Document:

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated
as of September 15, 2005 among Advanced Cell Technology, Inc., a Nevada
corporation (the “Company”), and each purchaser identified on the
signature pages hereto (each, including its successors and assigns, a “Purchaser”
and collectively the “Purchasers”).

 

WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”) 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 agree
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).

 

“Actual 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 or conversion in full of
all Warrants and the Debentures, ignoring any conversion or exercise limits set
forth therein.

 

“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.

 

“Aronson Settlement” shall have the
meaning ascribed to such term in Section 2.3(b).

 

“Capital Structure Requirements” shall
have the meaning ascribed to such term in Section 4.17.

 

 

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

 

“Closing Date” means the Trading 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.

 

“Closing Price” means on any
particular date (a) the last reported closing bid price per share of
Common Stock on such date on the Trading Market (as reported by Bloomberg L.P.
at 4:15 PM (New York time), or (b) if there is no such price on such date,
then the closing bid price on the Trading Market on the date nearest preceding
such date (as reported by Bloomberg L.P. at 4:15 PM (New York time) for the
closing bid price for regular session trading on such day), or (c) if the
Common Stock is not then listed or quoted on the Trading Market and if prices
for the Common Stock are then reported in the “pink sheets” published by the
Pink Sheets, LLC (or a similar organization or agency succeeding to its
functions of reporting prices), the most recent bid price per share of the
Common Stock so reported, or (d) if the shares of Common Stock are not
then publicly traded the fair market value of a share of Common Stock as
determined by a qualified independent appraiser selected in good faith by the
Purchasers of a majority in interest of the then outstanding Principal Amount
of the Debentures.

 

“Commission” means the Securities and
Exchange Commission.

 

“Common Stock” means the common stock
of the Company, par value $0.001 per share, and any other class of securities
into which such securities may hereafter have been reclassified or changed 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, Debentures, rights, options, warrants or other instrument that is at any
time convertible into or exercisable or exchangeable for, or otherwise entitles
the holder thereof to receive, Common Stock.

 

“Company Counsel” means Pierce Atwood
LLP.

 

“Conversion Price” shall have the
meaning ascribed to such term in the Debentures.

 

“Corporate Milestones” means, as of a
date in question, (i) all of the outstanding Common Stock is listed for
trading on the Nasdaq SmallCap Market, the American Stock Exchange or the
Nasdaq National Market, (ii) the
Closing Price for each of the 5 consecutive Trading Days immediately prior to
such date, which 5 consecutive Trading Day period shall not have
commenced until after the Effective Date, is at or above the Conversion Price then in effect and (iii) the
daily trading volume of the Common Stock on such market or exchange shall be
equal to at least the greater of (a) $750,000 per day

 

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for each of the 20 consecutive Trading Days immediately prior to such
date, which 20 consecutive Trading Day period shall not have commenced until
after the Effective Date, or (b) 200,000 shares of Common Stock per day for
each of the 20 consecutive Trading Days immediately prior to such date, subject
to adjustment for forward and reverse stock splits, recapitalizations, stock interests
and the like after the date hereof, which 20 consecutive Trading Day period
shall not have commenced until after the Effective Date.

 

“Debentures” means the Amortizing
Convertible Debentures issued by the Company to the Purchasers hereunder, in
the form of Exhibit A.

 

“Disclosure Schedules” shall have the
meaning ascribed to such term in Section 3.1.

 

“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.

 

“Evaluation Date” shall have the
meaning ascribed to such term in Section 3.1(r).

 

“Exchange Act” means the Securities
Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder.

 

“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 or
conversion of any securities issued pursuant to this Agreement, 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 or to decrease the
exercise, exchange or conversion price of any such securities, (c) securities
issued pursuant to acquisitions or strategic transactions, provided any such
issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the business
of the Company and in which the Company receives benefits in addition to the
investment of funds, but shall not include a transaction in which the Company
is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities, (d) shares
issued in connection with Capital Structure Requirements, (e) shares
issued pursuant to Section 4.18 hereof and (f) with respect to
Sections 4.14 and 4.14 only, up to 300,000 shares of Common Stock or Common
Stock Equivalents issued in connection with the satisfaction of $2,200,000 of
trade debt owed to legal service providers (the “Legal Fee Settlement”).

 

“Exempt Redemptions” means redemption
of shares by the Company solely as a result of (a) Capital Structure
Requirements or (b) redemption of a de minimus number of

 

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shares from employees, officers or directors of the Company pursuant to
termination of employment or resolution of employment disputes with any such Persons,
which issuances are approved by the Board of Directors.

 

“Force Majeure”  shall mean any
unusual event arising from causes reasonably beyond the control of the Company
that could not be reasonably anticipated that causes a delay in or prevents the
performance of any obligation under this Agreement or the Transaction
Documents, including but not limited to: acts of God; fire; war; terrorism;
insurrection; civil disturbance; explosion; adverse weather conditions that
could not be reasonably anticipated; unusual delay in transportation; strikes
or other labor disputes; restraint by court order or order of public authority
but not including delays solely caused by any action of, or failure to act by,
the Commission or the Company’s transfer agent.

 

“FW” means Feldman Weinstein LLP with
offices located 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).

 

“Indebtedness” shall have the meaning
ascribed to such term in Section 3.1(aa).

 

“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.

 

 “Market
Price” shall mean $2.30, subject to adjustment for reverse and forward
stock splits, stock interests, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement

 

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

 

“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.

 

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“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.

 

“Principal Amount” shall mean, as to
each Purchaser, the amounts set forth below such Purchaser’s signature block on
the signature pages hereto and next to the heading “Principal Amount”, in
United States Dollars, which shall equal such Purchaser’s Subscription Amount
multiplied by 1.255.

 

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

 

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

 

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

 

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

 

“Required Approvals” shall have the
meaning ascribed to such term in Section 3.1(e).

 

“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.

 

“SEC Reports” shall have the meaning
ascribed to such term in Section 3.1(h).

 

“Securities” means the Debentures, the
Warrants, the Warrant Shares and the Underlying Shares.

 

“Securities Act” means the Securities
Act of 1933, as amended.

 

 “Short
Sales” shall include all “short sales” as defined in Rule 200 of
Regulation SHO under the Exchange Act.

 

“Subscription Amount” shall mean, as
to each Purchaser, the amount to be paid for Debentures and Warrants purchased
hereunder as specified below such Purchaser’s name on the signature page of
this Agreement, in United States Dollars.

 

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

 

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

 

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

 

“Trading Day” means a day on which the
Common Stock is traded on a Trading Market.

 

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

 

“Transaction Documents” means this
Agreement, the Debentures, the Warrants, the Registration Rights Agreement and
the other documents or agreements listed on Schedule A attached
hereto.

 

“Underlying Shares” means the shares
of Common Stock issued and issuable upon conversion of the Debenture and upon
exercise of the Warrants.

 

“VWAP” means, for any date, the price
determined by the first of the following clauses that applies: (a) if the
Common Stock is then listed or quoted on a Trading Market, the daily volume
weighted average price of the Common Stock for such date (or the nearest
preceding date) on the primary Trading Market on which the Common Stock is then
listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading
Day from 9:30 a.m. EST to 4:02 p.m. Eastern Time) using the VAP
function; (b) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in the “Pink
Sheets” published by the Pink Sheets, LLC (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported; or (c) in all other cases, the fair
market value of a share of Common Stock as determined by a nationally
recognized-independent appraiser selected in good faith by Purchasers holding a
majority of the Principal Amount of the Debentures then outstanding.

 

 “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(a) hereof,
which Warrants shall be exercisable immediately and have a term of exercise
equal to five years.

 

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

 

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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, up to $22,500,000 Principal Amount of Debentures and Warrants as
determined pursuant to Section 2.2(a). 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check of immediately available funds equal to their Subscription
Amount and the Company shall deliver to each Purchaser their respective Debentures
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 Sections 2.2 and 2.3, 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;

 

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

 

(iii)          a
Debenture with a principal amount equal to such Purchaser’s Principal Amount,
registered in the name of such Purchaser;

 

(iv)          a
Warrant registered in the name of such Purchaser to purchase up to a number of
shares of Common Stock equal to 50% of such Purchaser’s Principal Amount
divided by the Market Price, with an exercise price equal to $2.53, subject to
adjustment therein;

 

(v)           irrevocable
lock-up agreement, in the form of Exhibit E attached hereto, duly
executed from each officer and director of the Company; and

 

(vi)          the
Registration Rights Agreement duly executed by the Company.

 

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; and

 

(iii)          the
Registration Rights Agreement duly executed by such

 

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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; and

 

(iii)          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;

 

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

 

(v)           the
Company shall entered into a binding settlement agreement with Gary Aronson and
John Gorton releasing all claims against the Company (the “Aronson Settlement”)
in form and substance satisfactory to the Purchasers; and

 

(vi)          from
the date hereof to the Closing Date, trading in the Common Stock shall not have
been suspended by the Commission (except for any suspension of trading of
limited duration agreed to by the Company, which suspension shall be terminated
prior to the Closing), and, at any time prior to the Closing Date, trading in
securities generally as reported by Bloomberg Financial Markets shall not have
been suspended or limited, or minimum prices shall not have been established on
securities whose trades are reported

 

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by such service, or on any Trading Market,
nor shall a banking moratorium have been declared either by the United States
or New York State authorities nor shall there have occurred any material
outbreak or escalation of hostilities or other national or international
calamity of such magnitude in its effect on, or any material adverse change in,
any financial market which, in each case, in the reasonable judgment of each
Purchaser, makes it impracticable or inadvisable to purchase the Debentures at
the Closing.

 

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 (and, where applicable,
covenants) 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.  The Company and each
of the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as applicable), with the requisite power and
authority to own and use its properties and assets and to carry on its business
as currently conducted.  Neither the
Company nor any Subsidiary is in violation or default of any of the provisions
of its respective certificate or articles of incorporation, bylaws or other
organizational or charter documents. 
Each of the Company and the Subsidiaries is duly qualified to conduct
business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, except where the failure to be
so qualified or in good standing, as the case may be, could not have or
reasonably be expected to result in (i) a material adverse effect on the
legality, validity or enforceability of any Transaction Document, (ii) a
material adverse effect on the results of operations, assets, business 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 Document (any
of (i), (ii) or (iii), a “Material Adverse Effect”) and no

 

9

 

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 hereunder and 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 and no further action is required by the
Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals.  Each Transaction Document has been (or upon
delivery will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, 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,
general principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and except as the
indemnification agreements and penalty provisions hereof may be legally
unenforceable.

 

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

 

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

 

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Section 4.6, (ii) the filing with
the Commission of the Registration Statement, (iii) the notice and/or
application(s) to each applicable Trading Market for the issuance and sale of
the Debentures and Warrants and the listing of the Underlying Shares for
trading thereon in the time and manner required thereby and (iv) the
filing of Form D with the Commission and such filings as are required to
be made under applicable state securities laws (collectively, the “Required
Approvals”).

 

(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 Actual Minimum on the
date hereof.

 

(g)           Capitalization.  The list of the shareholders of the Company
holding in excess of one percent (1%) of the issued and outstanding stock of
the Company as of September 1, 2005 and stating in the aggregate the
number of shares held by shareholders holding less than one percent (1%) of the
outstanding stock of the Company is set forth on Schedule 3.1(g).  The Company has not issued any capital stock
since its most recently filed periodic report under the Exchange Act, other
than as set forth on Schedule 3.1(g).  The capitalization of the Company is 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, 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 exercisable 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
Common Stock Equivalents.  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.  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.

 

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(h)           SEC
Reports; Financial Statements.  The
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it under the Securities Act and the Exchange Act,
including pursuant to Section 13(a) or 15(d) thereof, for the
two years preceding the date hereof (or such shorter period as the Company was
required by law to file such material) (the foregoing materials, including the
exhibits thereto and documents incorporated by reference therein, being
collectively referred to herein as the “SEC Reports”) on a timely basis
or has received a valid extension of such time of filing and has filed any such
SEC Reports prior to the expiration of any such extension.  As of their respective dates, the SEC Reports
complied in all material respects with the requirements of the Securities Act
and the Exchange Act and the rules and regulations of the Commission
promulgated thereunder, and none of the SEC Reports, when filed, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.  The financial statements of
the Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes
thereto and except that unaudited financial statements may not contain all
footnotes required by GAAP, and fairly present in all material respects the
financial position of the Company and its consolidated subsidiaries as of and
for the dates 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
latest audited financial statements included within the SEC Reports, except as
disclosed in the SEC Reports, (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 interest 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 for Exempt Issuances.  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

 

12

 

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.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.

 

(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 material agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is
in violation of any order of any court, arbitrator or governmental body, or (iii) is
or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business except in each case as could
not have a Material Adverse Effect.

 

(m)          Regulatory
Permits.  The Company and the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary
to conduct their respective businesses as described in the SEC Reports, 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 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, except for Liens as do not materially
affect the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and the
Subsidiaries and Liens for the payment of federal, state or other taxes, the
payment of which is neither delinquent nor subject to penalties, except in each
case as could not have a Material Adverse Effect.  Any real property and facilities held under
lease by the Company and the Subsidiaries are

 

13

 

held by them under valid, subsisting and
enforceable leases of which the Company and the Subsidiaries are in compliance,
except in each case as could no have a Material Adverse Effect.

