Document:

BP53713 -- Care Concepts -- Exhibit 10.5

EXHIBIT 10.5

Care Concepts I, Inc.

Shares of Series E Convertible Preferred Stock and Common Stock Warrants

SUBSCRIPTION AGREEMENT

September 28, 2004

Mercator Advisory Group LLC

Monarch Pointe Fund, Ltd. 

555 South Flower Street, Suite 4500

Los Angeles, California  90071

Ladies and Gentlemen:

Care Concepts I, Inc., a Delaware corporation (the “Company”), hereby confirms its agreement with Monarch Pointe Fund, Ltd. (the “Purchaser”) and Mercator Advisory Group, LLC (“MAG”) as set forth below.

1.

The Offering and the Transactions.

A.

The Securities.  Subject to the terms and conditions herein contained, the Company proposes to issue and sell to the Purchaser an aggregate of: (a) 35,000 shares (the “Shares”) of its Series E Convertible Preferred Stock (the “Series E Stock”), which shall be convertible into shares (the “Conversion Shares”) of the Company's Common Stock, $0.001 par value per share (the “Common Stock”) in accordance with the formula set forth in the Certificate of Designation further described below.  For no additional compensation, the Company shall issue to Purchaser and MAG four warrants, substantially in the form attached hereto at Exhibit A (the “Warrants”), to acquire 430,504 shares of Common Stock calculated by dividing $2,333,333 by the Market Price (as defined below) of the Common Stock as of September 20, 2004 (the “Warrant Shares”).  The rights, preferences and privileges of the Series E Stock are as set forth in the Certificate of Designation of Series E Stock as filed with the Secretary of State of the State of Delaware (the “Certificate of Designation”) in the form attached hereto as Exhibit B.  The number of Conversion Shares and Warrant Shares that the Purchaser and MAG may acquire at any time are subject to the limitations set forth in the Certificate of Designation and in the Warrants, respectively, so that the aggregate number of shares of Common Stock of which the Purchaser, MAG and all persons affiliated with the Purchaser and/or MAG have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any time exceed 9.99% of the Company's then outstanding Common Stock.

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(a)

Terms of the Series E Stock.  The Series E Stock shall:

(i)

pay an annual dividend of 6% per annum, until the effective date of the Registration Statement registering the underlying Conversion Shares and Adjustment Shares issuable upon conversion of the Series E Stock for resale, as well as the Warrant Shares; 

(ii)

on liquidation or a sale of control of the Company, be senior, at the rate of $100 per share, to the Company’s outstanding Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series G Preferred Stock, and pari passu with the Company’s outstanding Series D Preferred Stock; 

(iii)

be junior on liquidation and sale of control to the Company’s outstanding Series F Senior Preferred Stock; 

(iv)

not be redeemable or secured by any Liens on assets of iBill or pledge of equity of iBill or Reorganized GMI; and 

(v)

upon the approval by the holders of a majority of the approximately 19.6 million shares of outstanding Common Stock of the Company of the acquisition of the GMI Stock and issuance of all “Transaction Securities” (including the 10% Notes, the Series E Preferred Stock, the Series F Senior Preferred Stock and the Series G Preferred Stock) described below, and  an amendment to the Company’s certificate of incorporation increasing its 30,000,000 shares of authorized Common Stock to 250.0 million shares of Common Stock (collectively “Stockholder Approval”), the Series E Preferred Stock shall be convertible into Conversion Shares, at any time, at the option of the Purchaser, at a price per share (the “Series E Preferred Conversion Price”) that shall be equal to 50% of “Market Price” (as hereinafter defined), as traded on the American Stock Exchange, LLC (the “AMEX”) or on the Nasdaq Stock Exchange, the New York Stock Exchange or the NASD OTC-Bulletin Board (together with the AMEX, a “National Securities Exchange”) immediately prior to the date (the “Conversion Date”) that notice of conversion is given to the Company by the Purchaser (the “Conversion Notice”); provided, however, that in no event shall the Series E Preferred Market Price be less than $3.00 per share (the “Floor Price”), subject to adjustment as set forth in the Certificate of Designation.  As used herein and in the Certificate of Designations for the Series E Stock, the term “Market Price” shall mean the average of the lowest three (3) intra-day trading prices of the Common Stock of the Company, as traded on AMEX or any other National Securities Exchange, for the ten (10) trading days immediately preceding the date of determination of such Market Price.

(b)

Notwithstanding the foregoing $3.00 per share Floor Price, in the event that 50% of Market Price shall be less than the $3.00 Floor Price, on the Conversion Date, then, and in such event, the Purchaser shall be entitled to receive from the “Escrowed Shares,” hereinafter defined, that number of additional shares 

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of Common Stock of the Company (the “Adjustment Shares”) as shall represent, together with the number of Series E Conversion Shares issuable at the Series F Preferred Conversion Price then in effect, the aggregate number of shares of Company Common Stock that would have been issuable on the Conversion Date (i) based upon the Series E Preferred Conversion Price then in effect, and (ii) assuming that the Floor Price had been reduced to $0.50 per share (the “Assumed Floor Price”).   

A maximum of up to 39,916,666 Adjustment Shares of the Company are subject to potential issuance (i) up to a maximum of 5,833,333 of such Adjustment Shares to the holders of $3,500,000 stated value of the Series E Preferred Stock, (ii) up to a maximum of 25,000,000 of such Adjustment Shares to the holders of up to a maximum of $15,000,000 of 10% Notes of the Company due September 15, 2009 (the “10% Notes”) hereinafter described, and (iii) up to a maximum of 9,083,333 of such Adjustment Shares to the Purchaser upon conversion of the maximum $5,450,000 stated value of Series F Senior Preferred Stock.  Such maximum number of Adjustment Shares shall be subject to adjustment in the event that the Assumed Floor Price is lowered pursuant to the Certificate of Designation of the Series F Senior Preferred Stock.  

For the avoidance of doubt, if for example, the Purchaser sends a Conversion Notice to convert $1,000,000 of his or its Series E Preferred Stock and (absent the Floor Price) the Series E Preferred Conversion Price would be calculated at $1.00 per share, notwithstanding the Series E Preferred Conversion Price set forth above and in the Certificate of Designations for the Series E Preferred Stock, in addition to 333,333 Series E Conversion Shares, the Purchaser shall be entitled to receive out of the Escrowed Shares (defined below) 1,666,667 Adjustment Shares of Common Stock of the Company.  However, based upon the $0.50 per shares Assumed Floor Price, in no event would the Purchaser be entitled to receive more than 1,666,667 Adjustment Shares in such example, even if the Series F Preferred Conversion Price then in effect (absent the $3.00 Floor Price or $0.50 Assumed Floor Price) was less than $0.50.  

(c)

To avoid further dilution to the Company if Adjustment Shares become issuable to holders of the Series E Preferred Stock, Series F Senior Preferred Stock and 10% Notes, GMI Investment Partners, a principal stockholder of the Company, and their affiliates described in Section 1B below and the Company, have agreed to place in a joint escrow between legal counsel to the Company and legal counsel to the holders of each of the Series F Senior Preferred Stock, 10% Notes and Series E Preferred Stock an aggregate of 29,929 shares of the Company’s “Series G Preferred Stock” (described below) that are automatically convertible into an aggregate of 39,916,666 shares of Common Stock of the Company by not later than December 31, 2004 (the “Escrowed Shares”).   In the event that the Series E Preferred Conversion Price shall be less than $3.00 per share on any Conversion Date, within three (3) Business Days after a Conversion Notice shall be delivered to counsel to the Company and to the Purchaser setting forth the 

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calculation of the appropriate number of Escrowed Shares to be delivered to the Purchaser as Adjustment Shares, the Escrow Agents shall cause certificates evidencing such Adjustment Shares (up to the maximum 5,833,333 Adjustment Shares available to Purchaser) to be delivered to the Purchaser.  Similar escrow arrangements will be available with counsel to the holders of 10% Notes and Series F Senior Preferred Stock Any Escrowed Shares no longer subject to issuance as Adjustment Shares or otherwise remaining in escrow following conversion into Common Stock of all outstanding 10% Notes, Series E Preferred Stock and Series F Senior Preferred Stock, shall be promptly returned to GMI Partners or its Affiliates.  

(d)

The issuance of Conversion Shares, any Adjustment Shares and Warrant Shares to Purchaser and/or MAG are subject to limitation, so that the aggregate number of shares of Common Stock of which the Purchaser, MAG and all persons affiliated with Purchaser and MAG have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) does not at any time exceed 9.99% of the Company's then outstanding Common Stock.

(e)

The Series E Stock, the Conversion Shares, the Warrants, the Warrant Shares and any Adjustment Shares that may be issued to the Purchaser of Series E Stock and MAG are sometimes herein collectively referred to as the “Securities.”  This Agreement, the Warrant in the form of Exhibit A, the Certificate of Designation for the Series E Stock in the form of Exhibit B, the Registration Rights Agreement in the form of Exhibit C annexed hereto (the “Registration Rights Agreement”), the GMI Stock Purchase Agreement in the form of Exhibit D, and the Plan (a copy of which has been furnished to the Purchaser) are sometimes herein collectively referred to as the “Transaction Documents.”

(f)

The Securities will be offered and sold to the Purchaser without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the “SEC”) promulgated thereunder, the “Securities Act”), in reliance on exemptions therefrom.

(g)

In connection with the sale of the Securities, the Company has made available (including electronically via the SEC’s EDGAR system) to Purchaser its periodic and current reports, forms, schedules, proxy statements and other documents (including exhibits and all other information incorporated by reference) filed with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) since January 1, 2002. These reports, forms, schedules, statements, documents, filings and amendments, are collectively referred to as the “Disclosure Documents.”  All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Disclosure Documents (or other references of like import) shall be deemed to mean and include all such financial statements and schedules, documents, exhibits and other information which is incorporated by reference in the Disclosure Documents.

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B.

The Transactions, Issuance of Transaction Securities and Use of Proceeds.

(a)

Use of Proceeds.  The proceeds from the sale of up to $15.0 million of 10% Notes, up to $3.5 million of Series E Stock and up to $3.45 million of Senior Series F Preferred Stock (together with the shares of Series G Preferred Stock to be issued to GMI Investment Partners described below, collectively referred to as the “Transaction Securities”) shall be utilized by the Company to pay $16.35 million of the $20.0 million purchase price for approximately 39.5% of the outstanding common stock of General Media, Inc. (the “GMI Stock”), as reorganized (the “Reorganized GMI” and, together with certain of its subsidiaries, the “General Media Debtors”).  The GMI Stock is being purchased by the Company from GMI Investment Partners in connection with the transactions contemplated by a Settlement and Securities Purchase Agreement, dated as of September 21, 2004, by and among PET Capital Partners LLC, Absolute Return Europe Fund, Susan Devine, NAFT Ventures I LLC, Marc H. Bell, Daniel Staton (collectively, the “Bell/Staton Group”), Penthouse International, Inc., MVIT, GMI Investment Partners and Milberg Weiss Bershad & Schulman LLP, as Escrow Agent (the “GMI Stock Purchase Agreement”).  Under the terms of the GMI Stock Purchase Agreement, a minimum of $10.0 million and a maximum of $20.0 million is required to be paid as the purchase price for between 24.15% and 48.3% of the GMI Stock by September 29, 2004.  It is anticipated that the Company will pay $16.350 million by such date and purchase approximately 81.75% of the GMI Stock, representing an aggregate of 39.5% of the outstanding common stock of General Media.  However, the Bell/Staton Group has given the Company an extension until October 13, 2004 to pay the remaining $3.650 million for the GMI Stock and increase its percentage ownership in the outstanding General Media common stock from 39.5% to 48.3%. The balance of the proceeds in excess of $20.0 million, if any, from the sale of the Transaction Securities will be used by the Company and its subsidiaries (other than Reorganized GMI) for working capital and other corporate purposes.  The Company intends to continue to offer the Transaction Securities (and/or other equity or equity type convertible securities subordinated to the Series F Preferred Stock) through October 31, 2004.  Although the Company presently intends to purchase the remaining available GMI Stock, it reserves the right to allocate all net proceeds from the sale of additional Transaction Securities or other securities to working capital and general business purposes for its prospective iBill subsidiary. 

