Document:

exv10w2

 

Exhibit 10.2

COINSURANCE AGREEMENT

Between

ANNUITY AND LIFE REASSURANCE, LTD.,

(referred to as the Company)

and

WILTON REINSURANCE BERMUDA LIMITED

(referred to as the Retrocessionaire)

Dated January 17, 2006

Effective June 30, 2005

 

 

COINSURANCE AGREEMENT

     THIS COINSURANCE AGREEMENT (the “Agreement”), is made and entered into this 17th day
of January, 2006, by and between ANNUITY AND LIFE REASSURANCE, LTD., a Bermuda insurance company
(the “Company”) and WILTON REINSURANCE BERMUDA LIMITED, a Bermuda insurance company
(“Retrocessionaire”).

     WHEREAS, the Company, Annuity and Life Reassurance America, Inc., a Connecticut insurance
company (“ALR America”), Retrocessionaire and Wilton Reassurance Company (f/k/a Prudential
Select Life Insurance Company of America), a Minnesota insurance company (“Wilton
America,”) have entered into that certain Master Agreement, dated August 10, 2005 (the
“Master Agreement”) and attached as Exhibit A-1 hereto, as amended by a Letter
Agreement dated December 29, 2005 and attached as Exhibit A-2 hereto, pursuant to which the
Company and ALR America have agreed to retrocede, and Retrocessionaire and Wilton America have
agreed to reinsure, certain reinsurance treaties;

     WHEREAS, as contemplated by the Master Agreement, the Company wishes to retrocede to the
Retrocessionaire, and the Retrocessionaire wishes to indemnity reinsure, on a one-hundred percent
(100%) coinsurance basis, the Covered Treaties in accordance with the terms and conditions of this
Agreement; and

     WHEREAS, following the Transition Date, the Company desires that the Retrocessionaire perform,
and the Retrocessionaire wishes to perform, administrative functions on behalf of the Company with
respect to the Covered Treaties as well as certain agreements related thereto.

     NOW, THEREFORE, in consideration of the mutual and several promises and undertakings herein
contained, and for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Company and the Retrocessionaire agree as follows:

ARTICLE I

BASIS OF COINSURANCE AND BUSINESS COINSURED

     1.01 Coinsurance.

     (a) Subject to the terms and conditions of this Agreement, the Company hereby retrocedes on a
coinsurance basis to the Retrocessionaire as of the Effective Time, and the Retrocessionaire hereby
accepts and agrees to assume and indemnity reinsure on a coinsurance basis as of the Effective
Time, one hundred percent (100%) of the Reinsured Liabilities. This is an Agreement for indemnity
reinsurance solely between the Company and the Retrocessionaire and shall not create any legal
relationship whatsoever between the Retrocessionaire and any Person other than the Company. The
reinsurance effected under this Agreement shall be maintained in force, without reduction, unless
such reinsurance is terminated or reduced as provided herein.

 

 

     (b) On and after the Effective Time, the Retrocessionaire will have the responsibility for
immediately paying on behalf of the Company, as and when due, all Reinsured Liabilities arising
under or attributable to the Covered Treaties.

     1.02 Reinsurance Coverage. In no event shall the reinsurance provided hereunder
with respect to a particular Covered Treaty be in force and binding at any time unless such Covered
Treaty was in force and binding as of the Effective Time and is not a Novated Treaty at such time.

     1.03 Reserves. On and after the Effective Time, the Retrocessionaire shall establish
and maintain as a liability on its Statutory Financial Returns filed with the Bermuda Monetary
Authority reserves for the Covered Treaties retroceded hereunder, calculated in accordance with
SAP.

ARTICLE II

ACCOUNTINGS AND TRANSFER OF ASSETS

     2.01 Reinsurance Premiums. (a) In connection with the Closing under the Master
Agreement, in order to effect the reinsurance on the Covered Treaties at the Effective Time, the
Company has paid to the Retrocessionaire an initial reinsurance premium the amounts described in
the Master Agreement.

     (b) The Retrocessionaire shall be entitled to receive, as additional reinsurance premium,
immediate payment of an amount equal to (i) Premiums received on and after the Effective Time
attributable to the Covered Treaties less (ii) Premiums paid by the Company to Third-Party
Retrocessionaires under any Existing Retrocession Agreements.

     (c) To the extent that the Company recovers amounts from any third party relating to the
Covered Treaties (including, without limitation, Premiums from any Ceding Company and litigation
recoveries, but excluding recoveries under Existing Retrocession Agreements that have not been
assigned or novated to Retrocessionaire), immediately upon receipt of any such amounts the Company
shall transfer such amounts to the Retrocessionaire and provide the Retrocessionaire with any
pertinent information that the Company may have relating thereto.

     (d) Notwithstanding anything to the contrary set forth in Section 2.01(b) and (c) of this
Agreement, any amounts paid, received or due by the Company thereunder prior to the Transition Date
shall be accounted for and paid pursuant to Section 5.2(b) and (c) of the Master Agreement.

     2.02 Delayed Payments. If there is a delayed settlement of any payment due hereunder,
interest will accrue on such payment on a daily compounded basis at an annual rate equal to the
Treasury Rate. For purposes of this Section 2.02, a payment will be considered overdue, and such
interest will begin to accrue, on the first day immediately following the date such payment is due.
For greater clarity, (i) a payment shall be deemed to be due hereunder on the last date on which
such payment may be timely made under the applicable provision, and (ii)

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interest will not accrue on any payment due the Retrocessionaire hereunder unless the delayed
settlement thereof was caused by the Company.

     2.03 Failure to Pay Reinsurance Premiums. The payment of reinsurance premiums is a
condition precedent to the continuing liability of the Retrocessionaire under this Agreement,
unless such failure is a result of any action or inaction of the Retrocessionaire or any of its
Representatives during the time it is administering the Covered Treaties pursuant to Article III of
this Agreement. If reinsurance premiums with respect to this Agreement are not paid when due, the
Retrocessionaire shall have the right to provide the Company 45 days’ prior written notice (the
“Initial Notice”) of its intent to terminate because of the Company’s failure to pay
reinsurance premiums. If such reinsurance premiums have not been paid within 45 days of the
delivery of the Initial Notice, the Retrocessionaire shall provide to the Company a second notice
(the “Second Notice”) of its intent to terminate because of the Company’s failure to pay
such premiums. The reinsurance hereunder of all Covered Treaties shall terminate as of the last
date upon which premiums with respect to such Covered Treaties were paid.

ARTICLE III

ADMINISTRATION

     3.01. Engagement. Commencing on the Transition Date and during the entire term of
this Agreement, the Company hereby exclusively engages the Retrocessionaire to render on behalf of
the Company all administrative and management services necessary and desirable to fully administer
and manage the Covered Treaties, the Ancillary Agreements and the Existing Retrocession Agreements
(collectively, the “Administrative Services”). The Retrocessionaire hereby accepts such
engagement and agrees to perform the Administrative Services in accordance with the terms and
conditions of this Agreement. The Administrative Services shall include, but not be limited to,
the following: (i) collecting Premiums and other amounts due under the Covered Treaties, provided
that the Company shall cooperate with the Retrocessionaire with respect to any dispute or
litigation with respect thereto by making available any information in the possession of the
Company necessary to respond to any such dispute or litigation on a timely basis; (ii) receiving,
processing, investigating, evaluating and paying claims filed or made by Ceding Companies; (iii)
defending any action brought upon a Covered Treaty (other than in respect of an Excluded
Liability), Existing Retrocession Agreement or Ancillary Agreement or in connection with Reinsured
Liabilities; (iv) providing usual and customary services for Ceding Companies to the extent
required under the terms of the Covered Treaties, Existing Retrocession Agreements, and Ancillary
Agreements; (v) paying amounts due to agents, brokers, reinsurance intermediaries, and other
Persons, as applicable, under the terms of any of the Covered Treaties, Existing Retrocession
Agreements, and Ancillary Agreements; (vi) preparing and providing to the Company all accounting
and actuarial information related to the Covered Treaties, Existing Retrocession Agreements, and
Ancillary Agreements that are necessary in order for the Company to timely meet statutory or tax
accounting requirements for periods commencing on or after the Transition Date; (vii) maintaining
appropriate books and records of all transactions related to the each of the Covered Treaties,
Existing Retrocession Agreements, and Ancillary Agreements, including, without limitation, those
books and records required by and in accordance with the Industry Standards; (viii) fully
administering Existing Retrocession Agreements, including, without limitation, paying all
reinsurance premiums and collecting all

