse Effect; (ii) the Company has, to its
knowledge, not interfered with, infringed upon or misappropriated any
Intellectual Property rights of third parties, except for interferences,
infringements and misappropriations which would not individually or in the
aggregate have a Material Adverse Effect, and the Company has not received any
claim, demand or notice alleging any such interference, infringement or
misappropriation (including any claim that it must license or refrain from
using any Intellectual Property rights of any third party).  To the Company’s knowledge, no third party
has interfered with, infringed upon or misappropriated any Intellectual
Property rights of the Company, except for interferences, infringements and
misappropriations which would not individually or in the aggregate have a
Material Adverse Effect.

             (b)        Except as set forth on
Schedule 2.10(b), neither the Business, the Company nor its Subsidiaries
is obligated to pay any amount, whether as royalty, license fee or other
payment, to any person in order to make, use, or sell any Intellectual
Property.

             (c)         Except as set forth on
Schedule 2.10(c), the operation of the Business, the Company and its
Subsidiaries as presently operated does not need to use or rely upon any
Intellectual Property rights of third parties.

             (d)        Schedule 2.10(d) sets forth a list
of all Software used in the operation of the Business, the Company and its
Subsidiaries (in connection with servicing the customer) as currently conducted
or currently proposed to be conducted.

             (e)         Schedule 2.10(e) lists and
identifies all Third Party Software used in connection with servicing clients.
Except as set forth on Schedule 2.10(e), the Company and its Subsidiaries
has the right to use all Third Party Software, including all Intellectual
Property Rights associated therewith, pursuant to license, sublicense or
contract.  All royalties due under said
licenses have been paid and there exists no default by the Business, the
Company or its Subsidiaries or by any other party under the terms of said
licenses, and no event has occurred which, upon the passage of time or the
giving of notice, or both, would result in any default by the Business, the
Company or its Subsidiaries or by any other party to the license or prevent the
Company from exercising and obtaining the benefits of any options contained
therein.  The Company is not aware of
any circumstance pursuant to which it is, or could be, unable to use, or have
access to, such Third Party Software, or that its ability to use, or have
access to, such Third Party Software would be materially limited (including any
oral or written claim made by a third party to the Company or its counsel
threatening to stop or restrict use of access by the Company to such Third
Party Software).

             (f)         The Company Software actually performs
as presently described in the Business and as currently anticipated to be
conducted, including, but in no way limited to, as set forth in the SEC Reports
and to the specifications as set forth therein and as demonstrated;

             (g)        As used in this Agreement “Intellectual
Property” means all intellectual property owned, leased, licensed, and used
by the Company or its Subsidiaries, including, without limitation, (i) all
world wide inventions and discoveries (whether patentable or unpatentable and
whether or not reduced to practice), all improvements thereto, and all patents,
patent applications and patent disclosures, together with all reissuances,
continuations, continuations in-part, revisions, extensions and reexaminations
thereof, (ii) all trademarks, service marks, trade dress, logos, trade
names and corporate names, together with all translations, adaptations,
derivations and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, renewals and derivatives in
connection therewith, (iii) all copyrightable works, all copyrights and
all applications, registrations and renewals in connection therewith,
(iv) all mask works and all applications, registrations and renewals in
connection therewith, (v) all know-how, trade secrets and confidential
business information, whether patentable or unpatentable and whether or not
reduced to practice (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier lists,
addresses, phone numbers, pricing and cost information, and business and
marketing plans and proposals), (vi) all Software, (vii) all other
proprietary rights of any type of description (regardless of whether the same
have been formally registered), (viii) all copies and tangible embodiments
thereof (in whatever form or medium) and (ix) all licenses and agreements
in connection with the foregoing.

             (h)        As used in this Agreement, “Software”
means any and all versions, releases, and predecessors of the software and
computer programs of the Company, including all such software and computer
programs in machine readable source code forms and in machine executable object
code forms and all related specifications (including, without limitation, all
logic architectures, algorithms and logic flows and all physical, financial,
operating and design parameters), any data used by or related to Software, work
in progress relating to corrections, modifications or enhancements, operating
systems and procedures (including development methodology), designs, design
revisions, related applications, work benches, software in any language,
concepts, ideas, processes, techniques, software designs and test tools, third
party software interfaces written by them and all methods of implementation and
packaging, together with all associated know-how and show-how.

             (i)          As used in this Agreement, “Third
Party Software” means software or computer programs used in the operation
of the Business (specifically, in connection with servicing clients) as
presently conducted or currently anticipated to be conducted and that are not
owned by the Company.

             2.11      Equity Investments;
Subsidiaries. Except for its Subsidiaries or as set forth
on Schedule 2.11, the Company has never had, nor does it presently have,
any subsidiaries, nor has it owned, nor does it presently own, whether directly
or indirectly owned, any capital stock or other proprietary interest, directly
or indirectly, in any corporation, association, trust, partnership, joint
venture or other entity.  All of the
outstanding shares of capital stock of each class of its Subsidiaries
(a) are owned beneficially and of record by the Company free and clear of
any liens, charges and Encumbrances, (b) constitute 100% of such
Subsidiary’s outstanding shares and (c) have been validly issued, are
fully paid and non-assessable.

          2.12      Title
to Assets and Properties, Insurance. (a) Each of the Company and its Subsidiaries has good and
marketable title, or a valid leasehold interest in or contractual right to use,
all of its assets and properties, free and clear of any mortgages, judgments,
claims, liens, security interests, pledges, escrows,
charges or other encumbrances of any kind or character whatsoever (“Encumbrances”) except in each case
for Permitted Encumbrances and such defects in title and such other liens and
Encumbrances which do not individually or in the aggregate materially detract
from the value to the Company of the properties and assets of the Company and
its Subsidiaries taken as a whole.

             (b)        The Company and its Subsidiaries
maintain insurance in such amounts (to the extent available in the public
market), including self-insurance, retainage and deductible arrangements, and
of such a character as is reasonable for companies engaged in the same or
similar business (including, but not limited to, insurance against liability
from customer losses as a result of the Company’s products).  Schedule 2.12(b) sets forth a list of
all insurance coverage carried by the Business and/or the Company and/or its
Subsidiaries, the carrier and terms and amount of coverage.

             2.13      Employee
Benefit Plans. (a) Schedule 2.13 hereto contains a true
and complete list of (i) each plan, program, policy, payroll practice,
contract, agreement or other arrangement, or commitment therefor, providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits of any kind, whether formal or informal, funded or unfunded,
written or oral, and whether or not legally binding, which is now or previously
has been sponsored, maintained, contributed to or required to be contributed to
by the Company or pursuant to which the Company or its Subsidiaries have any liability, contingent or otherwise,
including, but not limited to, any “employee benefit plan” within the meaning
of Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”) (each, a “Benefit Plan”); and (ii) each
management, employment, bonus, option, equity (or equity related), severance, consulting, non compete, confidentiality or similar
agreement or contract (each, an “Employee Agreement”), pursuant
to which the Company or the Subsidiary have any
liability, contingent or otherwise, between the Company or its Subsidiaries and
any current, former or retired employee, officer, consultant, independent
contractor, agent or director of the Company or its Subsidiaries (an “Employee”).  Except as identified on Schedule 2.13,
neither the Company nor its Subsidiaries currently sponsor, maintain,
contribute to, nor is it required to contribute to, nor has the Company or its
Subsidiaries ever sponsored, maintained, contributed to or been required to
contribute to, or incurred any liability to, (i) any “defined benefit
plan” (as defined in ERISA Section 3(35)); (ii) any “multiemployer
plan” (as defined in ERISA Section 3(37)) or (iii) any Benefit Plan
which provides, or has any liability to provide, life insurance, medical,
severance or other employee welfare benefits to any
Employee upon his or her retirement or termination of employment, except as
required by Section 4980B of the Internal Revenue Code of 1986, as amended
(the “Code”).

             (b)        Neither the Company nor its Subsidiaries
has ever been (i) a member of a “controlled group of corporations,” under
“common control” or an “affiliated service group” within the meaning of
Sections 414(b), (c) or (m) of the Code, (ii) required to be
aggregated under Section 414(o) of the Code, or (ii) under “common
control,” within the meaning of Section 4001(a)(14) of ERISA, or any
regulations promulgated or proposed under any of the foregoing Sections, in
each case with any other entity.

             (c)         The Company has previously provided to
the Purchaser current, accurate and complete copies of all documents embodying
or relating to each Benefit Plan and each Employee Agreement, including all
amendments thereto, trust or funding agreements relating thereto (if any), the
two most recent annual reports (Series 5500 and related schedules)
required under ERISA (if any), the most recent determination letter (if any)
received from the Internal Revenue Service, the most recent summary plan
description (with all material modifications) (if any), and all material
communications to any Employee or Employees relating to any Benefit Plan or
Employee Agreement.

             (d)        Each Benefit Plan has been established
and maintained in accordance with its terms and in compliance with all
applicable, laws, statutes, orders, rules and regulations, including but not
limited to ERISA and the Code; and each Benefit Plan intended to qualify under
Section 401 of the Code is, and since its inception has been, so
qualified.

             (e)         The execution of, and performance of
the transactions contemplated in, this Agreement will not (either alone or upon
the occurrence of any additional or subsequent events) (i) constitute an
event under any Benefit Plan or Employee Agreement that will or may result in
any payment (whether of severance pay or otherwise), acceleration, forgiveness
of indebtedness, vesting, distribution, increase in benefits or obligations to
fund benefits with respect to any Employee or (ii) result in a bonus or
payment to any officer or director of the Company.

             2.14      Labor
Relations, Employees. Schedule 2.14 hereto lists all employees
of the Company and its Subsidiaries with total cash compensation in excess of
$75,000.  Except as set forth on
Schedule 2.14 hereto, (i) neither the Company nor its Subsidiaries is
delinquent in
payments
to any of its employees, for any wages, salaries, commissions, bonuses or other
direct compensation for any services performed by
the date hereof or amounts required to be reimbursed by them to
the date hereof, (ii) each of the Company and its Subsidiaries is in
compliance with all applicable federal, state and local laws, rules and
regulations respecting employment, employment practices, labor, terms and
conditions of employment and wages and hours, (iii) neither the Company
nor its Subsidiaries is bound by or subject to (and none of its assets or
properties is bound by or subject to) any written or oral, express or implied,
commitment or arrangement with any labor union, and no labor union has requested
or, to the knowledge of the Company, has sought to represent any of the
employees, representatives or agents of the Company or its Subsidiaries,
(iv) there is no labor strike, dispute, slowdown or stoppage actually
pending, or, to the knowledge of the Company, threatened against or involving the Company or its Subsidiaries, (v) to
the knowledge of the Company, no salaried key employee has any plans to
terminate his or her employment with the Company or its Subsidiaries.  Each of the officers of the Company and its
Subsidiaries, each key employee and each other employee of the Company and its
Subsidiaries who has or had access to confidential information of the Business
has executed a confidentiality agreement, and such agreements are in full force
and effect.

             2.15      Litigation,
Orders. Except as set forth on Schedule 2.15,
there is no civil, criminal or administrative action, suit, claim, notice,
hearing, inquiry, proceeding or investigation at law or in equity by or before
any court, arbitrator or similar panel, governmental instrumentality or other
agency now pending or, to the knowledge of the Company, threatened against the Business, the Company or its Subsidiaries or
the assets (including the Intellectual Property) of the Business, the Company
or its Subsidiaries. Except as set forth in Schedule 2.15, neither the
Business, the Company nor its Subsidiaries is subject to any order, writ,
injunction or decree of any court of any federal, state, municipal or other
domestic or foreign governmental department, commission, board, bureau, agency
or instrumentality.