 

(o)           Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights necessary or material for use in connection
with their respective businesses as described in the SEC Reports 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 in connection with their
respective businesses as described in the SEC Reports 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
Subscription Amount.  To the best knowledge
of the Company, 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.

 

(q)           Transactions
With Affiliates and Employees. 
Except as set forth in the SEC Reports, none of the officers or directors
of the Company and, to the knowledge of the Company, none of the employees of
the Company is 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)            Sarbanes-Oxley;
Internal Accounting Controls. 
Reference is made to the SEC Reports which disclose that the Company is not
currently in compliance with all provisions of the Sarbanes-Oxley Act of
2002.  The Company is currently in the process
of, and will continue to exercise best efforts to, institute all requirements
necessary to comply with Sarbanes-Oxley Act of 2002 on or prior to March 31,
2006.

 

14

 

(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 the Transaction
Documents.  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 the Transaction
Documents.

 

(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. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading
Market.

 

(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)           Registration
Rights.  Other than each of the
Purchasers, no Person has any right to cause the Company to effect the
registration under the Securities Act of any securities of the Company.

 

(w)          Listing
and Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(g) of the
Exchange Act, and the Company has taken no action designed to, or which to its
knowledge is likely to have the effect of, terminating the registration of the
Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such
registration.  The Company has not, in
the 12 months preceding the date hereof, received notice from any Trading
Market on which the Common Stock is or has been listed or quoted to the effect
that the Company is not in compliance with the listing or maintenance
requirements of such Trading Market. The Company is, and has no reason to
believe that it will not in the foreseeable future continue to be, in
compliance with all such listing and maintenance requirements.

 

(x)            Application
of Takeover Protections.  The Company
and its Board of Directors have not taken any affirmative measures or action,
to institute any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar anti-takeover
provision under the Company’s Certificate of Incorporation (or similar charter
documents) or the laws of its state of incorporation that is or could become
applicable to the Purchasers as a result of the Purchasers and the Company
fulfilling their obligations or exercising their rights under the Transaction
Documents, including without limitation as a result of the Company’s issuance
of the Securities and the Purchasers’ ownership of the Securities, other than
those provisions of Nevada law generally applicable to corporations organized
under the laws of that State.

 

15

 

(y)           Disclosure.  The Company confirms that neither it nor any
other Person acting on its behalf has provided any of the Purchasers or their
agents or counsel with any information that constitutes or might constitute
material, nonpublic information.  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 disclosure 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.

 

(z)            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, including, without limitation, under the rules and
regulations of any Trading Market on which any of the securities of the Company
are listed or designated. 

 

(aa)         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 and assuming
for purposes of this representation that the Securities are all converted into
equity, (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).  The Company has no knowledge of
any facts or circumstances which lead it to believe that it will file for
reorganization or liquidation under the bankruptcy or reorganization laws of
any jurisdiction within one year from the Closing Date.  The SEC Reports set forth as of the dates
thereof all outstanding secured and unsecured Indebtedness of the Company or

 

16

 

any Subsidiary, or for which the Company or
any Subsidiary has commitments.  For the
purposes of this Agreement, “Indebtedness” shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value
of any lease payments in excess of $50,000 due under leases required to be
capitalized in accordance with GAAP. 
Neither the Company nor any Subsidiary is in default with respect to any
Indebtedness.

 

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

 

(cc)         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.

 

(dd)         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 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.

 

(ee)         Accountants.  The Company’s accountants are set forth on Schedule 3.1(ee)
of the Disclosure Schedule.  To the
knowledge of the Company, such accountants, who the Company expects will
express their opinion with respect to the financial statements to be included
in the Company’s Annual Report on Form 10-KSB for the year ended December 31,
2005 are a registered public accounting firm as required by the Securities Act.

 

(ff)           Seniority.  As of the Closing Date, no indebtedness or
other equity of the Company is senior to the Debentures in right of payment,
whether with respect to interest or upon liquidation or dissolution, or
otherwise, other than general unsecured indebtedness incurred in connection
with equipment and real estate financing customary for research and development
companies, accounts payables and indebtedness secured by

 

17

 

purchase money security interests (which is
senior only as to underlying assets covered thereby) and capital lease
obligations (which is senior only as to the property covered thereby), which
indebtedness is set forth on Schedule 3.1(ff).

 

(gg)         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 has fully accrued
all amounts owed to its accountants and lawyers.

 

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

 

(ii)                                  Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.16 hereof), it is understood and
agreed by the Company (i) that none of the Purchasers have been asked to
agree, nor has any Purchaser agreed, to desist from purchasing or selling, long
and/or short, securities of the Company, or “derivative” securities based on
securities issued by the Company or to hold the Securities for any specified
term; (ii) that past or future open market or other transactions by any
Purchaser, including Short Sales, and specifically including, without
limitation, Short Sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company’s publicly-traded securities; (iii) that
any Purchaser, and counter parties in “derivative” transactions to which any
such Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock, and (iv) that each Purchaser shall not be
deemed to have any affiliation with or control over any arm’s length counter-party
in any “derivative” transaction.  The
Company further understands and acknowledges that (a) one or more
Purchasers may engage in hedging activities at various times during the period
that the Securities are outstanding, including, without limitation, during the
periods that the value of the Underlying Shares deliverable with respect to
Securities are being determined and (b) such hedging activities (if any)
could reduce the value of the existing stockholders’ equity interests in the
Company at and after the time that the hedging activities are being
conducted.  The Company acknowledges that such aforementioned hedging
activities do not constitute a breach of any of the Transaction Documents.

 

18

 

(jj)           Manipulation
of Price.  The Company has not, and to its knowledge no one acting on
its behalf has, (i) taken, directly or indirectly, any action designed to
cause or to result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of any of the
Securities, (ii) sold, bid for, purchased, or, paid any compensation for
soliciting purchases of, any of the Securities (other than for the placement
agent’s placement of the Securities), or (iii) paid or agreed to pay to
any person any compensation for soliciting another to purchase any other
securities of the Company.

 

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 hereunder and 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 Document
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)           Own
Account.  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 in
violation of the Securities Act or any
applicable state securities law, has no present intention of
distributing any of such Securities in violation of the Securities Act or any applicable state securities law
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 the Registration
Statement or otherwise in compliance with applicable federal and state
securities laws) in violation of the Securities Act or any applicable state securities law.  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.

 

19

 

(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 converts any Debentures or exercises any Warrants, it will be
either: (i) an “accredited investor” as defined in Rule 501(a)(1),
(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a
“qualified institutional buyer” as defined in Rule 144A(a) under the
Securities Act.  Such Purchaser is not
required to be registered as a broker-dealer under Section 15 of the
Exchange Act.

 

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

 

(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.

 

(f)            Short
Sales and Confidentiality Prior To The Date Hereof.  Other than the transaction contemplated
hereunder, such Purchaser has not directly or indirectly, nor has any Person
acting on behalf of or pursuant to any understanding with such Purchaser,
executed any disposition, including Short Sales (but not including the location
and/or reservation of borrowable shares of Common Stock), in the
securities of the Company during the period commencing from the time that such
Purchaser first received a term sheet from the Company or any other Person
setting forth the material terms of the transactions contemplated hereunder until
the date hereof (“Discussion Time”). 
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage separate
portions of such Purchaser’s assets and the portfolio managers have no direct
knowledge of the investment decisions made by the portfolio managers managing other
portions of such Purchaser’s assets, the representation set forth above shall
only apply with respect to the portion of assets managed by the portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.  Other than to other
Persons party to this Agreement, such Purchaser has maintained the confidentiality
of all disclosures made to it in connection with this transaction (including
the existence and terms of this transaction).

 

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.

 

20

 

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 and the Registration Rights
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 substantially in the following form:

 

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

 

21

 

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,
including, if the Securities are subject to registration pursuant to the
Registration Rights Agreement, the preparation and filing of any required
prospectus supplement under Rule 424(b)(3) under the Securities Act
or other applicable provision of the Securities Act to appropriately amend the
list of Selling Stockholders thereunder.

 

(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 (including the 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 Debentures or any portion of a Warrant is converted or exercised
(as applicable) 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 Trading
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 Trading 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.  Certificates for Securities subject to legend
removal hereunder shall be transmitted by the transfer agent of the Company to
the Purchasers by crediting the account of the Purchaser’s prime broker with
the Depository Trust Company System.

 

(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 $1,000 of Underlying Shares (based on the VWAP of the Common Stock on the
date such Securities are submitted to the Company’s transfer agent) delivered
for removal of the restrictive legend and subject to Section 4.1(c), $10
per Trading Day (increasing to $20 per Trading Day 5 Trading Days after such
damages have begun to accrue) for each Trading 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

 

22

 

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.

 

(g)           Until
the one year anniversary of the Effective Date, 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
interest of the then outstanding Principal Amount of Debentures.

 

(h)           No
liquidated damages, financial penalty or other remedies provided for under this
Agreement, or any of the other Transaction Documents, in the event of delay in
delivery of share certificates or delay in the de-legending of share
certificates beyond any applicable deadline provided for herein, or therein, by
the Company, shall apply as to a Purchaser in the event such delay is the
result of (i) solely the fault of such Purchaser or (ii) any Force
Majeure, provided that the Company shall continue to use best efforts to cause
such delivery or de-legending as soon as possible.

 

4.2           Acknowledgment
of Dilution.  The Company
acknowledges that the issuance of the Securities 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.  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.

 

23

 

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

 

4.6           Securities
Laws Disclosure; Publicity. 
The Company shall, by 8:30 a.m. Eastern time on the Trading Day
following the date hereof, issue a Current Report on Form 8-K, reasonably
acceptable to each Purchaser disclosing the material terms of the transactions
contemplated hereby, and shall attach the Transaction Documents thereto.  The Company and each Purchaser shall consult
with each other in issuing any other press releases with respect to the
transactions contemplated hereby, and neither the Company nor any Purchaser
shall issue any such press release or otherwise make any such public statement
without the prior consent of the Company, with respect to any press release of
any Purchaser, or without the prior consent of each Purchaser, with respect to
any press release of the Company, which consent shall not unreasonably be
withheld, except if such disclosure is required by law, in which case the
disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. 
Notwithstanding the foregoing, the Company shall not publicly disclose
the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission or any regulatory agency or Trading Market, without the
prior written consent of such Purchaser, except (i) as required by federal
securities law in connection with the registration statement contemplated by
the Registration Rights Agreement and (ii) to the extent such disclosure
is required by law or Trading Market regulations, in which case the Company
shall provide the Purchasers with prior notice of such disclosure permitted
under subclause (i) or (ii).

 

4.7           Shareholder
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 shareholder 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.

 

4.8           Non-Public
Information.  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

 

24

 

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.

 

4.9           Use
of Proceeds.  Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for working capital purposes and not for the satisfaction
of any portion of the Company’s debt (other than payment of trade payables in
the ordinary course of the Company’s business and prior practices), to redeem Common
Stock or Common Stock Equivalents or to settle any outstanding litigation.

 

4.10         Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as a result of sales, pledges, margin sales and similar
transactions by such Purchaser to or with any current stockholder), solely as a
result of such Purchaser’s acquisition of the Securities under this Agreement,
the Company will reimburse such Purchaser for its reasonable legal and other
expenses (including the cost of any investigation preparation and travel in
connection therewith) incurred in connection therewith, as such expenses are
incurred.  The reimbursement obligations
of the Company under this paragraph shall be in addition to any liability which
the Company may otherwise have, shall extend upon the same terms and conditions
to any Affiliates of the Purchasers who are actually named in such action,
proceeding or investigation, and partners, directors, agents, employees and
controlling persons (if any), as the case may be, of the Purchasers and any
such Affiliate, and shall be binding upon and inure to the benefit of any
successors, assigns, heirs and personal representatives of the Company, the
Purchasers and any such Affiliate and any such Person.  The Company also agrees that neither the
Purchasers nor any such Affiliates, partners, directors, agents, employees or
controlling persons shall have any 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. The Purchaser shall not be
entitled to reimbursement for any claims that result from or relate to the
Purchaser’s, its agents’ or employees’ willful misconduct, violation of law, rule or
regulation or violation of any of the terms or provisions of this Agreement or
the other Transaction Documents.

 

4.11         Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.11, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, members, 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 representations, 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

 

25

 

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.

 

4.12         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 130% of (i) the Actual Minimum on such
date, minus (ii) the number of shares of Common Stock previously issued
pursuant to the Transaction Documents, then the Board of Directors of the
Company shall use commercially reasonable efforts to amend the Company’s
certificate or articles of incorporation to increase the number of authorized
but unissued shares of Common Stock to at least the Actual Minimum at such time
(minus the number of shares of Common Stock previously issued pursuant to the
Transaction Documents), as soon as possible and in any event not later than the
75th day after such date; provided that the Company will not be required at any
time to authorize a number of shares of Common Stock greater than the maximum
remaining number of shares of Common Stock that could possibly be issued after
such time pursuant to the Transaction Documents.

 

(c)           The
Company shall, if applicable: (i) in the time and manner required by the
Trading Market, 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 Actual 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 Actual Minimum on such date on
such Trading Market or another Trading Market.