(b)

Escrow of Proceeds.  The aforesaid $16.35 million to $20.0 million purchase price for the GMI Stock shall be deposited with the Escrow Agent and released to the Bell/Staton Group only upon the closing (the “Plan Closing”) of the transactions contemplated by the Fourth Amended and Restated Joint Plan of Reorganization of the General Media Debtors, a copy of which has been made available to the Purchaser (the “Plan”).  

(c)

Capitalization of Reorganized GMI.  Pursuant to the Plan, the General Media Debtors shall be emerging from the Chapter 11 bankruptcy currently pending in the United States Bankruptcy Court for the Southern District of New York, Case No. 03-

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15078 (SMB) (the “Bankruptcy Case”) as a result of which (i) the Bell/Staton Group or their affiliates shall hold approximately $27.0 million of seven year New GMI Term Loan Notes, (ii) the unsecured creditors shall receive $2.0 million in cash and up to $11.0 million in New GMI Term Loan Notes, (iii) certain members of the Bell/Staton Group shall provide a maximum $20.0 million Exist Financing Facility (of which approximately $8.0 million shall be drawn to pay cash expenses and payments in the Bankruptcy Case, (iv) all outstanding equity securities of General Media, Inc. shall be cancelled, and (v) an aggregate of 1,000,000 shares of Common Stock of Reorganized GMI shall be issued, of which (A) the Company shall own the GMI Stock, to represent approximately between 39.5% and 48.3% of the outstanding common stock of Reorganized GMI, and (B) an equal number of shares of Common Stock of Reorganized GMI shall be owned by the Bell/Staton Group or their affiliates. 

(d)

Reserved Shares.  The Company will reserve for issuance to (i) the Purchaser of 35,000 shares of Series E Stock up to 1,166,666 shares of Common Stock upon conversion of the Series E Stock, (ii) the holders of up to $15.0 million of 10% Notes up to 15,000,000 shares of Company Common Stock upon full conversion of the 10% Notes, and (iii) the holders of up to $5,450,000 Series F Preferred Stock, up to 1,815,000 shares of Company Common Stock upon full conversion of such Series F Stock, a maximum of 9,066,667 million shares of Common Stock that may be issuable: (i) upon conversion of 10% Notes, (ii) as Conversion Shares upon conversion of the Series E Preferred Stock, and (iii) upon conversion of the Series F Senior Preferred Stock, to holders of 10% Notes, Series E Preferred Stock and Series F Preferred Stock (collectively the “Total Conversion Shares”).  The Company shall also reserve for issuance an additional (i) 5,000,000 shares of Common Stock issuable upon exercise of warrants (similar to the Warrants) sold to purchasers of 10% Notes (the “Note Warrant Shares”), (ii) a maximum of 610,776 Series F Warrant Shares issuable to in connection with the Series F Warrants, and (iii) a maximum of 430,504 shares of Common Stock issuable upon exercise of warrants (similar to the Series F Warrants) sold to Purchasers of the Series E Preferred Stock (collectively, the “Warrant Shares”).  GMI Investment Partners shall also place in escrow an aggregate of 29,929 shares of Series G Preferred Stock that is automatically convertible on or before December 31, 2004 into 39,916,666 shares of Common Stock.  Such 39,916,666 Escrowed Shares shall be reserved as Adjustment Shares for potential issuance to the holders of 10% Notes, Series E Preferred Stock and Series F Senior Preferred Stock.  The maximum of (i) 7,983,333 shares of Common Stock that may be issuable as Total Conversion Shares, (ii) 39,916,666 shares of Common Stock that may be issued as Adjustment Shares, and (iii) 6,041,280 shares of Common Stock (subject to anti-dilution adjustment) that may be issued as Warrant Shares are collectively referred to as the “Reserved Shares”.    

(e)

Series G Preferred Stock.  In consideration of their (i) assignment to the Company of the right to purchase the GMI Stock, (ii) having provided financing and financial accommodations that facilitated the acquisitions of iBill and the GMI Stock, (iii) having provided iBill with transaction processing financing, (iv) having providing personal guarantees and ongoing indemnification to Penthouse and iBill in connection with certain contingent liabilities, and (v) having and continuing to provide management 

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and consulting services to the Company and iBill; the fair value of which financings, financial accommodations, indemnification and management services are estimated to be in excess of approximately $85.0 million, on the Effective Date of the Plan and transfer of title to the GMI Stock to CCI, it is contemplated that CCI shall sell and issue to GMI Investment Partners, 45,000 shares of newly authorized Series G convertible preferred stock (the “Series G Preferred Stock”).  The Series G Preferred Stock will:

(i)

be junior on liquidation and sale of control of the Company to the Series E Stock and Series F Senior Preferred Stock;

(ii)

not pay any dividend or be secured by any assets of the Company;

(iii)

not be subject to mandatory redemption; and

(iv)

upon the Company obtaining Stockholder Approval, the Series G Preferred Stock shall be automatically converted in an aggregate number of shares of Common Stock as shall equal 68.0 million shares less all Total Conversion Shares. 

(v)

The partners of GMI Investment Partners are The Molina Vector Investment Trust (“MVIT”), Aries Capital LLC (“Aries”), Granite Management LLC (“Granite”) and certain affiliates, financial partners and business associates of MVIT, Aries and Granite.  MVIT is an affiliate of Penthouse.  GMI Investment Partners shall escrow for potential retirement, an aggregate of 39,916,666 of such shares of Common Stock it shall receive upon conversion of its Series G Preferred Stock, in the event and to the extent that the Company shall be required to issue Adjustment Shares.

(f)

Anticipated Capitalization of the Company.  Upon issuance of the Transaction Securities, in addition to the Series E Stock and the shares of Series G Preferred Stock (the terms of which are described above), it is anticipated that the Capitalization of the Company shall be as follows: 

(i)

10% Notes.  Up to $15.0 Million of 10% Notes will be issued.  Such 10% Notes shall:

(A)

shall be payable as to interest only, at the rate of 10% per annum, payable semi-annually on June 30th and December 31st, based on a 360 day calendar year; provided, that interest on the 10% Notes shall be payable either 100% in cash, or at the option of the Company, 50% in cash and the balance in additional shares of Company “Common Stock” at the “Series F Assumed Conversion Price, (but without regard to the Assumed Floor Price);

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(B)

unless previously converted into Common Stock (the “Note Conversion Shares”), shall be payable as to principal, together with all accrued an unpaid interest, on September 15, 2009 (the “Note Maturity Date”);

(C)

upon the earlier of December 31, 2004 or the Company obtaining Stockholder Approval, shall be convertible, at any time, at the option of the Purchaser at a price per share (the “Note Conversion Price”) that shall be equal to 50% of the average closing price of Company, as traded on the AMEX or other National Securities Exchange, for the five trading days immediately prior to the date (the “Conversion Date”) that notice of conversion is given to the Company by the Purchaser (the “Conversion Notice”), subject to a Note Conversion Price floor of $3.00 per share; provided, that at the time of conversion, the holders of the 10% Notes shall be entitled to receive the benefit of the issuance of Adjustment Shares on the same terms and conditions as holders of the Series F Senior Preferred Stock and shares of Series E Preferred Stock; and

(D)

be secured by (i) a Lien on the assets of the iBill, and (ii) the pledge by the Company of a portion (pro rated with the Series F Senior Preferred Stock) of its 39.5% to 48.3% equity interest in the “Reorganized General Media” (as that term is hereinafter defined).  The Lien securing the 10% Notes shall be expressly (A) subject and subordinate to the first priority Lien on the assets of iBill now existing or hereafter granted to Senior Lender providing up to $10.0 million of working capital iBill Senior Financing, and (B) subject and subordinate to the Lien granted to the Purchaser of the Series F Senior Preferred Stock.

In addition, the holders of the 10% Notes will receive warrants (the “10% Note Warrants”) to purchase up to 5,000,000 additional shares of Common Stock at an exercise price of $3.00 per share

(ii)

Series A, B and C Preferred Stock.  No shares of Series A Preferred Stock are issued, 1,000 shares of Series B Preferred Stock, convertible into 100,000 shares of Common Stock, and 10,000 shares of Series C Preferred Stock are issued, convertible into 1,000,000 shares of Common Stock; 

(iii)

Series D Preferred Stock.  An aggregate of 330,000 shares of Series D Preferred Stock have been issued to Penthouse in partial consideration for the contemplated sale of iBill to CCI.  The Series D Preferred Stock (A) pays no dividend, (B) has a $100 per share liquidation value, (C) is unsecured and non-redeemable, and (D) on the earlier to occur of (x) the Company obtaining Stockholder Approval and approval by the AMEX of the iBill, or (y) January 21, 2005, shall be automatically converted, together with approximately 3.2 million shares of Company Common Stock to be issued to Penthouse in connection with the consummation of the iBill sale, into that number of shares of Common Stock that would represent 49.9% of 

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the “Fully-Diluted Company Common Stock” at the time of conversion.  Fully-Diluted Company Common Stock means all outstanding shares of Company Common Stock and all additional Common Stock issuable upon exercise or conversion of all options, warrants, convertible notes or convertible preferred stock (including, for purposes of such definition, all Common Stock issuable in connection with the Transaction Securities).  It is anticipated that an aggregate of approximately 81.4 million shares of Company Common Stock (the “Series D Conversion Shares”) will be issued to Penthouse upon full conversion of the Series D Preferred Stock.  It is anticipated that, following the acquisition of the GMI Stock and consummation of the iBill acquisition, such Series D Conversion Shares and the 3.2 million shares of Common Stock (a total of up to 85.0 million shares of Common Stock) will be distributed to the holders of Penthouse Common Stock and other securities convertible into or exercisable for shares of Penthouse Common Stock in connection with the subsequent liquidation of that entity.

(iv)

Series F Senior Preferred Stock.  Up to an aggregate of $3.45 million, represented by up to 34,500 shares of Series F Preferred Stock to be issued to Vestcap International Management Limited, Castlerigg Master Investments Limited and Brivis Investments Limited or their affiliates (collectively “Castlerigg”) which shall: (A) pay an annual dividend of 10% per annum, of which 50% is payable in cash and the balance payable in additional shares of Common Stock at the Conversion Price then in effect (but without regard for the $0.50 per share assumed floor; (B) be senior, at the rate of $100 per share, on liquidation and sale of control to the Notes and the Company’s outstanding Series A Preferred, Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock, Series E Preferred Stock and Series G Preferred Stock, (C) unless previously converted into Common Stock shall be redeemable at the option of the holders on September 15, 2009; (D) be secured by a second priority Lien on the assets of iBill senior to the Lien granted to the holders of the Notes, and by the pledge of equity of Reorganized GMI, on a pari passu basis with the holders of the Notes; and (E) be convertible upon the earlier of December 31, 2004 or the Company’s obtaining of Stockholder Approval into Common Stock at a conversion price equal to $3.00 per share (the “Series F Conversion Price”); provided, that if at the time of conversion, 50% of the “Market Price” (as defined) of the Company’s Common Stock, as traded on the AMEX or any other national securities exchange shall be less than $3.00, the holders of the Series F Preferred Stock shall be entitled to receive the benefit of the issuance of Adjustment Shares from the Escrowed Shares on the same terms and conditions as holders of the Notes and shares of Series E Preferred Stock. In addition, Castlerigg will receive warrants (the “Castlerigg Warrants”) to purchase approximately 975,000 additional shares of Common Stock at an exercise price of $3.00 per share.