             2.16      Compliance with Laws, Permits. (a) Except as provided in Schedule 2.16, the Business, the
Company and its Subsidiaries are in compliance, and have been conducted in
compliance with, all federal, state, local and foreign laws, rules, ordinances,
codes, consents, authorizations, registrations, regulations, decrees,
directives, judgments and orders (including Environmental Laws) applicable to
it except where the failure to comply would not individually or in the
aggregate have a Material Adverse Effect. Each of the Company and its
Subsidiaries has all federal, state, local and foreign governmental licenses,
permits, qualifications and authorizations (“Permits”) necessary in the
conduct of the Business as currently conducted. All such Permits are in full
force and effect, and no violations have been recorded in respect of any such
Permits; no proceeding is pending or, to the best knowledge of the Company,
threatened to revoke or limit any such Permit; and no such Permit will be
suspended, cancelled or adversely modified as a result of the execution and
delivery of this Agreement or the Ancillary Documents
and the consummation of the transactions contemplated hereby or thereby, except
where
failure to have such Permit would not individually or in the aggregate have a
Material Adverse Effect. 
Schedule 2.16 sets forth a list of all such Permits and the
expiration dates thereof.

             (b)        For purposes of this Agreement, “Environmental
Laws” means, without limitation, (i) the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. §§ 9601, et seq.; the Emergency Planning and
Community Rights-to-Know Act of 1986, 42 U.S.C. §§ 11001, et seq.; the Resource Conservation and
Recovery Act, 42 U.S.C. §§ 6901, et seq.;
the Toxic Substances Control Act, 15 U.S.C. §§ 2601, et seq.; the Federal Insecticide,
Fungicide, and Rodenticide Act, 7 U.S.C. §§ 136, et seq.; the Clean Air Act 42 U.S.C.
§§ 7401, et seq.; the Clean
Water Act (Federal Water Pollution Control Act), 33 U.S.C. §§ 1251, et seq.; the Safe Drinking Water Act, 42
U.S.C. §§ 300f, et seq.; the
Occupational Safety and Health Act, 29 U.S.C. §§ 641, et seq.; the Hazardous Materials
Transportation Act, 49 U.S.C. §§ 1801, et
seq.; as any of the above statutes have been or may be amended from
time to time, all rules and regulations promulgated pursuant to any of the
above statutes, and any other foreign, federal, state or local law, statute,
ordinance, rule or regulation governing environmental matters, as the same have
been or may be amended from time to time, including any common law cause of
action providing any right or remedy with respect to environmental matters, and
all applicable judicial and administrative decisions, orders, and decrees relating
to environmental matters and (ii) and all indemnity agreements and other
contractual obligations, as in effect at such date, relating to the protection
of the environment, including the air, surface and subsurface soils, surface
waters, groundwaters and natural resources, and occupational health and safety
and exposure of persons to hazardous materials.

             2.17      Offering
Exemption. Assuming the accuracy of the representations
and warranties contained in Section 3 hereof, the offer and sale of the
Series A Preferred Stock and the Warrants as contemplated hereby and the
issuance and delivery of the Warrant Shares to the Purchaser
upon exercise of the Warrants and the issuance and delivery of the Conversion
Shares to the Purchaser upon the conversion of the Series A Preferred
Stock are each exempt from registration under the Securities Act of 1933, as
amended (the “Securities Act”), and under applicable
state securities and “blue sky” laws, as currently in effect.

             2.18      Disclosure. Neither this Agreement (including the
Exhibits and Schedules attached hereto) nor any certificate, instrument or
written statement furnished or made to the Purchaser by or on behalf of the
Company in connection with this Agreement or the Ancillary Documents contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements contained herein and therein not
misleading.  There is no fact which the
Company has not disclosed to the Purchaser or their counsel in writing and of
which the Company is aware which materially and adversely affects or which
could reasonably be expected to materially and adversely affect the Business or
the business, financial condition, operations, property, affairs or prospects
of the Company or its Subsidiaries or the ability of the Company to perform its
obligations under the Agreement or any of the Ancillary Documents.

             2.19      Taxes. The Company and its Subsidiaries have filed
or caused to be filed all income tax returns which are required to be filed and
have paid or caused to be paid all Taxes that have
become due, except Taxes the validity or amount of which is being contested in
good faith
by appropriate proceedings and with respect to which adequate reserves have
been set aside.  “Taxes,”
for purposes of this Agreement, means any taxes, assessments, duties, fees,
levies, imposts, deductions, withholdings, including, without limitation,
income, gross receipts, ad valorem, value added, excise, real or personal
property, asset, sales, use, license, payroll, transaction, capital, net
worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility, severance, production, unemployment compensation, occupation,
premium, windfall profits, transfer and gains taxes, or other governmental
charges of any nature whatsoever imposed by any government or taxing authority of any country or political subdivision of any country
and any liabilities with respect thereto, including any penalties, additions to tax,
fines or interest thereon, and includes any liability of the Company and its
Subsidiaries arising under any tax sharing agreement to which it is or has been
a party.

             2.20      Consents. Except as set forth on Schedule 2.20, no
permit, authorization, consent or approval of or by, or any notification of or
filing with, any person (governmental or private) is required by the Company in
connection with the execution, delivery and performance of this Agreement and
the Ancillary Documents to which it is a party, the consummation by the Company
of the transactions contemplated hereby or thereby, or the issuance, sale or
delivery of the Series A Preferred Stock, the Warrants, the Warrant Shares
or the Conversion Shares (other than such notifications or filings required
under applicable federal or state securities laws, if any, which shall be made
on a timely basis).

             2.21      Brokers. Except as listed on Schedule 2.21,
neither the Company nor any of its officers, directors, employees or stockholders
has employed any broker or finder in connection with the transactions
contemplated by this Agreement or the Ancillary Documents nor will the
execution of, and performance of the transactions contemplated in, this
Agreement or the Ancillary Documents result in a payment to any broker or
finder (including, but not limited to, any employee or director of the
Company).

             2.22      Suppliers
and Customers. Except as listed on and in the amounts set
forth on Schedule 2.22, the Company does not have any knowledge of any
termination, cancellation or threatened termination or cancellation or
limitation of, or any material modification or change in, or expressed material
dissatisfaction with the business relationship between the Business, the
Company or its Subsidiaries and any supplier or vendor or customer or client of
the Business, the Company or its Subsidiaries, in each case, of materials or
services in an amount in excess of $10,000.

             2.23      Accounts
Payable and Current Liabilities. The Company does
not have an account payable or a current liability in excess of $250,000.

             2.24      Transfer Restrictions. The employees of the Company and the
stockholders set forth on Schedule 2.24(a) have entered into the Stockholders
Agreement attached hereto as Schedule 2.24(b) and the Company has delivered an
originally-executed copy of all of those Stockholders Agreements to Purchaser.

             2.25      Efforts
in Completing Schedules. The Company has
used its best efforts to and has caused its agents and counsel to use their
respective commercially reasonable efforts to provide all information on all
Company schedules to this Agreement.

             2.26      Certain
Subsidiaries. The
subsidiaries set forth on Schedule 2.26 do not have any liabilities
(whether contingent, pending, or now due), in the aggregate, in excess of
$2,000 and as of the date hereof and as of the date of the Initial Closing and
each Subsequent Closing do not have any operations (each, a “Company
Excluded Subsidiary” and, collectively, the “Company Excluded
Subsidiaries”).  All outstanding shares of capital stock or
other equity interests of the Company Excluded
Subsidiaries are owned by the Company or a direct or indirect wholly-owned
subsidiary of the Company, free and clear of all liens, charges, encumbrances,
claims and options of any nature.  There
are not as of the date hereof and there will not be as of the date hereof and
as of the date of the Initial Closing and each Subsequent Closing, any
outstanding or authorized options, warrants, calls, rights (including
preemptive rights), commitments or any other agreements of any character which
any of the Company Excluded Subsidiaries or any of their respective subsidiaries are
a party to, or may be bound by, requiring the Company and any of the Company Excluded
Subsidiaries or any of their respective subsidiaries to issue, transfer, sell,
purchase, redeem or acquire any shares of capital stock, common stock
equivalents or any securities or rights convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of capital stock of the Company, any of the Excluded
Subsidiaries, or any of their respective subsidiaries.

             SECTION 3.    Representations
and Warranties of the Purchaser.  The Purchaser represents and warrants to the Company
as of the date hereof as follows:

             (a)         Purchaser is acquiring the
Series A Preferred Stock, and the Warrants, for its own account, for
investment and not with a view to the distribution thereof within the meaning
of the Securities Act.

             (b)        Purchaser understands that (i) the
Series A Preferred Stock and the Warrants, have not been, and that the
Warrant Shares and Conversion Shares will not be, registered under the
Securities Act or any state securities laws, by reason of their issuance by the
Company in a transaction exempt from the registration requirements thereof and
(ii) the Series A Preferred Stock, Warrants, Warrant Shares and the
Conversion Shares may not be sold unless such disposition is registered under
the Securities Act and applicable state securities laws or is exempt from
registration thereunder.

             (c)         Purchaser further understands that the
exemption from registration afforded by Rule 144 (the provisions of which
are known to such Purchaser) under the Securities Act depends on the
satisfaction of various conditions, and that, if applicable, Rule 144 may
afford the basis for sales only in limited amounts.

             (d)        Purchaser has not employed any broker or
finder in connection with the transactions contemplated by this Agreement.

             (e)         Purchaser is an “Accredited Investor”
(as defined in Rule 501(a) under the Securities Act).

             (f)         Purchaser is duly organized and validly
existing under the laws of the state of its organization and has all power and
authority to enter into and consummate the transactions contemplated by this
Agreement and the Ancillary Documents. 
This Agreement and each of the Ancillary Documents to which Purchaser is
a party has been duly authorized by all necessary action on the part of
Purchaser.  This Agreement and each of
the Ancillary Documents to which Purchaser is a party constitutes a valid and
binding agreement of Purchaser enforceable against Purchaser in accordance with
its terms except to the extent that enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting creditors’ rights
generally.

SECTION 4.    Certain
Covenants.

             4.1        Access to Records. The
Company shall afford the Purchaser and its employees, counsel and other
authorized representatives full access, during normal business hours, upon
reasonable advance notice, with due regard to its ongoing operations, to the
assets, properties, plants, offices, warehouses and
other facilities, Contracts and books and records of the Business and of the
Company and its Subsidiaries, and to the outside auditors of the Company and
their work papers relating thereto, in each case, as the Purchaser may from
time to time reasonably request.  The parties hereto agree that no
investigation by the Purchaser or their representatives shall affect or limit
the scope of the representations and warranties of the
Company
contained herein or in any Ancillary Document delivered pursuant hereto or
limit liability for breach of any such representation or warranty.

             4.2        Financial Reports. So long as the Purchaser holds one or more
seats on the Board of Directors, the Company agrees to furnish to the Purchaser
the following:

             (a)         Within 15 days after the end of
each fiscal month, internal summary financial and operating statements for such
month, prepared by management for the Chief Executive Officer of the Company
and, if prepared, a letter or memorandum discussing the summary financial
information for such period and setting forth a comparison by reasonable
categories of such financial information to the applicable budget and the
comparable figures for the prior year and a reasonable explanation of any
differences (a “Management Letter”).