 

26

 

4.13         Participation
in Future Financing.

 

(a)           From
the date hereof until the later of (i) the date that the Debentures are no
longer outstanding and (ii) 2 years from 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 an amount of the Subsequent Financing equal
to 100% of the Subsequent Financing (the “Participation Maximum”).

 

(b)           At
least 5 Trading 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 Trading 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.

 

(c)           Any
Purchaser desiring to participate in such Subsequent Financing must provide
written notice to the Company by not later than 5:30 p.m. (New York City
time) on the 5th Trading Day after all of the Purchasers have
received the Pre-Notice that the Purchaser is willing to participate in the
Subsequent Financing, the amount of the Purchaser’s participation, and that the
Purchaser has such funds ready, willing, and available for investment on the
terms set forth in the Subsequent Financing Notice.  If the Company receives no notice from a
Purchaser as of such 5th Trading Day, such Purchaser shall be deemed
to have notified the Company that it does not elect to participate.

 

(d)           If
by 5:30 p.m. (New York City time) on the 5th Trading 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.

 

(e)           If
by 5:30 p.m. (New York City time) on the 5th Trading Day after
all of the Purchasers have received the Pre-Notice, the Company receives
responses to a Subsequent Financing Notice from Purchasers seeking to purchase
more than the aggregate amount of the Participation Maximum, each such
Purchaser shall have the right to purchase the greater of (a) their Pro
Rata Portion (as defined below) of the Participation Maximum and (b) the
difference between the Participation Maximum and the aggregate amount of
participation by all other Purchasers.  “Pro
Rata Portion” is the ratio of (x) the Subscription Amount of Securities
purchased on the Closing Date by a Purchaser participating under this Section 4.13
and (y) the sum of the aggregate Subscription Amounts of Securities purchased
on the Closing Date by all Purchasers participating under this Section 4.13.

 

27

 

(f)            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 4.13, if the Subsequent Financing subject to the initial
Subsequent Financing Notice is not consummated for any reason on the terms not
materially more favorable to the investors in the Subsequent Financing than set
forth in such Subsequent Financing Notice within 60 Trading Days after the date
of the initial Subsequent Financing Notice.

 

(g)           Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance or a bona fide firm commitment public underwritten offering of the
Common Stock by a nationally recognized investment bank.

 

4.14         Subsequent Equity
Sales.

 

(a)           From
the date hereof until 90 days after the Effective Date, neither the Company nor
any Subsidiary shall issue shares of Common Stock or Common Stock Equivalents;
provided, however, the 90 day period set forth in this Section 4.14 shall
be extended for the number of Trading Days during such period in which (i) trading
in the Common Stock is suspended by any Trading Market, or (ii) following
the Effective Date, the Registration Statement is not effective or the
prospectus included in the Registration Statement may not be used by the
Purchasers for the resale of the Underlying Shares.

 

(b)           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”.  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 or (ii) enters into any agreement, including, but not
limited to, an equity line of credit, whereby the Company may sell securities
at a future determined price.

 

(c)           From
the date hereof until such time as no Purchaser holds any of the Securities, in
the event the Company issues or sells any shares of Common Stock or Common
Stock Equivalents, if a Purchaser reasonably believes that any of the terms and
conditions thereunder are more favorable to such investors as the terms and
conditions granted hereunder, upon notice to the Company by such Purchaser the
Company shall

 

28

 

amend the terms of this transaction as to
such Purchaser only so as to give such Purchaser the benefit of such more favorable
terms or conditions.

 

(d)           Notwithstanding
the foregoing, this Section 4.14 shall not apply in respect of (i) an
Exempt Issuance, except that no Variable Rate Transaction shall be an Exempt
Issuance or (ii) an issuance of Common Stock or Common Stock Equivalents
occurring after the Effective Date where the proceeds of such issuance are used
to redeem the Debentures in full.

 

4.15         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 on the Debenture 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 for the Company to treat the Purchasers 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.

 

4.16         Short
Sales and Confidentiality After The Date Hereof. Each Purchaser severally
and not jointly with the other Purchasers covenants that neither it nor any
affiliates acting on its behalf or pursuant to any understanding with it will
execute any Short Sales during the period after the Discussion Time and ending
at the time that the transactions contemplated by this Agreement are first
publicly announced as described in Section 4.6.  Each Purchaser, severally and not jointly
with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as
described in Section 4.6, such Purchaser will maintain, the
confidentiality of all disclosures made to it in connection with this transaction
(including the existence and terms of this transaction).  Each Purchaser understands and acknowledges,
severally and not jointly with any other Purchaser, that the Commission currently
takes the position that coverage of short sales of shares of the Common Stock “against
the box” prior to the Effective Date of the Registration Statement with the
Securities is a violation of Section 5 of the Securities Act, as set forth
in Item 65, Section 5 under Section A, of the Manual of Publicly
Available Telephone Interpretations, dated July 1997, compiled by the
Office of Chief Counsel, Division of Corporation Finance.  Notwithstanding the foregoing, no Purchaser
makes any representation, warranty or covenant hereby that it will not engage
in Short Sales in the securities of the Company after the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.6. 
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the covenant set forth
above shall only apply with respect to the portion of assets managed by the
portfolio manager that made the investment decision to purchase the Securities
covered by this Agreement.

 

29

 

4.17         Capital
Structure Developments.  The Company
shall satisfy the following milestones by November 18, 2005 (collectively
referred to as the “Capital Structure Requirements”):

 

a)  the Company shall (i) have
a board of directors not exceeding seven (7) members with a majority of
the board of directors of the Company comprised of independent directors, and (ii) have
received approval by the requisite vote of the board of directors and
shareholders of A.C.T. Group, Inc. of a distribution of substantially all
of the assets of A.C.T. Group, Inc. to the shareholders of A.C.T. Group,
Inc; and

 

b)  the Company shall effect the
Parent Merger (as defined in the Debenture).

 

4.18         Additional
Investment Option.

 

(a)             From
the Effective Date until the 6 month anniversary of the Effective Date (“Company
Exercise Period”), if on any Trading Day during such period the Company
duly satisfies the Corporate Milestones and provides written confirmation in
the form of a Secretary’s Certificate of the Company of satisfaction of such Corporate
Milestones to each Purchaser, each Purchaser shall be required to purchase, in
the ratio of such Purchaser’s Subscription Amount on the Closing Date to the
aggregate Subscription Amounts of all Purchasers on the Closing Date (such
amount, the Purchaser’s “Pro Rata Share”), additional Debentures and
Warrants, for an aggregate cash purchase price of up to fifty percent (50%) of
the aggregate cash Subscription Amounts hereunder (the “Company Option”).  Any Company Option shall close within 10
Trading Days of notice to each Purchaser by the Company that the Company has
duly satisfied the Corporate Milestones and that the Company elects to exercise
its Company Option hereunder.  The
Purchasers shall not be obligated to purchase such securities issuable pursuant
to the Company Option, notwithstanding this right, if (i) a Material
Adverse Effect has occurred during the period from the Closing Date to the date
of such exercise until the additional investment is closed or (ii) the
Equity Conditions (as defined in the Debentures) are not satisfied as to the Debentures
and Warrants.

 

(b)             From
the 6 month anniversary of the Effective Date until the 12 month anniversary of
the Effective Date (the “Initial Purchaser Exercise Period”), each
Purchaser may, in its sole discretion, purchase additional Debentures and
Warrants, in an amount up to such Purchaser’s Pro Rata Share, for an aggregate
purchase price of up to the total amount available under the Company Option
less any amounts purchased by the Purchasers under the Company Option (the “Initial
Purchaser Option”).  Any Initial
Purchaser Option shall close within 10 Trading Days of notice to the Company by
each Purchaser that such Purchaser elects to exercise its Initial Purchaser
Option hereunder.

 

(c)             On
the first Trading Day immediately following the 12  month anniversary
of the Effective Date, in the event that some Purchasers do not exercise the
Initial Purchaser Option pursuant to Section 4.18(b), the Company shall
offer the remaining Debentures and Warrants issuable for an aggregate
Subscription Amount of the total amount available under the Initial Purchaser
Option less any amounts purchased by the

 

30

 

Purchasers under the Company Option to each
Purchaser that exercised its Initial Purchaser Option (the “Subsequent
Purchaser Option”).  Such Purchaser shall
then have the option to purchase additional Debentures and Warrants for an
amount greater than such Purchaser’s Pro Rata Share.  If participating Purchasers elect to purchase
more than the Subsequent Purchaser Option, then each Purchaser shall have the
right to purchase their pro-rata share based on the ratio of such Purchaser’s
Subscription Amount on the Closing Date to the aggregate Subscription Amounts
of all participating Purchasers on the Closing Date Any Subsequent Purchaser
Option shall close within 10 Trading Days of notice to the Company by each
Purchaser that such Purchaser elects to exercise its Subsequent Purchaser
Option hereunder.

 

(d)             Any
additional investment pursuant to this Section 4.18 will be on terms and
prices identical to those set forth in the Transaction Documents, mutatis  mutandis; provided, however, (i) the
conversion price of the Debentures issuable hereunder shall be equal to the lesser
of (A) the then Conversion Price of the Debentures issued at the Closing
and (B) the lesser of (1) arithmetic average of the 5 Closing
Prices immediately prior to the applicable notice of exercise of such
additional investment and (2) $2.50 and (ii) the exercise price of the warrant issuable hereunder shall be equal to
the lesser of (A) the then Exercise Price of the Warrants issued at the
Closing and (B) 110% of the lesser of (1) arithmetic average
of the 5 Closing Prices immediately prior to the applicable notice of exercise
of such additional investment and (2) $2.50.  Additionally, the “Filing Date” under the Registration Rights Agreement shall be the
20th day following the consummation of any such additional
investment, as applicable, and the “Effective Date” shall be 40 days from such
Filing Date.  In order to
effectuate a purchase and sale of the additional Debentures and Warrants, the
Company and each Purchaser shall enter into the following agreements: (x) a
securities purchase agreement identical to this Agreement, mutatis
mutandis and shall include updated disclosure schedules and (y) a
registration rights agreement identical to the Registration Rights Agreement, mutatis mutandis and shall include updated disclosure
schedules.

 

4.19         Sarbanes-Oxley
Compliance.  The Company shall use
its best efforts to be compliant with the Sarbanes-Oxley Act of 2002 on or
before March 31, 2006.

 

4.20         Stock
Option Plans.  Except as set forth on
Schedule 4.20, the Company shall not issue shares of Common Stock
or options to employees, officers or directors of the Company pursuant to any
stock or option plan until such stock or option plan is duly authorized 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.

 

ARTICLE V

MISCELLANEOUS

 

5.1           Termination. 
This Agreement may be terminated by any Purchaser, as to such Purchaser’s
obligations hereunder only and without any effect whatsoever on the obligations
between the Company and the other Purchasers, by written notice to the other
parties, if the

 

31

 

Closing has
not been consummated on or before September 23, 2005; provided, however,
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 Omicron Master Trust (“Omicron”) non-accountable
sum of $45,000, for its actual, reasonable, out-of-pocket legal fees and
expenses, $20,000 which shall have been paid prior to the Closing and $5,000
was paid in advance to Bristol Investment Fund, Ltd. as reimbursement for the
payment of background checks.  Accordingly,
in lieu of the foregoing payment, the aggregate amount that Omicron is to pay
for the Securities at the Closing shall be reduced by $20,000.  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 delivery 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 representations, 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 Trading Day, (b) the
next Trading 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 Trading Day or
later than 5:30 p.m. (New York City time) on any Trading Day, (c) the
2nd Trading 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.

 

32

 

5.6           Headings.  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”.

 

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 4.11.

 

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.

 

33

 

5.10         Survival.  The representations and warranties contained
herein shall survive the Closing and the delivery, exercise and/or conversion
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 herefor, 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 Document
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; provided, however, in the case of
a rescission of a conversion of the Debentures or exercise of a Warrant, the
Purchaser shall be required to return any shares of Common Stock subject to any
such rescinded conversion or exercise notice.

 

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 herefor, 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.

 

34

 

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

 

5.17         Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction Document.  Notwithstanding any provision to the contrary
contained in any Transaction Document, 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 Document 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 Document.  Nothing contained herein or in any
Transaction Document, 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

 

35

 

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 Omicron.  The Company has
elected to provide all Purchasers with the same terms and Transaction Documents
for the convenience of the Company and not because it was required or requested
to do so by the Purchasers.

 

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

 

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

 

[SIGNATURE PAGE FOLLOWS]

 

36

 

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.

 

 

	
  ADVANCED CELL
  TECHNOLOGY, INC.

