exhibit101.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

EX-10 2 exhibit101.htm exhibit101.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

LV ADMINISTRATIVE SERVICES, INC.,

as Administrative and Collateral Agent

THE PURCHASERS

From Time to Time Party Hereto

and

ELEC COMMUNICATIONS CORP.

Dated: September 28, 2007

TABLE OF CONTENTS

			Page


1.	Agreement to Sell and Purchase		1

2.	Fees and Warrant		1

3.	Closing, Delivery and Payment		2
	3.1	Closing	2
	3.2	Delivery	2

4.	Representations and Warranties of the Company		2
	4.1	Organization, Good Standing and Qualification	2
	4.2	Subsidiaries	3
	4.3	Capitalization; Voting Rights	4
	4.4	Authorization; Binding Obligations	5
	4.5	Liabilities; Solvency	5
	4.6	Agreements; Action	6
	4.7	Obligations to Related Parties	7
	4.8	Changes	8
	4.9	Title to Properties and Assets; Liens, Etc	9
	4.10	Intellectual Property	10
	4.11	Compliance with Other Instruments	11
	4.12	Litigation	11
	4.13	Tax Returns and Payments	11
	4.14	Employees	12
	4.15	Registration Rights and Voting Rights	12
	4.16	Compliance with Laws; Permits	13
	4.17	Environmental and Safety Laws	13
	4.18	Valid Offering	14
	4.19	Full Disclosure	14
	4.20	Insurance	14
	4.21	SEC Reports	14
	4.22	Listing	15
	4.23	No Integrated Offering	15
	4.24	Stop Transfer	15
	4.25	Dilution	15
	4.26	Patriot Act	15
	4.27	ERISA	16

5.	Representations and Warranties of each Purchaser		16
	5.1	No Shorting	16
	5.2	Requisite Power and Authority	16
	5.3	Investment Representations	17
	5.4	The Purchaser Bears Economic Risk	17
	5.5	Acquisition for Own Account	17
	5.6	The Purchaser Can Protect Its Interest	17
	5.7	Accredited Investor	17


i

TABLE OF CONTENTS

			Page

	5.8	Legends	18

6.	Covenants of the Company		18
	6.1	Stop-Orders	19
	6.2	Listing	19
	6.3	Market Regulations	19
	6.4	Reporting Requirements	19
	6.5	Use of Funds	20
	6.6	Access to Facilities	21
	6.7	Taxes	21
	6.8	Insurance	23
	6.9	Intellectual Property	24
	6.10	Properties	25
	6.11	Confidentiality	25
	6.12	Required Approvals	26
	6.13	Reissuance of Securities	28
	6.14	Opinion	28
	6.15	Margin Stock	28
	6.16	FIRPTA	29
	6.17	Restricted Cash Disclosure	29
	6.18	No Restrictions on Additional Financing	29
	6.19	Authorization and Reservation of Shares	29
	6.20	Investor Relations/Public Relations	29
	6.21	Board Observation Rights	29

7.	Covenants of the Purchasers		30
	7.1	Confidentiality	30
	7.2	Non-Public Information	30
	7.3	Limitation on Acquisition of Common Stock of the Company	30

8.	Covenants of the Company and the Purchasers Regarding Indemnification		31
	8.1	Company Indemnification	31
	8.2	Purchaser Indemnification	31

9.	Exercise of Warrant		31
	9.1	Mechanics of Exercise	31

10.	Registration Rights		33
	10.1	Offering Restrictions	33

11.	Miscellaneous		33
	11.1	Governing Law, Jurisdiction and Waiver of Jury Trial	33
	11.2	Severability	34
	11.3	Survival	35
	11.4	Successors	35
	11.5	Entire Agreement; Maximum Interest	36


ii

TABLE OF CONTENTS

		Page

11.6	Amendment and Waiver	36
11.7	Delays or Omissions	36
11.8	Notices	36
11.9	Attorneys’ Fees	37
11.10	Titles and Subtitles	38
11.11	Facsimile Signatures; Counterparts	38
11.12	Broker’s Fees	38
11.13	Construction	38
11.14	Agency	38


iii

LIST OF EXHIBITS

Form of Term Note			Exhibit A
Form of Warrant			Exhibit B
Form of Opinion			Exhibit C
Form of Escrow Agreement			Exhibit D