             (b)        Within 45 days after the end of
each of the first three quarterly fiscal periods, (i) unaudited balance
sheets and an income statement as of the end of such period, together with
statements of retained earnings and cash flow for such period (“Quarterly
Financials”)
and a Management Letter, (ii) a statement certified by the Chief Financial
Officer of the Company, certifying that the financial position and results of
operations of the Company for such period as reflected in the Quarterly
Financials are presented fairly and have been prepared in accordance with GAAP
(subject to normal year–end adjustments and the absence of footnotes)
consistently applied and (iii) an officer’s certificate stating that the
Company is not in default under any of its material agreements or, if any such
default exists, specifying the nature and period of existence thereof and what
actions the Company has taken and proposes to take with respect thereto;
provided, however, that delivery pursuant to this clause (b) of a copy of
the Quarterly Financials on Form 10–Q of the Company for such
quarterly period filed with the Commission shall be deemed to satisfy the
requirements of this clause (b).

             (c)         Within 90 days after the end of
each fiscal year, commencing with the first fiscal year ending after the Closing,
(i) audited balance sheets and an income statement as of the end of such
fiscal year, together with statements of retained earnings and cash flow for
such fiscal year, all in reasonable detail and certified by a “Big Six”
national firm of independent accountants selected by the Board, or the
Company’s auditors ratified by the Company’s shareholders at their 2001 annual
meeting of shareholders, as presenting fairly the financial position and
results of operations of the Company and as having been prepared in accordance
with GAAP consistently applied, including their opinion thereon which is
unqualified with respect to the scope of such firm’s examination and the
Company’s status as a going concern, (ii) the accounting firm’s management
letter, plus (iii) an officer’s certificate stating that the Company is
not in default under any of its material agreements or, if such default by the
Company or its Subsidiaries exists, a certificate specifying the nature and
period of existence thereof and what actions the Company has taken and proposes
to take with respect thereto; provided, however, that delivery pursuant to
clause (c) of a copy of the Annual Report on Form 10–K of the
Company for such fiscal year filed with the Commission shall be deemed to
satisfy the requirements of this clause (c).

             (d)        At least 30 days but not more than
90 days prior to the beginning of each fiscal year, an annual operating
plan and budget prepared on a monthly basis for the Company for such fiscal
year (displaying anticipated statements of income and cash flows and balance
sheets), and promptly upon preparation thereof any other significant budgets
prepared by the Company and any revisions of such annual or other budgets, and
within 30 days after any monthly period in which there is a material
adverse deviation from the annual budget, an officer’s certificate explaining
the deviation and what actions the Company has taken and proposes to take with
respect thereto.

             (e)         Promptly (but in any event within three
business days) after the discovery or receipt of notice of any default under
any material agreement to which the Company and/or its Subsidiaries is a party,
which default could have a Material Adverse Effect on the Company or its
Subsidiaries or any other Material Adverse Event or circumstance affecting the
Company or its Subsidiaries (including, without limitation, the filing of any
material litigation against the Company or its Subsidiaries or the existence of
any dispute with any person which involves a reasonable likelihood of such
litigation being commenced), an officer’s certificate specifying the nature and
period of existence thereof and what actions the Company has taken and proposes
to take with respect thereto.

             (f)         Promptly (but in any event within three
business days) after transmission thereof, copies of all financial statements,
proxy statements, reports and any other general written communications which
the Company sends to its stockholders and copies of all registration statements
and all regular, special or periodic reports which it files, or any of its
officers or directors file with respect to the Company, with the Commission or
with any securities exchange on which any of its securities are then listed,
and copies of all press releases and other statements made available generally
by the Company to the public concerning material developments in the Company’s
businesses.

             (g)        With reasonable promptness, such other
information and financial data concerning the Company and/or its subsidiaries
as the Purchaser may reasonably request.

             (h)        If for any period the Company shall have
any subsidiary or subsidiaries whose accounts are consolidated with those of
the Company, then, in respect of such period, the financial statements and
information delivered pursuant to the foregoing Sections 4.2(a), 4.2(b)
and 4.2(c) shall be the consolidated and consolidating financial statements of
the Company and all such consolidated subsidiaries.

             (i)          In all cases, the Company shall
provide to the Purchaser all information which it provides or has an obligation
to provide to any other stockholder of the Company in such person’s capacity as
a stockholder, pursuant to any agreement with such stockholder or otherwise and
any other information that the Purchaser may reasonably request.

             4.3        Affirmative Covenants.

             (a)         The books of account and other
financial and corporate records of the Company and its Subsidiaries shall be
maintained in accordance with good business and accounting practices and the
financial condition of the Company and its Subsidiaries shall be accurately
reflected in the financial statements referred to in Section 4.2.

             (b)        The Company shall, and shall cause its
Subsidiaries to, maintain in full force and effect its corporate existence,
rights, governmental approvals and franchises and all licenses and other rights
to use patents, processes, trademarks, trade names or copyrights owned or
possessed by it and deemed by it to be material to the conduct of its
business.  The Company shall, and shall
cause its Subsidiaries to, use its commercially reasonable efforts to preserve
its favorable business relationships with the clients, lenders, suppliers,
customers, licensors and licensees and others having business dealings with the
Business and to preserve the goodwill and ongoing operations of the Business.

             (c)         The Company shall, and shall cause its
Subsidiaries to, comply with all applicable laws, rules regulations and orders,
the violation of which could have a Material Adverse Effect on the Company or
its Subsidiaries.

             (d)        The Company shall, and shall cause its
Subsidiaries to, keep their properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
reasonably needful and proper, or legally required, repairs, renewals, replacements,
additions and improvements thereto.  The
Company shall, and shall cause its Subsidiaries to, comply at all times with
each provision of all leases to which any of them is a party or under which any
of them occupies, or has possession, of, property and are material to the
operation of the Business.

             (e)         The Company shall, and shall cause its
Subsidiaries to, keep its assets which are of an insurable character, if any,
insured by financially sound and reputable insurers against loss or damage by fire,
extended coverage and other hazards and risks and liability to persons and
property to the extent and in the manner customary for companies in similar
businesses similarly situated.

             (f)         The Company shall, and shall cause its
Subsidiaries to, use its best efforts to obtain all federal, state, local and
foreign governmental licenses, permits and qualifications material to and
necessary in the conduct of its business as proposed to be conducted.

             (g)        The Company shall, and shall cause its
Subsidiaries to, use its best efforts to cause all Intellectual Property,
including, but not limited to, technological developments, inventions,
discoveries or improvements made by its employees to be fully documented in
engineering or other notebooks in accordance with the prevailing industrial
professional standards, and, where possible and appropriate, file and prosecute
United States and foreign patent applications relating to and protecting such
developments.  In addition, the Company
shall, and shall cause its Subsidiaries to, use its commercially reasonable
efforts to cause all Intellectual Property, including, but not limited to, all
technological developments, inventions, discoveries or improvements made by any
of its employees or any employees of its subsidiaries to be owned by it and,
where possible and appropriate, obtain reasonable legal protections for its
benefit with respect to such property.

             (h)        The Company shall, and shall cause its
Subsidiaries to, comply with all material obligations which it incurs pursuant
to any contract or agreement, whether oral or written, express or implied, as
such obligations become due, unless and to the extent that the same are being
contested in good faith and by appropriate proceedings and adequate reserves
(as determined in accordance with generally accepted accounting principles,
consistently applied) have been established on its books with respect thereto.

             4.4        Use of Proceeds. The Company shall use the proceeds arising
from the transactions contemplated hereby for development expenses and for
general working capital requirements.

             4.5        Insurance. The Company shall maintain after the closings
directors’ and officers’ liability insurance in an amount not less than
$5,000,000.  The Company and the Board
will evaluate the appropriateness of obtaining “key man” life insurance to be
owned by the Company and with the Company named as the payee of all benefits
thereunder.

             4.6        Merger, etc. The Company will not merge with or into or
consolidate with, or sell all or substantially all of its assets to, any other
person unless (a) the surviving entity shall have assumed in writing all
of the obligations of the Company under this Agreement and the Ancillary
Documents, and (b) immediately after the consummation of such merger or consolidation the surviving entity would not be in
violation of any of the provisions applicable to the Company contained in this
Agreement and the Ancillary Documents.

             4.7        Transactions with Affiliates. The Company will not, and will not permit its Subsidiaries to,
engage in any transaction or group of related transactions (including, without
limitation, the issuance of capital stock, borrowing money or a sale of the
Company, or the purchase, lease, sale or exchange of properties of any kind or
the rendering of any service) with any affiliate, including, but not limited to
any stockholder or any affiliate of such stockholder  (other than the Company), without the approval of a majority of
the disinterested members of the Board.

             4.8        Notice of Breach. As promptly as practicable, and in any event
not later than three business days after senior management of the Company
becomes aware thereof, the Company shall provide the Purchaser with written
notice of any breach by the Company of any provision of
this Agreement, including, without limitation, this Section 4, specifying
the nature of such breach and any actions proposed to be taken by the Company
to cure such breach.

             4.9        Matters Related to
Directors.

             (a)         Purchaser shall have the right to
ratify the appointment of one additional member to the Issuer’s Board for so
long as at least 50% of the Series A Preferred Stock remains outstanding.

             (b)        In the event that any of the Initial
Designees, or their replacements (collectively, the “Purchaser Designees”),
shall cease to be on the Board, other than in the event that such Initial
Designee or his or her replacement is removed for cause, the Purchaser shall
have the exclusive right to nominate replacements and the Board shall recommend
and elect the nominees or, in the case of the election of directors at an
annual meeting, the Board shall recommend such nominees and use its best
efforts to cause the shareholders to elect such nominees, subject to applicable
law.

             (c)         The Company shall, upon request
therefor, promptly reimburse the Initial Designees and any replacements, as the
case may be, for all reasonable expenses incurred by them in connection with
their attendance at meetings of the Board or of committees of the Board and any
other activities undertaken by them in their capacity as directors of the
Company or its Subsidiaries, as applicable. 
The foregoing shall be in addition to, and not in lieu of (or in
duplication of), any indemnification or reimbursement obligations of the Company
under the Certificate of Incorporation or By–Laws or by law.

             (d)        Without the approval of the Board that
includes the affirmative vote of the Purchaser Designees,

             (i)          the
Company shall not amend, supplement, modify or repeal any provision of the
Certificate of Incorporation or By-Laws or take any other action, including,
without limitation, the adoption of a shareholders’ rights plan or similar
plan, which would adversely affect the rights or benefits of the Purchaser
under any of this Agreement or the Ancillary Documents, including, without
limitation, the conversion rights of the holders of the Series A Preferred
Stock or the exercise rights of the Warrants hereunder, and

             (ii)         for so long as at least 50% of the Series A Preferred
Stock remains outstanding, the Company shall not, and shall not permit its
Subsidiaries to, sell assets of the Company or its Subsidiaries in excess of an
aggregate of $50,000 annually, without the prior written consent of Purchaser,
which consent shall not be unreasonably withheld.

             (e)         For so long as any of the Series A
Preferred Stock remains outstanding, the Board of the Company shall use its
best efforts, subject to applicable law, to not amend the By-Laws of the
Company to reflect that the size of the Board is in excess of 10 directors,
without the consent of the Purchaser Designees.