  	
  Address for Notice:

  
	
   

  	
   

  
	
  By:

  	
  /s/ William M. Caldwell,
  IV

  	
   

  	
  381
  Plantation Street

  
	
   

  	
  Name: William M. Caldwell,
  IV

  	
  Worcester,
  MA 01605

  
	
   

  	
  Title: Chief Executive
  Officer

  	
   

  
	
   

  	
   

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

  	
   

  
	
   

  	
   

  
	
  Jonathan F. Atzen

  	
  11100 Santa Monica Blvd, Ste 850

  
	
   

  	
  Los Angeles, CA 90025

  
				

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

37

 

[PURCHASER SIGNATURE PAGES TO ACTC 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 Purchaser:

  	
   

  	
   

  
	
  Signature of Authorized Signatory of Purchaser:

  	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  	
   

  
	
  Email Address of Purchaser:

  	
   

  	
   

  
										

 

Address for Notice of Purchaser:

 

 

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

 

 

Subscription Amount (0.7968 x Principal Amount):

Principal Amount (1.255 x Subscription Amount):

Warrant Shares:

 

38

 

SCHEDULE A

 

List of additional documents deemed “Transaction Documents”:

 

Lock-Up Agreements executed by officers and directors of the Company.

Disclosure Schedules to the Transaction Documents.

 

39

 

DISCLOSURE
SCHEDULE

 

TO THE
SECURITIES PURCHASE AGREEMENT

 

BY AND
AMONG 

ADVANCED CELL TECHNOLOGY, INC.

AND

THE PURCHASERS (AS DEFINED THEREIN)

 

Dated as
of September 15, 2005

 

 

40

 

TERMS AND
CONDITIONS

 

This
Disclosure Schedule, including the attachments hereto, is subject to the
following terms and conditions:

 

1.                                       The
inclusion of any fact or item on a Schedule, which Schedule requires the listing
of a “material” item, is not deemed to be an admission or representation that
the included item is “material.”

 

2.                                       Any
introductory language or heading on any Schedule is inserted for
convenience only and shall not create a different standard for disclosure than
that provided for in the Agreement (as defined below).

 

3.                                       All
capitalized terms used herein and not defined herein shall have the meanings
ascribed to them in the Securities Purchase Agreement (the “Agreement”) dated
as of September 15, 2005 by and among Advanced Cell Technology, Inc.
and certain Purchasers (as defined therein).

 

4.                                       Cross-references
are to items in other sections of the Schedules, unless otherwise indicated,
and serve to incorporate the cross-referenced items into the sections of the Schedule in
which the cross-reference is contained. 
Any item, document or disclosure contained in one Schedule shall be
deemed to also be disclosed in any other Schedule in which it is
applicable, but only if a good faith effort was made to cross-reference such
other Schedule or Schedules such that it is reasonably apparent on the
face of such other Schedule or Schedules that such item, document or
disclosure was intended to be disclosed on such other Schedule or
Schedules.

 

41

 

SCHEDULE 3.1(a)-
SUBSIDIARIES

 

Advanced Cell, Inc., a Delaware
corporation

 

SCHEDULE 3.1(c)-
AUTHORIZATION; ENFORCEMENT

 

Certain necessary consents and approvals
relating to the Capital Restructuring (as defined in the Debenture) have not
yet been obtained.

 

SCHEDULE 3.1(d)-
CONFLICTS

 

Certain necessary consents and approvals
relating to the Capital Restructuring (as defined in the Debenture) have not
yet been obtained.

 

See Schedule 3.1(v)

 

SCHEDULE 3.1(e)- FILINGS, CONSENTS AND
APPROVALS

 

Certain necessary consents and approvals
relating to the Capital Restructuring (as defined in the Debenture) have not
yet been obtained.

 

SCHEDULE 3.1(g)- CAPITALIZATION

 

	
  I.
  Common Stock

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  A. In Excess of 1%

  	
   

  	
   

  	
   

  
	
  A.C.T. Group, Inc.

  	
   

  	
  6,811,146

  	
   

  
	
  University of Massachusetts

  	
   

  	
  357,263

  	
   

  
	
  Highview Associates LLC

  	
   

  	
  1,060,000

  	
   

  
	
  Anthem/CIC Ventures Fund

  	
   

  	
  294,118

  	
   

  
	
  Chase Leavitt

  	
   

  	
  588,236

  	
   

  
	
  Greg Mauro/Revolution Capital LLC

  	
   

  	
  635,294

  	
   

  
	
  Kiranjit Sidhu

  	
   

  	
  294,118

  	
   

  
	
  SDS Capital Group

  	
   

  	
  411,764

  	
   

  
	
  Augustine Fund LP

  	
   

  	
  1,529,412

  	
   

  
	
  Jeff Lotman

  	
   

  	
  294,118

  	
   

  
	
  Anthem Ventures Fund LP

  	
   

  	
  2,588,235

  	
   

  
	
  Nancy Burrows

  	
   

  	
  246,748

  	
   

  
	
  Public Ventures

  	
   

  	
  560,009

  	
   

  
	
  Asiate Partners, LLC

  	
   

  	
  978,930

  	
   

  
	
  Quantum Merchant Bank LLC

  	
   

  	
  1,024,860

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  B. Aggregate of Less than 1%

  	
   

  	
  5,086,241

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  II. Options Outstanding

  	
   

  	
   

  	
   

  
	
  2004 Stock Option Plan

  	
   

  	
  2,592,000

  	
   

  
	
  2004 Stock Option Plan II

  	
   

  	
  1,301,161

  	
   

  
	
  2005 Stock Incentive Plan

  	
   

  	
  8,257,835

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  III. Warrants Outstanding

  	
   

  	
   

  	
   

  
	
  $0.05
  Warrants

  	
   

  	
  950,000

  	
   

  
	
  $0.25
  Warrants

  	
   

  	
  2,054,000

  	
   

  
	
  $0.85
  Warrants

  	
   

  	
  1,833,260

  	
   

  
	
  $1.27
  Warrants

  	
   

  	
  5,248,581

  	
   

  
	
  $2.00
  Warrants

  	
   

  	
  1,291,615

  	
   

  

 

42

 

Capital Stock issued since Company’s most
recently filed periodic report

 

Options:

 

Alan C. Shapiro- 50,000

 

Florence Crowley –20,000

 

Shi Jiang Lu
–65,000

 

Yordanka Ivanova
–20,000

 

Chad Griffin –24,000

 

David Carmel –12,000

 

George McNeill –2,500

 

David Wininger –40,000

 

Howard Blum –48,000

 

William Rauch
–48,000

 

Ivan Wolkind
–100,000

 

Victor Velez
–20,000

 

Other
capital stock:

 

Securities issued in connection with the
Aronson settlement

 

The representations made in Section 3.1(g) relating
to the capitalization of the Company are subject to the terms relating to the
Capital Restructuring and the Aronson settlement.  The Company has provided the Purchasers with
the documents executed in connection with the Aronson Settlement.

 

SCHEDULE 3.1(h)- SEC REPORTS; FINANCIAL
STATEMENTS

 

On June 30, 2005, the Company received a
comment letter (“Comment Letter”) from the Securities and Exchange Commission
(“SEC”) regarding certain filings made by the Company with the SEC since January 31,
2005.  The Company and the SEC have
successfully worked through the issues raised in the Comment Letter.  On August 25, the SEC verbally informed
the

 

43

 

Company that it was satisfied with the
Company’s proposed amendments to both (i) the Company’s 10-KSB for the
fiscal year 2004, and (ii) the Company’s 10-QSB for the quarter ended March 31,
2005.  On September 7th,
2005, the Company filed the amendments to each such filing.  The Company now believes that the SEC’s
review has been closed.

 

SCHEDULE 3.1(I)- MATERIAL CHANGES

 

Other than the terms of the Capital Structure
Requirements and the Aronson Settlement as set forth in the Transaction
Documents and these schedules.  Set forth
below is a description of the Aronson Settlement.

 

Aronson/Gorton Settlement.  The Company has entered into a Settlement
Agreement (“Settlement Agreement”) dated September 14, 2005 among Gary D.
Aronson and John S. Gorton (“Plaintiffs”) and A.C.T. Group, Inc., Advanced
Cell, Inc., a Delaware Corporation, Michael D. West, Gunnar L. Engstrom,
William M. Caldwell, IV, Anthem Venture Partners and Greg Bonfiglio (referred
to collectively with the Company as the “Defendants”).  The Settlement Agreement resolves certain
disputes relating to the litigation entitled Gary D. Aronson and John Gorton
v. A.C.T. Group, Inc., Advanced Cell Technology, Inc., Michael D.
West, and Gunnar L. Engstrom. Pending in Commonwealth of Massachusetts
Superior Court. Worcester. C.A. No. 040523B (the “Underlying Action”) and
two companion Contempt Complaints filed by the Plaintiffs against certain of
the Defendants, including the Company (the “Companion Actions”).

 

Pursuant to the Settlement
Agreement, the Plaintiffs have agreed to:

 

1.                                       Dismiss
with prejudice the Companion Actions;

 

2.                                       Assign
to the Company all of the Plaintiffs’ right, title and interest in the judgment
entered against A.C.T. Group, Inc. in the Underlying Action in the amount
of $690,040, plus interest and legal fees
(the “Judgment”).

 

3.                                       Assign
to the Company all of the Plaintiffs’ right, title and interest in and to the
two defaulted Promissory Notes, the collection of which is the subject matter
of the Underlying Action

 

4.                                       To
execute and deliver to the Company and certain Defendants a complete release of
all claims in the Underlying Action and the Companion Actions, with the
exception of those claims assigned to the Company by Plaintiffs under the
assignments of the Judgment and Promissory Notes.

 

Pursuant to the Settlement Agreement, the
Company has agreed to:

 

1.                                       Pay
in cash to Plaintiffs the amount of $332,524 upon execution and delivery of the
Settlement Agreement.

 

2.                                       Issue
to Plaintiffs unsecured convertible promissory notes in the aggregate amount of
$600,000, bearing interest at the rate of 7.5% per annum and maturing July 1,
2006 (collectively, the “Settlement Note”). 
The Settlement Note may be prepaid at any time without penalty.  The

 

44

 

holders of the Settlement Note have the right to convert the Settlement
Note, in whole or in part, into common stock or other securities of the Company
at the price specified in the Settlement Warrants.  The Settlement Note is expressly subordinated
to any indebtedness incurred by the Company in any debt or equity financings,
including re-financings thereof, consummated on or before November 9,
2005.

 

3.                                       Issue
to Plaintiffs warrants to purchase 422,727 shares of the Company’s common
stock, preferred stock or other non-debt securities issued by the Company at an
exercise price of $2.20 per share of common stock or per share of common stock
underlying any preferred stock or other non-debt securities (the “Settlement
Warrants”).  The Settlement Warrants have
a term expiring January 1, 2009.

 

A.C.T. Group, Inc.
Agreement.  In connection with the settlement effected
pursuant to the Settlement Agreement, and as a condition to the Company
entering into the Settlement Agreement, the Company has entered into an
Agreement with A.C.T. Group, Inc. (“Group”) compensating the Company for
the obligations the Company incurred under the Settlement Agreement, which extinguish
in full Group’s obligations and indebtedness to Plaintiffs, and resolving certain disputes with respect to
amounts due to and from the Company and Group (the “Group Agreement”).

 

Pursuant to the Group Agreement, in
consideration for the Company entering into the Settlement Agreement, the
Company and Group have agreed as follows:

 

1.                                       Group will
extinguish the liability of the Company to Group consisting of a note payable
of $1,000,000, and related accrued interest of $381,877.

 

2.                                       The Company will
extinguish an existing inter-company debt owed to the Company by Group of $782,295.

 

3.                                       Group has agreed
to transfer to the Company 352,153 shares of the common stock of the Company to
compensate the Company for the amount by which the value of (a) the
settlement consideration paid to the Plaintiffs by the Company and (b) the
amount of the liabilities of Group extinguished by the Company exceeds the
amount of the liabilities from the Company to Group extinguished under the
Group Agreement.

 

SCHEDULE 3.1(j)- LITIGATION.

 

Geron-Related Proceedings

 

Campbell et al. v. Stice et al., Patent Interference Nos. 104,746 and
105,192. These two interference proceedings were
initiated January 30, 2002 at the request of Geron Corporation in an
effort to obtain rights to U.S. Patent Nos. 5,945,577 and 6,235,970, which are
licensed by the University of Massachusetts exclusively to the Company. In both
proceedings, the Board of Patent Appeals and Interferences issued a decision
adverse to the Company. Both of these decisions are being challenged in
proceedings described below. This proceeding and the two

 

45

 

proceedings discussed immediately below are referred to as the
“Geron-Related Proceedings.” Adverse determinations in this proceeding would
have a materially adverse effect on our business.

 

University of Massachusetts and Advanced Cell Technology, Inc. v.
Roslin Institute (Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,
U.S. District Court for the District of Columbia. The Company filed an action
on February 18, 2005 in the U.S. District Court for the District of
Columbia. The Company brought this action under 35 U.S.C. 146 to reverse the
decision of the Board of Patent Appeals and Interferences regarding a patent to
a method of cloning non-human animals. The patent, U.S. Patent No. 5,945,577,
is licensed by the University of Massachusetts exclusively to the Company. The
parties have agreed to stay all proceedings until September 8, 2005.  Adverse determinations in this proceeding
would have a materially adverse effect on our business.

 

University of Massachusetts and Advanced Cell Technology, Inc. v.
Roslin Institute (Edinburgh), Geron Corporation and Exeter Life Sciences, Inc.,
U.S. District Court for the District of Columbia. The Company filed an action
on April 7, 2005 in the U.S. District Court for the District of Columbia.
The Company brought this action under 35 U.S.C. 146 to reverse the decision of
the Board of Patent Appeals and Interferences regarding a patent to a method of
creating embryonic stem cells. The patent, U.S. Patent No. 6,235,970, is
licensed by the University of Massachusetts exclusively to the Company. The
parties have agreed to stay all proceedings until September 8, 2005.  Adverse determinations in this proceeding
would have a materially adverse effect on our business.