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reinsurance recoverables due from or to the Company thereunder; (ix) commencing any actions
necessary to collect amounts due under the Existing Retrocession Agreements and Ancillary
Agreements; (x) fully administering Ancillary Agreements, including, without limitation, paying all
amounts due by the Company thereunder and collecting all amounts due the Company thereunder; and
(xi) providing any such additional services incident to the foregoing, including, without
limitation, those services as may be necessary or appropriate to fully and properly administer the
Covered Treaties, Existing Retrocession Agreements, and Ancillary Agreements in accordance with
Industry Standards. The Retrocessionaire shall provide the Administrative Services and perform its
other obligations under this Article III at its sole cost and expense and in accordance with
Industry Standards. It is acknowledged and agreed that payment of any amount under or with respect
to any Covered Treaty pursuant to this Section 3.01 (including without limitation the payment of
any Reinsured Liabilities) will constitute full and equivalent performance by Retrocessionaire of
its obligations with respect to such amount under Section 1.01.

     3.02. Facilities. The Retrocessionaire will furnish the facilities, including,
without limitation, physical facilities, trained personnel, and data processing hardware and
software, necessary or desirable to provide the Administrative Services.

     3.03. Safeguarding Data. The Retrocessionaire will provide the storage facilities for
its copies of books and records relating to the Covered Treaties, Existing Retrocession Agreements,
and Ancillary Agreements necessary or desirable and as required by Applicable Law. The
Retrocessionaire shall be responsible for ensuring that the quality and security of the storage
facilities is in accordance with Industry Standards. The Retrocessionaire shall establish
reasonable safeguards to protect such books and records, including, without limitation, the data
and data files of the Company and each Ceding Company, as the case may be, against unauthorized
distribution, loss or alteration. Without limiting the generality of the foregoing, the
Retrocessionaire shall provide for data recovery procedures and systems, including daily back-up of
records, which shall be stored at an off-site location reasonably acceptable to the Company. Upon
reasonable notice, the Company shall have the right to review and inspect such books, records and
procedures relating thereto.

     3.04. Bank Account. The Retrocessionaire shall establish and maintain a bank account
(the “Collections Account”) in the name of Company for the collection of and payment of all
amounts due in connection with each Covered Treaty, Existing Retrocession Agreement and Ancillary
Agreement. To the extent reasonably requested by the Retrocessionaire, the Company shall do all
things reasonably necessary to enable the Retrocessionaire to open and maintain the Collections
Account, including without limitation executing and delivering such board resolutions and other
documents as may be requested by the relevant bank. The Company shall direct that all amounts due
to the Company under the terms of any Covered Treaty, Existing Retrocession Agreement and Ancillary
Agreement be deposited directly into the Collections Account. The Retrocessionaire shall have the
right to draw on the Collections Account for the purpose of performing its obligations under this
Agreement. Schedule 3.04 sets forth a list of, and copies of incumbency certificates for,
the Retrocessionaire employees empowered to take any action with respect to the Collection Account.
The Retrocessionaire will notify the Company of the termination or replacement of any person
listed on Schedule 3.04 promptly, but in no event later than two business days after such
termination or replacement. The Company

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shall not, without the Retrocessionaire’s prior written consent, make any changes to the authorized
signatories on the Collections Account or attempt to withdraw any funds therefrom. As between the
Retrocessionaire and the Company, the Retrocessionaire shall own all funds deposited in the
Collections Account, shall be entitled to all interest thereon, and shall pay or reimburse the
Company for all taxes on such interest.

     3.05. Books and Records. The Retrocessionaire shall maintain at its principal
administrative office for the duration of this Agreement and six (6) years thereafter or such
longer period required by Applicable Law books and records (a) of all transactions between it, the
Company and the Ceding Companies, or (b) relating to or arising from any of the Covered Treaties,
Existing Retrocession Agreements and Ancillary Agreements. Such books and records shall be
maintained in accordance with Industry Standards. The commissioner of insurance or appropriate
governmental officer of any state or local authority with jurisdiction over the Company shall have
access to such books and records as required by Applicable Law. The Retrocessionaire shall give the
Company sixty (60) days’ advance written notice of the proposed disposal or destruction of such
books and records by or on behalf of the Retrocessionaire and shall make available for removal and
storage by the relevant Ceding Company, Third-Party Retrocessionaire, and/or the Company such books
and records during that sixty-day period. The storage and disposal/destruction of any books and
records so obtained by the Company shall thereafter be the sole responsibility of the Company.

     3.06. Right to Inspect and Audit. The Company and its Representatives shall have the
right to inspect and audit the Retrocessionaire during the Retrocessionaire’s normal business
hours with five (5) business days’ advance notice or upon other reasonable notice to evaluate the
internal controls and compliance with this Agreement with regard to the books and records
maintained by the Retrocessionaire pursuant to or in connection with this Agreement, including,
without limitation, records relating to the Collections Account, and all such books and records
shall be made available to the Company and its Representatives for review, audit, inspection, and
reproduction. The Company shall be fully responsible for the costs of such reviews, audits,
inspections and reproductions.

     3.07 Regulatory Reporting; Quarterly Reports.

     (a) The Retrocessionaire shall provide to the Company all information with respect to the
Covered Treaties, Existing Retrocession Agreements and Ancillary Agreements required by the Company
to satisfy all current and future informational reporting and any other requirements imposed upon
it by any governmental entity. Upon the reasonable request of the Company, the Retrocessionaire
shall timely provide all information necessary to prepare such reports and summaries as may be
necessary to satisfy any requirements imposed by a governmental entity upon the Company with
respect to Covered Treaties, Existing Retrocession Agreements and Ancillary Agreements, and
promptly provide to the Company copies of all existing records relating to the Covered Treaties,
Existing Retrocession Agreements and Ancillary Agreements (including, with respect to records
maintained in machine readable form, hard copies) necessary to satisfy such requirements.

     (b) Within a time period mutually agreeable to the Company and the Retrocessionaire, but in no
event more than 30 days following the end of each calendar quarter

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after the Transition Date, the Retrocessionaire will provide to the Company the information needed
by the Company for reporting the Covered Treaties, Existing Retrocession Agreements and Ancillary
Agreements on statutory or GAAP financial statements, tax returns, or other financial reports
required to be filed by the Company. The form of the report (the “Retrocessionaire Quarterly
Report”) and the information to be provided is set forth on Schedule 3.07 attached
hereto. If net cash is due to the Company, the amount due will accompany the Retrocessionaire
Quarterly Report. If net cash is due to the Retrocessionaire, the Company will pay such amount to
the Retrocessionaire promptly upon its receipt of the Retrocessionaire Quarterly Report.

     3.08 Insurance. The Retrocessionaire or an affiliate of the Retrocessionaire (to
which the Retrocessionaire has assigned its administrative duties hereunder in accordance with
Section 12.05) shall maintain (a) commercial general liability and/or office premises liability
insurance, including premises liability and contractual liability, for claims of bodily injury,
personal injury and property damage with a business personal property limit of not less than
$1,000,000, and an office premises liability of not less than $1,000,000 per occurrence, $2,000,000
general aggregate, $1,000,000 for fire damage, any one fire, and $10,000 for medical expense, any
one person; and (b) while any of the Retrocessionaire’s employees are based on the premises of the
Company, workers compensation insurance in compliance with statutory requirements.