             4.10      Rights
of First Offer. Prior to seeking financing from any third
party consisting of an issuance of Equity Securities (the “Proposed
Securities”)
by the Company on or after the Initial Closing and for so long as 50% of the
Series A Preferred Stock remains outstanding, the Company shall notify the
Purchaser of a description in reasonable detail of the Proposed Securities, the
amount proposed to be issued and the consideration the Company desires to
receive therefor (the “Notice”),
which Notice shall constitute an offer to the Purchaser to purchase a portion
(a “Maintenance Amount”)
of such Proposed Securities on a pari passu basis in order to maintain the
Purchaser’s percentage level of ownership of the total Common Stock outstanding
as such term is used in the last sentence of Section 2.3.  The Purchaser shall have 15 days after receipt of the Notice (unless the Purchaser earlier
indicates that
it has no interest in purchasing the Proposed Securities), to decide whether or
not to acquire the Maintenance Amount, after which (if the Purchaser has not
agreed to purchase the above-mentioned Maintenance Amount on the terms set
forth in the Notice or such other terms as are mutually acceptable to the
Company and the Purchaser) the Company shall be permitted to seek and obtain a
third-party purchaser to acquire the entire amount of the Proposed Securities,
provided that the closing of such acquisition by such third party purchaser
occurs within 90 days from the date of the Notice and provided that the
acquisition of the Proposed Securities by such third-party purchaser is on
terms no more favorable to such third-party purchaser than those terms set
forth in the Notice.  No equity
securities shall be issued by the Company to any person unless the Company has
first offered such portion of the equity securities to the Purchaser in
accordance with this Section 4.10, except with respect to a secondary
public offering of at least a price per share
equal to 500% of the amount designated as the Purchase Price Per Share on
Exhibit B–I with gross proceeds to the Company of at least
$15 million.

             4.11      Subsidiary
Stock. The Company shall not, without the prior
written consent of the holders of a majority of the shares of Series A
Preferred Stock, (a) create, designate, or authorize
the issuance of, any series of stock of its subsidiaries or (b) spin off
the assets or the shares of the common stock of its subsidiaries.

             4.12      Limitation on
Convertible Securities and Debt. For so long as at least 50% of the Series A
Preferred Stock remains outstanding, the Company and its Subsidiaries will not

             (a)         issue
any convertible debt securities,

             (b)        issue
any convertible equity securities ranking pari passu or senior to the
Series A Preferred Stock with respect to
dividends or as to distribution of assets upon liquidation, dissolution or
winding up or,

             (c)         incur, at any time, which in the aggregate
exceeds $250,000, any indebtedness for borrowed money or guarantee any such
indebtedness (excluding trade debt) or make any loans, advances or capital
contributions to, or investments in, any other person

without
the prior written consent of the holders of a majority of the shares of
Series A Preferred Stock then outstanding.

             4.13      Payment of Taxes and
Other Charges. The Company will pay or discharge, and will
cause its Subsidiaries to pay or discharge, before the same shall become
delinquent, (a) all Taxes, assessments and other governmental charges or
levies imposed upon it or any of its properties or income (including, without
limitation, such as may arise under Section 4062, 4063 or 4064 of ERISA or
any similar provision of law) and (b) all claims or demands of
materialmen, mechanics, carriers, warehousemen, landlords and other like
persons which, in the case of either clause (a) or clause (b), if
unpaid, might result in the creation of a material lien
upon any of its properties, provided, however, that the Company shall not be
required to pay or discharge or cause to be paid or discharged any such tax,
assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
pursuant to appropriate proceedings.

             4.14      Dividends. Without the approval of the Board, which
approval includes the affirmative vote of the Purchaser’s Designees, the
Company will not declare or pay any dividend or make any other distribution of
cash, stock or property to its shareholders.

             4.15      Investments. The
Company will not, and will not permit its Subsidiaries to, make, directly or
indirectly, any advance, loan (including guarantees), or other extension of
credit or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase, acquisition or ownership by such person of any
capital stock, bonds, notes, debentures or other securities
issued or owned by any other person and all other items that would be
classified as investments on a balance sheet prepared in accordance with
generally accepted accounting
principles (an “Investment”)
unless (i) such an Investment is in the ordinary course of business or
(ii) the Investment is approved by the Board, which approval includes the
affirmative vote of the Purchaser’s Designees.

             4.16      Changes
in Capital Stock. Between the date hereof and the Subsequent
Closing, the Company will not change the amount of its authorized capital
stock, or subdivide or otherwise change any shares of any class of its capital
stock, whether by way of reclassification, stock split
or otherwise, or issue any additional shares of capital stock other than as set
forth in Schedule 4.16 hereto (“Excluded Securities” ”)
and will not grant any options, warrants or other
rights to purchase or acquire shares of the Company’s capital stock.

             4.17      Filing of Certificate of
Designations. The Company shall file the Certificate of
Designations on the Closing Date and use its best efforts to get the Secretary
of State of the State of Delaware to approve the Certificate of Designations.

             4.18      NASDAQ Filing. On the date of the Initial Closing, the Company shall make all
filings with the Nasdaq National Market (“NASDAQ”)
and pay all fees, when due, in connection therewith to list all of the Common
Stock to be issued upon conversion of the Series A Preferred Stock and the
exercise of the Warrants and shall use its best efforts, and shall cause its
directors and its counsel to use their respective best efforts, to (i) list all
of the Common Stock on the NASDAQ, or register such shares of Common Stock on
the exchange or other forum in which the Company’s Common Stock is then traded,
and shall keep such Common Stock listed or registered, as the case may be.

             Closing
of Bridge.Notwithstanding
anything to the contrary in the Convertible Promissory Note and Warrant
Purchase Agreement, made as of the specific date in May or June, 2001 as set
forth in Schedule 4.19 (including all exhibits and attachments thereto, the
“Bridge Document”),
the Company shall at the Initial Closing: (i) cause each investors’ promissory
notes purchased in connection with the Bridge Document, together with all
accrued and unpaid interest thereon, in the amounts set forth on Schedule 4.19,
to convert into the number of shares of Series A Preferred Stock and Warrants
set forth on Schedule 4.19, which equal in the aggregate: 2,804,481 shares of
Preferred Stock; 975,000 Warrants exercisable at $.536; 225,000 Warrants
exercisable at $1.00; and 225,000 Warrants exercisable at $1.50, (ii) cause
each investors’ bridge warrants purchased in connection with the Bridge
Document, in the amount set forth on Schedule 4.19, to be exchanged for such
number of warrants, as set forth on Schedule 4.19, in an aggregate amount of
1,399,256, and (iii) shall issue and deliver such shares and Warrants to the
respective persons as set forth on Schedule 4.19.  The Series A Preferred Stock to be issued with respect to such
conversion and the Warrants to be issued in exchange for such warrants shall be
of the exact same kind, type and form as the Series A Preferred Stock purchased
pursuant to this Agreement and the Warrants issued pursuant to this Agreement,
respectively, as if such Series A Preferred Stock and warrants were purchased
pursuant to this Agreement.  The
conversion of all of the promissory notes into the number of shares of Series A
Preferred Stock, all as set forth on Schedule 4.19, at the Initial Closing, and
the issuance and delivery of Series A Preferred Stock in accordance with this
Section 4.19, and the exchange, issuance and delivery of the warrants as
contemplated in this Section 4.19, shall be referred to in this Agreement as
the “Bridge Conversion”).

             SECTION 5.    Transfer
Taxes.

             The Company agrees that it will
pay, and will hold each Purchaser harmless from any and all liability with
respect to any stamp or similar
Taxes which may be determined to be payable in connection
with the execution and delivery and performance of this Agreement, and that it
will similarly pay and hold each Purchaser harmless from all Taxes in respect
of the issuance of the Series A Preferred Stock, the Warrants, the Warrant
Shares and the Conversion Shares to such Purchaser.

             SECTION 6.    Survival
of Representations, Warranties, Agreements and Covenants, etc.

             All representations and warranties
in this Agreement and in the Ancillary Documents shall survive the execution
and delivery of this Agreement and the Closing.  All agreements contained herein shall survive the Closing until,
by their respective terms, they are no longer operative.

             SECTION 7.    Expenses.

             (a)         Except as set forth in
Section 7(b), the Company and Purchaser shall pay all the costs and
expenses incurred by it or on its behalf in connection with this Agreement and
the consummation of the transactions contemplated hereby.

             (b)        The Company shall pay and shall
reimburse the Purchaser in cash (or, at the option of the Company, penny warrants
equivalent to cash expenses) for all (i) reasonable legal (including, without
limitation, all fees and expenses of Cadwalader, Wickersham & Taft as
special counsel of the Purchaser), accounting and other fees and out-of-pocket
expenses associated with the proposed transaction and its due diligence in
connection therewith to the extent of not more than $125,000 in the aggregate,
including related engineering and accounting due diligence expenses, (ii)
reasonable fees and expenses incurred by the Purchaser with respect to any
amendments or waivers (whether or not the same become effective) under or in
respect of this Agreement and the Ancillary Documents, (iii) stamp and
other Taxes which may be payable in respect of the execution and delivery of
this Agreement or the issuance, delivery or acquisition of any shares of
Series A Preferred Stock, the Warrants, the Warrant Shares or Conversion
Shares and (iv) the reasonable fees and expenses incurred with respect to
the enforcement of the rights granted under this Agreement and the Ancillary
Documents.

             SECTION 8.    Indemnification.

             8.1        General Indemnification. The Company shall indemnify, defend and hold
Purchaser, its affiliates, officers, directors, partners, employees, attorneys,
agents,
representatives,
successors and assigns (each a “Purchaser Entity”) harmless from and
against all Losses incurred or suffered by a Purchaser Entity (whether incurred
or suffered directly or indirectly through ownership of capital stock of the
Company) arising from the breach of any of the
representations, warranties, covenants or agreements made by the Company in
this Agreement or in any Ancillary Document. 
Purchaser
shall indemnify, defend and hold the Company, its affiliates, officers,
directors, employees, agents, representatives, successors and assigns
harmless against all Losses arising from the breach of any of its
representations, warranties, covenants or agreements in this Agreement or in
any Ancillary Documents.

             8.2        Indemnification Principles. For purposes of this Section 8,
(i) “Losses”
shall mean each and all of the following items: claims, losses, (including,
without limitation, losses of earnings) liabilities, obligations, payments,
damages (actual, punitive or consequential), charges,
judgments, fines, penalties, amounts paid in settlement, costs and expenses
(including, without limitation, interest which may be imposed in connection
therewith, costs and expenses of investigation, actions, suits, proceedings,
demands, assessments and fees, expenses and disbursements of counsel,
consultants and other experts).  Any
payment (or deemed payment) by the Company to a Purchaser pursuant to this
Section 8 shall be treated for federal income tax purposes as an adjustment to the price
paid by such Purchaser for the Series A Preferred Stock and the Warrants
pursuant to this Agreement.