 

Other Legal Proceedings

 

Gary D. Aronson and John Gorton v. A.C.T. Group, Inc., Advanced
Cell Technology, Inc., Michael D. West, and Gunnar L. Engstrom.
Commonwealth of Massachusetts Superior Court, Worcester. C.A. No. 040523B.
This proceeding is a claim for breach of contract and failure to pay brought by
two of the individuals who hold Promissory Notes issued by ACT Group Inc., a
Delaware corporation (“ACT Group”). ACT is a named defendant in this
proceeding. In April 2004, the court entered an order denying a request
for a temporary restraining order and preliminary injunction with respect to
our subsidiary ACT. In its order, the Court stated that, based upon the record
before the Court at that stage of the proceeding, ACT was “not legally
responsible” for these ACT Group obligations. In August 2004, the
plaintiffs obtained a judgment against ACT Group for $690,040. The
Massachusetts Superior Court before which this proceeding is pending has
entered an Order requiring all 6,811,146 shares of our stock held by ACT Group
be placed in escrow pending sale to satisfy this judgment. Although the Order
specifies that the sale must be conducted in a commercially reasonable manner,
we cannot assure you that the plaintiffs in this action will effect the sale in
a manner that will not have a materially adverse impact upon the trading value
of our stock.  The Company and certain
officers and directors have been named as contemnors in a related contempt
complaint seeking to enforce the judgment against ACT Group and have been
ordered to show cause why they should not be held in contempt for allegedly
aiding and abetting ACT Group’s alleged contempt.  The Company and certain officers have moved
to dismiss the contempt complaint.  At
the request of the parties, the Massachusetts Superior Court has delayed
scheduling a hearing on the show cause order and the Company’s motion to
dismiss. If ACT Group is unable to resolve this dispute on terms that are
satisfactory to it and the Company, our business may be materially adversely
affected.

 

46

 

Although our operations and those of ACT Group are distinct and
separate, with separate governance structures, and the two companies observe
strict corporate formalities distinct to the respective entities, the
plaintiffs in this action seek to pierce the corporate veil and hold us
responsible for ACT Group’s liabilities. To date, those claims have not been
successful. However, we cannot assure you that there will not be further
attempts to pierce the corporate veil, or that they will be unsuccessful in
doing so. If there are such future attempts, they could result in significant
legal expenses in defending such claims. Moreover, if the plaintiffs creditors
are successful in piercing the corporate veil and holding us responsible for
these ACT obligations, there will be a material adverse effect on our business
and operations.

 

See discussion contained in Schedule 3.1(I) above regarding the
Aronson Settlement.

 

University of Massachusetts v. James M. Robl and Phillippe Collas,
Massachusetts Superior Court (Suffolk County). 
The University of Massachusetts, referred to as UMass, filed a complaint
on February 22, 2004 in the Superior Court (Suffolk County) for the Commonwealth
of Massachusetts.  We are not a party to
this litigation; however, a decision adverse to UMass in this litigation could
have a materially adverse effect on the Company’s business.  The complaint alleges the misappropriation by
the defendants of valuable inventions in the fields of animal cloning and cell
reprogramming, made by the defendants at UMass and with UMass support, that are
exclusively licensed to ACT by UMass. 
The complaint includes counts for declaratory judgment, breach of
contract seeking specific performance, injunctive relief and damages,
intentional interference with contract and prospective contractual relations,
conversion, breach of duty, and breach of the covenant of good faith and fair
dealing.  ACT has been cooperating with UMass
in connection with the prosecution and possible settlement of this litigation.

 

William A. Brandt, Jr. as Assignee for
the Benefit of the Creditors of Avian Farms, Inc. v. Advanced Cell
Technology, Inc. and A.C.T. Group, Inc.  U.S.
District Court for the District of Massachusetts, C.A. No. 01-40227-NMG.  Plaintiff brought suit on December 3,
2001 in U.S. District Court in Worcester, Massachusetts alleging that ACT Group
and ACT defaulted on two promissory notes totaling $2,787,000.  Plaintiff sought that amount plus interest
and legal fees.  ACT Group and ACT filed
an answer in which they disputed the amount due.  ACT Group and ACT also brought counterclaims
in which they sought compensation for travel expenses and legal fees owed to
ACT.  ACT paid its note in full in
August of 2002.  Following the
parties’ notification to the court that they had reached tentative settlement,
the case was dismissed on August 16, 2004 without prejudice to the right
of any party to move to re-open the case within 60 days if settlement could not
be formalized.  The parties never reached
settlement and none of the parties moved to re-open the case.  On or about January 11, 2005, Brandt
assigned Avian Farms’ rights to Highview Associates.  Although our operations and those of ACT
Group are distinct and separate, with separate governance structures, and the
two companies observe strict corporate formalities distinct to the respective
entities, there have been several attempts by the debt holders of ACT Group,
via a legal complaint, to pierce the corporate veil and hold us responsible for
ACT Group’s liabilities.  To date, those
claims have not been successful. 
However, we cannot assure you that there will not be further attempts by
creditors of ACT Group to pierce the corporate veil, or that they will be
unsuccessful in doing so.  If there are
such future attempts, they could result in significant legal expenses in
defending such claims.

 

47

 

Moreover, if ACT Group creditors are successful in piercing the
corporate veil and holding us responsible for ACT Group debts, there will be a
material adverse effect on our business and operations.

 

Securities Laws related Litigation relating to Officer of Company

 

David Miller et al. v. Ventro Corporation et
al., N.D. Cal., Docket No.  C-01-1287, filed March 30,
2001.  A complaint was filed alleging
that Ventro Corporation (“Ventro”) and certain of its officers violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5.
During the class period, Ventro built and operated platforms for vertical
business-to-business (B2B) e-commerce marketplace companies. The complaint also
alleges that by 12/99, defendants knew that Ventro’s existing business model
did not work. But, the complaint alleges the defendants continued to make
positive but false statements about Ventro’s business and future revenues.

 

The Company’s Chief Financial Officer, James
Stewart, was named as a party defendant in a class action lawsuit brought by
shareholders of Ventro.  The trial court
judge approved final settlement of the matter March 29, 2005.  There was only one insignificant opt out to
the settlement (an individual in Germany who said he has no records of his
purchase or sale of Ventro stock and wants no part of any litigation) and only
one objector (who did not opt out).  The
objecting party (a trust who purchased a very small amount of Notes) was only
asking the judge to reduce the total fees and costs being awarded to plaintiffs’
counsel, something we took no position on. 
The Court overruled the objector.

 

The objector/trust filed  a
notice of appeal.  However, the objector
is only contesting the amount of attorney’s fees that should be awarded to the
plaintiffs’ lawyers.  There is nothing in
the objector submissions that states that the objector will contest the merits
of the settlement or the releases given to any of the defendants.  Assuming that the objector is not attacking
the merits of the settlement, the appeal should not have any impact on any
defendants because the settlement agreement expressly provided that any
reversal or modification to the amount of attorney’s fees awarded to plaintiffs’
counsel would not impact the releases and final judgment on the merits.

 

SCHEDULE 3.1(l)- COMPLIANCE

 

See Schedule 3.1(h)

 

See Schedule 3.1(j)

 

See Schedule 3.1(bb)

 

SCHEDULE 3.1(o)- PATENTS AND TRADEMARKS

 

See Schedule 3.1(j)

 

48

 

SCHEDULE 3.1(p)- INSURANCE

 

The Company presently has a Directors’ and Officers’
insurance policy providing for $3 million of coverage.

 

The Company will use its commercially
reasonable efforts to increase such coverage to an amount equal to the
Subscription Amount.

 

SCHEDULE 3.1(s)- CERTAIN FEES

 

The Company is a party to that certain
Transaction Fee Agreement (the “Transaction Fee Agreement”) with T.R. Winston &
Company, LLC (the “Broker”) pursuant to which, in connection with the
consummation of the transactions contemplated by the Purchase Agreement, the
Company shall compensate the Broker by providing the Broker with (i) cash
in an amount equal to six percent (6%) of any and all cash raised, including
but not limited to the principal amount of the Debentures plus any monies
raised pursuant to the exercise of Warrants and pursuant to the exercise of the
Additional Investment Option in Section 4.18 of the Purchase Agreement,
and (ii) an immediately exercisable warrant to purchase a number of shares
equal to eight percent (8%) of the aggregate shares and warrant shares issued to
the Purchasers.

 

SCHEDULE 3.1(v)- REGISTRATION RIGHTS

 

Pursuant to the Private Placement Memorandum
(“PPM”) of Advanced Cell, Inc. (f/k/a Advanced Cell Technology, Inc.),
dated as of November 10, 2004 and as subsequently amended, certain
piggy-back registration rights were granted to those investors purchasing Series A
Convertible Preferred Stock (“ACT Preferred Stock”) of Advanced Cell, Inc.  Such shares of ACT Preferred Stock were
subsequently converted into common stock and then exchanged for shares of
Common Stock (the “Exchange Shares”) of the Company in connection with the
reverse merger consummated by the Company on January 31, 2005.  The piggy-back registration rights granted
pursuant to the PPM continue to apply to the Exchange Shares.

 

Pursuant to certain Warrant Agreements (the
“Warrant Agreements”) entered into by Advanced Cell, Inc., certain
piggy-back registration rights were granted to the purchasers of warrants
(“Warrants”) of Advanced Cell, Inc. 
The Warrants were originally exercisable into shares of common stock of
Advanced Cell, Inc.  However, in
connection with the reverse merger consummated by the Company on January 31,
2005, the Warrants became exercisable into shares of Common Stock of the
Company.  The piggy-back registration
rights granted pursuant to the Warrant Agreements continue to apply to  the shares of Common Stock of the Company
underlying the Warrants.  See Schedule 3.1(g) for
the aggregate number of Warrants outstanding.

 

The Company has granted certain registration
rights in connection with the Aronson Settlement.  The Company has also proposed granting
certain registration rights to third parties being issued shares of capital
stock of the Company in connection with the Capital Structure
Requirements.  The registration rights
granted in connection with both the Aronson Settlement and the other Company
proposals with respect to such third party registration rights have been made
subject to “any requirements, conditions or restrictions imposed upon the
Company in any future financing or related arrangement regarding the granting
of registration rights to any third party.”

 

Pursuant to the Transaction Fee Agreement,
the Company has agreed to provide the Broker with the same registration rights
granted to the Purchasers under the Registration Rights Agreement.

 

49

 

SCHEDULE 3.1(bb)- TAX STATUS

 

Advanced Cell, Inc., a Delaware
corporation and a wholly-owned subsidiary of the Company, has not filed state
or federal tax returns for the years 2000-2004.

 

SCHEDULE 3.1(ee)- ACCOUNTANTS

 

Stonefield Josephson, Inc.

 

SCHEDULE 3.1(gg)- NO DISAGREEMENTS WITH
ACCOUNTANTS AND LAWYERS

 

The Company is in the process of finalizing
resolution of disputes with respect to historical outstanding balances with
certain law firms for legal services provided to the Company prior to the
merger.

 

50Exhibit 10.2

 

EXHIBIT B

 

REGISTRATION
RIGHTS AGREEMENT

 

This Registration Rights Agreement (this “Agreement”)
is made and entered into as of September 15, 2005 among Advanced Cell
Technology, Inc., a Nevada corporation (the “Company”), and the
purchasers signatory hereto (each such purchaser is a “Purchaser” and
collectively, the “Purchasers”).

 

This Agreement is made pursuant to the
Securities Purchase Agreement, dated as of the date hereof among the Company
and the Purchasers (the “Purchase Agreement”).

 

The Company and the Purchasers hereby agree
as follows:

 

1. Definitions

 

Capitalized terms
used and not otherwise defined herein that are defined in the Purchase
Agreement shall have the meanings given such terms in the Purchase Agreement.
As used in this Agreement, the following terms shall have the following
meanings:

 

“Advice”
shall have the meaning set forth in Section 6(d).

 

“Effectiveness
Date” means, with respect to the initial Registration Statement required to
be filed hereunder, the 90th calendar day following the date hereof (the
120th calendar day in the case of a “full review” by the Commission)
and, with respect to any additional Registration Statements which may be
required pursuant to Section 3(c), the 75th calendar day
following the date on which the Company first knows, or reasonably should have
known, that such additional Registration Statement is required hereunder; provided,
however, in the event the Company is notified by the Commission that one
of the above Registration Statements will not be reviewed or is no longer
subject to further review and comments, the Effectiveness Date as to such
Registration Statement shall be the fifth Trading Day following the date on
which the Company is so notified if such date precedes the dates required above.

 

“Effectiveness
Period” shall have the meaning set forth in Section 2(a).

 

“Event”
shall have the meaning set forth in Section 2(b).

 

“Event Date”
shall have the meaning set forth in Section 2(b).