(v)

Outstanding and Fully-Diluted Common Stock.  As at the date hereof, the Company is authorized to issue an aggregate of 30,000,000 shares of Common Stock, of which approximately 17.0 million shares of Common Stock are currently outstanding.  On a fully-diluted basis, after giving effect to:

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(A)

the issuance by not later than December 31, 2004 (upon automatic conversion of the Series G Preferred Stock) of (x) 68.0 million shares of Common Stock, less (y) up to 7,983,333 Conversion Shares, in connection with the completion of the Company’s acquisition of the GMI Stock (to occur not later than October 31, 2004);

(B)

the issuance by not later than January 21, 2005 to Penthouse International Inc. (upon automatic conversion of the Series D Preferred Stock) of 85.0 million shares of Common Stock in connection with the consummation of the acquisition of 100% of the members equity of iBill (the “iBill Acquisition”), and 

(C)

after giving effect to the issuance of all Conversion Shares (based on a $3.00 per share Conversion Price stated conversion or floor price set forth in the 10% Notes or certificates of designations of the Series E Preferred Stock and Series F Senior Preferred Stock) of all outstanding Preferred Stock, it is anticipated that an aggregate of 170,000,000 shares of Fully-Diluted Company Common Stock will be outstanding, before issuance of up to approximately 6,100,000 shares of Common Stock (subject to anti-dilution adjustment) that may be issued as Warrant Shares to holders of 10% Notes, Series E Preferred Stock and Series F Preferred Stock.  

(g)

Stockholder Approval.  Penthouse and other Company stockholders holding in excess of 50% of the outstanding shares of Company Common Stock have provided the Company with irrevocable and unconditional written approvals and consents to all of the Transactions, including, without limitation (i) the transactions contemplated by the GMI Stock Purchase Agreement, (ii) consummation of the iBill Acquisition, (iii) an amendment to the Certificate of Incorporation of the Company that, inter alia, shall increase the authorized Common Stock to 250.0 million shares of Common Stock, (iv) the sale and issuance of the 10% Notes, the Warrants, the Series E Preferred Stock, the Series F Senior Preferred Stock, the Series G Preferred Stock, and the other Warrant Shares, and (v) all of the related transactions described herein (the “Stockholder Approval”).  The term “Stockholder Approval” shall also include the filing and approval of a listing application for the additional shares of the Company’s Common Stock to be issued upon conversion of the 10% Notes, the Series E Preferred Stock, the Series F Senior Preferred Stock and the Series G Preferred Stock, in accordance with the rules of the AMEX.  Such Stockholder Approval, in lieu of a special meeting of stockholders, are permissible under Delaware corporate law and pursuant to Section 705 and Section 712 of the rules and regulations of the AMEX.  Following the Closing Date, the Company will, in accordance with the Securities Exchange Act of 1934, as amended, file a Form 14C Information Statement with the SEC, describing the Transactions and, upon approval of such Information Statement, mail same to the Company stockholders.  No further vote or approval is required of Company stockholders receiving such Information Statement.  Accordingly, it is anticipated that the “Stockholder Approval” condition to the rights of holders of the 10% Notes, the Series E Preferred Stock, the Series F Senior Preferred Stock and the Series G Preferred Stock to convert such Securities into Common Stock, and the rights of holders of Warrants and other warrants to exercise such Securities will be obtained on or before November 30, 2004.  

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In the event that, for any reason, all of the foregoing “Stockholder Approval” conditions are not satisfied by December 31, 2004, then the Company shall pay to the Purchaser in cash 2% of the $3,450,000 Purchase Price for the Series F Senior Preferred Stock for each month following December 31, 2004 that such Stockholder Approval conditions remain unsatisfied (provided, however, that to the extent that the Purchaser exercises its Exchange Option, the payment shall also be based on the purchase price of the Penthouse stock so exchanged).  The Company has agreed to pay a similar penalty to the holders of the 10% Notes and the Series E Preferred Stock. 

(h)

AMEX Approval.  In August 2004, the Company announced its consummation of the acquisition of Media Billing Company, LLC and its wholly owned subsidiary Internet Billing Company LLC (“iBill”), pursuant to the terms of a securities purchase agreement, dated July 22, 2004, as amended (the “iBill Purchase Agreement”).  On September 20, 2004, the Company received a notice from the AMEX of its intention to de-list the Company’s Common Stock from trading on the AMEX, pending a hearing requested by the Company.  The delisting notice stated, among other things, that the Company failed to furnish certain necessary information to the AMEX concerning iBill and that the iBill Acquisition raised certain public interest concerns.  On September 23, 2004, the Company agreed to rescind the closing of the iBill Acquisition; however, the iBill Purchase Agreement continues to remain in full force and effect.  As a result of its agreement to rescind the closing of the iBill Acquisition, pending the resolution of all listing eligibility issues and AMEX approvals, the staff of the AMEX agreed to withdraw its notice of intent to de-list the Company’s securities.  

The Company intends to furnish the information requested by the AMEX on a timely basis and is hopeful that the staff of the AMEX will, upon receipt and review of such information, provide all necessary approvals for the iBill Acquisition.  There can be no assurance that the Company will be able to satisfactorily resolve all listing issues or that it will receive all such AMEX approvals associated with the iBill transaction.  However, if for any reason, AMEX approval has not been obtained by January 21, 2005, the Company will nevertheless close the iBill Acquisition, withdraw from the AMEX and seek to re-list its Common Stock on another National Securities Exchange.  

Following receipt of the AMEX notice of delisting, on September 23, 2004, each of the Company, Penthouse and GMI Investment Partners entered into an agreement (the “September 23rd Agreement”) that provides that the iBill Acquisition will be consummated, all shares of the Company Common Stock and Series D Preferred Stock issuable to Penthouse upon consummation of the iBill Acquisition will be issued, and all of the Series D Preferred Stock will be converted into approximately 81.4 million shares of Company Common Stock, upon the earlier to occur of (i) AMEX Approval of the iBill Acquisition, or (ii) January 21, 2005.  The Company has delivered to legal counsel to Penthouse, for filing with the Secretary of State of the State of Delaware on the earlier of AMEX Approval or January 21, 2005, a duly executed undated certificate of designation for the Series D Preferred Stock, containing no conditions to conversion of such securities into Common Stock. 

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In addition, pursuant to the September 23rd Agreement, the Company has also delivered to legal counsel to Penthouse, for delivery to the 10% Note holders or filing with the Secretary of State of the State of Delaware, as applicable, on the earlier of Stockholder Approval or December 31, 2004 (i) duly executed 10% Notes, and (ii) duly executed undated certificates of designation for each of the Series E Preferred Stock, Series F Senior Preferred Stock and the Series G Preferred Stock, which Notes and Certificates contain no conditions to conversion of any of such securities into Company Common Stock. 

2.

Representations and Warranties of the Company.  The Company represents and warrants to and agrees with Purchaser and MAG as follows; provided, however, that Purchaser and MAG each acknowledges that (i) the following direct and indirect Subsidiaries of the Company; namely, General Media, Inc. and its direct and indirect subsidiaries, General Media Art Holding, Inc., General Media Communications, Inc., General Media Entertainment, Inc., General Media (UK), Ltd., GMCI Internet Operations, Inc., GMI On-Line Ventures, Ltd., Penthouse Images Acquisitions, Ltd. and Pure Entertainment Telecommunications, Inc. (collectively the “General Media Group”), are all debtors in a Chapter 11 bankruptcy case pending in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Case”), (ii) the Purchaser and MAG and their respective representatives have been furnished copies of Debtors’ Second Amended Joint Plan of Reorganization, dated April 19, 2004 (the “Proposed Plan”) and have had and opportunity to ask questions of the Company and its bankruptcy counsel, and (iii) all representations and warranties of the Company, to the extent related to the General Media Group, are qualified in their entirety by reference to the status of the Bankruptcy Case.

(a)

The Disclosure Documents as of their respective dates did not, and will not (after giving effect to any updated disclosures therein) as of the Closing Date as defined in Section 3 below, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.  The Disclosure Documents and the documents incorporated or deemed to be incorporated by reference therein, at the time they were filed or hereafter are filed with the CommissionSEC, complied and will comply, at the time of filing, in all material respects with the requirements of the Securities Act and/or the Exchange Act, as the case may be, as applicable.

(b)

Schedule A attached hereto sets forth a complete list of the subsidiaries of the Company (the "Subsidiaries").  Each of the Company and its Subsidiaries has been duly incorporated and each of the Company and the Subsidiaries is validly existing in good standing as a corporation under the laws of its jurisdiction of incorporation, with the requisite corporate power and authority to own its properties and conduct its business as now conducted as described in the Disclosure Documents and is duly qualified to do business as a foreign corporation in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified would not, individually or in the aggregate, have a material adverse effect on the business, 

12

condition (financial or other), properties, prospects or results of operations of the Company and the Subsidiaries, taken as a whole (any such event, a "Material Adverse Effect"); as of the Closing Date, the Company will have the authorized, issued and outstanding capitalization set forth in on Schedule B attached hereto (the “Company Capitalization”); except as set forth in the Disclosure Documents or on Schedule A, the Company does not have any subsidiaries or own directly or indirectly any of the capital stock or other equity or long-term debt securities of or have any equity interest in any other person; all of the outstanding shares of capital stock of the Company and the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights and are owned free and clear of all liens, encumbrances, equities, and restrictions on transferability (other than those imposed by the Securities Act and the state securities or "Blue Sky" laws) or voting; except as set forth in the Disclosure Documents, all of the outstanding shares of capital stock of the Subsidiaries are owned, directly or indirectly, by the Company; except as set forth in the Disclosure Documents, no options, warrants or other rights to purchase from the Company or any Subsidiary, agreements or other obligations of the Company or any Subsidiary to issue or other rights to convert any obligation into, or exchange any securities for, shares of capital stock of or ownership interests in the Company or any Subsidiary are outstanding; and except as set forth in the Disclosure Documents or on Schedule C, there is no agreement, understanding or arrangement among the Company or any Subsidiary and each of their respective stockholders or any other person relating to the ownership or disposition of any capital stock of the Company or any Subsidiary or the election of directors of the Company or any Subsidiary or the governance of the Company's or any Subsidiary's affairs, and, if any, such agreements, understandings and arrangements will not be breached or violated as a result of the execution and delivery of, or the consummation of the transactions contemplated by, the Transaction Documents.

(c)

The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Transaction Documents.  Each of the Transaction Documents has been duly and validly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally or (B) general principles of equity and the discretion of the court before which any proceeding therefore may be brought (regardless of whether such enforcement is considered in a proceeding at law or in equity) (collectively, the "Enforceability Exceptions").

(d)

The Shares and the Warrants have been duly authorized and, when issued upon payment thereof in accordance with this Agreement, will have been validly issued, fully paid and nonassessable.  The Conversion Shares issuable have been duly authorized and validly reserved for issuance, and when issued upon conversion of the Shares in accordance with the terms of the Certificate of Designation, will have been validly issued, fully paid and nonassessable.  The Warrant Shares have been duly 

13

authorized and validly reserved for issuance, and when issued upon exercise of the Warrants in accordance with the terms thereof, will have been validly issued, fully paid and nonassessable.  The Common Stock of the Company conforms to the description thereof contained in the Disclosure Documents.  The stockholders of the Company have no preemptive or similar rights with respect to the Common Stock.