             8.3        Claim Notice. A party seeking indemnification under this
Section 8 shall, promptly upon becoming aware of the facts indicating that
a claim for Indemnification may be warranted, give to the party from whom
indemnification is being sought a claim notice relating to
such Loss (a “Claim Notice”).  Each Claim Notice shall specify the nature
of the claim, the applicable provision(s) of this Agreement or other instrument
under which the claim for indemnify arises, and, if possible, the amount or the
estimated amount thereof. No failure or delay in giving a Claim Notice (so long
as the same is given prior to expiration of the representation or warranty upon
which the claim is based) and no failure to include any specific information
relating to the claim (such as the amount or estimated amount thereof) or any reference to any provision of this
Agreement or other instrument under which the claim arises shall affect the
obligation of the party from whom indemnity is sought unless such failure
materially and adversely prejudices the indemnifying party.

             SECTION 9.    Events of Default and Remedies.

             9.1        Events of Default. Each of the following shall constitute an “Event
of Default”
under this Agreement:

             (a)         The failure to maintain a 1.25/1.00
ratio of current assets over current liabilities; or

             (b)        The failure to make required redemption
payment on the Series A Preferred Stock, when and as the same becomes due and
payable; or

             (c)         Any capital expenditures together with
cash expenditures are made that exceed $1,000,000 per month during the year
2001, unless approved in advance by WallerSutton; or

             (d)        Voluntary Bankruptcy and Insolvency
Proceedings.  If the Company or any
of its Subsidiaries shall file a petition in bankruptcy or for reorganization
or for an arrangement or any composition, readjustment liquidation, dissolution
or similar relief pursuant to the Federal Bankruptcy Code of 1978, as amended,
or under any similar present or future federal Law or the law of any other
jurisdiction or shall be adjudicated a bankrupt or become insolvent, or consent
to the appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or other similar official) of the Company or
its Subsidiaries or for all or any substantial part of the Company’s or its
Subsidiaries’ property, or the Company or its Subsidiaries shall make an
assignment for the benefit of its creditors, or shall admit in writing its
inability to pay its debts generally as they become due, or shall take any
corporate action, as the case may be, in furtherance of any of the foregoing;
or

             (e)         Adjudication of Bankruptcy.  If a petition or answer shall be filed
proposing the adjudication of the Company or its Subsidiaries as a bankrupt or
its reorganization or arrangement, or any composition, readjustment,
liquidation, dissolution or similar relief with respect to it pursuant to the
Federal Bankruptcy Code of 1978, as amended, or under any similar present or
future federal Law or the Law of any other jurisdiction applicable to the
Company or its Subsidiaries, and the Company or its Subsidiaries shall consent
to or acquiesce in the filing thereof, or such petition or answer shall not be
discharged or denied within 60 days after the filing thereof, or

             (f)         Receivership or Sequestration.  If a decree or order is entered by a court
having jurisdiction (i) for the appointment of a receiver or custodian or
liquidator or trustee or sequestrator or assignee (or similar official) in
bankruptcy or insolvency of the Company or its Subsidiaries or of all or a
substantial part of its property, or for the winding–up or liquidation of
its affairs, and such decree or order shall have remained in force undischarged
and unstayed for a period of 60 days, or (ii) for the sequestration
or attachment of any property of the Company or its Subsidiaries without its
return to the possession of the Company or its Subsidiaries or its release from
such sequestration or attachment within 60 days thereafter; or

             (g)        Defaults Under Other Agreements.
The Company or its Subsidiaries shall (i) default in the payment or
principal or interest on any indebtedness of $250,000, in the aggregate, or
more beyond the applicable period of grace, if any, (ii) fail to observe
or perform any covenant or agreement contained in any agreement(s) or
instrument(s) relating to indebtedness of $250,000 or more in the aggregate
within any applicable grace period, (iii) any other event shall occur, if
the effect of such failure or other event is to accelerate, or to permit the
holder of such indebtedness or any other person to accelerate, the maturity of
$250,000 or more in the aggregate of such indebtedness; or (iv) $250,000
or more in the aggregate of any indebtedness shall be, or if as a result if
such failure or other event may be, required to be prepaid (other than by
regularly scheduled required prepayment) in whole or in part prior to its
stated maturity; or

             (h)        Covenants.  The Company shall fail to observe or perform
any covenant or agreement contained in this Agreement or the Ancillary
Documents, and, if capable of being remedied, such failure shall remain
unremedied for 30 days after the Company becomes aware of such failure; or

             (i)          Misrepresentation.  The representations and warranties of the
Company set forth in this Agreement, without giving effect to any materiality
or knowledge qualifier therein, shall not have been true and correct in any
material respect as of the date hereof and shall not be true and correct in any
material respect as of the date of the Subsequent Closing with the same effect
as though such representations and warranties had been made as of such date; or

             (j)          Purchaser Designee.  The failure of at least one designee of the
Purchaser to be serving as a director of the Company, which situation continues
for a period of five days or more, provided that such failure is not the result
of the Purchaser failing to designate a designee, and provided further that it
shall be an Event of Default if, during any period in which no Designee of the
Purchaser is serving as a director of the Company, a meeting of the Board shall
be called or held or action shall have been taken by written consent of the
directors; or

             (k)         Judgments.  A final judgment or Judgments entered by a
court of competent jurisdiction for the payment of money aggregating in excess
of $50,000 is or are outstanding against the Company or its Subsidiaries and
any one such judgment in excess of $50,000 has, or such Judgments aggregating
in excess of $50,000 have, remained unpaid, unvacated, unbonded, or unstayed by
appeal or otherwise for a period of 30 days from the date of entry.

             (l)          Bridge Conversion.  If the Bridge Conversion has not occurred at
the Initial Closing.

             9.2        Remedy for Event of Default. In addition to the remedies set forth herein and in the Ancillary
Documents, if any Event of Default shall have occurred and be continuing, WallerSutton shall have the right to demand immediate
redemption or require a sale of the Company, and shall have the right to elect
a majority of the directors of the Board.

             9.3        Waiver. No course of dealing on the part of any
holder, nor any delay or failure on the part of any holder to exercise any of
its rights, shall operate as a waiver of such right or otherwise prejudice such
holder’s rights, powers and remedies.

             SECTION 10.  Other Remedies.

             (a)         In addition to those remedies
specifically set forth herein and in the Ancillary Documents, each Purchaser
may proceed to protect and enforce its rights under this Agreement and the
Ancillary Agreements either by suit in equity and/or by action at law,
including, but not limited to, an action for damages as a result of any such
breach and/or an action for specific performance of any such covenant or
agreement contained in this Agreement. No right or remedy conferred upon or
reserved to the holders of Series A Preferred Stock under this Agreement
or the Ancillary Documents is intended to be exclusive of any other right or
remedy, and every right and remedy shall be cumulative and in addition to every
other right and remedy given hereunder or under the Ancillary Documents or now
and hereafter existing under applicable law.  Every right and remedy given by this Agreement or the Ancillary
Documents or by applicable law to the holders of Series A Preferred Stock
may be exercised from time to time and as often as may be deemed expedient by
the holders.

             (b)        Any payment by the Company to Purchaser
in connection with a breach of the representations, warranties and covenants of
the company shall be treated for federal income tax purposes as an adjustment
to the price paid by such Purchaser for the Series A Preferred Stock and
the Warrants pursuant to this Agreement.

             SECTION 11.  Further
Assurances.

             At any time or from time to time
after the Closing, the Company, on the one hand, and the Purchaser, on the
other hand, agree to cooperate with each other, and at the request of the other
party, to execute and deliver any further instruments or documents and to take
all such further action as the other party may reasonably request in order to
evidence or effectuate the consummation of the transactions contemplated hereby
relating to the Purchase and to otherwise carry out the intent of the parties
hereunder.

             SECTION 12.  Successors
and Assigns.

             This Agreement shall bind and inure
to the benefit of the Company and the Purchaser and the respective successors,
permitted assigns, heirs and personal representatives of the Company and the
Purchaser except that the Company may not assign its rights and obligations
under this Agreement to any person without the prior written consent of the
Purchaser.  In addition, and whether or
not any express assignment has been made, the provisions of this Agreement
which are for each of the Purchaser’s benefit as a purchaser or holder of
Series A Preferred Stock are also for the benefit of, and enforceable by,
any subsequent holder of such Series A Preferred Stock and/or Conversion
Shares.

             SECTION 13.  Entire
Agreement.

             This Agreement and the other
writings referred to herein or delivered pursuant hereto which form a part
hereof contain the entire agreement among the parties with respect to the
subject matter hereof and, other than as set forth on Schedule 13, supersede
all prior and contemporaneous arrangements or understandings with respect
thereto, including the Letter of Intent, as amended.

             SECTION 14.  Notices.

             All notices, requests, consents and
other communications hereunder to any party shall be deemed to be sufficient if
contained in a written instrument delivered in person or sent by telecopy,
nationally recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:

(i)          if to the Company, to:

             TeraGlobal Communications
Corp.

             9171
Towne Centre Drive, 6th Floor

             San Diego, CA  92122

             Telecopy:  (858) 404-5555

             Attention: Chief Executive
Officer

(ii)         if to the Purchaser, to the address
listed on Exhibit A

with
a copy to:

             Cadwalader, Wickersham &
Taft

             100 Maiden Lane

             New York, New York  10038

             Telecopy:  (212) 504-6666

             Attention:  Jonathan M. Wainwright, Esq.

All
such notices, requests, consents and other communications shall be deemed to
have been given when received.

             SECTION 15.  Amendments.

             The terms and provisions of this
Agreement, the Ancillary Agreements and any instruments pertaining to the
Investment may be modified or amended, or any of the provisions hereof and
thereof waived, temporarily or permanently, pursuant to the written consent of
the holders of a majority of the Company’s Common Stock and the holders of the
Series A Preferred Stock voting together as a single group on an as
converted basis; provided, however, that (i) any amendment or modification that
would adversely affect one or more holders (“Adversely Affected Holders”
)
in a manner that is materially different from its effect upon other holders
shall not be effective unless approved by a majority in interest of the
Adversely Affected Holders, or, in the event the Adversely Affected Holders include
the holders of the Series A Preferred Stock, such amendment shall not be
effective unless approved by WallerSutton and (ii) any amendment or
modification that would take away any rights specifically granted under this
Agreement, the Ancillary Agreements and any instruments pertaining to the
Investment, including buy not limited to tag along and registration rights,
shall not be effective unless approved by a majority in interest of the holders
to whom such rights were granted, or in the case of the Series A Preferred
Stock, unless approved by WallerSutton. 
No waiver of any of the provisions of this Agreement shall be deemed to
or shall constitute a waiver of any other provision hereof (whether or not
similar).  No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof.

             SECTION 16.  Counterparts.

             This Agreement may be executed in
any number of counterparts, and each such counterpart hereof shall be deemed to
be an original instrument, but all such counterparts together shall constitute
but one agreement.

             SECTION 17.  Headings.

             The headings of the sections of
this Agreement have been inserted for convenience of reference only and shall
not be deemed to be a part of this Agreement.

             SECTION 18.  Nouns
and Pronouns.

             Whenever the context may require,
any pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of names and pronouns shall include the
plural and vice versa.

             SECTION 19.  Arbitration.