 

“Filing
Date” means, with respect to the initial Registration Statement required
hereunder, the 30th calendar day following the date hereof and, with
respect to any additional Registration Statements which may be required
pursuant to Section 3(c), the 30th day following the date on
which the Company first knows, or reasonably should have known that such
additional Registration Statement is required hereunder.

 

1

 

“Holder”
or “Holders” means the holder or holders, as the case may be, from time
to time of Registrable Securities.

 

“Indemnified
Party” shall have the meaning set forth in Section 5(c).

 

 “Indemnifying Party” shall have the
meaning set forth in Section 5(c).

 

“Losses”
shall have the meaning set forth in Section 5(a).

 

“Plan of
Distribution” shall have the meaning set forth in Section 2(a).

 

“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.

 

“Prospectus”
means the prospectus included in a Registration Statement (including, without
limitation, a prospectus that includes any information previously omitted from
a prospectus filed as part of an effective registration statement in reliance
upon Rule 430A promulgated under the Securities Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Registrable Securities covered by a Registration
Statement, and all other amendments and supplements to the Prospectus,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

 

“Registrable
Securities” means, as of the date in question, (i) all of the shares
of Common Stock issuable upon conversion in full of the Debentures, (ii) all
Warrant Shares, (iv) any securities issued or issuable upon any stock
split, dividend or other distribution, recapitalization or similar event with
respect to the foregoing and (iii) any additional shares issuable in
connection with any anti-dilution provisions associated with the Debentures and
Warrants (in each case, without giving effect to any limitations on conversion
set forth in the Debentures or limitations on exercise set forth in the Warrant).    Registrable Securities shall include any
Registrable Securities issuable upon (i) conversion of any Debentures
issued pursuant to Section 4.18 of the Purchase Agreement, and only
following the exercise of such rights pursuant to Section 4.18 of the
Purchase Agreement or (ii) exercise of any Warrants, issued pursuant to Section 4.18
of the Purchase Agreement, and only following the exercise of such rights to
purchase additional Debentures and Warrants pursuant to Section 4.18 of
the Purchase Agreement.

 

“Registration
Statement” means the registration statements required to be filed hereunder
and any additional registration statements contemplated by Section 3(c),
including (in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statement.

 

2

 

“Rule 415”
means Rule 415 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
purpose and effect as such Rule.

 

“Rule 424”
means Rule 424 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
purpose and effect as such Rule.

 

“Selling
Shareholder Questionnaire” shall have the meaning set forth in Section 3(a).

 

2. Shelf Registration

 

(a)  On
or prior to each Filing Date, the Company shall prepare and file with the
Commission a “Shelf” Registration Statement covering the resale of 130% of the
Registrable Securities on such Filing Date for an offering to be made on a
continuous basis pursuant to Rule 415. 
The Registration Statement shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case such registration shall be on another
appropriate form in accordance herewith) and shall contain (unless otherwise
directed by the Holders) substantially the “Plan of Distribution”
attached hereto as Annex A. 
Subject to the terms of this Agreement, the Company shall use its best
efforts to cause a Registration Statement to be declared effective under the
Securities Act as promptly as possible after the filing thereof, but in any event
prior to the applicable Effectiveness Date, and shall use its best efforts to
keep such Registration Statement continuously effective under the Securities
Act until all Registrable Securities covered by such Registration Statement
have been sold or may be sold without volume restrictions pursuant to Rule 144(k)
as determined by the counsel to the Company pursuant to a written opinion
letter to such effect, addressed and acceptable to the Company’s transfer agent
and the affected Holders (the “Effectiveness Period”).  The Company shall telephonically request
effectiveness of a Registration Statement as of 5:00 pm Eastern Time on a
Trading Day.   The Company shall
immediately notify the Holders via facsimile of the effectiveness of a Registration
Statement on the same Trading Day that the Company telephonically confirms
effectiveness with the Commission, which shall be the date requested for
effectiveness of a Registration Statement. 
The Company shall, by 9:30 am Eastern Time on the Trading Day after the
Effective Date (as defined in the Purchase Agreement), file a Form 424(b)(5) with
the Commission.  Failure to so notify the
Holder within 1 Trading Day of such notification shall be deemed an Event under
Section 2(b).

 

(b) If: (i) a
Registration Statement is not filed on or prior to its Filing Date (if the
Company files a Registration Statement without affording the Holders the
opportunity to review and comment on the same as required by Section 3(a),
the Company shall not be deemed to have satisfied this clause (i)), or (ii) the
Company fails to file with the Commission a request for acceleration in
accordance with Rule 461 promulgated under the Securities Act, within five
Trading Days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be “reviewed,” or not subject to further

 

3

 

review, or (iii) prior to
its Effectiveness Date, the Company fails to file a pre-effective amendment and
otherwise respond in writing to comments made by the Commission in respect of
such Registration Statement within 10 calendar days after the receipt of
comments by or notice from the Commission that such amendment is required in
order for a Registration Statement to be declared effective, or (iv) a
Registration Statement filed or required to be filed hereunder is not declared
effective by the Commission by its Effectiveness Date, or (v) after the
Effectiveness Date, a Registration Statement ceases for any reason to remain
continuously effective as to all Registrable Securities for which it is
required to be effective, or the Holders are not permitted to utilize the
Prospectus therein to resell such Registrable Securities for 10 consecutive calendar
days but no more than an aggregate of 15 calendar days during any 12-month
period (which need not be consecutive Trading Days) (any such failure or breach
being referred to as an “Event”,
and for purposes of clause (i) or (iv) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five Trading
Day period is exceeded, or for purposes of clause (iii) the date which
such 10 calendar day period is exceeded, or for purposes of clause (v) the
date on which such 10 or 15 calendar day period, as applicable, is exceeded
being referred to as “Event Date”),
then in addition to any other rights the Holders may have hereunder or under
applicable law, on each such Event Date and on each monthly anniversary of each
such Event Date (if the applicable Event shall not have been cured by such
date) until the applicable Event is cured, the Company shall pay to each Holder
an amount in cash, as partial liquidated damages and not as a penalty, equal to
1.5% of the aggregate purchase price paid by such Holder pursuant to the
Purchase Agreement for any Registrable Securities then held by such
Holder.  If the Company fails to pay any
partial liquidated damages pursuant to this Section in full within seven
days after the date payable, the Company will pay interest thereon at a rate of
18% per annum (or such lesser maximum amount that is permitted to be paid by
applicable law) to the Holder, accruing daily from the date such partial
liquidated damages are due until such amounts, plus all such interest thereon,
are paid in full. The partial liquidated damages pursuant to the terms hereof
shall apply on a daily pro-rata basis for any portion of a month prior to the
cure of an Event.

 

3. Registration Procedures.

 

In connection with the Company’s registration
obligations hereunder, the Company shall:

 

(a)                                  Not less than five
Trading Days prior to the filing of each Registration Statement or any related
Prospectus or any amendment or supplement thereto (including any document that
would be incorporated or deemed to be incorporated therein by reference), the
Company shall, (i) furnish to each Holder copies of all such documents
proposed to be filed, which documents (other than those incorporated or deemed
to be incorporated by reference) will be subject to the review of such Holders,
and (ii) cause its officers and directors, counsel and independent
certified public accountants to respond to such inquiries as shall be
necessary, in the reasonable opinion of respective counsel to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file a Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities shall reasonably object in good faith, provided that,
the Company is notified of such objection in writing no later than 5 Trading
Days after the Holders have been so furnished copies

 

4

 

of such documents. Each Holder agrees to furnish to the Company a
completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling
Shareholder Questionnaire”) not less than two Trading Days prior to the
Filing Date or by the end of the fourth Trading Day following the date on which
such Holder receives draft materials in accordance with this Section.

 

(b)                                 (i) Prepare and
file with the Commission such amendments, including post-effective amendments,
to a Registration Statement and the Prospectus used in connection therewith as
may be necessary to keep a Registration Statement continuously effective as to
the applicable Registrable Securities for the Effectiveness Period and prepare
and file with the Commission such additional Registration Statements in order
to register for resale under the Securities Act all of the Registrable
Securities; (ii) cause the related Prospectus to be amended or
supplemented by any required Prospectus supplement (subject to the terms of
this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424;
(iii) respond as promptly as reasonably possible to any comments received
from the Commission with respect to a Registration Statement or any amendment
thereto and as promptly as reasonably possible provide the Holders true and
complete copies of all correspondence from and to the Commission relating to a
Registration Statement; and (iv) comply in all material respects with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all Registrable Securities covered by a Registration Statement
during the applicable period in accordance (subject to the terms of this
Agreement) with the intended methods of disposition by the Holders thereof set
forth in such Registration Statement as so amended or in such Prospectus as so
supplemented.

 

(c)                                  If during the
Effectiveness Period, the number of Registrable Securities at any time exceeds 90%
of the number of shares of Common Stock then registered in a Registration
Statement, then the Company shall file as soon as reasonably practicable but in
any case prior to the applicable Filing Date, an additional Registration
Statement covering the resale by the Holders of not less than 130% of the
number of such Registrable Securities.     
Additionally, the Company must file an additional Registration
Statement, within 75 calendar days following the (i) issuance of any Debentures
issued pursuant to Section 4.18 of the Purchase Agreement or (ii) the
issuance of any Warrant issued pursuant to Section 4.18 of the Purchase
Agreement.

 

(d)                                 Notify the Holders of
Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through
(vi) hereof, be accompanied by an instruction to suspend the use of the
Prospectus until the requisite changes have been made) as promptly as reasonably
possible (and, in the case of (i)(A) below, not less than five Trading
Days prior to such filing) and (if requested by any such Person) confirm such
notice in writing no later than one Trading Day following the day (i)(A) when
a Prospectus or any Prospectus supplement or post-effective amendment to a
Registration Statement is proposed to be filed; (B) when the Commission
notifies the Company whether there will be a “review” of such Registration
Statement and whenever the Commission comments in writing on such Registration
Statement (the Company shall provide true and complete copies thereof and all
written responses thereto to each of the Holders); and (C) with respect to
a Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or
state governmental authority for amendments or supplements to a Registration
Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission or any other

 

5

 

federal or state governmental authority of any stop order suspending
the effectiveness of a Registration Statement covering any or all of the
Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of
the receipt by the Company of any notification with respect to the suspension
of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of
any Proceeding for such purpose; (v) of the occurrence of any event or
passage of time that makes the financial statements included in a Registration
Statement ineligible for inclusion therein or any statement made in a
Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to a Registration Statement, Prospectus or other
documents so that, in the case of a Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; and (vi) the occurrence or existence of any
pending corporate development with respect to the Company that the Company
believes may be material and that, in the determination of the Company, makes
it not in the best interest of the Company to allow continued availability of a
Registration Statement or Prospectus; provided that any and all of such
information shall remain confidential to each Holder until such information
otherwise becomes public, unless disclosure by a Holder is required by law; provided,
further, notwithstanding each Holder’s agreement to keep such
information confidential, the Holders make no acknowledgement that any such
information is material, non-public information.

 

(e)                                  Use its best efforts to avoid the issuance
of, or, if issued, obtain the withdrawal of (i) any order suspending the
effectiveness of a Registration Statement, or (ii) any suspension of the
qualification (or exemption from qualification) of any of the Registrable
Securities for sale in any jurisdiction, at the earliest practicable moment.

 

(f)                                    Furnish to each
Holder, without charge, at least one conformed copy of each such Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference to the extent requested by such Person, and all exhibits to the
extent requested by such Person (including those previously furnished or
incorporated by reference) promptly after the filing of such documents with the
Commission.

 

(g)                                 Promptly deliver to
each Holder, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request in connection with resales by the Holder of
Registrable Securities.  Subject to the
terms of this Agreement, the Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by each of the selling
Holders in connection with the offering and sale of the Registrable Securities
covered by such Prospectus and any amendment or supplement thereto, except
after the giving on any notice pursuant to Section 3(d).

 

(h)                                 If NASDR Rule 2710
requires any broker-dealer to make a filing prior to executing a sale by a
Holder, the Company shall (i) make an Issuer Filing with the NASDR, Inc.
Corporate Financing Department pursuant to NASDR Rule 2710(b)(10)(A)(i), (ii) respond

 

6

 

within five Trading Days to any comments received from NASDR in
connection therewith, and (iii) pay the filing fee required in connection
therewith.

 

(i)                                     Prior to any
resale of Registrable Securities by a Holder, use its commercially reasonable
efforts to register or qualify or cooperate with the selling Holders in
connection with the registration or qualification (or exemption from the
Registration or qualification) of such Registrable Securities for the resale by
the Holder under the securities or Blue Sky laws of such jurisdictions within
the United States as any Holder reasonably requests in writing, to keep each
registration or qualification (or exemption therefrom) effective during the
Effectiveness Period and to do any and all other acts or things reasonably
necessary to enable the disposition in such jurisdictions of the Registrable
Securities covered by each Registration Statement; provided, that the Company
shall not be required to qualify generally to do business in any jurisdiction
where it is not then so qualified, subject the Company to any material tax in
any such jurisdiction where it is not then so subject or file a general consent
to service of process in any such jurisdiction.

 

(j)                                     If requested by
the Holders, cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be
delivered to a transferee pursuant to a Registration Statement, which
certificates shall be free, to the extent permitted by the Purchase Agreement,
of all restrictive legends, and to enable such Registrable Securities to be in
such denominations and registered in such names as any such Holders may
request.