(e)

No consent, approval, authorization, license, qualification, exemption or order of any court or governmental agency or body or third party is required for the performance of the Transaction Documents by the Company or for the consummation by the Company of any of the transactions contemplated thereby, or the application of the proceeds of the issuance of the Securities as described in this Agreement, except for such consents, approvals, authorizations, licenses, qualifications, exemptions or orders (i) as have been obtained on or prior to the Closing Date, (ii) as are not required to be obtained on or prior to the Closing Date that will be obtained when required, or (iii) the failure to obtain which would not, individually or in the aggregate, have a Material Adverse Effect.

(f)

Except as set forth on Schedule D, none of the Company or the Subsidiaries is (i) in material violation of its articles of incorporation or bylaws (or similar organizational document), (ii) in breach or violation of any statute, judgment, decree, order, rule or regulation applicable to it or any of its properties or assets, which breach or violation would, individually or in the aggregate, have a Material Adverse Effect, or (iii) except as described in the Disclosure Documents, in default (nor has any event occurred which with notice or passage of time, or both, would constitute a default) in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which it is a party or to which it is subject, which default would, individually or in the aggregate, have a Material Adverse Effect.

(g)

The execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby and the fulfillment of the terms thereof will not (a) violate, conflict with or constitute or result in a breach of or a default under (or an event that, with notice or lapse of time, or both, would constitute a breach of or a default under) any of (i) the terms or provisions of any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, permit, certificate or agreement or instrument to which any of the Company or the Subsidiaries is a party or to which any of their respective properties or assets are subject, (ii) the articles of incorporation or bylaws of any of the Company or the Subsidiaries (or similar organizational document) or (iii) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or other body applicable to the Company or the Subsidiaries or any of their respective properties or assets or (b) result in the imposition of any lien upon or with respect to any of the properties or assets now owned or hereafter acquired by the Company or any of the Subsidiaries; which violation, conflict, breach, default or lien would, individually or in the aggregate, have a Material Adverse Effect.

14

(h)

The audited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations, cash flows and changes in shareholders' equity of the entities, at the dates and for the periods to which they relate and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis; the interim unaudited consolidated financial statements included in the Disclosure Documents present fairly the consolidated financial position, results of operations and cash flows of the entities, at the dates and for the periods to which they relate subject to year-end audit adjustments and have been prepared in accordance with generally accepted accounting principles applied on a consistent basis with the audited consolidated financial statements included therein; the selected financial and statistical data included in the Disclosure Documents present fairly the information shown therein and have been prepared and compiled on a basis consistent with the audited financial statements included therein, except as otherwise stated therein; and each of the auditors previously engaged by the Company or to be engaged in the future by the Company is an independent certified public accountant as required by the Securities Act for an offering registered thereunder.

(i)

Except as described in the Disclosure Documents, there is no pending or, to the knowledge of the Company, threatened any action, suit, proceeding, inquiry or investigation, governmental or otherwise, to which any of the Company or the Subsidiaries is a party, or to which their respective properties or assets are subject, before or brought by any court, arbitrator or governmental agency or body, that, if determined adversely to the Company or any such Subsidiary, would, individually or in the aggregate, have a Material Adverse Effect or that seeks to restrain, enjoin, prevent the consummation of or otherwise challenge the issuance or sale of the Securities to be sold hereunder or the application of the proceeds therefrom or the other transactions described in the Disclosure Documents.

(j)

The Company and the Subsidiaries own or possess adequate licenses or other rights to use all patents, trademarks, service marks, trade names, copyrights and know-how that are necessary to conduct their businesses as described in the Disclosure Documents.  None of the Company or the Subsidiaries has received any written notice of infringement of (or knows of any such infringement of) asserted rights of others with respect to any patents, trademarks, service marks, trade names, copyrights or know-how that, if such assertion of infringement or conflict were sustained, would, individually or in the aggregate, have a Material Adverse Effect.

(k)

Each of the Company and the Subsidiaries possesses all licenses, permits, certificates, consents, orders, approvals and other authorizations from, and has made all declarations and filings with, all federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals presently required or necessary to own or lease, as the case may be, and to operate its respective properties and to carry on its respective businesses as now or proposed to be conducted as set forth in the Disclosure Documents ("Permits"), except where the failure to obtain such 

15

Permits would not, individually or in the aggregate, have a Material Adverse Effect and none of the Company or the Subsidiaries has received any notice of any proceeding relating to revocation or modification of any such Permit, except as described in the Disclosure Documents and except where such revocation or modification would not, individually or in the aggregate, have a Material Adverse Effect.

(l)

Subsequent to the respective dates as of which information is given in the Disclosure Documents and except as described therein, (i) the Company and the Subsidiaries have not incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions not in the ordinary course of business or (ii) the Company and the Subsidiaries have not purchased any of their respective outstanding capital stock, or declared, paid or otherwise made any dividend or distribution of any kind on any of their respective capital stock or otherwise (other than, with respect to any of such Subsidiaries, the purchase of capital stock by the Company), (iii) there has not been any material increase in the long-term indebtedness of the Company or any of the Subsidiaries, (iv) there has not occurred any event or condition, individually or in the aggregate, that has a Material Adverse Effect, and (v) the Company and the Subsidiaries have not sustained any material loss or interference with respect to their respective businesses or properties from fire, flood, hurricane, earthquake, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding.

(m)

There are no material legal or governmental proceedings nor are there any material contracts or other documents required by the Securities Act to be described in a prospectus that are not described in the Disclosure Documents.  Except as described in the Disclosure Documents, none of the Company or the Subsidiaries is in default under any of the contracts described in the Disclosure Documents, has received a notice or claim of any such default or has knowledge of any breach of such contracts by the other party or parties thereto, except for such defaults or breaches as would not, individually or in the aggregate, have a Material Adverse Effect.

(n)

Each of the Company and the Subsidiaries has good and marketable title to all real property described in the Disclosure Documents as being owned by it and good and marketable title to the leasehold estate in the real property described therein as being leased by it, free and clear of all liens, charges, encumbrances or restrictions, except, in each case, as described in the Disclosure Documents or such as would not, individually or in the aggregate, have a Material Adverse Effect.  All material leases, contracts and agreements to which the Company or any of the Subsidiaries is a party or by which any of them is bound are valid and enforceable against the Company or any such Subsidiary, are, to the knowledge of the Company, valid and enforceable against the other party or parties thereto and are in full force and effect.

(o)

Each of the Company and the Subsidiaries has filed all necessary federal, state and foreign income and franchise tax returns, except where the failure to so file such returns would not, individually or in the aggregate, have a Material Adverse 

16

Effect, and has paid all taxes shown as due thereon; and other than tax deficiencies which the Company or any Subsidiary is contesting in good faith and for which adequate reserves have been provided in accordance with generally accepted accounting principles, there is no tax deficiency that has been asserted against the Company or any Subsidiary that would, individually or in the aggregate, have a Material Adverse Effect.

(p)

None of the Company or the Subsidiaries is, or immediately after the Closing Date will be, required to register as an "investment company" or a company "controlled by" an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act").

(q)

None of the Company or the Subsidiaries or, to the knowledge of any of such entities' directors, officers, employees, agents or controlling persons, has taken, directly or indirectly, any action designed, or that might reasonably be expected, to cause or result in the stabilization or manipulation of the price of the Common Stock.

(r)

None of the Company, the Subsidiaries or any of their respective Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) directly, or through any agent, engaged in any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) in connection with the offering of the Securities or engaged in any other conduct that would cause such offering to be constitute a public offering within the meaning of Section 4(2) of the Securities Act.  Assuming the accuracy of the representations and warranties of the Purchaser in Section 6 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities to the Purchaser in the manner contemplated by this Agreement to register any of the Securities under the Securities Act.

(s)

Except as set forth in the Disclosure Documents, there is no strike, labor dispute, slowdown or work stoppage with the employees of the Company or any of the Subsidiaries which is pending or, to the knowledge of the Company or any of the Subsidiaries, threatened.

(t)

Each of the Company and the Subsidiaries carries general liability insurance coverage comparable to other companies of its size and similar business.

(u)

Each of the Company and the Subsidiaries maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its material assets is permitted only in accordance with management's authorization and (D) the values and amounts reported for its material assets are compared with its existing assets at reasonable intervals.

(v)

Except for a fee payable to Mercator Advisory Group, the Company does not know of any claims for services, either in the nature of a finder's fee or financial 

17

advisory fee, with respect to the offering of the Shares and the transactions contemplated by the Transaction Documents.

(w)

The Common Stock currently trades on the American Stock Exchange.  Except as described in the Disclosure Documents, the Company currently is not in violation of, and the consummation of the transactions contemplated by the Transaction Documents will not violate, any rule of the National Association of Securities Dealers.

(x)

The Company is eligible to use Form S-1 or SB-2 for the resale of the Conversion Shares and the Warrant Shares by Purchaser or their transferees and the Warrant Shares by MAG or its transferees.  The Company has no reason to believe that it is not capable of satisfying the registration or qualification requirements (or an exemption therefrom) necessary to permit the resale of the Conversion Shares and the Warrant Shares under the securities or "blue sky" laws of any jurisdiction within the United States that is the residence or domicile of any Purchaser.  

3.

Purchase, Sale and Delivery of the Shares.  On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Purchaser, and Purchaser agrees to purchase from the Company, 35,000 Shares of Series E Stock at $100.00 per Share.  In connection with the purchase and sale of Shares, for no additional consideration (a) the Purchaser and MAG will receive Warrants to purchase up to an aggregate of 430,504 shares of Common Stock calculated by dividing $2,333,333 by the Market Price as of September 20, 2004, subject to adjustment as set forth in the Warrants. The allocation of the Warrants is set forth on the signature page of this Subscription Agreement.

One or more certificates in definitive form for the Shares that the Purchaser have agreed to purchase, as well as the Warrants, shall be delivered by or on behalf of the Company, against payment by or on behalf of the Purchaser, of the purchase price therefor by wire transfer of immediately available funds to the account of the Company previously designated by it in writing.  Such delivery of and payment for the Shares and the Warrants shall be made at the offices of MAG, 555 South Flower Street, Suite 4500, Los Angeles, California 90071, at not later than 12:00 noon (Los Angeles time) on Wednesday, September 29, 2004 (the “Closing”), or at such date as the Purchaser and the Company may agree upon, such time and date of delivery against payment being herein referred to as the “Closing Date”.  The aggregate $3.5 million Purchase Price for the Series E Stock (the “Purchase Price”) shall be paid by wire transfer of immediately available funds to the attorneys’ escrow account of Gersten, Savage Kaplowitz Wolf & Marcus, LLP, counsel to the Company, or at the request of the Company (subject to the execution of the GMI Stock Purchase Agreement) to the attorneys’ escrow account of Milberg Weiss Bershad & Schulman LLP, as Escrow Agent, under the GMI Securities Purchase Agreement.  At the Closing or not later than five (5) days after completion of the Closing, (a) the Company shall deliver one or more duly executed certificates evidencing the Series E Stock to the Purchaser to his or its address designated in writing 

18

to the Company, (b) the escrow shall release the $210,000 due diligence fee and the $15,000 legal fees to MAG and (c) the escrow shall release the balance of the Purchase Price to the Company.  If for any reason the GMI Stock Purchase Agreement shall not be executed by September 21, 2004 (unless extended by mutual agreement of the parties to the GMI Stock Purchase Agreement to not later than September 30, 2004), all escrowed funds shall be immediately returned to the Purchaser.

4.

Certain Covenants of the Company.  The Company covenants and agrees with the Purchaser as follows:

(a)

None of the Company or any of its Affiliates will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any "security" (as defined in the Securities Act) which could be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities.