             Any dispute, controversy or claim
arising out of or relating to this Agreement or the Ancillary Documents shall
be resolved by confidential binding arbitration in New York City, New York
conducted in accordance with the JAMS’ Comprehensive Arbitration Rules and
Procedures then in effect and shall be submitted to arbitration with JAMS.  Arbitration shall be initiated by written
demand.  The determination of the arbitrator
shall be final and binding on the parties and not subject to further review.  Judgment upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof, and for
purposes of enforcing any award, the parties hereby consent to jurisdiction in
any state or federal court located within New York County.  Each party shall bear its own attorneys’
fees and other costs of the arbitration, and the Company on the one hand and
the Series A Preferred Shares, on a pro rata basis, on the other hand shall
each pay one-half of the arbitrator’s fees and expenses.  The arbitrator shall have discretion to
award reasonable attorneys’ fees and expenses and the costs of the arbitration,
including the fees of the arbitrator, to the prevailing party only upon an
express determination by the arbitrator that the losing party has acted in bad
faith or in willful disregard of his or its obligations under this
Agreement.  The arbitrator shall have no
authority to amend this Agreement in any fashion or to award punitive damages.  Notwithstanding anything to the contrary
contained herein, the provisions of this Section 19 shall not apply with regard
to (i) any equitable remedies to which any party may be entitled hereunder,
(ii) any fraud claims, or (iii) any disputes involving claims of third parties.

             SECTION 20.  Publicity.

             Each of the parties hereto agrees
that it will make no public statement regarding the transactions contemplated
hereby unless the language and timing
of such statement has been approved by the Company and
the Purchaser.  Notwithstanding the
foregoing, each of the parties hereto may, in documents required to be filed by
it with the Commission or other regulatory bodies, make such statements with
respect to the transactions contemplated hereby as each may be advised is
legally necessary upon advice of its counsel; provided, however,
that the party making such determination shall immediately notify the other
party that it intends to make a public announcement and the parties hereto
shall, in good faith, attempt to agree on any public announcements or publicity
statements with respect thereto.

             SECTION 21.  Severability.

             Whenever possible, each provision
of this Agreement shall be interpreted in such manner as to be effective and
valid, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect, such invalidity or unenforceability shall not
render invalid or unenforceable any other provision of this Agreement.

IN WITNESS WHEREOF, the parties hereto
have duly executed this Series A Preferred Stock and Warrant Purchase
Agreement as of the date first above written.

THE COMPANY:

TERAGLOBAL COMMUNICATIONS CORP.

	By:	 	/s/
  ROBERT E. RANDALL
	 	 	

	 	 	Name:          Robert E. Randall
	 	 	Title:            Chief Executive Officer

PURCHASER:

WALLERSUTTON 2000, L.P.

	By:	 	WallerSutton
  2000, L.L.C., general partner

 

 

	By:	 	/s/
  JACK WOODRUFF
	 	 	

	 	 	Name:          Jack Woodruff
	 	 	Title:            MemberPrepared by MerrillDirect

 

TERAGLOBAL COMMUNICATIONS,
CORP.

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF

SERIES A CONVERTIBLE PREFERRED STOCK

Pursuant
to Section 151 of the Delaware General Corporation Law

             TeraGlobal
Communications Corp., a corporation organized and existing under the laws of
the State of Delaware (the “Corporation”), does hereby certify that, pursuant
to the authority conferred on the Board of Directors of the Corporation by the
Certificate of Incorporation of the Corporation and in accordance with Section
151 of the Delaware General Corporation Law, the Board of Directors of the
Corporation adopted the following resolution establishing a series of 13
million shares of preferred stock of the Corporation designated as “Series A
Convertible Preferred Stock”:

             RESOLVED,
that pursuant to the authority conferred on the Board of Directors of this
Corporation by the Certificate of Incorporation, as amended, a series of
Preferred Stock of the Corporation is hereby established and created, and that
the designation and number of shares thereof and the voting and other powers,
preferences and relative, participating, optional or other rights of the shares
of such series and the qualifications, limitations and restrictions thereof are
as follows:

Series
A Convertible Preferred Stock

                           Section
1.  Designation and Amount. There
shall be a series of Preferred Stock designated as “Series A Convertible
Preferred Stock” and the number of shares constituting such series shall be
Thirteen Million (13,000,000).  Such
series is referred to herein as the “Series A Preferred Stock” and shall have a
par value of $.001 per share.  Such
number of shares may be increased, decreased or eliminated by resolution of the
Board of Directors of the Corporation or a duly-authorized committee thereof in
compliance with the Delaware General Corporation Law stating that such increase
or reduction has been authorized; provided, however, that no decrease shall
reduce the number of shares of Series A Preferred Stock to less than the number
of shares then issued and outstanding or agreed as of the date of this
Certificate of Designations, Preferences and Rights to be issued and
outstanding.

                           Section
2.  Certain Definitions.  For purposes hereof the following
definitions shall apply:

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

 

                           “Closing
Bid Price” of any security, for each Trading Day, shall mean the price at
which such security was last exchanged on the Stock Market during such Trading
Day, or, if there were no transactions on such Trading Day, the average of the
reported closing bid and asked prices, regular way, of such security on the
relevant Stock Market on such Trading Day or if no closing bid price, the last
sale price of such security, regular way.

                           “Common
Stock” shall mean the Common Stock, $.001 par value, of the Corporation.

                           “Conversion
Price” shall have the meaning assigned to such term in Section 7(b) hereof.

                           “Conversion
Rate” shall have the meaning assigned to such term in Section 7(b) hereof.

                           “Convertible
Securities” shall have the meaning assigned to such term in Section 7 (f)
hereof.

                           “Corporation”
shall mean TeraGlobal Communications Corp., a Delaware corporation.

                           “Event
of Default” shall have the meaning assigned to such term in Section 10
hereof.

                           “Fair
Market Value” of any asset (including any security) means the fair market
value thereof as mutually determined by the Corporation and the holders of a
majority of the Series A Preferred Stock then outstanding.  If the Corporation and the holders of a majority
of the Series A Preferred Stock then outstanding are unable to reach agreement
on any valuation matter, such valuation shall be submitted to and determined by
a nationally recognized independent investment bank selected by the Board of
Directors and the holders of a majority of the Series A Preferred Stock (or, if
such selection cannot be agreed upon promptly, or in any event within ten days,
then such valuation shall be made by a nationally recognized independent
investment banking firm selected by the American Arbitration Association in New
York City in accordance with its rules), the costs of which valuation shall be
paid for by the Corporation.

                           “Initial
Closing” shall mean the date of this Certificate of Designations,
Preferences and Rights.

                           “Investment
Amount” shall mean the lesser of $0.51 per share of Series A Preferred
Stock or the Market Price on the closing date.

                           “Junior
Stock” shall mean the Common Stock and any shares of any other series or
class of preferred stock of the Corporation, whether presently outstanding or
hereafter issued.

                           “Liquidation
Amount” shall have the meaning ascribed to such term in Section 4(a)
hereof.

                           “Majority”
shall mean more than 50% of the shares of Series A Preferred Stock from time to
time issued and outstanding.

                           “Market
Price” of any security shall mean the average Closing Bid Price for the 20
consecutive Trading Days ending with the Trading Day prior to the date as of
which the Market Price is being determined (with appropriate adjustments for
subdivisions or combinations of shares effected during such period), provided
that if the prices referred to in the definition of Closing Bid Price cannot be
determined for such period, “Market Price” shall mean Fair Market Value as of
5:00 pm (New York City time) on the Trading Day prior to the date on which the
Market Price is being determined.

                           “Redemption
Date” shall have the meaning assigned to such term in Section 5(b) hereof.

                           “Redemption
Price” shall have the meaning assigned to such term in Section 5(b) hereof.

                           “Redemption
Notice” shall have the meaning assigned to such term in Section 5(c)
hereof.

                           “Registered
Holders” shall mean, at any time, the holders of record of the Series A
Preferred Stock.

                           “Series
A Preferred Stock” shall mean the Series A Convertible Preferred Stock of
the Corporation.

                           “Series
A Substantial Stockholder” shall mean each purchaser from the Corporation
of  $1 million or more of Series A
Preferred Stock, together with such purchaser’s successors and assigns.

                           “Stock
Market” shall mean, with respect to any security, the principal national
securities exchange on which such security is listed or admitted to trading or,
if such security is not listed or admitted to trading on any national
securities exchange, shall mean The Nasdaq National Market System (“NNM”) or
The Nasdaq SmallCap Market (“SCM” and, together with NNM, “Nasdaq”) or, if such
security is not quoted on Nasdaq, shall mean the OTC Bulletin Board or, if such
security is not quoted on the OTC Bulletin Board, shall mean the
over-the-counter market as furnished by any NASD member firm selected from time
to time by the Corporation for that purpose.

                           “Subsidiary”
shall mean any corporation, limited liability company or other entity, a
majority of the voting stock or interest of which is, at the time as of which
any determination is being made, owned by the Corporation either directly or
through one or more Subsidiaries.

                           “Trading
Day” shall mean a day on which the relevant Stock Market is open for the
transaction of business.

 

                           Section
3.  Dividends.

                           (a)
The holders of shares of Series A Preferred Stock shall be entitled to receive,
as, when and if declared by the Board, out of assets legally available for that
purpose, dividends or distribution in cash, stock or otherwise.  All dividends or distributions declared upon
the Series A Preferred Stock shall be declared pro rata per share.

                           (b)
The Series A Preferred Stock shall be entitled to cumulative dividends payable
in cash at a rate of 10% per annum on the Investment Amount. Dividends shall be
payable only when, as and if declared by the Board of Directors.  Accrued and unpaid dividends thereon shall
be compounded semi-annually until paid. Upon conversion, liquidation, sale of the
Corporation or redemption of the Series A Preferred Stock, accrued but unpaid
dividends on the Series A Preferred Stock shall be payable in full in cash.

                           (c)  If and when the Corporation shall declare
any dividend or distribution on any Junior Stock, the Corporation shall,
concurrently with the declaration of such dividend or distribution on the
Junior Stock, declare a like dividend or distribution, as the case may be, on
the Series A Preferred Stock in an amount per share equal to (x) the amount of
the dividend or distribution per share of Common Stock multiplied by (y) the
number of shares of Common Stock into which one share of Series A Preferred
Stock is then convertible.

                           (d)  No dividend or distribution, as the case may
be, may be declared on any Junior Stock unless a dividend or distribution, as
the case may be, is declared on the Series A Preferred Stock. Any dividend or
distribution payable to the holders of the Series A Preferred Stock pursuant to
this Section 3(d) shall be paid to such holders at the same time as the
dividend or distribution on the Junior Stock by which it is measured is
paid.  Notwithstanding the foregoing,
the Corporation shall not declare any dividend or distribution on any Junior
Stock unless and until a special dividend or distribution equal to the per
share Liquidation Amount (subject to appropriate adjustment to reflect any
stock split, combination, reclassification or reorganization of the Series A
Preferred Stock) has been declared on the Series A Preferred Stock.

                           (e)         So long as any shares of the Series A Preferred
Stock are outstanding, no dividends shall be declared or paid or set apart for
payment on any Junior Stock, for any period unless all dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof set apart for such payment, on the Series A Preferred
Stock.

                           (f)  So long as any shares of the Series A
Preferred Stock are outstanding, no other Junior Stock shall be redeemed,
purchased or otherwise acquired for any consideration (or any moneys be paid to
or made available for a sinking fund or otherwise for the purchase or
redemption of any shares of any such stock) by the Corporation unless the
dividends, if any, accrued on all outstanding shares of the Series A Preferred
Stock shall have been paid or set apart for payment.

                           Section
4.  Liquidation Rights of Series A
Preferred Stock.