ARTICLE IV

REGULATORY MATTERS

     4.01 Regulatory Matters. If the Company or the Retrocessionaire receives notice of,
or otherwise becomes aware of, any regulatory inquiry, investigation or proceeding relating to the
Covered Treaties, the Company or the Retrocessionaire, as applicable, shall promptly notify the
other party thereof, whereupon the parties shall cooperate in good faith and use their respective
commercially reasonable efforts to resolve such matter in a mutually satisfactory manner, in light
of all the relevant business, regulatory and legal facts and circumstances.

     4.02 Licenses. At all times during the term of this Agreement, the Retrocessionaire
shall hold and maintain all licenses, certificates of authority and authorizations required under
Applicable Law or otherwise take all action that may be necessary or desirable (i) for the Company
to obtain full financial credit for the Covered Treaties in the Statutory Financial Return filed
with the Bermuda Monetary Authority, and (ii) to perform its obligations hereunder.

     4.03 Notice of Litigation. On and after the date of this Agreement, the Company and
the Retrocessionaire shall promptly notify the other upon receipt of any demand letter, summons,
complaint, petition or notice of litigation, arbitration, or other dispute resolution proceedings
from any Person, and any complaint, notice, inquiry or other correspondence from any insurance
regulatory authority relating to this Agreement, any Covered Treaty, Existing Retrocession
Agreement, or Ancillary Agreement, or the subject matter hereof or thereof.

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ARTICLE V

CERTAIN COVENANTS

     5.01 Cooperation. Each party hereto shall cooperate fully with the other in all
reasonable respects in order to accomplish the objectives of this Agreement, including, without
limitation, the conveyance of the benefits of the Covered Treaties, Ancillary Agreements and the
Existing Retrocession Agreements, each in accordance with the terms of such agreements. In the
event and to the extent that the parties are unable to obtain any required consents, approvals or
agreements of any such Person as may be required to convey such benefits (i) the Company shall use
commercially reasonable efforts in cooperation with the Retrocessionaire to (A) provide or cause to
be provided to the Retrocessionaire the benefits of each of the Covered Treaties, Ancillary
Agreements and the Existing Retrocession Agreements, and (B) enforce for the account of the
Retrocessionaire any rights of the Company arising from any such agreement, and (ii) the
Retrocessionaire shall use commercially reasonable efforts to perform the obligations of the
Company arising under all such agreements. If and when any such consent, approval or agreement
shall be obtained, the Company shall promptly assign all of its rights and obligations thereunder
to the Retrocessionaire without the payment of further consideration and the Retrocessionaire
shall, without the payment of any further consideration therefor, assume such rights and
obligations and the Company shall be relieved of any and all obligation or liability hereunder.

     5.02 Further Assurances. Each of the parties hereto shall execute such documents and
other papers and perform such further acts as may be reasonably required to carry out the
provisions hereof and the transactions contemplated hereby. Without limiting the generality of the
foregoing, (i) the Company shall grant to the Retrocessionaire a power of attorney to authorize the
Retrocessionaire, to the greatest extent possible, to act on behalf of the Company in administering
the Covered Treaties, the Existing Retrocession Agreements, and the Ancillary Agreements, and (ii)
the parties shall cooperate with each other by furnishing any additional information and executing
and delivering any additional documents as may be reasonably requested by the other to further
perfect or evidence the consummation of, or otherwise implement, any transaction contemplated by
this Agreement, or to aid in the preparation of any regulatory filing, financial statement or Tax
return; provided, however, that any such additional documents must be reasonably satisfactory to
each of the parties and not impose upon either party any material liability, risk, obligation,
loss, cost or expense not contemplated by this Agreement.

     5.03 Oversights. Inadvertent delays, errors or omissions made in connection with this
Agreement or any transaction hereunder shall not relieve either party from any liability which
would have attached had such delay, error or omission not occurred, provided always that such error
or omission is rectified as soon as possible after discovery, and provided that the party making
such error or omission or responsible for such delay shall be responsible for any additional
liability which attaches as a result.

     5.04 No Amendments or Waivers. Following the execution of this Agreement, the
Company shall not terminate, modify, amend or waive compliance with any provision of any of the
Covered Treaties, Ancillary Agreements or Existing Retrocession Agreements and shall fully comply
with all of the terms and provisions of such agreements.

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ARTICLE VI

[Reserved]

ARTICLE VII

ARBITRATION

     7.01 Arbitration. (a) After the Closing Date, any dispute between the parties
relating in any way to this Agreement (other than any dispute arising in connection with the
Post-Effective Time Accounting or the Post-Transition Accounting contemplated by Section 5.2 of the
Master Agreement, which shall be resolved in accordance with Section 5.2(c) of the Master
Agreement), shall be decided through negotiation and, if necessary, arbitration as set forth in
Schedule 7.01 hereto. 

     (b) The parties intend this Section 7.01 to be enforceable in accordance with the Bermuda
International Conciliation Arbitration Act 1993 including any amendments to that Act which are
subsequently adopted. In the event that either party refuses to submit to arbitration as required
by Section 7.01(a), the other party may request the court specified in Section 12.04 to compel
arbitration.

ARTICLE VIII

INSOLVENCY

     8.01 Insolvency of the Company. In the event of the insolvency of the Company, all
coinsurance made, retroceded, renewed or otherwise becoming effective under this Agreement shall be
payable by the Retrocessionaire directly to the Company or to its liquidator, receiver or statutory
successor on the basis of the liability of the Company under the Covered Treaties without
diminution because of the insolvency of the Company. It is understood, however, that in the event
of the insolvency of the Company, the liquidator or receiver or statutory successor of the Company
shall give written notice of the pendency of a claim against the Company on a Covered Treaty within
a reasonable period of time after such claim is filed in the insolvency proceedings and that during
the pendency of such claim the Retrocessionaire may investigate such claim and interpose, at its
own expense, in the proceeding where such claim is to be adjudicated any defense or defenses which
it may deem available to the Company or its liquidator or receiver or statutory successor. It is
further understood that the expense thus incurred by the Retrocessionaire shall be chargeable,
subject to court approval, against the Company as part of the expense of liquidation to the extent
of a proportionate share of the benefit which may accrue to the Company solely as a result of the
defense undertaken by the Retrocessionaire.

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ARTICLE IX

DURATION

     9.01 Duration. This Agreement shall continue in force (a) with respect to each
Covered Treaty until such time as (i) such Covered Treaty becomes a Novated Treaty, or (ii) if such
Covered Treaty does not become a Novated Treaty, (1) all the Company’s liability with respect to
such Covered Treaty is terminated in accordance with its terms, and (2) the Company has received,
or the Retrocessionaire has made on behalf of the Company, payments that discharge such liability
in full; (b) each Existing Retrocession Agreement and Ancillary Agreement until such time as (i)
each such agreement is assigned to and assumed by the Retrocessionaire, or, (ii) if such agreement
is not so assigned or assumed, (1) all the Company’s liability with respect to each such agreement
is terminated in accordance with its terms, and (2) the Company has received, or the
Retrocessionaire has made on behalf of the Company, payments that discharge such liability in full.
This Agreement shall terminate following the satisfaction of the requirements of the foregoing
subsections (a) and (b) with respect to the last non-Novated Treaty, Existing Retrocession
Agreement or Ancillary Agreement then in force. In no event shall the interpretation of this
Section 9.01 imply a unilateral right of the Retrocessionaire to terminate this Agreement.

     9.02 Survival. Notwithstanding the other provisions of this Article IX, the terms and
conditions of Articles VI, X and XI shall remain in full force and effect after the date on which
this Agreement is terminated in accordance with the terms and conditions of this Article IX.