(b)

The Company will not become, at any time prior to the expiration of three years after the Closing Date, an open-end investment company, unit investment trust, closed-end investment company or face-amount certificate company that is or is required to be registered under the Investment Company Act.

(c)

None of the proceeds of the Series E Stock will be used to reduce or retire any insider note or convertible debt held by an officer or director of the Company.

(d)

Subject to Section 10 of this Agreement, the Conversion Shares and the Warrant Shares will be listed on the AMEX, or such market on which the Company's shares are subsequently listed or traded, immediately following their issuance.

(e)

The Company shall ensure that no officer or director of the Company sells any shares of Company Common Stock from the Closing Date until the date that is 90 days following the effective date of the Registration Statement, as defined in Section 9 below.  

(f)

The Company will use its best efforts to do and perform all things required to be done and performed by it under this Agreement and the other Transaction Documents and to satisfy all conditions precedent on its part to the obligations of the Purchaser to purchase and accept delivery of the Securities.

5.

Conditions of the Purchaser's Obligations.  The obligation of the Purchaser to purchase and pay for the Securities is subject to the following conditions unless waived in writing by the Purchaser:

(a)

The representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects (other than representations and warranties with a Material Adverse Effect qualifier, which shall be true and correct as written) on and as of the Closing Date; the Company shall have complied in all 

19

material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date.

(b)

None of the issuance and sale of the Securities pursuant to this Agreement or any of the transactions contemplated by any of the other Transaction Documents shall be enjoined (temporarily or permanently) and no restraining order or other injunctive order shall have been issued in respect thereof; and there shall not have been any legal action, order, decree or other administrative proceeding instituted or, to the Company's knowledge, threatened against the Company or against any Purchaser relating to the issuance of the Securities or any Purchaser's activities in connection therewith or any other transactions contemplated by this Agreement, the other Transaction Documents or the Disclosure Documents.

(c)

The Purchaser shall have received certificates, dated the Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company, to the effect of paragraphs 5(a) and (b). 

(d)

The Purchaser shall have received an opinion of Gersten Savage Kaplowitz Wolf & Marcus, LLP, counsel to the Company, and/or Florida counsel reasonably satisfactory to the Purchaser, with respect to the authorization of the Shares, the Warrants and the Warrant Shares and other customary matters in the form attached hereto as Exhibit C.

(e)

The Purchaser shall have received a copy of a fully executed GMI Purchase Agreement; which agreement shall provide, inter alia, that all funds (including the Purchase Price for the Series E Stock that has been wired to the attorney’s escrow account of Milberg Weiss, as Escrow Agent, will only be released to the Bell/Staton Group upon written confirmation that the General Media Debtors have emerged from bankruptcy.

6.

Representations and Warranties of the Purchaser.

(a)

The Purchaser represents and warrants to the Company that the Securities to be acquired by it hereunder (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) are being acquired for its own account for investment and with no intention of distributing or reselling such Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) or any part thereof or interest therein in any transaction which would be in violation of the securities laws of the United States of America or any State.  Nothing in this Agreement, however, shall prejudice or otherwise limit a Purchaser's right to sell or otherwise dispose of all or any part of such Conversion Shares or Warrant Shares under an effective registration statement under the Securities Act and in compliance with applicable state securities laws or under an exemption from such registration.  By executing this 

20

Agreement, the Purchaser further represents that such Purchaser does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to any Person with respect to any of the Securities.

(b)

The Purchaser understands that the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be) have not been registered under the Securities Act and may not be offered, resold, pledged or otherwise transferred except (a) pursuant to an exemption from registration under the Securities Act (and, if requested by the Company, based upon an opinion of counsel acceptable to the Company) or pursuant to an effective registration statement under the Securities Act and (b) in accordance with all applicable securities laws of the states of the United States and other jurisdictions.

The Purchaser agrees to the imprinting, so long as appropriate, of the following legend on the Securities (including the Conversion Shares and the Warrant Shares that it may acquire upon conversion or exercise thereof, as the case may be):

The shares of stock evidenced by this certificate have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered, sold, pledged or otherwise transferred ("transferred") in the absence of such registration or an applicable exemption therefrom. In the absence of such registration, such shares may not be transferred unless, if the Company requests, the Company has received a written opinion from counsel in form and substance satisfactory to the Company stating that such transfer is being made in compliance with all applicable federal and state securities laws.

The legend set forth above may be removed if and when the Conversion Shares or the Warrant Shares, as the case may be, are disposed of pursuant to an effective registration statement under the Securities Act or in the opinion of counsel to the Company experienced in the area of United States Federal securities laws such legends are no longer required under applicable requirements of the Securities Act.  The Shares, the Warrants, the Conversion Shares and the Warrant Shares shall also bear any other legends required by applicable Federal or state securities laws, which legends may be removed when in the opinion of counsel to the Company experienced in the applicable securities laws, the same are no longer required under the applicable requirements of such securities laws.  The Company agrees that it will provide the Purchaser, upon request, with a substitute certificate, not bearing such legend at such time as such legend is no longer applicable.  The Purchaser agrees that, in connection with any transfer of the Conversion Shares or the Warrant Shares by it pursuant to an effective registration statement under the Securities Act, such Purchaser will comply with all prospectus delivery requirements of the Securities Act.  The Company makes no representation, warranty or agreement as to the availability of any exemption from registration under the Securities Act with respect to any resale of the Shares, the Conversion Shares or the Warrant Shares.

21

(c)

The Purchaser is an "accredited investor" within the meaning of Rule 501(a) of Regulation D under the Securities Act.  The Purchaser did not learn of the opportunity to purchase Shares or any other security issuable by the Company through any form of general advertising or public solicitation.

(d)

The Purchaser represents and warrants to the Company that it 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, having been represented by counsel, and has so evaluated the merits and risks of such investment and is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment.

(e)

The Purchaser represents and warrants to the Company that (i) the purchase of the Securities to be purchased  by it has been duly and properly authorized and this Agreement has been duly executed and delivered by it or on its behalf and constitutes the valid and legally binding obligation of the Purchaser, enforceable against the Purchaser in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity; (ii) the purchase of the Securities to be purchased by it does not conflict with or violate its charter, by-laws or any law, regulation or court order applicable to it; and (iii) the purchase of the Securities to be purchased by it does not impose any penalty or other onerous condition on the Purchaser under or pursuant to any applicable law or governmental regulation.

(f)

The Purchaser represents and warrants to the Company that neither it nor any of its directors, officers, employees, agents, partners, members, or controlling persons has taken, directly or indirectly, any actions designed, or might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock.

(g)

The Purchaser acknowledges it or its representatives have reviewed the Disclosure Documents and further acknowledges that it or its representatives have been afforded (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Securities and the merits and risks of investing in the Securities; (ii) access to information about the Company and the Company's financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment in the Securities; and (iii) the opportunity to obtain such additional information which the Company possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy and completeness of the information contained in the Disclosure Documents.

22

(h)

The Purchaser represents and warrants to the Company that it has based its investment decision solely upon the information contained in the Disclosure Documents and such other information as may have been provided to it or its representatives by the Company in response to their inquiries, and has not based its investment decision on any research or other report regarding the Company prepared by any third party ("Third Party Reports").  The Purchaser understands and acknowledges that (i) the Company does not endorse any Third Party Reports and (ii) its actual results may differ materially from those projected in any Third Party Report.

(i)

The Purchaser understands and acknowledges that (i) any forward-looking information included in the Disclosure Documents supplied to Purchaser by the Company or its management is subject to risks and uncertainties, including those risks and uncertainties set forth in the Disclosure Documents; and (ii) the Company's actual results may differ materially from those projected by the Company or its management in such forward-looking information.

(j)

The Purchaser understands and acknowledges that (i) the Securities are offered and sold without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act and (ii) the availability of such exemption depends in part on, and that the Company and its counsel will rely upon, the accuracy and truthfulness of the foregoing representations and Purchaser hereby consents to such reliance.

7.

Covenants of Purchaser Not to Short Stock.  The Purchaser, MAG and their respective affiliates and assigns agree not to short the Company Common Stock as long as shares of the Series E Stock are outstanding.  

8.

Termination.

(a)

This Agreement may be terminated in the sole discretion of the Company by notice to the Purchaser if at the Closing Date:  

(1)

the representations and warranties made by any Purchaser in Section 6 are not true and correct in all material respects; or

(2)

as to the Company, the sale of the Securities hereunder (i) is prohibited or enjoined by any applicable law or governmental regulation or (ii) subjects the Company to any penalty, or in its reasonable judgment, other onerous condition under or pursuant to any applicable law or government regulation that would materially reduce the benefits to the Company of the sale of the Securities to such Purchaser, so long as such regulation, law or onerous condition was not in effect in such form at the date of this Agreement.

23

(b)

This Agreement may be terminated in the sole discretion of the Purchaser by notice to the Company given in the event that the Company shall have failed, refused or been unable to satisfy all conditions on its part to be performed or satisfied hereunder on or prior to the Closing Date, or if after the execution and delivery of this Agreement and immediately prior to the Closing Date, trading in securities of the Company or in securities generally on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National or Small Cap Market or the OTC Bulletin Board shall have been suspended or minimum or maximum prices shall have been established on any such exchange.

(c)

This Agreement may be terminated by mutual written consent of all parties.

9.

Registration.  Within 45 days from the Closing Date, the Company shall prepare and file with the SEC a Registration Statement (the “Registration Statement”) covering the resale of the maximum number of (a) Conversion Shares issuable upon conversion of the Notes, the Series E Stock and the Series F Preferred Stock, (b) Adjustment Shares, (c) Warrant Shares issuable upon exercise of the Warrants, and (d) the Note Warrant Shares and the Series F Warrant Shares (collectively, the “Registrable Securities”) as set forth in the Registration Rights Agreement.  

(a)

Until the Registration Statement shall have been declared effective by the SEC (the “Effective Date”), the Shares shall pay a mandatory monthly dividend, at an annual rate equal to the product of multiplying (i) the $100.00 per share Series E Purchase Price, by (ii) 6.0% (the “Dividend”).  The Dividend shall be payable monthly in arrears in cash. Payment shall be made on or before the 5th day of the following month by wire transfer to the account designated by Purchaser in writing.  

(b)

From and after the Effective Date, the Dividend shall no longer be payable.  Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holder of the Shares shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the Company legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

10.

Event of Default.  If an Event of Default (as defined below) occurs and remains uncured for a period of 5 days, the Purchaser shall have the right to (i) exercise any or all of the rights given to the Purchaser relating to the Securities, as further described in the Certificate of Designation and (ii) the Floor Price and Assumed Floor Price shall be adjusted as set forth in Section 7(d)(i) of the Certificate of Designation for the Series E Stock.  In addition, from and including the day following the date on which an Event of Default of the nature specified in clause (ii), (v) or (vi) of the definition of Event of Default below shall occur, until the date on which the Company has cured such Event of Default by filing the registration statement with the SEC, the Company shall pay 

24

liquidated damages to Holder equal to $4,666 for each day during which such situation exists. Any amounts to be paid as liquidated damages shall be paid in cash monthly in arrears on or before the 10th day following the end of the month or partial month to which they relate.  

The Holder need not provide and the Company hereby waives any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such declaration may be rescinded and annulled by Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.  