                           (a)  Liquidation Event and Liquidation Amount.
In the event of any liquidation, or winding up of the Corporation (whether
voluntary or involuntary) or any sale, exchange, conveyance or other
disposition of all or substantially all of the assets of the Corporation or of
the outstanding capital stock of the Corporation in which more than 50% of the
voting power of the Corporation is disposed of (each a “Liquidation Event”),
each holder of a share of Series A Preferred Stock, after provision for the
Corporation’s debts and other liabilities, will be entitled to receive the
Investment Amount per share, plus compounded accrued and unpaid dividends
thereon prior to any distributions being made in respect of any Junior Stock
(collectively, the “Liquidation Amount”).

                           (b)  Preference of Series A Preferred Stock.
All shares of Series A Preferred Stock shall rank as to payment, upon the
occurrence of a Liquidation Event, senior to the Junior Stock. If upon any
Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such shareholders of the full Liquidation
Amount, then all of the assets of the Corporation to be distributed shall be so
distributed ratably to the holders of the Series A Preferred Stock on the basis
of the number of outstanding shares of Series A Preferred Stock held by such
holders.

                           Section
5.  Redemption.

                           (a)  Restriction on Redemption and Purchase.  Except as expressly provided in this Section
5, the Corporation shall not have the right to purchase, call, redeem or
otherwise acquire for value any or all of the Series A Preferred Stock.

                          (b)  Mandatory Redemption. The Series A Preferred Stock will be
mandatorily redeemable at the election of the then holders of a Majority of the
shares of Series A Preferred Stock, commencing on the third anniversary of the
Initial Closing in equal installments over a period of three years upon not
less than 30 days nor more than 60 days written notice at a redemption price
(the “Redemption Price”) equal to the Liquidation Amount.  The date on which the Series A Preferred
Stock is to be redeemed pursuant to this Section 5(b) is herein called the
“Redemption Date.”

                           (c)  Redemption Notice.  The Corporation shall, not less than 30 days
nor more than 60 days prior to the Redemption Date, give written notice
(“Redemption Notice”) to each holder of record of Series A Preferred Stock to
be redeemed.  The Redemption Notice
shall state:

                                        (i)  that one-third of the outstanding shares of
Series A Preferred Stock are to be redeemed and the total number of shares
being redeemed;

                                        (ii)  the number of shares of Series A Preferred
Stock held by the holder that the Corporation intends to redeem;

                                        (iii)  the Redemption Date and Redemption Price;

                                        (iv)
that the holder’s right to convert the Series A Preferred Stock into shares of
the Common Stock as provided in Section 7 hereof will terminate on the
Redemption Date; and

                                        (v)
the time, place and manner in which the holder is to surrender to the
Corporation the certificate or certificates representing the shares of Series A
Preferred Stock to be redeemed.

                           (d)  Payment of Redemption Price and Surrender
of Stock.  On the Redemption Date,
the Redemption Price of the Series A Preferred Stock scheduled to be redeemed
or called for redemption shall be payable to the holders of the Series A
Preferred Stock.  On or before the
Redemption Date, each holder of Series A Preferred Stock to be redeemed, unless
such holder has exercised its right to convert the shares as provided in
Section 7 hereof, shall surrender the certificate or certificates representing
such shares to the Corporation, in the manner and at the place designated in
the Redemption Notice, and thereupon the Redemption Price for such shares shall
be payable to the order of the person or entity whose name appears on such
certificate or certificates as the owner thereof, and each surrendered
certificate shall be canceled and retired.

                           (e)  Termination of Rights.  If the Redemption Notice is duly given, and,
if at least 10 days prior to the Redemption Date, the Redemption Price is
either paid or made available for payment through the arrangement specified in
subsection (f) below, then notwithstanding that the certificates evidencing any
of the shares of Series A Preferred Stock so called or scheduled for redemption
have not been surrendered, all rights with respect to such shares shall
forthwith after the Redemption Date cease and terminate, except only (i) the
right of the holders to receive the Redemption Price without interest upon
surrender of their certificates therefor or (ii) the right to receive shares of
Common Stock upon exercise of the conversion rights provided in Section 7
hereof on or before the Redemption Date.

                           (f)  Deposit of Funds.  At least 10 days prior to the Redemption
Date, the Corporation shall deposit with any bank or trust company in New York,
New York, a sum equal to the aggregate Redemption Price of all shares of the
Series A Preferred Stock scheduled to be redeemed or called for redemption and
not yet redeemed, with irrevocable instructions and authority to the bank or
trust company to pay the Redemption Price to the respective holders upon the
surrender of their share certificates. 
The deposit shall constitute full payment for the shares of Series A
Preferred Stock to the holders thereof, and from and after the date of such
deposit (even if prior to the Redemption Date), the shares of Series A
Preferred Stock shall be deemed to be redeemed and no longer outstanding, and
the holders thereof shall cease to be stockholders with respect to such shares
of Series A Preferred Stock and shall have no rights with respect thereto,
except the right to receive from the bank or trust company payment of the
Redemption Price of the shares of Series A Preferred Stock, without interest,
upon surrender of their certificates therefor and the right to convert such shares
of Series A Preferred Stock into shares of Common Stock as provided in Section
7 hereof.  Any monies so deposited and
unclaimed at the end of one year from the Redemption Date shall be released or
repaid to the Corporation, after which time the holders of shares of Series A
Preferred Stock called for redemption shall be entitled to receive payment of
the Redemption Price only from the Corporation.

 

                           Section
6.  Voting Rights.

                           (a)  Series A Preferred Stock.  Each holder of shares of Series A Preferred
Stock shall be entitled to vote on all matters and, except as otherwise
expressly provided herein, shall be entitled to the number of votes equal to
the largest number of full shares of Common Stock into which the shares of
Series A Preferred Stock of such holder could be converted, pursuant to the
provisions of Section 7 hereof, at the record date for the determination of the
stockholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken.

                           (b)
 Voting Together.  Except as otherwise expressly provided
herein or as required by law, the holders of Series A Preferred Stock and
Common Stock shall vote together and not as separate classes.  The Corporation may not issue any additional
shares of preferred stock which vote separately as a class with the Series A
Preferred Stock.

                           (c)  Board Right.  For so long as at least 50% of the shares of
Series A Preferred Stock remain outstanding, the holders of the Series A
Preferred Stock shall vote as a separate class for the purpose of appointing a
two of the six members to the Board of Directors.  Those two members shall have the right to ratify any appointment
of an additional member, in the event that the size of the Board of Directors
is increased to seven members.

                           (d)  Amendment of Certificate of Incorporation.  Any amendment to the Certificate of
Incorporation of the Corporation that adversely affects the dividend rights,
liquidation preference, Conversion Rate, conversion rights, redemption or
voting rights with respect to the Series A Preferred Stock, or would alter or
change any other powers, preferences or special rights of the Series A
Preferred Stock, shall require the approval of the holders of a Majority of the
Series A Preferred Stock.

                           (e)  Approval Rights.  For so long as at least 50% of the Series A
Preferred Stock remains outstanding, the Corporation shall obtain approval of
the holders of a Majority of the Preferred Stock prior to taking any of the
following corporate actions:

                                        (A)
approving any liquidation, dissolution, merger or sale of all or substantially
all of the assets of the Corporation;

                                        (B)
approving any recapitalization or restructuring of the Corporation’s
outstanding shares of capital stock; or

                                        (C)  incurring from time to time or at any time
any indebtedness, which in the aggregate, exceeds $250,000, excluding trade
debt.

                           Section
7.  Conversion.  The Series A Preferred Stock shall be
subject to the following conversion rights:

                           (a)  Holder’s Right to Convert.  Each share of Series A Preferred Stock shall
be convertible, at any time at the option of the holder thereof, into validly
issued, fully paid and nonassessable shares of Common Stock and such other
securities and property as hereinafter provided.

                           (b)  Conversion Rate.  The initial conversion price per share of
Common Stock shall be equal to the Investment Amount per share (the “Conversion
Price”) and shall be subject to adjustment as provided in this Section 7.  The rate at which each share of Series A
Preferred Stock is convertible at any time into Common Stock (the “Conversion
Rate”) shall be determined by dividing the then existing Conversion Price into
the Investment Amount per share.

                           (c)  Dividends Upon Conversion.  Upon conversion, all accrued and unpaid dividends
(whether or not declared), if any, on the Series A Preferred Stock, including
the Preferred Dividends described in Section 3(b) above, shall be paid in full.

                           (d)  Mechanics of Conversion.  Each holder of Series A Preferred Stock that
desires to convert its shares of Series A Preferred Stock into shares of Common
Stock shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for the Series A
Preferred Stock, and shall give written notice to the Corporation at such
office that such holder elects to convert the same and shall state therein the
number of shares of Series A Preferred Stock being converted.  Thereupon the Corporation shall promptly
issue and deliver to such holder a certificate or certificates for the number
of shares of Common Stock to which such holder is entitled, together with a
cash adjustment of any fraction of a share as hereinafter provided.  Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender
of the certificate or certificates representing the shares of Series A
Preferred Stock to be converted, and the person or entity entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock on such
date.  In the event that a notice to
convert is given following a Redemption Notice and such redemption is not consummated
on the terms described in such notice, then the conversion shall, at the option
of the holder of the Series A Preferred Stock who tendered for conversion, be
voidable and such holder shall have the right to maintain ownership of the
shares of Series A Preferred Stock tendered for conversion.

                           (e)  Automatic Conversion. After the fifth
anniversary of the date of this Certificate of Designations, Preferences and
Rights, if at any time the closing bid price for the Corporation’s Common Stock
exceeds $10.00 per share for 20 consecutive Trading Days, each share of the
outstanding Series A Preferred Stock, subject to adjustments as hereinafter
provided and together with accrued and unpaid interest, will automatically
convert to shares of the Corporation’s Common Stock at the Conversion Rate.  In the event of an automatic conversion, the
outstanding shares of Series A Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Corporation or its
transfer agent; provided, however, that the Corporation shall not be obligated
to issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Series A Preferred
Stock are either delivered to the Corporation or its transfer agent as provided
below, or the holder thereof notifies the Corporation or its transfer agent
that such certificates have been lost, stolen, mutilated or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such
certificates.  Upon the occurrence of
such automatic conversion of the Series A Preferred Stock, the holders of
Series A Preferred Stock shall surrender the certificates representing such
shares at the office of the Corporation or any transfer agent for the Series A
Preferred Stock.  Thereupon, there shall
be issued and delivered to such holder promptly at such office and in its name
as shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of Common Stock into which the shares of
Series A Preferred Stock surrendered were convertible on the date on which such
automatic conversion occurred.

                           (f)         Adjustment of Conversion Rate and
Conversion Price.

                                        (i)          Except as otherwise provided herein,
in the event the Corporation shall, at any time or from time to time after the
date hereof, (A) without the consent of the holders of a Majority of the shares
of Series A Preferred Stock, sell or issue any shares of Common Stock for a
consideration per share less than the Conversion Price in effect on the date of
such sale or issuance, (B) issue any shares of Common Stock as a stock dividend
to the holders of Common Stock, or (C) subdivide or combine the outstanding
shares of Common Stock into a greater or lesser number of shares (any such
sale, issuance, subdivision or combination being herein called a “Change of
Shares”), then, and thereafter upon each further Change of Shares, the
Conversion Price in effect immediately prior to such Change of Shares shall be
changed to a price (rounded to the nearest cent) determined by multiplying the
Conversion Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Common Stock
outstanding immediately prior to the sale or issuance of such additional shares
or such subdivision or combination and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in
Subsection 7(f)(iv)(D)) for the issuance of such additional shares would
purchase at the Conversion Price in effect on the date of such issuance, and
the denominator of which shall be the number of shares of Common Stock
outstanding immediately after the sale or issuance of such additional shares or
such subdivision or combination.  Such
adjustment shall be made successively whenever such an issuance is made.