ARTICLE X

INDEMNIFICATION

     10.01 Retrocessionaire’s Obligation to Indemnify. The Retrocessionaire hereby agrees
to indemnify, defend and hold harmless the Company and its Affiliates and their respective
directors, officers and employees (collectively, the “Company Indemnified Parties”) from
and against all losses, liabilities, claims, expenses (including reasonable attorneys’ fees and
expenses) and damages (“Losses”) incurred by the Company to the extent arising from (i) any
breach of any covenant or obligation of the Retrocessionaire contained in this Agreement, (ii)
fraud, theft or embezzlement by directors, officers, employees, agents, subcontractors, successors
or assigns of the Retrocessionaire in connection with the performance of the Retrocessionaire’s
obligations under Article III of this Agreement, (iii) any Reinsured Liability, or (iv) any
Retrocessionaire Extracontractual Liability, provided, however, that no indemnification shall be
due under Sections 10.01(i) or (ii) to the extent that Losses are attributable to acts, omissions
or conduct of a person who is a director, officer, employee, agent, representative, successor, or
permitted assign of the Company or any of its Affiliates (other than the Retrocessionaire or any of
its Representatives acting as an agent, representative, successor or permitted assign of the
Company or any of its Affiliates), unless such acts, omissions or conduct were committed at the
written direction of the Retrocessionaire.

     10.02 Company’s Obligation to Indemnify. The Company hereby agrees to indemnify,
defend and hold harmless the Retrocessionaire and its Affiliates and their respective

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directors, officers and employees (collectively, the “Retrocessionaire Indemnified
Parties”) from and against all Losses incurred by the Retrocessionaire to the extent arising
from (i) any breach of any covenant or obligation of the Company contained in this Agreement, (ii)
fraud, theft or embezzlement by directors, officers, employees, agents, subcontractors, successors
or assigns of the Company in connection with the performance of the Company’s obligations under
Article III of this Agreement, (iii) any Excluded Liability; provided, however, that no
indemnification shall be due under Sections 10.02(i) or (ii) to the extent that Losses are
attributable to acts, omissions or conduct of a person who is a director, officer, employee, agent,
representative, successor, or permitted assign of the Retrocessionaire or any of its Affiliates
(other than the Company or any of its Representatives acting as an agent, representative, successor
or permitted assign of the Retrocessionaire or any of its Affiliates), unless such acts, omissions
or conduct were committed at the written direction of the Company.

ARTICLE XI

DEFINITIONS

     11.01 Definitions. Any capitalized term used but not defined herein shall have the
meaning set forth in the Master Agreement. The following terms shall have the respective meanings
set forth below throughout this Agreement:

"Affiliate” means, with respect to any Person, at the time in question, any other Person
controlling, controlled by or under common control with such Person.

"Agreement” has the meaning set forth in the preamble.

"Ancillary Agreements” means each contract or agreement identified on Schedule
11.01(a) hereto between the Company (or any Affiliate thereof) and a Ceding Company or other
counterparty relating to the administration or management of one or more of the Covered Treaties.

"Applicable Law” means any federal, state, local or foreign law (including common law),
statute, ordinance, rule, regulation, order, writ, injunction, judgment, permit, governmental
agreement or decree applicable to a Person or any such Person’s subsidiaries, properties, assets,
or to such Person’s officers, directors, managing directors, employees or agents in their capacity
as such.

"Business Day” means any day other than a Saturday, Sunday or other day on which commercial
banks in New York or Bermuda are required or authorized by law to be closed.

"Ceding Company” means the ceding company under any Covered Treaty.

"Company” has the meaning set forth in the preamble.

"Company Extracontractual Liabilities” means all liabilities for consequential, exemplary,

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punitive or similar extracontractual damages or statutory penalties, whether owing to Ceding
Companies, governmental authorities or any other person relating to the Covered Treaties, which
liabilities arise from any action, act of bad faith, error or omission by the Company, any of its
Affiliates, or any Representative of the Company or any of its Affiliates, in each case excluding
any action taken or failure to take any action at the written direction or with the express consent
of the Retrocessionaire; provided, however, that Company Extracontractual Liabilities shall
exclude, with respect to a given Covered Treaty, those liabilities arising pursuant to the express
terms of such Covered Treaty.

"Covered Treaty” means each reinsurance agreement identified on Exhibit B hereto.

"Effective Date” means June 30, 2005.

"Effective Time” means 11:59 p.m. Eastern time on June 30, 2005.

"Excluded Liability” means any liability that (i) represents a Company Extracontractual
Liability, or (ii) is not expressly assumed by the Retrocessionaire pursuant the Master Agreement,
a Coinsurance Agreement (as defined in the Master Agreement), a Novation Amendment, an Existing
Retrocession Agreement Assignment (as defined in the Master Agreement) or an Ancillary Agreement.

"Existing Retrocession Agreement” at any time means any Existing Retrocession Agreement (as
defined in the Master Agreement) that (a) was in force and effect as of the Effective Time, (b)
covers any risk associated with any Covered Treaty, and (c) has not been assigned or novated to
Retrocessionaire at or prior to such time.

"GAAP” means United States generally accepted accounting principles.

"Industry Standards” as to any Administrative Service shall mean the performance of such
service (i) with the skill, diligence and expertise commonly expected from experienced and
qualified personnel performing such duties in the life reinsurance industry and (ii) in accordance
with Applicable Law and the terms of each Covered Treaty, Existing Retrocession Agreement, and
Ancillary Agreement, as applicable.

"Master Agreement” has the meaning set forth in the preamble.

"Novated Treaty” means, at any time, each Covered Treaty that has been assumed by the
Retrocessionaire pursuant to the terms of a Novation Amendment at such time.

"Novation Amendment” means an amendment of a Covered Treaty in substantially the form
attached as Exhibit D to the Master Agreement under which the Retrocessionaire will be
contractually substituted for the Company as respects such Covered Treaty.

"Person” means any individual, corporation, limited liability company, partnership, limited
partnership, firm, joint venture, association, joint stock company, trust, unincorporated
organization, governmental, judicial or regulatory body or other entity.

-11-

 

"Premiums” means premiums, considerations, deposits and similar amounts due from Ceding
Companies or to Third-Party Retrocessionaires with respect to the Covered Treaties.

"Reinsured Liabilities” means all net retained liabilities of the Company, whether incurred
before or after the Effective Time, arising under the Covered Treaties (net of all liabilities with
respect to the Covered Treaties retroceded by the Company under any Existing Retrocession Agreement
that has not been assigned or novated to the Retrocessionaire, except to the extent any retroceded
liability to a non-Affiliate of the Company under an Existing Retrocession Agreement cannot be
collected, in which case such liability shall be reinsured by the Retrocessionaire hereunder),
including any amounts payable to any broker, agent or reinsurance intermediary identified on
Schedule 11.01(b) hereto but excluding any Excluded Liability. For the avoidance of doubt,
Reinsured Liabilities does not include any premium tax liability or any obligation to pay any
guaranty fund assessment by any jurisdiction except to the extent any such liability or obligation
arises under the express terms of a Covered Treaty.

"Representatives” means, with respect to any party hereto, its officers, directors,
employees, agents and other representatives (including legal counsel, investment bankers,
consultants, independent public accountants and actuaries).

"Retrocessionaire” has the meaning set forth in the preamble.

"Retrocessionaire Extracontractual Liability” means all liabilities for consequential,
exemplary, punitive or similar extracontractual damages or statutory penalties, whether owing to
Ceding Companies, governmental authorities or any other person relating to the Covered Treaties,
which liabilities arise from any action, act of bad faith, error or omission by the
Retrocessionaire, any of its Affiliates, or any Representative of the Retrocessionaire or any of
its Affiliates, in each case excluding any action taken or failure to take any action at the
written direction or with the express consent of the Company.