LIST OF SCHEDULES

Schedule	1	Purchaser Commitments
Schedule	2	Warrant Holders and Warrant Shares
Schedule	4.2	Subsidiaries
Schedule	4.3	Capitalization
Schedule	4.6	Extraordinary Agreements
Schedule	4.7	Obligations to Related Parties
Schedule	4.9	Title to Properties; Liens
Schedule	4.10	IP Registration
Schedule	4.12	Litigation
Schedule	4.13	Taxes
Schedule	4.14	Employees
Schedule	4.15	Registration and Voting Rights
Schedule	4.21	SEC Reports
Schedule	6.12(e)	Indebtedness
Schedule	11.12	Brokers


iv

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and

entered into as of September 28, 2007, among ELEC COMMUNICATIONS CORP., a New

York corporation (the “Company”), the purchasers from time to time a party hereto (each a

“Purchaser” and collectively, the “Purchasers”) and LV ADMINISTRATIVE SERVICES, INC.,

a Delaware corporation, as administrative and collateral agent for each Purchaser (the “Agent”),

and together with the Purchasers, the “Creditor Parties”).

RECITALS

WHEREAS, the Company has authorized the sale to each Purchaser of a Secured Term

Note in the form of Exhibit A hereto in the principal amount set forth opposite such Purchaser’s

name on Schedule 1 hereto (each as amended, restated, modified and/or supplemented from time

to time, a “Note” and, collectively, the “Notes”);

WHEREAS, the Company wishes to issue to each Purchaser warrants in the form of

Exhibit B hereto (each as amended, restated, modified and/or supplemented from time to time, a

“Warrant” and, collectively the “Warrants”) to purchase up to the number of shares of the

Company’s common stock, $0.10 par value per share (the “Common Stock”), set forth opposite

such Purchaser’s name on Schedule 2 (subject to adjustment as set forth therein) in connection

with such Purchaser’s purchase of the applicable Note;

WHEREAS, each Purchaser desires to purchase the applicable Note and Warrant on the

terms and conditions set forth herein; and

WHEREAS, the Company desires to issue and sell the applicable Note and Warrant to

each Purchaser on the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises,

representations, warranties and covenants hereinafter set forth and for other good and valuable

consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto

agree as follows:

1. Agreement to Sell and Purchase. Pursuant to the terms and conditions set forth in

this Agreement, on the Closing Date (as defined in Section 3), the Company shall sell to each

Purchaser, and each Purchaser shall purchase from the Company, the applicable Note in the

principal amount set forth opposite such Purchaser’s name on Schedule 1 hereto. The sale of the

Notes on the Closing Date shall be known as the “Offering.” The Notes will mature on the

Maturity Date (as defined in the Notes). Collectively, the Notes and Warrants and Common

Stock issuable upon exercise of the Warrants are referred to as the “Securities.”

2. Fees and Warrant. On the Closing Date:

(a) The Company will issue and deliver to each Purchaser a Warrant

to purchase up to the number of shares of Common Stock set forth opposite its name on

Schedule 2 (subject to adjustment as set forth therein) in connection with the Offering

pursuant to Section 1 hereof. All the representations, covenants, warranties,

undertakings, and indemnifications, and other rights made or granted to or for the benefit

of each Creditor Party by the Company are hereby also made and granted for the benefit

of the holder of the related Warrant and shares of the Common Stock issuable upon

exercise of such Warrant (the “Warrant Shares”).