As used in this Agreement, the term "Event of Default" shall mean (i) the commencement by the Company of a voluntary case or proceeding under the bankruptcy laws or the Company's failure to discharge or stay a bankruptcy proceeding within 60 days of such action being taken against the Company, (ii) the Company’s failure to file the Registration Statement with the SEC within 45 days after the Closing Date or the Company’s failure or inability to cause such Registration Statement be declared effective by the SEC within 70 days after the Closing Date, (iii) the failure of the Company to pay the expenses referred to below or the Due Diligence Fee within five (5) days of the Closing, (iv) the Company’s failure to make timely payments of the Dividend, (v) the Company’s failure to file the Information Statement relating to Stockholder Approval with the SEC within five (5) trading days after the Closing Date as required by Section 1(B)(g) of this Agreement, or (vi) the Company’s failure to obtain SEC approval of the Information Statement relating to Stockholder Approval on or before November 30, 2004.

11.

Notices.  All communications hereunder shall be in writing and shall be hand delivered, mailed by first-class mail, couriered by next-day air courier or by facsimile and confirmed in writing (i) if to the Company, at the addresses set forth below, or (ii) if to a Purchaser or MAG, to the address set forth for such party on the signature page hereto.

If to the Company:

Care Concepts I, Inc. 2200 S.W. 10th Street

Deerfield Beach, Florida 33442

Attention:  President Telephone:  (954) 363-4400

with a copy to:

Gertsten Savage Kaplowitz Wolf & Marcus, LLP

101 East 52nd Street,

New York, New York 10022

Attn: Stephen A. Weiss, Esq. 

Telephone:  (212) 752-9700

Facsimile:  (212) 980-5192

25

All such notices and communications shall be deemed to have been duly given:  (i) when delivered by hand, if personally delivered; (ii) five business days after being deposited in the mail, postage prepaid, if mailed certified mail, return receipt requested; (iii) one business day after being timely delivered to a next-day air courier guaranteeing overnight delivery; (iv) the date of transmission if sent via facsimile to the facsimile number as set forth in this Section or the signature page hereof prior to 6:00 p.m. on a business day, or (v) the business day following the date of transmission if sent via facsimile at a facsimile number set forth in this Section or on the signature page hereof after 6:00 p.m. or on a date that is not a business day.  Change of a party's address or facsimile number may be designated hereunder by giving notice to all of the other parties hereto in accordance with this Section.

12.

Survival Clause.  The respective representations, warranties, agreements and covenants of the Company and the Purchaser set forth in this Agreement shall survive until the first anniversary of the Closing.

13.

Fees and Expenses.  Within five (5) days of Closing, the Company agrees to pay Purchaser's expenses (including legal fees of its legal counsel incurred in connection with the preparation and negotiation of the Transaction Documents of $15,000.  If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the Warrants or the Certificate of Designation, the prevailing party or parties shall be entitled to receive from the other party or parties reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which the prevailing party or parties may be entitled.  

14.

Successors.  This Agreement shall inure to the benefit of and be binding upon Purchaser, MAG and the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained; this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person. Neither the Company nor any Purchaser may assign this Agreement or any rights or obligation hereunder without the prior written consent of the other party.

15.

No Waiver; Modifications in Writing.  No failure or delay on the part of the Company, MAG or any Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy.  The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company, MAG or any Purchaser at law or in equity or otherwise.  No waiver of or consent to any departure by the Company, MAG or any Purchaser from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof, provided that notice of any such waiver shall be given to each party hereto as set forth below.  Except 

26

as otherwise provided herein, no amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by or on behalf of each of the Company, MAG and the Purchaser.  Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company, MAG or any Purchaser from the terms of any provision of this Agreement shall be effective only in the specific instance and for the specific purpose for which made or given.  Except where notice is specifically required by this Agreement, no notice to or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances.

16.

Entire Agreement.  This Agreement, together with Transaction Documents, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof and thereof.

17.

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.

18.

APPLICABLE LAW.  THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.  THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT ONLY IN STATE OR FEDERAL COURTS LOCATED IN THE CITY OF LOS ANGELES, CALIFORNIA AND HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR SUCH PURPOSE. 

19.

Facsimile Signatures.  Facsimile signatures shall be construed and considered original signatures for purposes of enforcement of the terms of this agreement.

20.

Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 

[the balance of this page intentionally left blank B signature page follows]

27

If the foregoing correctly sets forth our understanding, please indicate your acceptance thereof in the space provided below for that purpose, whereupon this Agreement shall constitute a binding agreement among the Company, the Purchaser and MAG.

Very truly yours,

CARE CONCEPTS I, INC. 

By:

___________________________

Name:

Charles L. Samel

Title:

Executive Vice-President

 

ACCEPTED AND AGREED:

28

Monarch Pointe Fund, Ltd.

By:    

David Firestone

Its:

President 

Number of Shares Purchased at Closing:  35,000

Purchase Price:  $3,500,000

Warrants:  344,403

Mercator Advisory Group, LLC

By:     

David Firestone

Its:

Managing Member 

Warrants:  86,100

Addresses for Notice to Purchaser and MAG

Mercator Advisory Group, LLC

555 South Flower Street, Suite 4500 

Los Angeles, California 90071

Attention:  David Firestone

Facsimile:  (213) 533-8285

with copy to:

David C. Ulich, Esq.

Sheppard, Mullin, Richter & Hampton LLP

333 South Hope Street, 48th Floor

Los Angeles, California 90071

Facsimile: (213) 620-1398

29

Schedule A

Direct and Indirect Subsidiaries of Care Concepts I, Inc.

Media Billing LLC

Subsidiary of Media Billing, LLC

Internet Billing Company, LLC 

 

30

Exhibit A

Warrant

 

31

Exhibit B

Certificate of Designation of 

Series E Convertible Preferred Stock of Care Concepts I, Inc.

 

32

Exhibit C

Registration Rights Agreement

 

33

Exhibit “D”

GMI Preferred Stock Purchase Agreement

34BP53713 -- Care Concepts -- Exhibit 10.6

EXHIBIT 10.6

CERTIFICATE OF DESIGNATION OF PREFERENCES AND RIGHTS OF

SERIES E CONVERTIBLE PREFERRED STOCK

OF

CARE CONCEPTS I, INC.

a Delaware corporation

The undersigned, Gary Spaniak, Jr. and Charles Pearlman, do hereby certify that:

1.

They are the President and an Assistant Secretary, respectively, of CARE CONCEPTS I, INC., a corporation organized and existing under the Delaware General Corporation Law (“DGCL”) of the State of Delaware (the “Corporation”).

2.

Pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, and pursuant to the provisions of Section 151 of the DGCL, the Board of Directors of the Corporation, pursuant to a meeting held September 20, 2004, adopted a resolution establishing the rights, preferences, privileges and restrictions of, and the number of shares comprising, the Corporation’s Series E Convertible Preferred Stock, which resolution is as follows:

RESOLVED, that a series of Preferred Stock in the Corporation, having the rights, preferences, privileges and restrictions, and the number of shares constituting such series and the designation of such series, set forth below be, and it hereby is, authorized by the Board of Directors of the Corporation pursuant to authority given by the Corporation’s Articles of Incorporation.

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors hereby fixes and determines the Determinations of, the number of shares constituting, and the rights, preferences, privileges and restrictions relating to, a new series of Preferred Stock as follows:

1.

Definitions.  For the purposes of this Certificate of Designation and in addition to other terms defined herein, the following definitions shall apply:

“10% Notes” shall mean the maximum of $15.0 million of the Corporation’s 10% convertible secured notes due September 15, 2009 to be issued pursuant to the transactions contemplated by the Subscription Agreement. 

 

“Affiliate means, as to any Person, any other Person which, directly or indirectly, alone or together with other Persons, controls or is controlled by or is under common control with such Person. “Control” “controlled by” and “under common control with”, as and with respect to any Person, means the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person.

“Adjustment Shares”  shall have the meaning defined in Section 7(b) of this Certificate of Designation and as “Additional Shares” in the Subscription Agreement.

“AMEX” shall mean the American Stock Exchange, Inc.

“Applicable Law” means any domestic or foreign law, statute, regulation, rule, policy, guideline or ordinance applicable to the businesses of the Corporation.

1

“Business Day” means any day, Monday through Friday, on which U.S. federally chartered banks are open for business in New York, New York, and Fort Lauderdale, Florida.

“Commission” shall mean the United States Securities and Exchange Commission.

“Common Stock” shall mean the authorized common stock, $.001 par value per share, of the Corporation.

“Common Stock Equivalent” shall mean any issued and outstanding notes, debentures or Preferred Stock that is convertible into shares of Common Stock, any options, warrants or securities exercisable for shares of Common Stock, or other rights entitling the holder to purchase Common Stock or exchange property or other assets for Common Stock.

 “Conversion Price” shall mean a price equal to fifty (50%) percent of the Market Price as at the Conversion Notice Date; provided, that in no event shall the Conversion Price be lower than the Floor Price.

“Conversion Notice” shall have the meaning defined in Section 7(b) of this Series E Certificate of Designations.

 “Conversion Notice Date” shall mean the date on which a Holder of Series E Preferred Stock shall deliver a Conversion Notice to the Corporation.

“DGCL” shall mean the Delaware General Corporation Law, as amended,

“Floor Price” shall mean $3.00 per share of Common Stock.

“Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended, or any successor law.

 “Fully-Diluted Common Stock” means, at any applicable point in time, the issued and outstanding shares of Common Stock of the Corporation, on a fully-diluted basis, after giving effect to (i) all issued and outstanding shares of Common Stock, (ii) the conversion into Common Stock of all issued and outstanding shares of Preferred Stock, (iii) all shares of Common Stock issuable upon exercise of any outstanding options, warrants or other rights to purchase Common Stock, and/or (iv) all shares of Common Stock issuable upon conversion of any outstanding notes, debentures, preferred stock, or other securities convertible into or exchangeable for shares of Common Stock.

“GAAP” means generally accepted United States accounting principles in effect from time to time.

“Governmental Authority” shall mean any court, tribunal, authority, agency, commission, bureau, department, official or other instrumentality of the United States, or any other country or any provincial, state, local, county, city or other political subdivision.

“Holder(s)” shall mean the individual or collective reference to Monarch Pointe Fund, Ltd. and any other holder(s) of the Series E Preferred Stock.

 “Law” shall mean any United States, state or local (including common law) statute, code, directive, ordinance, rule, regulation or other requirement.

2

“Market Price” shall mean the average of the lowest three (3) intra-day trading prices of the Common Stock of the Corporation, as traded on the AMEX or any other National Securities Exchange, for the ten (10) trading days immediately preceding the date of determination of such Market Price.

“National Securities Exchange” shall mean the individual and collective reference to the New York Stock Exchange, the AMEX, the Nasdaq Stock Market, and/or the NASD OTC-Bulletin Board. 

“Person” shall mean any individual, corporation (including any non-profit corporation), general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union or other entity or governmental body or Governmental Authority.

“Preferred Stock” shall mean the authorized preferred stock, $.001 par value per share, of the Corporation.

“Proceeding” shall mean any claim, action, investigation, arbitration, litigation or other judicial, administrative or regulatory proceeding.

“Representatives” shall mean officers, directors, employees, agents, attorneys, accountants, advisors and representatives.

 “Securities Act” shall mean the United States Securities Act of 1933, as amended, or any successor law.

“Series A Preferred Stock” shall mean the 1,000 authorized shares of Series A Preferred Stock of the Corporation.

“Series B Preferred Stock” shall mean the 10,000 authorized shares of Series B Preferred Stock of the Corporation.

“Series C Preferred Stock” shall mean the 45,000 authorized shares of Series C Preferred Stock of the Corporation.

“Series D Preferred Stock” shall mean the 330,000 shares of Series D Preferred Stock of the Corporation issued to Penthouse pursuant to the Series D Preferred Stock Certificate of Designations and the Series D Preferred Stock Certificate of Designation Amendment.