"SAP” means the statutory accounting practices prescribed or permitted by the insurance
regulatory authorities of the jurisdiction in which the Retrocessionaire is domiciled.

"Third-Party Retrocessionaire” shall mean any retrocessionaire under an Existing
Retrocession Agreement.

"Treasury Rate” means the annual yield rate, on the Closing Date, of actively traded U.S.
Treasury securities having a remaining time to maturity of six (6) months, as such rate is
published under “Treasury Constant Maturities” in Federal Reserve Statistical Release H.15(519).

ARTICLE XII

MISCELLANEOUS

     12.01 Notices. Any and all notices and other communications required or permitted
under this Agreement shall be in writing and shall be deemed to have been duly given when (a)

-12-

 

received by the receiving party if mailed via United States registered or certified mail,
return receipt requested, (b) received by the receiving party if mailed by United States overnight
express mail, (c) sent by facsimile or telecopy machine, followed by confirmation mailed by United
States first-class mail or overnight express mail, or (d) delivered in person or by commercial
courier to the parties at the following addresses:

     (i) If to the Company to:

Annuity and Life Reassurance, Ltd.

Cumberland House

1 Victoria Street

Hamilton, Bermuda HM11

Attention: Chief Executive Officer

Fax: (441) 296-7665

With a concurrent copy to each of:

Annuity and Life Re (Holdings), Ltd.

Cumberland House

1 Victoria Street

Hamilton, Bermuda HM 11

Attention: Chief Executive Officer

Fax: (441) 296-7665

Robert C. Juelke, Esq.

Drinker, Biddle & Reath LLP

One Logan Square

18th and Cherry Streets

Philadelphia, PA 19103-6996

Fax: (215) 988-2757

     (ii) If to Retrocessionaire to:

Wilton Reinsurance Bermuda Limited

Par La Ville Place

14 Par la Ville Road

P.O. Box HM 3379

Hamilton HM PX Bermuda

Attention: Chief Executive Officer

Fax: (441) 295-6821

With a concurrent copy to each of:

Wilton Services, Inc.

187 Danbury Road

Riverview Building, 3rd Floor

-13-

 

Wilton, Connecticut 06897

Attention: General Counsel

Fax: (203) 762-4445

Sutherland Asbill & Brennan LLP

1275 Pennsylvania Ave., N.W.

Washington, D.C., 20004

Attn: David A. Massey

Fax: (202) 637-3593

Either party may change the names or addresses where notice is to be given by providing notice to
the other party of such change in accordance with this Section 12.01.

     12.02 Entire Agreement. This Agreement, including the Schedules hereto, and the
Master Agreement constitute the sole and entire agreement between the parties hereto with respect
to the subject matter hereof and thereof, and supersede all prior discussions and agreements
between the parties with respect to the subject matter hereof, which are merged with and into this
Agreement. In the even of a conflict between this Agreement and the Master Agreement, this
Agreement shall control.

     12.03 Waivers and Amendments; Preservation of Remedies. Any term or condition of this
Agreement may be waived at any time by the party that is entitled to the benefit thereof. Such
waiver must be in writing and must be executed by an executive officer of such party. A waiver on
one occasion will not be deemed to be a waiver of the same or any other term or condition on a
future occasion. This Agreement may be modified or amended only by a writing duly executed by an
executive officer of the Company and the Retrocessionaire.

     12.04 Governing Law and Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of Bermuda applicable to contracts entered into therein,
without reference to principles of choice of law or conflicts of laws of that or any other
jurisdiction. Each party hereto irrevocably and unconditionally submits to the exclusive
jurisdiction of any court sitting in Bermuda, over any suit, action or proceeding arising out of or
relating to this Agreement. Each party hereto agrees that service of any process, summons, notice
or document by hand in Bermuda, addressed to such party, with a concurrent copy by overnight mail,
shall be effective service of process for any action, suit or proceeding brought against such party
in such court. Each party hereto irrevocably and unconditionally waives any objection to the
laying of venue of any such suit, action or proceeding brought in any such court and any claim that
any such action, suit or proceeding brought in any such court has been brought in an inconvenient
forum. Each party hereto agrees that final judgment in any such action, suit or proceeding brought
in any such court shall be conclusive and binding upon such party and may be enforced in any other
courts to whose jurisdiction such party may be subject, by suit upon such judgment.

     12.05 Assignment. This Agreement shall not be assigned by either of the parties
hereto without the prior written consent of the other party. The Retrocessionaire shall be
entitled to assign its administrative duties hereunder without the prior written consent of the
Company,

-14-

 

unless the Person to whom such duties are to be assigned is not, at the time of such
assignment, an Affiliate of the Retrocessionaire, in which event the Retrocessionaire shall obtain
the prior written consent of the Company, such consent not to be unreasonably withheld.

     12.06 No Third Party Beneficiaries. Except as expressly provided in this Agreement,
the terms and provisions of this Agreement are intended solely for the benefit of the Company and
the Retrocessionaire and their permitted successors and assigns, and it is not the intention of the
parties to confer rights as a third-party beneficiary to this Agreement upon any other person.

     12.07 Expenses. Except as otherwise specifically provided in this Agreement, the
parties hereto shall each bear their own respective expenses incurred in connection with the
preparation, execution and performance of this Agreement and all documentation related hereto,
including without limitation all fees and expenses of counsel, actuaries and accountants.

     12.08 Counterparts. This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same instrument. Each counterpart may consist
of a number of copies hereof each signed by less than all, but together signed by all of the
parties hereto. Each counterpart may be delivered by facsimile transmission, which transmission
shall be deemed delivery of an originally executed document.

     12.9 Headings. The headings in this Agreement have been inserted for convenience and
do not constitute matter to be construed or interpreted in connection with this Agreement.

     12.10 Severability. If any provision of this Agreement other than any provision of
Article I, Article II, or Article X is held to be illegal, invalid or unenforceable under any
present or future law or is determined by a court of competent jurisdiction to be unenforceable,
and if the rights or obligations of the Company or the Retrocessionaire under this Agreement will
not be materially and adversely affected thereby, such provision shall be fully severable, and this
Agreement will be construed and enforced as if such illegal, invalid or unenforceable provision had
never comprised a part of this Agreement, and the remaining provisions of this Agreement shall
remain in full force and effect and will not be affected by the illegal, invalid or unenforceable
provision or by its severance herefrom.

     12.11 Offset Rights. Any debits or credits incurred on and after the Effective Time
in favor of or against either the Company or Retrocessionaire with respect to this Agreement,
Section 5.2 of the Master Agreement and any Ancillary Agreement are deemed mutual debits or
credits, as the case may be, and shall be set off, and only the net balance shall be allowed or
paid. This Section 12.11 shall apply notwithstanding the existence of any insolvency,
rehabilitation, conservatorship or comparable proceeding by or against the Company or the
Retrocessionaire.

[Remainder of page intentionally left blank; signature page follows.]

-15-

 

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on this 17th day
of January, 2006.

ANNUITY AND LIFE REASSURANCE, LTD.

By: /s/ William H. Mawdsley

Name: William H. Mawdsley

Title: Chief Executive Officer

WILTON REINSURANCE BERMUDA LIMITED

By: /s/ Michael N. Smith

Name: Michael N. Smith

Title: Chief Executive Officer

-16-<PAGE>
                                                                     Exhibit 4.2

                          SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this "Agreement") is dated as of
December 31, 2004, among Edentify, Inc., a Delaware corporation (the "Company"
and after a Public Liquidity Event, the term Company shall include the Public
Liquidity Company), and each purchaser identified on the signature pages hereto
(each, including its successors and assigns, a "Purchaser" and collectively the
"Purchasers").

     WHEREAS, subject to the terms and conditions set forth in this Agreement
and pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act") and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.

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

                                   ARTICLE I.
                                   DEFINITIONS

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

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

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

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

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

<PAGE>

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

          "Commission" means the Securities and Exchange Commission.