 

(k)                                  Upon the occurrence
of any event contemplated by this Section 3, as promptly as reasonably
possible under the circumstances taking into account the Company’s good faith
assessment of any adverse consequences to the Company and its stockholders of
the premature disclosure of such event, prepare a supplement or amendment,
including a post-effective amendment, to a Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither a Registration Statement nor such
Prospectus will contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Company notifies the Holders in accordance with clauses (ii) through
(vi) of Section 3(d) above to suspend the use of any Prospectus
until the requisite changes to such Prospectus have been made, then the Holders
shall suspend use of such Prospectus. 
The Company will use its best efforts to ensure that the use of the
Prospectus may be resumed as promptly as is practicable.  The Company shall be entitled to exercise its
right under this Section 3(k) to suspend the availability of a
Registration Statement and Prospectus, subject to the payment of partial
liquidated damages pursuant to Section 2(b), for a period not to exceed 60
days (which need not be consecutive days) in any 12 month period.

 

(l)                                     Comply with all
applicable rules and regulations of the Commission.

 

(m)                               The Company may require
each selling Holder to furnish to the Company a certified statement as to the
number of shares of Common Stock beneficially owned by such Holder and, if
required by the Commission, the person thereof that has voting and dispositive control
over the Shares. During any periods that the Company is unable to meet its
obligations

 

7

 

hereunder with respect to the registration of the Registrable
Securities solely because any Holder fails to furnish such information within
three Trading Days of the Company’s request, any liquidated damages that are
accruing at such time as to such Holder only shall be tolled and any Event that
may otherwise occur solely because of such delay shall be suspended as to such
Holder only, until such information is delivered to the Company.

 

4. Registration Expenses. All fees and
expenses incident to the performance of or compliance with this Agreement by
the Company shall be borne by the Company whether or not any Registrable
Securities are sold pursuant to a Registration Statement. The fees and expenses
referred to in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses (A) with
respect to filings required to be made with the Trading Market on which the
Common Stock is then listed for trading, (B) in compliance with applicable
state securities or Blue Sky laws reasonably agreed to by the Company in
writing (including, without limitation, fees and disbursements of counsel for
the Company in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as requested by
the Holders) and (C) if not previously paid by the Company in connection
with an Issuer Filing, with respect to any filing that may be required to be
made by any broker through which a Holder intends to make sales of Registrable
Securities with NASD Regulation, Inc. pursuant to the NASD Rule 2710,
so long as the broker is receiving no more than a customary brokerage
commission in connection with such sale, (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses if the printing of
prospectuses is reasonably requested by the holders of a majority of the
Registrable Securities included in a Registration Statement), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel
for the Company, (v) Securities Act liability insurance, if the Company so
desires such insurance, and (vi) fees and expenses of all other Persons
retained by the Company in connection with the consummation of the transactions
contemplated by this Agreement.  In
addition, the Company shall be responsible for all of its internal expenses
incurred in connection with the consummation of the transactions contemplated by
this Agreement (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the expense of
any annual audit and the fees and expenses incurred in connection with the
listing of the Registrable Securities on any securities exchange as required
hereunder.  In no event shall the Company
be responsible for any broker or similar commissions or, except to the extent
provided for in the Transaction Documents, any legal fees or other costs of the
Holders.

 

5. Indemnification

 

(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment
advisors and employees of each of them, each Person who controls any such
Holder (within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act) and the officers, directors, agents and employees of each
such controlling Person, to the fullest extent permitted by applicable law,
from and against any and all losses, claims, damages, liabilities, costs

 

8

 

(including, without limitation, reasonable attorneys’ fees) and
expenses (collectively, “Losses”), as incurred, arising out of or
relating to any untrue or alleged untrue statement of a material fact contained
in a Registration Statement, any Prospectus or any form of prospectus or in any
amendment or supplement thereto or in any preliminary prospectus, or arising
out of or relating to any omission or alleged omission of a material fact
required to be stated therein or necessary to make the statements therein (in
the case of any Prospectus or form of prospectus or supplement thereto, in
light of the circumstances under which they were made) not misleading, except
to the extent, but only to the extent, that (i) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly for use therein, or to the
extent that such information relates to such Holder or such Holder’s proposed
method of distribution of Registrable Securities and was reviewed and expressly
approved in writing by such Holder expressly for use in a Registration
Statement, such Prospectus or such form of Prospectus or in any amendment or
supplement thereto (it being understood that the Holder has approved Annex A
hereto for this purpose) or (ii) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of
an outdated or defective Prospectus after the Company has notified such Holder
in writing that the Prospectus is outdated or defective and prior to the
receipt by such Holder of the Advice contemplated in Section 6(d).  The Company shall notify the Holders promptly
of the institution, threat or assertion of any Proceeding arising from or in
connection with the transactions contemplated by this Agreement of which the
Company is aware.

 

(b) Indemnification by Holders. Each Holder shall, severally and
not jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange
Act), and the directors, officers, agents or employees of such controlling
Persons, to the fullest extent permitted by applicable law, from and against
all Losses, as incurred, to the extent arising out of or based solely upon: (x)
such Holder’s failure to comply with the prospectus delivery requirements of
the Securities Act or (y) any untrue or alleged untrue statement of a material
fact contained in any Registration Statement, any Prospectus, or any form of
prospectus, or in any amendment or supplement thereto or in any preliminary
prospectus, or arising out of or relating to any omission or alleged omission
of a material fact required to be stated therein or necessary to make the
statements therein not misleading (i) to the extent, but only to the
extent, that such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company specifically for
inclusion in such Registration Statement or such Prospectus or (ii) to the
extent that (1) such untrue statements or omissions are based solely upon
information regarding such Holder furnished in writing to the Company by such
Holder expressly for use therein, or to the extent that such information
relates to such Holder or such Holder’s proposed method of distribution of
Registrable Securities and was reviewed and expressly approved in writing by
such Holder expressly for use in a Registration Statement (it being understood
that the Holder has approved Annex A hereto for this purpose), such Prospectus
or such form of Prospectus or in any amendment or supplement thereto or (2) in
the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi),
the use by such Holder of an outdated or defective Prospectus after the Company
has notified such Holder in writing that the Prospectus is outdated or
defective and prior to the receipt by such Holder of the Advice contemplated in
Section 6(d). In no event shall the liability of any selling Holder
hereunder be greater in amount than the dollar amount of the net proceeds

 

9

 

received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation.

 

(c) Conduct of Indemnification Proceedings. If any Proceeding
shall be brought or asserted against any Person entitled to indemnity hereunder
(an “Indemnified Party”), such Indemnified Party shall promptly notify
the Person from whom indemnity is sought (the “Indemnifying Party”) in
writing, and the Indemnifying Party shall have the right to assume the defense
thereof, including the employment of counsel reasonably satisfactory to the
Indemnified Party and the payment of all fees and expenses incurred in
connection with defense thereof; provided, that the failure of any Indemnified
Party to give such notice shall not relieve the Indemnifying Party of its
obligations or liabilities pursuant to this Agreement, except (and only) to the
extent that it shall be finally determined by a court of competent jurisdiction
(which determination is not subject to appeal or further review) that such
failure shall have prejudiced the Indemnifying Party.

 

An Indemnified Party shall have the right to
employ separate counsel in any such Proceeding and to participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
expense of such Indemnified Party or Parties unless:  (1) the Indemnifying Party has agreed in
writing to pay such fees and expenses; (2) the Indemnifying Party shall
have failed promptly to assume the defense of such Proceeding and to employ
counsel reasonably satisfactory to such Indemnified Party in any such
Proceeding; or (3) the named parties to any such Proceeding (including any
impleaded parties) include both such Indemnified Party and the Indemnifying
Party, and such Indemnified Party shall reasonably believe that a material
conflict of interest is likely to exist if the same counsel were to represent
such Indemnified Party and the Indemnifying Party (in which case, if such
Indemnified Party notifies the Indemnifying Party in writing that it elects to
employ separate counsel at the expense of the Indemnifying Party, the Indemnifying
Party shall not have the right to assume the defense thereof and the reasonable
fees and expenses of one separate counsel shall be at the expense of the
Indemnifying Party).  The Indemnifying
Party shall not be liable for any settlement of any such Proceeding effected
without its written consent, which consent shall not be unreasonably
withheld.  No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.

 

Subject to the terms of this Agreement, all
reasonable fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten
Trading Days of written notice thereof to the Indemnifying Party; provided,
that the Indemnified Party shall promptly reimburse the Indemnifying Party for
that portion of such fees and expenses applicable to such actions for which such
Indemnified Party is not entitled to indemnification hereunder, determined
based upon the relative faults of the parties.

 

(d) Contribution. If the indemnification under Section 5(a) or
5(b) is unavailable to an Indemnified Party or insufficient to hold an
Indemnified Party harmless for any Losses, then

 

10

 

each Indemnifying Party shall contribute to the amount paid or payable
by such Indemnified Party, in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party and Indemnified Party in connection
with the actions, statements or omissions that resulted in such Losses as well
as any other relevant equitable considerations. The relative fault of such
Indemnifying Party and Indemnified Party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission of
a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative
intent, knowledge, access to information and opportunity to correct or prevent
such action, statement or omission.  The
amount paid or payable by a party as a result of any Losses shall be deemed to
include, subject to the limitations set forth in this Agreement, any reasonable
attorneys’ or other reasonable fees or expenses incurred by such party in
connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.

 

The parties hereto agree that it would not be
just and equitable if contribution pursuant to this Section 5(d) were
determined by pro rata allocation or by any other method of allocation that
does not take into account the equitable considerations referred to in the
immediately preceding paragraph. 
Notwithstanding the provisions of this Section 5(d), no Holder
shall be required to contribute, in the aggregate, any amount in excess of the
amount by which the proceeds actually received by such Holder from the sale of
the Registrable Securities subject to the Proceeding exceeds the amount of any
damages that such Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission, except in the
case of fraud by such Holder.

 

The indemnity and contribution agreements
contained in this Section are in addition to any liability that the
Indemnifying Parties may have to the Indemnified Parties.

 

6. Miscellaneous

 

(a)                                  Remedies.  In the event of a breach by the Company or by
a Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement.  The Company and each Holder agree that
monetary damages would not provide adequate compensation for any losses
incurred by reason of a breach by it of any of the provisions of this Agreement
and hereby further agrees that, in the event of any action for specific performance
in respect of such breach, it shall waive the defense that a remedy at law
would be adequate.

 

(b)                                 No Piggyback on Registrations.
Except as set forth on Schedule 6(b) attached hereto, neither
the Company nor any of its security holders (other than the Holders in such
capacity pursuant hereto) may include securities of the Company in the initial Registration
Statement other than the Registrable Securities.  No Person has any right to cause the Company
to effect the registration under the Securities Act of any securities of the
Company.  The

 

11

 

Company shall not file any other registration statements until the
initial Registration Statement required hereunder is declared effective by the
Commission, provided that this Section 6(b) shall not prohibit the
Company from filing amendments to registration statements already filed.  Until there are no longer any Registrable
Securities outstanding, the Company shall not file any other registration
statements registering for resale Common Stock, Common Stock underlying Common
Stock Equivalents and Common Stock Equivalents that are outstanding on the date
hereof.

 

(c)                                  Compliance. Each Holder covenants
and agrees that it will comply with the prospectus delivery requirements of the
Securities Act as applicable to it in connection with sales of Registrable
Securities pursuant to a Registration Statement.

 

(d)                                 Discontinued Disposition. Each
Holder agrees by its acquisition of such Registrable Securities that, upon
receipt of a notice from the Company of the occurrence of any event of the kind
described in Section 3(d), such Holder will forthwith discontinue
disposition of such Registrable Securities under a Registration Statement until
such Holder’s receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement, or until it is advised in writing (the “Advice”)
by the Company that the use of the applicable Prospectus may be resumed, and,
in either case, has received copies of any additional or supplemental filings
that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement. 
The Company will use its best efforts to ensure that the use of the
Prospectus may be resumed as promptly as it practicable.  The Company agrees and acknowledges that any
periods during which the Holder is required to discontinue the disposition of
the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

 

(e)                                  Piggy-Back Registrations. If at
any time during the Effectiveness Period there is not an effective Registration
Statement covering all of the Registrable Securities and the Company shall
determine to prepare and file with the Commission a registration statement
relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities, other than on Form S-4 or Form S-8
(each as promulgated under the Securities Act) or their then equivalents
relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in
connection with the stock option or other employee benefit plans, then the
Company shall send to each Holder a written notice of such determination and,
if within fifteen days after the date of such notice, any such Holder shall so
request in writing, the Company shall include in such registration statement
all or any part of such Registrable Securities such Holder requests to be
registered; provided, however, that, the Company shall not be
required to register any Registrable Securities pursuant to this Section 6(e) that
are eligible for resale pursuant to Rule 144(k) promulgated under the
Securities Act or that are the subject of a then effective Registration
Statement.

 

(f)                                    Amendments and Waivers. The
provisions of this Agreement, including the provisions of this sentence, may
not be amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, unless the same shall be in
writing and signed by the Company and each Holder of the then outstanding
Registrable Securities.  Notwithstanding
the foregoing, a waiver or consent to depart from the provisions

 

12

 

hereof with respect to a matter that relates exclusively to the rights
of Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of all of the Registrable Securities to which
such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented
except in accordance with the provisions of the immediately preceding sentence.