                                        (ii)         If as of the first anniversary of the date
of this Certificate of Designations, Preferences and Rights the Market Price is
less than the Conversion Price, the Conversion Price shall be adjusted by
multiplying the then existing Conversion Rate by a fraction, the numerator of
which is the Market Price and the denominator of which is the Conversion Price.

                                        (iii)        After each adjustment of the Conversion
Price pursuant to this Section 7(f), the Corporation shall promptly prepare a
certificate signed by the Chairman or President, and by the Treasurer or an
Assistant Treasurer or the Secretary or an Assistant Secretary, of the
Corporation setting forth: (A) the Conversion Price as so adjusted, (B) the
Conversion Rate corresponding to such Conversion and (C) a brief statement of
the facts accounting for such adjustment. 
The Corporation shall promptly file such certificate with the Transfer
Agent and cause a brief summary thereof to be sent by ordinary first class mail
to each registered holder of Series A Preferred Stock at his or her last
address as it shall appear on the registry books of the Transfer Agent.  No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity of such
adjustment.  The affidavit of an officer
of the Transfer Agent or the Secretary or an Assistant Secretary of the
Corporation that such notice has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.  The Transfer Agent may rely on the information in the certificate
as true and correct and has no duty or obligation to independently verify the
amounts or calculations set forth therein.

                                        (iv)       For purposes of Subsection 7(f)(i)
hereof, the following provisions (A) to (D) shall also be applicable:

                                                     (A)       The number of shares of Common Stock deemed
outstanding at any given time shall include all shares of capital stock
convertible into, or exchangeable for, Common Stock (on an as converted basis)
as well as all shares of Common Stock issuable upon the exercise of (1) any
convertible debt, (2) warrants outstanding on the date hereof and (3) options
outstanding on the date hereof.

                                                     (B)        No adjustment of the Conversion Price
shall be made unless such adjustment would require an increase or decrease of
at least $.01 in such price; provided that any adjustments which by reason of
this Subparagraph (B) are not required to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with adjustments so carried forward, shall require an increase
or decrease of at least $.01 in the Conversion Price then in effect hereunder.

                                                     (C)        In case of the sale or other issuance by
the Corporation (including as a component of a unit) of any rights or warrants
to subscribe for or purchase, or any options for the purchase of, Common Stock
or any securities convertible into or exchangeable for Common Stock (such
securities convertible, exercisable or exchangeable into Common Stock being
herein called “Convertible Securities”), and the consideration per share for
which Common Stock is issuable upon the exercise of such rights, warrants or
options or upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the minimum aggregate consideration, as set forth
in the instrument relating thereto without regard to any anti-dilution or
similar provisions contained therein for a subsequent adjustment of such
amount, payable to the Corporation upon the exercise of such rights, warrants
or options, plus the consideration received by the Corporation for the issuance
or sale of such rights, warrants or options, plus, in the case of such
Convertible Securities, the minimum aggregate amount, as set forth in the
instrument relating thereto without regard to any anti-dilution or similar provisions
contained therein for a subsequent adjustment of such amount, of additional
consideration, if any, other than such Convertible Securities, payable upon the
conversion or exchange thereof, by (y) the total maximum number, as set forth
in the instrument relating thereto without regard to any anti-dilution or
similar provisions contained therein for a subsequent adjustment of such
amount, of shares of Common Stock issuable upon the exercise of such rights,
warrants or options or upon the conversion or exchange of such Convertible
Securities issuable upon the exercise of such rights, warrants or options) is
less than the Conversion Price, then such total maximum number of shares of
Common Stock issuable upon the exercise of such rights, warrants or options or
upon the conversion or exchange of such Convertible Securities (as of the date
of the issuance or sale of such rights, warrants or options) shall be deemed to
be “Common Stock” for purposes of Subsection 7(f)(i) and shall be deemed to
have been sold for an amount equal to such consideration per share and shall
cause an adjustment to be made in accordance with Subsection 7(f)(i).

                                                     (D)        In case of the sale of any shares of
Common Stock, any Convertible Securities, any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or
Convertible Securities, the consideration received by the Corporation therefor
shall be deemed to be the gross sales price therefor without deducting
therefrom any expense paid or incurred by the Corporation or any underwriting
discounts or commissions or concessions paid or allowed by the Corporation in
connection therewith.  In the event that
any securities shall be issued in connection with any other securities of the
Corporation, together comprising one integral transaction in which no specific
consideration is allocated among the securities, then each of such securities
shall be deemed to have been issued for such consideration as the Board of
Directors of the Corporation determines in good faith.

                                        (v)        Notwithstanding any other provision
hereof, no adjustment to the Conversion Price will be made:

                                                     (A)       upon the issuance of up to an aggregate
of 2,000,000 options and shares issued from and after the date of this
Certificate of Designations, Preferences and Rights pursuant to the
Corporation’s Board-approved stock option and similar equity based plans or
employee stock purchase plans; or

                                                     (B)        upon the issuance or sale of Common
Stock or Convertible Securities pursuant to the exercise of any rights, options
or warrants to receive, subscribe for or purchase, or any options for the
purchase of, Common Stock or Convertible Securities, which rights, warrants or
options were outstanding on the date of this Certificate of Designations, Preferences
and Rights; or

                                                     (C)        upon the issuance or sale, from and
after the date of this Certificate of Designations, Preferences and Rights, of
Common Stock or common stock equivalents issued in respect of debt, the
incurrence of which is not prohibited pursuant to (or is approved under) the
restrictions contained in Section 6 (e) hereof, or equity issued in conjunction
with Board-approved joint ventures, acquisitions, strategic partnerships and
the like, which shall not exceed 1,500,000 shares of Common Stock on a fully
diluted basis.

                           (g)
       Prior Notice of Certain Events.  In case:

                                        (i)          the Corporation shall declare any
dividend (or any other distribution); or

                                        (ii)         the Corporation shall authorize the
granting to the holders of Common Stock of rights or warrants to subscribe for
or purchase any shares of stock of any class or of any other rights or
warrants; or

                                        (iii)        of any reclassification of Common Stock
(other than a subdivision or combination of the outstanding Common Stock, or a
change in par value, or from par value to no par value, or from no par value to
par value); or

                                        (iv)       of any consolidation or merger to which
the Corporation is a party and for which approval of any stockholders of the
Corporation shall be required, or of the sale or transfer of all or
substantially all of the assets of the Corporation or of any compulsory share
exchange whereby the Common Stock is converted into other securities, cash or
other property; or

                                        (v)        of the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; then the Corporation
shall cause to be filed with the transfer agent for the Series A Preferred
Stock, and shall cause to be mailed to the Registered Holders, at their last
addresses as they shall appear upon the stock transfer books of the
Corporation, at least 30 days prior to the applicable record date hereinafter
specified, a notice stating (x) the date on which a record (if any) is to be
taken for the purpose of such dividend, distribution or granting of rights or warrants
or, if a record is not to be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend, distribution, rights or
warrants are to be determined and a description of the cash, securities or
other property to be received by such holders upon such dividend, distribution
or granting of rights or warrants or (y) the date on which such
reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up is expected to become effective, the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such exchange, dissolution, liquidation or winding up
and the consideration, including securities or other property, to be received
by such holders upon such exchange; provided, however, that no failure to mail
such notice or any defect therein or in the mailing thereof shall affect the
validity of the corporate action required to be specified in such notice.

                           (h)  Fractional Shares.  No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of the Series
A Preferred Stock.  In lieu of any
fractional share or scrip to which the holder would otherwise be entitled, the
Corporation shall pay a cash adjustment in respect of such fractional interest
in an amount equal to the same fraction of the Market Price as of the close of
business on the day of conversion.

                           (i)  Reservation of Common Stock Issuable Upon
Conversion.  The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock. The Corporation shall,
from time to time, in accordance with the laws of the State of Delaware, to
increase the authorized number of shares of Common Stock if at any time the
number of shares of authorized, unissued and unreserved Common Stock shall not
be sufficient to permit the conversion of all the then-outstanding shares of
Series A Preferred Stock.

                           (j)  Notices.  Any notice or other communication given hereunder shall be deemed
sufficient if in writing and sent by registered or certified mail, return
receipt requested, or delivered by hand against written receipt therefor,
addressed to: the Corporation at TeraGlobal Communications Corp., 9171 Towne
Centre Drive, Suite 600, San Diego, California 92122, Attn: Chief Executive
Officer, and to the holder at such holder’s address as appearing on the books
of the Corporation.  Notices shall be
deemed to have been given or delivered on the date of mailing, except notices
of change of address, which shall be deemed to have been given or delivered
when received.

                           (k)  Payment of Taxes.  The Corporation will pay all taxes (other
than taxes based upon income) and other governmental charges that may be
imposed with respect to the issue or delivery of shares of Common Stock upon
conversion of shares of Series A Preferred Stock, including, without
limitation, any tax or other charge imposed in connection with any transfer
involved in the issue and delivery of shares of Common Stock in a name other
than that in which the shares of Series A Preferred Stock so converted were
registered.

                           Section
8.  Status of Acquired Shares.  Shares of Series A Preferred Stock received
upon redemption, purchase, conversion or otherwise acquired by the Corporation
will be retired and cancelled restored to the status of authorized but unissued
shares of Preferred Stock, without designation as to class or series, and may
thereafter be issued, but not as shares of Series A Preferred Stock.

                           Section
9.  Preemptive Rights. So long as
at least 50% of the Series A Preferred Stock remains outstanding, each Series A
Substantial Stockholder (and its permitted assigns) shall have the right to
maintain its percentage ownership of shares of Common Stock (computed on a
fully diluted basis), provided, however, that no pre-emptive right shall apply
to the issuance of securities enumerated in Section 7 (f) (v) (A), (B) and (C).

                           Section
10.  Events of Default.  The following events shall constitute an
“Event of Default”:

                           (i)
failure to maintain a 1.25/1.00 ratio of current assets over current
liabilities;

                           (ii)
failure to make a required redemption payment; or

                           (iii)
making any capital expenditures together with cash expenditures that exceed
$1,000,000 per month during the year 2001, unless approved in advance by the
holders of a Majority of the outstanding shares of Series A Preferred Stock.

             If
an Event of Default shall occur, then the holders of a Majority of the
outstanding shares of Series A Preferred Stock shall have the right to demand
immediate redemption of all of the outstanding shares of Series A Preferred
Stock at the Redemption Price.  Further,
during the continuance of any Event of Default, a Majority of the holders of
the Series A Preferred Stock shall have the right to elect a sufficient number
of directors to constitute a majority of the members of the Board of Directors.

                           IN
WITNESS WHEREOF, TeraGlobal Communications Corp. has caused its duly authorized
representatives to sign this certificate on its behalf this 28th day of June,
2001.

 

TERAGLOBAL COMMUNICATIONS CORP.

 

	By:	 	/s/
  ROBERT E. RANDALL
	 	 	

	 	 	Robert
  E. Randall, Chief Executive Officer

 

	By:	 	/s/
  JAMES A. MERCER III
	 	 	

	 	 	James
  A. Mercer III, Secretary

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