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

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

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

          "Conversion Shares" shall mean the shares of Common Stock and, after a
     Public Liquidity Event, the Public Liquidity Shares issuable upon
     conversion of the Debentures.

          "Debentures" means, the 8% Senior Secured Convertible Debentures, in
     the form of Exhibit A, due, subject to the terms therein, upon the earlier
     of (a) the two year anniversary of the date hereof and (b) if a Public
     Liquidity Event has not occurred on or before the first anniversary of the
     date hereof, the one year anniversary of the date hereof.

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

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

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

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

                                       -2-

<PAGE>

     Company receives benefits in addition to the investment of funds, but shall
     not include a transaction in which the Company is issuing securities
     primarily for the purpose of raising capital or to an entity whose primary
     business is investing in securities.

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

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

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

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

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

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

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

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

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

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

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

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

          "Public Liquidity Event" shall mean an acquisition, merger, offering
     or other occurrence which results in either (a) the Common Stock being
     registered pursuant to the Exchange Act or Securities Act or (b) the
     holders of the Common Stock receiving, in exchange for their Common Stock,
     common stock of another corporation whereby such common stock is registered
     or, as part of an agreement, will be registered, under the Exchange Act or
     Securities Act.

                                       -3-

<PAGE>

          "Public Liquidity Company" shall mean (a) the Company, if after a
     Public Liquidity Event the Common Stock is registered pursuant to the
     Exchange Act or (b) the corporation whose common stock registered pursuant
     to the Exchange Act and is exchanged for Common Stock in the Public
     Liquidity Event.

          "Public Liquidity Shares" shall mean, after the Public Liquidity
     Event, the shares of common stock of the Public Liquidity Company.

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

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

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

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

          "Rule 144" means Rule 144 promulgated by the Commission pursuant to
     the Securities Act, as such Rule may be amended from time to time, or any
     similar rule or regulation hereafter adopted by the Commission having
     substantially the same effect as such Rule.

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

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

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

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

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

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

                                       -4-

<PAGE>

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

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

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

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

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

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

          "Warrant Shares" means the shares of Common Stock, and after a Public
     Liquidity Event, the Public Liquidity Shares, issuable upon exercise of the
     Warrants.

                                   ARTICLE II.
                                PURCHASE AND SALE

     2.1 Closing. On the Closing Date, upon the terms and subject to the
conditions set forth herein, concurrent with the execution and delivery of this
Agreement by the parties hereto, the Company agrees to sell, and each Purchaser
agrees to purchase in the aggregate, severally and not jointly, $300,000
principal amount of the Debentures. Each Purchaser shall deliver to the Company
via wire transfer or a certified check immediately available funds equal to
their Subscription Amount and the Company shall deliver to each Purchaser their
respective Debenture and Warrants as determined pursuant to Section 2.2(a) and
the other items set forth in Section 2.2 issuable at the Closing. Upon
satisfaction of the conditions set forth in Section 2.2, the Closing shall occur
at the offices of FW, or such other location as the parties shall mutually
agree.

     2.2 Deliveries.

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

               (i) this Agreement duly executed by the Company;

                                       -5-

<PAGE>

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

               (iii) a Warrant registered in the name of such Purchaser to
          purchase up to a number of shares of Common Stock or, after a Public
          Liquidity Event, Public Liquidity Shares, equal to, in the aggregate,
          such Purchaser's pro-rata share of 10% of the outstanding shares of
          Common Stock on a fully diluted basis or, after a Public Liquidity
          Event, outstanding Public Liquidity Shares on a fully diluted basis
          ("10% Amount"), with an exercise price equal to the Purchaser's
          Subscription Amount divided by the 10% Amount, subject to adjustment
          therein;

               (iv) the Security Agreement along with all Security Documents;
          and

               (v) a legal opinion of Company Counsel, in the form of Exhibit D
          attached hereto.

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

               (i) this Agreement duly executed by such Purchaser;

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

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

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

     2.3 Closing Conditions.

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

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

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

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

                                       -6-

<PAGE>

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

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

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

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

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

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

                                  ARTICLE III.
                         REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. Except as set forth
under the corresponding section of the disclosure schedules delivered to the
Purchasers concurrently herewith (the "Disclosure Schedules") which Disclosure
Schedules shall be deemed a part hereof, the Company hereby makes the
representations and warranties set forth below to each Purchaser.

          (a) Subsidiaries. All of the direct and indirect subsidiaries of the
     Company are set forth on Schedule 3.1(a). The Company owns, directly or
     indirectly, all of the capital stock or other equity interests of each
     Subsidiary free and clear of any Liens, and all the issued and outstanding
     shares of capital stock of each Subsidiary are validly issued and are fully
     paid, non-assessable and free of preemptive and similar rights to subscribe
     for or purchase securities. If the Company has no subsidiaries, then
     references in the Transaction Documents to the Subsidiaries will be
     disregarded.

          (b) Organization and Qualification. Each of the Company and the
     Subsidiaries is an entity duly incorporated or otherwise organized, validly
     existing and in good standing under the laws of the jurisdiction of its
     incorporation or organization (as applicable), with the requisite power and
     authority to own and use its properties and assets and to carry on its
     business as currently conducted. Neither the Company nor any Subsidiary is
     in violation or default of any of the provisions of its respective
     certificate or articles of incorporation, bylaws or other organizational or
     charter documents. Each of the Company and the Subsidiaries is duly
     qualified to conduct business and is in good standing as a foreign
     corporation or other entity in each jurisdiction in which the nature of the
     business conducted or property owned by it makes such qualification
     necessary,

                                       -7-

<PAGE>

     except where the failure to be so qualified or in good standing, as the
     case may be, could not have or reasonably be expected to result in (i) a
     material adverse effect on the legality, validity or enforceability of any
     Transaction Documents, (ii) a material adverse effect on the results of
     operations, assets, business, prospects or financial condition of the
     Company and the Subsidiaries, taken as a whole, or (iii) a material adverse
     effect on the Company's ability to perform in any material respect on a
     timely basis its obligations under any Transaction Documents (any of (i),
     (ii) or (iii), a "Material Adverse Effect") and no Proceeding has been
     instituted in any such jurisdiction revoking, limiting or curtailing or
     seeking to revoke, limit or curtail such power and authority or
     qualification.

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

          (d) No Conflicts. The execution, delivery and performance of the
     Transaction Documents by the Company and the consummation by the Company of
     the other transactions contemplated thereby do not and will not: (i)
     conflict with or violate any provision of the Company's or any Subsidiary's
     certificate or articles of incorporation, bylaws or other organizational or
     charter documents, or (ii) conflict with, or constitute a default (or an
     event that with notice or lapse of time or both would become a default)
     under, result in the creation of any Lien upon any of the properties or
     assets of the Company or any Subsidiary, or give to others any rights of
     termination, amendment, acceleration or cancellation (with or without
     notice, lapse of time or both) of, any agreement, credit facility, debt or
     other instrument (evidencing a Company or Subsidiary debt or otherwise) or
     other understanding to which the Company or any Subsidiary is a party or by
     which any property or asset of the Company or any Subsidiary is bound or
     affected, or (iii) conflict with or result in a violation of any law, rule,
     regulation, order, judgment, injunction, decree or other restriction of any
     court or governmental authority to which the Company or a Subsidiary is
     subject (including federal and state securities laws and regulations), or
     by which any property or asset of the Company or a Subsidiary is bound or
     affected; except in the case of each of clauses (ii) and (iii), such as
     could not have or reasonably be expected to result in a Material Adverse
     Effect.

          (e) Filings, Consents and Approvals. The Company is not required to
     obtain any consent, waiver, authorization or order of, give any notice to,
     or make any filing or registration with, any court or other federal, state,
     local or other governmental authority

                                       -8-

<PAGE>

     or other Person in connection with the execution, delivery and performance
     by the Company of the Transaction Documents.