“Series E Preferred Stock” shall mean the 35,000 shares of Series E Preferred Stock of the Corporation authorized to be issued pursuant to this Series E Preferred Stock Certificate of Designations. 

“Series E Stated Value” shall mean the $100.00 per share stated value payable in respect of each of the authorized and issued series of the Series E Preferred Stock of the Corporation, as applicable, in connection with any Liquidation Event (as hereinafter defined in Section 7(a)) redemption or other sale or disposition of such Series E Preferred Stock.

“Series F Preferred Stock” shall mean the maximum of 54,500 shares of 10% Series F Convertible Redeemable Secured Preferred Stock of the Corporation to be issued pursuant to the transactions contemplated by the Subscription Agreement. 

 

“Series G Preferred Stock” shall mean the 45,000 shares of Series G Convertible Preferred Stock of the Corporation to be issued pursuant to the transactions contemplated by the Subscription Agreement. 

 

3

“Subsidiary” shall mean with respect to any Person, any corporation, joint venture, limited liability company, partnership, association or other business entity of which 50% or more of the total voting power of stock or other equity entitled to vote generally in the election of directors or managers or equivalent Persons thereof is owned or controlled, directly or indirectly, by such Person.

“Subscription Agreement” shall mean the subscription agreement, dated September 20, 2004, between the Holder(s) of Series E Preferred Stock, Mercator Advisory Group, LLC and the Corporation.

“Transfer of Control” shall mean the occurrence of any one of the following events: (a) the sale, conveyance, exchange or disposition (collectively, “Transfer”) of all or substantially all of the assets of the Corporation, (b) the Transfer of all or substantially all of the assets of all or substantially all of the Subsidiaries of the Corporation, or (c) the consummation of a transaction or series of related transactions (whether by tender offer, merger, consolidation or like combination) in which either (i) more than fifty percent (50%) of the voting power of the Corporation is disposed of, or (ii) the power to elect a majority of the Board of Directors of the Corporation is invested in one or more Person(s) who are not currently stockholders of the Corporation or of Penthouse or Affiliates of such Persons.

2.

Determination.  The series of Preferred Stock is hereby designated Series E Convertible Preferred Stock (the “Series E Preferred Stock”). 

3.

Authorized Shares.  The number of authorized shares constituting the Series E Preferred Stock shall be thirty five thousand (35,000) shares of such series. 

4.

Dividends.  Until such date (the “Effective Date”) as a registration statement covering the Common Stock issuable upon conversion of the Series E Preferred Stock, certain additional shares of Common Stock purchased on the Issue Date from an affiliate of the Corporation, and other shares of Common Stock issuable upon exercise of certain warrants issued on the Issue date to the Holder of the Series E Preferred Stock (collectively, the “Registrable Securities”), on Form S-1 or other applicable form for registering securities under the Securities Act of 1933, as amended (the “Registration Statement”) shall have been declared effective by the Securities and Exchange Commission, each Share of Series E Preferred Stock shall pay a mandatory monthly dividend, at an annual rate equal to the product of multiplying (i) the $100.00 per share Series E Purchase Price, by (ii) six percent (6.0%).  Such dividend shall be payable monthly in arrears in cash.  From and after the Effective Date of the Registration Statement, no further mandatory dividends shall be payable on the Series E Preferred Stock.  Subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends, the holder of the Series E Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of any assets of the Corporation legally available therefor, such dividends as may be declared from time to time by the Board of Directors.

5.

Liquidation Preference.

(a)

Liquidation, Dissolution or Winding Up.  If (A) the Corporation shall commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, or consent to the entry of an order for relief In an involuntary case under any law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due, or if a decree or order for relief in respect of the Corporation shall be entered by a court having jurisdiction in the premises in an involuntary case under the Federal bankruptcy laws or any other 

4

applicable Federal or state bankruptcy, insolvency or similar law resulting in the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Corporation or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and any such decree or order shall be unstayed and in effect for a period of 30 consecutive days and, on account of any such event (“Insolvency Proceeding”), or (B) the Corporation shall otherwise liquidate, dissolve or wind up, a “Liquidation Event” shall be deemed to have occurred for purposes of this Certificate of Designation. If a Liquidation Event shall occur, the available funds and assets of the Corporation and its Subsidiaries shall be distributed in the following manner:

(i)

Liquidation Preference. Upon the occurrence of any Liquidation Event, the holder(s) of the issued and outstanding shares of Series E Preferred Stock shall be entitled to be paid a liquidation preference at the Series E Stated Value per share, out of the Available Funds and Assets (A) junior to and subordinated to all payments as shall be made to the holders of the Series F Preferred Stock, (B) pari passu and at the same time as payment shall be made to the holders of the Series D Preferred Stock, and (C) senior, prior to, and before any payment or distribution (or any setting apart of any payment or distribution) of any available funds and assets of the Corporation or any Subsidiary on any shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series G Preferred Stock or Common Stock of the Corporation. If, upon a Liquidation Event, after payment in full of all payments as shall be made to the holders of the Series F Preferred Stock, the available funds and assets of the Corporation and its Subsidiaries to be distributed to the holders of the Series D and Series E Preferred Stock shall be insufficient to permit the payment to such shareholders of their full preferential amount described in this subsection, then all of such available funds and assets shall be distributed among the holders of then outstanding series of such Series D Preferred Stock and Series E Preferred Stock pro rata, according to the number of outstanding shares of such Series D Preferred Stock and Series E Preferred Stock held by each holder thereof. Except for the Series F Preferred Stock, the Corporation shall not create, designate or authorize any series of Preferred Stock with liquidation preferences or rights senior to the liquidation preferences and rights held by the holders of the Series E Preferred Stock.

(ii)

Other Shares of Junior Preferred Stock. Subject to payment in full of the Stated Value liquidation preference, first to the holders of the Series F Preferred Stock, then to the Series D Preferred Stock and Series E Preferred Stock, as provided above, the holder(s) of all other series of Preferred Stock of the Corporation then outstanding (including the Series B Preferred Stock, Series C Preferred Stock and Series G Preferred Stock) shall be entitled to be paid, out of the remaining available funds and assets, if any, and prior and in preference to any payment or distribution (or any setting apart of nay payment or distribution) of any available finds and assets on any shares of Common Stock, the amount of any liquidation preference or other payment required under the terms of such Preferred Stock.

(iii)

Remaining Assets. If there are any available finds and assets remaining after the payment or distribution (or the setting aside for payment or distribution) to the holders of the Preferred Stock of their full preferential amounts described in Sections here above, then all such remaining available finds and assets shall be distributed among the holders of the then outstanding Common Stock pro rata according to the number of shares of Common Stock held by each holder thereof.

(b)

Merger or Sale of Assets.  At the option of the holders of the Series E Preferred Stock, with such series voting as a separate series, upon the consummation of a transaction or series of related transactions affecting the Corporation that shall constitute a Transfer of Control, for all purposes of this Certificate of Designation, a Liquidation Event shall be deemed to have occurred. In such event the Corporation shall, at the sole option of the holders of a majority of the outstanding Series E Preferred Stock, either (i) distribute, upon consummation of and as a condition to, such Transfer of Control an 

5

amount equal to the $100.00 per share Series E Stated Value liquidation preference with respect to each outstanding share of Series E Preferred Stock, (ii) issue to the holders of the Series E Preferred Stock that number of shares of common stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and/or other property as is receivable upon or as a result of such Transfer of Control, as though each Holder of Series E Preferred Stock had converted his or its Series E Preferred Stock into shares of Common Stock, at the applicable Conversion Percentage of Fully-Diluted Common Stock, immediately prior to such Transfer of Control or (iii) require the Corporation, or such successor, resulting, surviving or purchasing corporation, as the case may be, and without benefit of any additional consideration therefor, to execute and deliver to the Holder of Series E Preferred Stock shares of its preferred stock with substantially identical rights, preferences, privileges, powers, restrictions and other terms as the Series E Preferred Stock equal to the number of shares of Series E Preferred Stock held by such Holder divided by the Fully-Diluted Common Stock of the Corporation immediately prior to such Transfer of Control multiplied by the Fully-Diluted Common Stock of the Corporation or such successor, resulting or purchasing or surviving corporation, as the case may be, immediately after the consummation of such Transfer of Control; provided, that all Holders of Series E Preferred Stock shall be deemed to elect the option set forth in clause (i) above if at least a majority in interest of such Holders elect such option. For purposes of this Section 5(b), “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption and shall also include any evidences of indebtedness, shares of stock or other securities which are convertible into or exchangeable for any such stock, either immediately or upon the arrival of a specified date or the happening of a specified event and any warrants or other rights to subscribe for or purchase any such stock..

(c)

Non-Cash Consideration. If any assets of the Corporation distributed to shareholders in connection with any Liquidation Event are other than cash, then the value of such assets shall be their fair market value as determined by the Board of Directors in good faith, except that any securities to be distributed to shareholders in connection with a Liquidation Event shall be valued as follows:

(i)

The method of valuation of securities not subject to investment representation letter or other similar restrictions on free marketability shall be as follows:

(A)

unless otherwise specified in a definitive agreement for the acquisition of the Corporation, if the securities to be distributed are shares of Common Stock of the Corporation or other securities that are traded on a National Securities Exchange, the same shall be determined based on its then Market Value; and

(B)

if there is no public market as described in clause (A) above, then the value shall be the fair market value thereof, as determined in good faith by the Board of Directors,

(ii)

The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make a thirty percent (30%) discount from the Market Value to reflect the approximate fair market value thereof as determined in good faith by the Board of Directors.

6.

Voting Rights.  Except as otherwise required by law, the holder of shares of Series E Preferred Stock shall not have the right to vote on matters that come before the shareholders.  

6

7.

Conversion Rights.  The holders of Series E Preferred Stock will have the right to convert their shares of Series E Preferred Stock into Common Stock upon the following terms and conditions:

(a)

Right to Convert.  Upon the earlier to occur of (i) December 31, 2004, or (ii) the Corporation’s obtaining “Stockholder Approval” (as that term is defined in the Subscription Agreement), subject to and in compliance with the provisions of this Section 7, any issued and outstanding shares of Series E Preferred Stock may, at the option of the Holder, be converted at any time or from time to time into fully paid and non-assessable shares of Common Stock at the Conversion Price in effect at the time of conversion, determined as provided herein; provided, that a holder of Series E Preferred Stock may at any given time convert only up to that number of shares of Series E Preferred Stock so that, upon conversion, the aggregate beneficial ownership of the Corporation’s Common Stock (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of such holder and all persons affiliated with such holder is not more than 9.99% of the Corporation’s Common Stock then outstanding.

(b)

Mechanics of Conversion.  Before any holder of Series E Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender and deliver the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Common Stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the number of shares of Series E Preferred Stock being converted (the “Conversion Notice”).  Such Conversion Notice shall be delivered either simultaneous with, or not earlier than five (5) business days prior to, deliver of the certificate or certificates for conversion, as aforesaid.  Thereupon, the Corporation shall promptly issue and deliver at such office to such holder of Series E Preferred Stock a certificate or certificates for the number of shares of Common Stock to which he shall be entitled.  Each conversion of Series E Preferred Stock into shares of Common Stock shall be deemed to have been made immediately prior to the close of business on the date of such surrender and delivery of the shares of Series E Preferred Stock to be converted (each, a “Conversion Date”), and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such Conversion Date.