 

(g)                                 Notices. Any and all notices or
other communications or deliveries required or permitted to be provided
hereunder shall be delivered as set forth in the Purchase Agreement.

 

(h)                                 Successors and Assigns. This
Agreement shall inure to the benefit of and be binding upon the successors and
permitted assigns of each of the parties and shall inure to the benefit of each
Holder. The Company may not assign its rights or obligations hereunder without
the prior written consent of all of the Holders of the then-outstanding
Registrable Securities. Each Holder may assign their respective rights hereunder
in the manner and to the Persons as permitted under the Purchase Agreement.

 

(i)                                     No Inconsistent Agreements.
Neither the Company nor any of its subsidiaries has entered, as of the date
hereof, nor shall the Company or any of its subsidiaries, on or after the date
of this Agreement, enter into any agreement with respect to its securities,
that would have the effect of impairing the rights granted to the Holders in
this Agreement or otherwise conflicts with the provisions hereof.  Except as set forth on Schedule 6(i),
neither the Company nor any of its subsidiaries has previously entered into any
agreement granting any registration rights with respect to any of its
securities to any Person that have not been satisfied in full.

 

(j)                                     Execution and Counterparts. This
Agreement may be executed in any number of counterparts, each of which when so
executed shall be deemed to be an original and, all of which taken together
shall constitute one and the same Agreement. In the event that any signature is
delivered by facsimile transmission, such signature shall create a valid
binding obligation of the party executing (or on whose behalf such signature is
executed) the same with the same force and effect as if such facsimile
signature were the original thereof.

 

(k)                                  Governing Law.  All
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be determined with the provisions of the Purchase
Agreement.

 

(l)                                     Cumulative Remedies. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.

 

(m)                               Severability. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their commercially reasonable
efforts to find and employ an alternative means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the
intention of the parties that

 

13

 

they would have executed the remaining terms, provisions, covenants and
restrictions without including any of such that may be hereafter declared
invalid, illegal, void or unenforceable.

 

(n)                                 Headings. The headings in this
Agreement are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.

 

(o)                                 Independent Nature of Holders’ Obligations
and Rights. The obligations of each Holder hereunder are several and
not joint with the obligations of any other Holder hereunder, and no Holder
shall be responsible in any way for the performance of the obligations of any
other Holder hereunder. Nothing contained herein or in any other agreement or
document delivered at any closing, and no action taken by any Holder pursuant
hereto or thereto, shall be deemed to constitute the Holders as a partnership,
an association, a joint venture or any other kind of entity, or create a
presumption that the Holders are in any way acting in concert with respect to
such obligations or the transactions contemplated by this Agreement. Each
Holder shall be entitled to protect and enforce its rights, including without
limitation the rights arising out of this Agreement, and it shall not be
necessary for any other Holder to be joined as an additional party in any
proceeding for such purpose.

 

********************

 

14

 

IN WITNESS WHEREOF, the parties have executed
this Registration Rights Agreement as of the date first written above.

 

 

	
   

  	
  ADVANCED CELL TECHNOLOGY,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William M. Caldwell, IV

  	
   

  
	
   

  	
   

  	
  Name:  William
  M. Caldwell, IV

  
	
   

  	
   

  	
  Title:  Chief
  Executive Officer

  

 

 

[SIGNATURE PAGE OF HOLDERS
FOLLOWS]

 

15

 

[SIGNATURE PAGE OF HOLDERS TO ACTC
RRA]

 

	
  Name of Holder:

  	
   

  	
   

  
	
  Signature of Authorized Signatory of Holder:

  	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  	
   

  
								

 

16

 

ANNEX
A

 

Plan of Distribution

 

Each Selling Stockholder (the “Selling Stockholders”)
of the common stock (“Common Stock”) of Advanced Cell Technology, Inc.,
a Nevada corporation (the “Company”) and any of their pledgees,
assignees and successors-in-interest may, from time to time, sell any or all of
their shares of Common Stock on the Trading Market or any other stock exchange,
market or trading facility on which the shares are traded or in private
transactions.  These sales may be at
fixed or negotiated prices.  A Selling
Stockholder may use any one or more of the following methods when selling
shares:

 

•                  ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;

 

•                  block trades in which the broker-dealer
will attempt to sell the shares as agent but may position and resell a portion
of the block as principal to facilitate the transaction;

 

•                  purchases by a broker-dealer as
principal and resale by the broker-dealer for its account;

 

•                  an exchange distribution in
accordance with the rules of the applicable exchange;

 

•                  privately negotiated transactions;

 

•                  settlement of short sales entered
into after the effective date of the registration statement of which this
prospectus is a part;

 

•                  broker-dealers may agree with the
Selling Stockholders to sell a specified number of such shares at a stipulated
price per share;

 

•                  a combination of any such methods of
sale;

 

•                  through the writing or settlement of
options or other hedging transactions, whether through an options exchange or
otherwise; or

 

•                  any other method permitted pursuant
to applicable law.

 

The Selling Stockholders may also sell shares under Rule 144
under the Securities Act of 1933, as amended (the “Securities Act”), if
available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may
arrange for other brokers-dealers to participate in sales.  Broker-dealers may receive commissions or
discounts from the Selling Stockholders (or, if any broker-dealer acts as agent
for the purchaser of shares, from the purchaser) in amounts to be negotiated,
but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage

 

17

 

commission in compliance
with NASDR Rule 2440; and in the case of a principal transaction a markup
or markdown in compliance with NASDR IM-2440.

 

In connection with the sale of the Common Stock or
interests therein, the Selling Stockholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage
in short sales of the Common Stock in the course of hedging the positions they
assume.  The Selling Stockholders may
also sell shares of the Common Stock short and deliver these securities to
close out their short positions, or loan or pledge the Common Stock to
broker-dealers that in turn may sell these securities.  The Selling Stockholders may also enter into
option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction).

 

The Selling Stockholders and any brokerdealers or
agents that are involved in selling the shares may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales.  In such event, any commissions received by
such brokerdealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act.  Each Selling
Stockholder has informed the Company that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the Common Stock. In no event shall any broker-dealer receive fees,
commissions and markups which, in the aggregate, would exceed eight percent
(8%).

 

The Company is required to pay certain fees and
expenses incurred by the Company incident to the registration of the
shares.  The Company has agreed to
indemnify the Selling Stockholders against certain losses, claims, damages and
liabilities, including liabilities under the Securities Act.

 

Because Selling Stockholders may be deemed to be “underwriters”
within the meaning of the Securities Act, they will be subject to the
prospectus delivery requirements of the Securities Act.  In addition, any securities covered by this
prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than under this
prospectus.  Each Selling Stockholder has
advised us that they have not entered into any written or oral agreements,
understandings or arrangements with any underwriter or broker-dealer regarding
the sale of the resale shares.  There is
no underwriter or coordinating broker acting in connection with the proposed
sale of the resale shares by the Selling Stockholders.

 

We agreed to keep this prospectus effective until the
earlier of (i) the date on which the shares may be resold by the Selling
Stockholders without registration and without regard to any volume limitations
by reason of Rule 144(e) under the Securities Act or any other rule of
similar effect or (ii) all of the shares have been sold pursuant to the
prospectus or Rule 144 under the Securities Act or any other rule of
similar effect.  The resale shares will
be sold only through registered or licensed brokers or dealers if required
under applicable state securities laws. In addition, in certain states, the
resale shares may not be sold unless they have been registered or

 

18

 

qualified for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

 

Under applicable rules and regulations under the
Exchange Act, any person engaged in the distribution of the resale shares may
not simultaneously engage in market making activities with respect to the Common
Stock for the applicable restricted period, as defined in Regulation M, prior
to the commencement of the distribution. 
In addition, the Selling Stockholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including Regulation M, which may limit the timing of purchases and sales of
shares of the Common Stock by the Selling Stockholders or any other
person.  We will make copies of this
prospectus available to the Selling Stockholders and have informed them of the
need to deliver a copy of this prospectus to each purchaser at or prior to the
time of the sale.

 

19

 

Annex B

 

ADVANCED CELL TECHNOLOGY, INC.

 

Selling Securityholder Notice and Questionnaire

 

The
undersigned beneficial owner of common stock, par value $0.001 per share (the “Common
Stock”), of Advanced Cell Technology, Inc., a Nevada corporation (the “Company”),
(the “Registrable Securities”) understands that the Company has filed or
intends to file with the Securities and Exchange Commission (the “Commission”)
a registration statement on Form S-3 (the “Registration Statement”)
for the registration and resale under Rule 415 of the Securities Act of
1933, as amended (the “Securities Act”), of the Registrable Securities,
in accordance with the terms of the Registration Rights Agreement, dated as of September       ,
2005 (the “Registration Rights Agreement”), among the Company and the Purchasers
named therein.  A copy of the
Registration Rights Agreement is available from the Company upon request at the
address set forth below.  All capitalized
terms not otherwise defined herein shall have the meanings ascribed thereto in
the Registration Rights Agreement.

 

Certain
legal consequences arise from being named as a selling securityholder in the
Registration Statement and the related prospectus.  Accordingly, holders and beneficial owners of
Registrable Securities are advised to consult their own securities law counsel
regarding the consequences of being named or not being named as a selling
securityholder in the Registration Statement and the related prospectus.

 

NOTICE

 

The
undersigned beneficial owner (the “Selling Securityholder”) of Registrable
Securities hereby elects to include the Registrable Securities owned by it and
listed below in Item 3 (unless otherwise specified under such Item 3) in the
Registration Statement.

 

20

 

The undersigned hereby
provides the following information to the Company and represents and warrants
that such information is accurate:

 

QUESTIONNAIRE

 

1.  Name.

 

	
  (a)

  	
  Full
  Legal Name of Selling Securityholder

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (b)

  	
  Full
  Legal Name of Registered Holder (if not the same as (a) above) through
  which Registrable Securities Listed in Item 3 below are held:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  (c)

  	
  Full
  Legal Name of Natural Control Person (which means a natural person who
  directly or indirectly alone or with others has power to vote or dispose of
  the securities covered by the questionnaire):

  

 

2.  Address for Notices to Selling
Securityholder:

 

	
   

  
	
   

  
	
   

  
	
  Telephone:

  
	
  Fax:

  
	
  Contact Person:

  

 

3.  Beneficial Ownership of Registrable
Securities:

 

	
  (a)

  	
  Type and Number of Registrable Securities
  beneficially owned:

  

 

21

 

4.  Broker-Dealer Status:

 

(a)                                  Are you a
broker-dealer?

 

Yes   o       No   o

 

(b)                                 If “yes” to Section 4(a),
did you receive your Registrable Securities as compensation for investment
banking services to the Company.

 

Yes   o       No   o

 

Note:                   If no, the Commission’s
staff has indicated that you should be identified as an underwriter in the
Registration Statement.

 

(c)                                  Are you an
affiliate of a broker-dealer?

 

Yes   o       No   o

 

(d)                                 If you are an
affiliate of a broker-dealer, do you certify that you bought the Registrable
Securities in the ordinary course of business, and at the time of the purchase
of the Registrable Securities to be resold, you had no agreements or
understandings, directly or indirectly, with any person to distribute the
Registrable Securities?

 

Yes   o       No   o

 

Note:                   If no, the Commission’s
staff has indicated that you should be identified as an underwriter in the
Registration Statement.

 

5.  Beneficial Ownership of Other Securities of
the Company Owned by the Selling Securityholder.

 

Except as set forth below in this
Item 5, the undersigned is not the beneficial or registered owner of any
securities of the Company other than the Registrable Securities listed above in
Item 3.

 

(a)                                  Type and Amount
of Other Securities beneficially owned by the Selling Securityholder:

 

 

 

22

 

6.  Relationships with the Company:

 

Except as set forth below, neither
the undersigned nor any of its affiliates, officers, directors or principal
equity holders (owners of 5% of more of the equity securities of the
undersigned) has held any position or office or has had any other material
relationship with the Company (or its predecessors or affiliates) during the
past three years.

 

State
any exceptions here:

 

 

The
undersigned agrees to promptly notify the Company of any inaccuracies or
changes in the information provided herein that may occur subsequent to the
date hereof at any time while the Registration Statement remains effective.

 

By
signing below, the undersigned consents to the disclosure of the information
contained herein in its answers to Items 1 through 6 and the inclusion of such
information in the Registration Statement and the related prospectus and any
amendments or supplements thereto.  The
undersigned understands that such information will be relied upon by the
Company in connection with the preparation or amendment of the Registration
Statement and the related prospectus.

 

IN
WITNESS WHEREOF the undersigned, by authority duly given, has caused this
Notice and Questionnaire to be executed and delivered either in person or by
its duly authorized agent.

 

	
  Dated:

  	
   

  	
   

  	
  Beneficial Owner:

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Title:

  
						

 

PLEASE FAX A COPY OF THE COMPLETED AND
EXECUTED NOTICE AND QUESTIONNAIRE, AND RETURN THE ORIGINAL BY OVERNIGHT MAIL,
TO:

 

23

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