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

          (g) Capitalization. The capitalization of the Company is as described
     in Schedule 3.1(g). The Company has not issued any capital stock other than
     as set forth on Schedule 3.1(g). No Person has any right of first refusal,
     preemptive right, right of participation, or any similar right to
     participate in the transactions contemplated by the Transaction Documents.
     Except as a result of the purchase and sale of the Securities or as set
     forth on Schedule 3.1(g), there are no outstanding options, warrants,
     script rights to subscribe to, calls or commitments of any character
     whatsoever relating to, or securities, rights or obligations convertible
     into or exchangeable for, or giving any Person any right to subscribe for
     or acquire, any shares of Common Stock, or contracts, commitments,
     understandings or arrangements by which the Company or any Subsidiary is or
     may become bound to issue additional shares of Common Stock, or securities
     or rights convertible or exchangeable into shares of Common Stock. The
     issuance and sale of the Securities will not obligate the Company to issue
     shares of Common Stock or other securities to any Person (other than the
     Purchasers) and will not result in a right of any holder of Company
     securities to adjust the exercise, conversion, exchange or reset price
     under such securities. All of the outstanding shares of capital stock of
     the Company are validly issued, fully paid and nonassessable, have been
     issued in compliance with all federal and state securities laws, and none
     of such outstanding shares was issued in violation of any preemptive rights
     or similar rights to subscribe for or purchase securities. No further
     approval or authorization of any stockholder, the Board of Directors of the
     Company or others is required for the issuance and sale of the Securities.
     Except as disclosed in Schedule 3.1(g), there are no stockholders
     agreements, voting agreements or other similar agreements with respect to
     the Company's capital stock to which the Company is a party or, to the
     knowledge of the Company, between or among any of the Company's
     stockholders. A complete list of stockholders of record, with their
     shareholdings as of ______________, is included in Schedule 3.1(g).

          (h) Financial Statements. The audited financial statements of the
     Company for its last three fiscal years are unaudited statements for the
     most recent fiscal quarter, are attached hereto as Schedule 3.1(h). Such
     financial statements have been prepared in accordance with United States
     generally accepted accounting principles applied on a consistent basis
     during the periods involved ("GAAP"), except as may be otherwise specified
     in such financial statements or the notes thereto and except that unaudited

                                       -9-

<PAGE>

     financial statements may not contain all footnotes required by GAAP, and
     fairly present in all material respects the financial position of the
     Company and its consolidated subsidiaries as of and for the dates thereof
     and the results of operations and cash flows for the periods then ended,
     subject, in the case of unaudited statements, to normal, immaterial,
     year-end audit adjustments.

          (i) Material Changes. Since the date of the Company's most recent
     financial statements, attached hereto as Schedule 3.1(h), (i) there has
     been no event, occurrence or development that has had or that could
     reasonably be expected to result in a Material Adverse Effect, (ii) the
     Company has not incurred any liabilities (contingent or otherwise) other
     than (A) trade payables and accrued expenses incurred in the ordinary
     course of business consistent with past practice and (B) liabilities not
     required to be reflected in the Company's financial statements pursuant to
     GAAP or required to be disclosed in filings made with the Commission, (iii)
     the Company has not altered its method of accounting, (iv) the Company has
     not declared or made any dividend or distribution of cash or other property
     to its stockholders or purchased, redeemed or made any agreements to
     purchase or redeem any shares of its capital stock and (v) the Company has
     not issued any equity securities to any officer, director or Affiliate,
     except pursuant to existing Company stock option plans. The Company does
     not have pending before the Commission any request for confidential
     treatment of information.

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

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

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

                                      -10-

<PAGE>

     violation of any order of any court, arbitrator or governmental body, or
     (iii) is or has been in violation of any statute, rule or regulation of any
     governmental authority, including without limitation all foreign, federal,
     state and local laws applicable to its business except in each case as
     could not have a Material Adverse Effect.

          (m) Regulatory Permits. The Company and the Subsidiaries possess all
     certificates, authorizations and permits issued by the appropriate federal,
     state, local or foreign regulatory authorities necessary to conduct their
     respective businesses as described in Schedule 3.1(m), except where the
     failure to possess such permits could not have or reasonably be expected to
     result in a Material Adverse Effect ("Material Permits"), and neither the
     Company nor any Subsidiary has received any notice of proceedings relating
     to the revocation or modification of any Material Permit.

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

          (o) Patents and Trademarks. The Company and the Subsidiaries have, or
     have rights to use, all patents, patent applications, trademarks, trademark
     applications, service marks, trade names, copyrights, licenses and other
     similar rights necessary or material for use in connection with their
     respective businesses as described in Schedule 3.1(o) and which the failure
     to so have could have a Material Adverse Effect (collectively, the
     "Intellectual Property Rights"). Neither the Company nor any Subsidiary has
     received a written notice that the Intellectual Property Rights used by the
     Company or any Subsidiary violates or infringes upon the rights of any
     Person. To the knowledge of the Company, all such Intellectual Property
     Rights are enforceable and there is no existing infringement by another
     Person of any of the Intellectual Property Rights of others.

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

                                      -11-
<PAGE>

          (q) Transactions With Affiliates and Employees. Except as set forth in
     Schedule 3.1(q), none of the officers or directors of the Company and, to
     the knowledge of the Company, none of the employees of the Company are
     presently a party to any transaction with the Company or any Subsidiary
     (other than for services as employees, officers and directors), including
     any contract, agreement or other arrangement providing for the furnishing
     of services to or by, providing for rental of real or personal property to
     or from, or otherwise requiring payments to or from any officer, director
     or such employee or, to the knowledge of the Company, any entity in which
     any officer, director, or any such employee has a substantial interest or
     is an officer, director, trustee or partner, in each case in excess of
     $60,000 other than (i) for payment of salary or consulting fees for
     services rendered, (ii) reimbursement for expenses incurred on behalf of
     the Company and (iii) for other employee benefits, including stock option
     agreements under any stock option plan of the Company.

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

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

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

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

          (v) Application of Takeover Protections. The Company and its Board of
     Directors have taken all necessary action, if any, in order to render
     inapplicable any control share acquisition, business combination, poison
     pill (including any distribution

                                      -12-

<PAGE>

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

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

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

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

          (z) Tax Status. Except for matters that would not, individually or in
     the aggregate, have or reasonably be expected to result in a Material
     Adverse Effect, the

                                      -13-

<PAGE>

     Company and each Subsidiary has filed all necessary federal, state and
     foreign income and franchise tax returns and has paid or accrued all taxes
     shown as due thereon, and the Company has no knowledge of a tax deficiency
     which has been asserted or threatened against the Company or any
     Subsidiary.

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

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

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

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

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

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

                                      -14-

<PAGE>

     on the independent evaluation of the transactions contemplated hereby by
     the Company and its representatives.

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

          (a) Organization; Authority. Such Purchaser is an entity duly
     organized, validly existing and in good standing under the laws of the
     jurisdiction of its organization with full right, corporate or partnership
     power and authority to enter into and to consummate the transactions
     contemplated by the Transaction Documents and otherwise to carry out its
     obligations thereunder. The execution, delivery and performance by such
     Purchaser of the transactions contemplated by this Agreement have been duly
     authorized by all necessary corporate or similar action on the part of such
     Purchaser. Each Transaction Documents to which it is a party has been duly
     executed by such Purchaser, and when delivered by such Purchaser in
     accordance with the terms hereof, will constitute the valid and legally
     binding obligation of such Purchaser, enforceable against it in accordance
     with its terms, except (i) as limited by general equitable principles and
     applicable bankruptcy, insolvency, reorganization, moratorium and other
     laws of general application affecting enforcement of creditors' rights
     generally, (ii) as limited by laws relating to the availability of specific
     performance, injunctive relief or other equitable remedies and (iii)
     insofar as indemnification and contribution provisions may be limited by
     applicable law.