Notwithstanding the $3.00 per share Floor Price, in the event that the Conversion Price shall be less than the $3.00 Floor Price on the Conversion Date, then and in such event the Holder(s) of Series E Preferred Stock shall be entitled to receive from the “Escrowed Shares” defined in the Subscription Agreement, that number of additional shares of Common Stock (the “Adjustment Shares”) as shall represent, together with the number of Conversion Shares issuable at the then Series E Preferred Conversion Price in effect, the aggregate number of shares of Company Common Stock that would have been issuable (i) based upon the Conversion Price then in effect, and (ii) assuming that the Floor Price had been reduced to $0.50 per share (the “Assumed Floor Price”), up to a maximum aggregate of 5,833,333 of such Adjustment Shares, if all 35,000 shares of Series E Stock are converted; provided, that in no event would such Assumed Floor Price ever be less than $0.50 per share. 

For the avoidance of doubt, if for example, the Holder sends a Conversion Notice to convert $1,000,000 of his or its Series E Preferred Stock and the Conversion Price then in effect shall be $1.00 per share, notwithstanding the $3.00 Floor Price set forth above, in addition to 333,333 Conversion Shares, the Corporation shall sell to such Holder an additional 666,667 shares of Common Stock for a total of $666.67.  However, based upon the $0.50 Assumed Floor Price, in no event will the Corporation be required to issue more than 1,666,667 Adjustment Shares in such example, even if the Conversion Price then in effect is less than $0.50.

7

(c)

Conversion Price.  The number of shares of Common Stock into which one share of Series E Preferred Stock shall be convertible shall be determined by dividing the $100.00 per share Series E Purchase Price by the Conversion Price, as the same shall be adjusted pursuant to Section 7(d) below. 

(d)

Adjustments to Floor Price and Assumed Floor Price.  The Floor Price and Assumed Floor Price shall be subject to adjustment as set forth below in this Section 7(d).   

(i)

Adjustment upon Occurrence of an Event of Default.  If an Event of Default occurs, as defined in the Subscription Agreement for the Series E Preferred Stock, the Floor Price and Assumed Floor Price shall be reduced to seventy five percent (75%) of the Floor Price and Assumed Floor Price. 

(ii)

Adjustment for Stock Splits and Combinations.  If the Corporation shall at any time, or from time to time after the date shares of the Series E Preferred Stock are first issued (the "Original Issue Date"), effect a subdivision of the outstanding Common Stock, the Floor Price and Assumed Floor Price in effect immediately prior thereto shall be proportionately decreased, and conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Floor Price and Assumed Floor Price then in effect immediately before the combination shall be proportionately increased.  Any adjustment under this Section 7(d)(ii) shall become effective at the close of business on the date the subdivision or combination becomes effective.

(iii)

Adjustment for Certain Dividends and Distributions.  In the event the Corporation at any time, or from time to time after the Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Floor Price and Assumed Floor Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Floor Price and Assumed Floor Price then in effect by a fraction:

(A)

the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(B)

the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Floor Price and Assumed Floor Price shall be recomputed accordingly as of the close of business on such record date and thereafter, the Floor Price and Assumed Floor Price shall be adjusted pursuant to this Section 7(d)(iii) as of the time of actual payment of such dividends or distributions.

(iv)

Adjustments for Other Dividends and Distributions.  In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, then and in each such event provision shall be made so that the holders of such Series E Preferred Stock shall receive upon conversion thereof in addition to the number of shares of Common Stock receivable thereupon, the amount of 

8

securities of the Corporation that they would have received had their Series E Preferred Stock been converted into Common Stock on the date of such event and had thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period giving application to all adjustments called for during such period under this paragraph (f) with respect to the rights of the holders of the Series E Preferred Stock.

(v)

Adjustments to Floor Price and Assumed Floor Price for Certain Diluting Issues.

(A)

Special Definitions.  For purposes of this Section 7(d)(v), the following definitions apply:

(1)

"Options" shall mean rights, options, or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (defined below).

(2)

"Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock and Series E Preferred Stock) or other securities convertible into or exchangeable for Common Stock.

(3)

“Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 7(d)(v)(C), deemed to be issued) by the Corporation after the Original Issue Date; provided, that “Additional Shares of Common Stock” shall not mean or include any shares of Common Stock issued or issuable:

(a)

upon conversion of shares of Series E Preferred Stock;

(b) 

to officers, directors or employees of, or consultants to, the Corporation pursuant to stock option or stock purchase plans or agreements on terms approved by the Board of Directors, but not exceeding, at any one time, more than five (5%) percent of the fully-diluted shares of Common Stock then issued and outstanding (net of any repurchases of such shares), subject to adjustment for all subdivisions and combinations;

(c)

in connection with any acquisition, joint venture or similar combination, as full or partial consideration for the assets, securities or properties of any other person, firm or corporation, whether by purchase, exchange, merger, consolidation or like combination; 

(d) 

as a dividend or distribution on Series E Preferred Stock; 

(e) 

for which adjustment of the Floor Price and Assumed Floor Price is made pursuant to Section 7(d); or

(f) 

any shares of Common Stock issued or issuable as “Adjustment Shares” within the meaning defined in the Subscription Agreement and in Section 7(b) above.  

9

(B)

No Adjustment of Floor Price and Assumed Floor Price.  Any provision herein to the contrary notwithstanding, no adjustment in the Floor Price and Assumed Floor Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share (determined pursuant to this Section 7(d) for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Floor Price and Assumed Floor Price in effect on the date of, and immediately prior to such issue.

(C)

Deemed Issue of Additional Shares of Common Stock.  In the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities then entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein designed to protect against dilution) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued:

(i)

No further adjustments in the Floor Price and Assumed Floor Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

(ii)

If such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase in the consideration payable to the Corporation, or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Floor Price and Assumed Floor Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities (provided, however, that no such adjustment of the Floor Price and Assumed Floor Price shall effect Common Stock previously issued upon conversion of the Series E Preferred Stock);

(iii)

Upon the expiration of any such Options or rights, the termination of any such rights to convert or exchange, or the expiration of any rights related to such Convertible Securities, the Floor Price and Assumed Floor Price, to the extent in any way affected by or computed using such Options or Convertible Securities (unless such Options or Convertible Securities were merely deemed to be included in the numerator and denominator for purposes of determining the number of shares of Common Stock outstanding for purposes of this Section 7(d)) shall be recomputed to reflect the issuance of only the number of shares of Common Stock (and Convertible Securities that remain in effect) actually issued upon the exercise of such Options or rights related to such Convertible Securities.

(iv)

No readjustment pursuant to clause (ii) or (iii) above shall have the effect of increasing the Floor Price and Assumed Floor Price to an amount which exceeds the lower of (a) the Floor Price and Assumed Floor Price on the original adjustment date, or (b) the Floor Price and Assumed Floor Price that would have resulted from any issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date.

10

(D)

Adjustment of Floor Price and Assumed Floor Price Upon Issuance of Additional Shares of Common Stock.  In the event this Corporation, at any time after the Original Issue Date shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 7(d)(v)(C)) without consideration or for a consideration per share less than the Floor Price and Assumed Floor Price in effect on the date of and immediately prior to such issue, then and in such event, the Floor Price and Assumed Floor Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Floor Price and Assumed Floor Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of additional shares of Common Stock so issued would purchase at the Floor Price and Assumed Floor Price in effect immediately prior to such issuance, and the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued.  For the purpose of the above calculation, the number of shares of Common Stock outstanding immediately prior to such issue shall be calculated on a fully diluted basis, as if all shares of Series E Preferred Stock and all Convertible Securities had been fully converted into shares of Common Stock and any outstanding warrants, options or other rights for the purchase of shares of stock or convertible securities had been fully exercised (and the resulting securities fully converted into shares of Common Stock, if so convertible) as of such date.

(E)

Determination of Consideration.  For purposes of this Section 7(d)(v), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(i)

Cash and Property:  Such consideration shall:

1.

insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends;

2.

insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

3.

in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (1) and (2) above, as determined in good faith by the Board of Directors.

(ii)

Options and Convertible Securities.  The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 7(d)(v), relating to Options and Convertible Securities shall be determined by dividing

1.

the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against 

11

dilution) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities by

2.

the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein designed to protect against the dilution) issuable upon the exercise of such Options or conversion or exchange of such Convertible Securities.

(vi)

Adjustment for Reclassification Exchange or Substitution.  If the Common Stock issuable upon the conversion of the Series E Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this paragraph (f)), then and in each such event the holder of each share of Series E Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which such shares of Series E Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein.

(vii)

Reorganization, Mergers, Consolidations or Sales of Assets.  If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification or exchange of shares provided for elsewhere in this Section 7(d)) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation’s properties and assets to any other person, then, as a part of such reorganization, merger, consolidation or sale, provision shall be made so that the holders of the Series E Preferred Stock shall thereafter be entitled to receive upon conversion of such Series E Preferred Stock, the number of shares of stock or other securities or property of the Corporation or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation or sale.  In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 7(d) with respect to the rights of the holders of the Series E Preferred Stock after the reorganization, merger, consolidation or sale to the end that the provisions of this Section 7(d) (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of the Series E Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

(viii)

Certificate of Adjustment.  In each case of an adjustment or readjustment of the Conversion Price or the securities issuable upon conversion of the Series E Preferred Stock, the Corporation shall compute such adjustment or readjustment in accordance herewith and the Corporation’s Chief Financial Officer shall prepare and sign a certificate showing such adjustment or readjustment, and shall mail such certificate by first class mail, postage prepaid, to each registered holder of the Series E Preferred Stock at the holder’s address as shown in the Corporation’s books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based.

12

(e)

Notices of Record Date.  In the event of (A) any taking by the Corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (B) any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation or any transfer of all or substantially all of the assets of the Corporation to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series E Preferred Stock at least 10 days prior to the record date specified therein, a notice specifying (1) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (2) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (3) the time, if any is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares, of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up.

(f)

Fractional Shares.  No fractional shares of Common Stock shall be issued upon conversion of the Series E Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of the Corporation’s Common Stock on the date of conversion, as determined in good faith by the Board of Directors.

(g)

Reservation of Stock Issuable Upon Conversion.  The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series E Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series E Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of Series E Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose.

(h)

Notices. Any notice required by the provisions of this Section 7 to be given to the holders of shares of Series E Preferred Stock shall be deemed given (A) if deposited in the United States mail, postage prepaid, or (B) if given by any other reliable or generally accepted means (including by facsimile or by a nationally recognized overnight courier service), in each case addressed to each holder of record at his address (or facsimile number) appearing on the books of the Corporation.

(i)

Payment of Taxes.  The Corporation will pay all transfer taxes and other governmental charges that may be imposed in respect of the issue or delivery of shares of Common Stock upon conversion of shares of Series E Preferred Stock.

(j)

No Dilution or Impairment.  The Corporation shall not amend its Articles of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, without the approval of a majority of the then outstanding Series E Preferred Stock.  

8.

No Reissuance of Preferred Stock.  Any shares of Series E Preferred Stock acquired by the Corporation by reason of purchase, conversion or otherwise shall be canceled, retired and eliminated from the shares of Series E Preferred Stock that the Corporation shall be authorized to issue.  All such shares 

13

shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth in the Articles of Incorporation or in any certificate of Determination creating a series of Preferred Stock or any similar stock or as otherwise required by law.

9.

Severability.  If any right, preference or limitation of the Series E Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule, law or public policy, all other rights, preferences and limitations set forth herein that can be given effect without the invalid, unlawful or unenforceable right, preference or limitation shall nevertheless remain in full force and effect, and no right, preference or limitation herein shall be deemed dependent upon any other such right, preference or limitation unless so expressed herein.

Each of the undersigned declares under penalty of perjury that the matters set out in the foregoing Certificate are true of his own knowledge.  Executed in New York, New York on this __ day of September, 2004.  

________________________________

Name:

Gary Spaniak, Jr.

Title:

President 

_______________________________

Name:

 Charles Pearlman

Title:

Assistant Secretary 

14

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