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

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

          (d) Experience of Such Purchaser. Such Purchaser, either alone or
     together with its representatives, has such knowledge, sophistication and
     experience in business and financial matters so as to be capable of
     evaluating the merits and risks of the

                                      -15-

<PAGE>

     prospective investment in the Securities, and has so evaluated the merits
     and risks of such investment. Such Purchaser is able to bear the economic
     risk of an investment in the Securities and, at the present time, is able
     to afford a complete loss of such investment.

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

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

                                   ARTICLE IV.
                         OTHER AGREEMENTS OF THE PARTIES

     4.1 Transfer Restrictions.

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

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

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

                                      -16-

<PAGE>

     SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THESE
     SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES
     MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN
     SECURED BY SUCH SECURITIES.

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

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

          (d) In addition to such Purchaser's other available remedies, the
     Company shall pay to a Purchaser, in cash, as partial liquidated damages
     and not as a penalty, for each $500 of Underlying Shares (based on the
     closing bid price of the Common Stock on

                                      -17-

<PAGE>

     the then principal Trading Market on the date such Securities are submitted
     to the Company's transfer agent) delivered for removal of the restrictive
     legend and subject to this Section 4.1(c), $5 per Business Day (increasing
     to $10 per Business Day 5 Business Days after such damages have begun to
     accrue) for each Business Day after the Legend Removal Date until such
     certificate is delivered without a legend. Nothing herein shall limit such
     Purchaser's right to pursue actual damages for the Company's failure to
     deliver certificates representing any Securities as required by the
     Transaction Documents, and such Purchaser shall have the right to pursue
     all remedies available to it at law or in equity including, without
     limitation, a decree of specific performance and/or injunctive relief.

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

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

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

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

                                      -18-

<PAGE>

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

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

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

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

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

     4.9 Reimbursement. If any Purchaser becomes involved in any capacity in any
Proceeding by or against any Person who is a stockholder of the Company (except
as a result of sales, pledges, margin sales and similar transactions by such
Purchaser to or with any current stockholder), solely as a result of such
Purchaser's acquisition of the Securities under this Agreement, the Company will
reimburse such Purchaser for its reasonable legal and other expenses (including
the cost of any investigation preparation and travel in connection therewith)
incurred in connection therewith, as such expenses are incurred. The
reimbursement obligations of the Company under this paragraph shall be in
addition to any liability which the Company may otherwise have, shall extend
upon the same terms and conditions to any Affiliates of the Purchasers who are
actually named in such action, proceeding or investigation, and partners,
directors, agents, employees and controlling persons (if any), as the case may
be, of the Purchasers and any such Affiliate, and shall be binding upon and
inure to the benefit of any successors, assigns, heirs and personal
representatives of the Company, the Purchasers and any

                                      -19-

<PAGE>

such Affiliate and any such Person. The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any liability to the Company or any Person
asserting claims on behalf of or in right of the Company solely as a result of
acquiring the Securities under this Agreement.

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

     4.11 Reservation and Listing of Securities.

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

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

                                      -20-

<PAGE>

     amend the Company's certificate or articles of incorporation to increase
     the number of authorized but unissued shares of Common Stock to at least
     the Required Minimum at such time, as soon as possible and in any event not
     later than the 75th day after such date.

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

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

                                      -21-

<PAGE>

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

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

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

     4.15 Public Liquidity Event. Notwithstanding anything to the contrary in
the Transaction Documents, the parties agree and acknowledge that upon and after
the occurrence of a Public Liquidity Event, the Debentures and Warrants will be
convertible or exercisable, as the case may be, into Public Liquidity Shares
equal in number to, in the aggregate and upon a full conversion of the
Debentures and exercise of the Warrant, 20% of the Public Liquidity Company's
common stock outstanding at such time on a fully diluted basis. Further, no
Public Liquidity Event shall occur without the consent of all of the Purchasers
and the Company shall ensure that the foregoing is provided for as part of the
Public Liquidity Event.

                                      -22-

<PAGE>

                                   ARTICLE V.
                                  MISCELLANEOUS

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

     5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse
Bushido Capital Master Fund, L.P. ("Bushido") for $25,000, for its actual,
reasonable, out-of-pocket legal fees and expenses. The Company shall deliver,
prior to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. Except as expressly set forth in the Transaction
Documents to the contrary, each party shall pay the fees and expenses of its
advisers, counsel, accountants and other experts, if any, and all other expenses
incurred by such party incident to the negotiation, preparation, execution,
delivery and performance of this Agreement. The Company shall pay all transfer
agent fees, stamp taxes and other taxes and duties levied in connection with the
issuance of any Securities.

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

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

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

                                      -23-

<PAGE>

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

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

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

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

                                      -24-

<PAGE>

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

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

     5.12 Severability. If any provision of this Agreement is held to be invalid
or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.

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

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

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

     5.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to any Purchaser pursuant to any Transaction Documents or a Purchaser
enforces or exercises its rights thereunder, and such payment or payments or the
proceeds of such

                                      -25-

<PAGE>

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

     5.17 Usury. To the extent it may lawfully do so, the Company hereby agrees
not to insist upon or plead or in any manner whatsoever claim, and will resist
any and all efforts to be compelled to take the benefit or advantage of, usury
laws wherever enacted, now or at any time hereafter in force, in connection with
any claim, action or proceeding that may be brought by any Purchaser in order to
enforce any right or remedy under any Transaction Documents. Notwithstanding any
provision to the contrary contained in any Transaction Documents, it is
expressly agreed and provided that the total liability of the Company under the
Transaction Documents for payments in the nature of interest shall not exceed
the maximum lawful rate authorized under applicable law (the "Maximum Rate"),
and, without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
contract rate of interest allowed by law and applicable to the Transaction
Documents is increased or decreased by statute or any official governmental
action subsequent to the date hereof, the new maximum contract rate of interest
allowed by law will be the Maximum Rate applicable to the Transaction Documents
from the effective date forward, unless such application is precluded by
applicable law. If under any circumstances whatsoever, interest in excess of the
Maximum Rate is paid by the Company to any Purchaser with respect to
indebtedness evidenced by the Transaction Documents, such excess shall be
applied by such Purchaser to the unpaid principal balance of any such
indebtedness or be refunded to the Company, the manner of handling such excess
to be at such Purchaser's election.

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

                                      -26-

<PAGE>

Transaction Documents for the convenience of the Company and not because it was
required or requested to do so by the Purchasers.

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

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

                            (Signature Pages Follow)

                                      -27-

<PAGE>

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

EDENTIFY, INC.                          Address for Notice:

By:                                     109-22 Shearwater Court
    ---------------------------------   Jersey City, New Jersey 07305
Name: Terrence DeFranco
Title: President

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

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

                                      -28-

<PAGE>

      [PURCHASER SIGNATURE PAGES TO EDENTIFY SECURITIES PURCHASE AGREEMENT]

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

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

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

Address for Notice of Investing Entity:

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

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

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

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

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

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

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

                           [SIGNATURE PAGES CONTINUE]

                                      -29-

<PAGE>

                                                                         ANNEX A

                                CLOSING STATEMENT

Pursuant to the attached Securities Purchase Agreement, dated as of the date
hereto, the purchasers shall purchase up to $300,000 of Debentures and Warrants
from Edentify, Inc., (the "Company"). All funds will be wired into a trust
account maintained by ____________, counsel to the Company. All funds will be
disbursed in accordance with this Closing Statement.

DISBURSEMENT DATE: December 31, 2004.

I. PURCHASE PRICE

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

II. DISBURSEMENTS

                                                             $
                                                             $
                                                             $
                                                             $
                                                             $

TOTAL AMOUNT DISBURSED:                                      $
</TABLE>

WIRE INSTRUCTIONS:

To: _____________________________________

                                      -30-

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