(b) Subject to the terms of Section 2(c) below, the Company shall pay

(i) to Valens Capital Management, LLC, the investment manager of the Purchasers

(“VCM”), a non-refundable payment in an amount equal to $46,000; (ii) to Laurus

Capital Management, LLC, the investment manager of the Purchasers (“LCM”), a non-

refundable payment in an amount equal to $119,000; (iii) to the Purchasers, a non-

refundable payment in an amount equal to $6,000; and (iii) to the Purchasers, an advance

prepayment discount deposit equal to $6,000. Each of the foregoing payments shall be

deemed fully earned on the Closing Date and shall not be subject to rebate or proration

for any reason.

(b) (net of deposits previously paid by the Company) shall be paid at closing out of funds

held pursuant to the Escrow Agreement (as defined below) and a disbursement letter (the
“Disbursement Letter”).

3. Closing, Delivery and Payment.

3.1 Closing. Subject to the terms and conditions herein, the closing of the

transactions contemplated hereby (the “Closing”), shall take place on the date hereof, at such

time or place as the Company and the Agent may mutually agree (such date is hereinafter

referred to as the “Closing Date”).

3.2 Delivery. Pursuant to the Escrow Agreement, at the Closing on the

Closing Date, the Company will deliver to each Purchaser, among other things, the applicable

Note and Warrant and such Purchaser will deliver to the Company, among other things, the

amounts set forth opposite its name in the Disbursement Letter by certified funds or wire transfer

(it being understood that $2,664,035.38 of the proceeds of the Note shall be placed in the

Restricted Account (as defined in the Restricted Account Agreement referred to below. The

Company hereby acknowledges and agrees that each Purchaser’s obligation to purchase the

applicable Note from the Company on the Closing Date shall be contingent upon the satisfaction

(or waiver by the Agent in its sole discretion) of the items and matters set forth in the closing

checklist provided by the Agent to the Company on or prior to the Closing Date.

4. Representations and Warranties of the Company. The Company hereby

represents and warrants to each Creditor Party as follows:

4.1 Organization, Good Standing and Qualification. The Company and each

of its Subsidiaries is a corporation, partnership or limited liability company, as the case may be,

duly organized, validly existing and in good standing under the laws of its jurisdiction of

organization. The Company and each of its Subsidiaries has the corporate, limited liability

company or partnership, as the case may be, power and authority to own and operate its

properties and assets and, insofar as it is or shall be a party thereto, to (1) execute and deliver (i)

this Agreement, (ii) the Notes and the Warrants to be issued in connection with this Agreement,

(iii) the Master Security Agreement dated as of the date hereof among the Company, certain

Subsidiaries of the Company and the Agent (as amended, restated, modified and/or

supplemented from time to time, the “Master Security Agreement”), (iv) the Subsidiary Guaranty

dated as of the date hereof made by certain Subsidiaries of the Company (as amended, restated,

modified and/or supplemented from time to time, the “Subsidiary Guaranty”), (v) the Stock

Pledge Agreement dated as of the date hereof among the Company, certain Subsidiaries of the

Company and the Purchaser (as amended, restated, modified and/or or supplemented from time

to time, the “Stock Pledge Agreement”), (vi) the Funds Escrow Agreement dated as of the date

hereof among the Company, the Purchasers and the escrow agent referred to therein,

substantially in the form of Exhibit D hereto (as amended, restated, modified and/or

supplemented from time to time, the “Escrow Agreement”), (vii) the Restricted Account

Agreement dated as of the date hereof among the Company, the Agent and North Fork Bank (as

amended, modified or supplemented from time to time, the “Restricted Account Agreement”),

(vi) the Restricted Account Side Letter related to the Restricted Account Agreement dated as of

the date hereof between the Company and the Agent (as amended, modified or supplemented

from time to time, the “Restricted Account Side Letter”), (viii) all other documents, instruments

and agreements entered into in connection with the transactions contemplated hereby and thereby

(the preceding clauses (ii) through (viii), collectively, the “Related Agreements”); (2) issue and

sell the Notes; (3) issue and sell the Warrants and the Warrant Shares; and (4) carry out the

provisions of this Agreement and the Related Agreements and to carry on its business as

presently conducted. Each of the Company and each of its Subsidiaries is duly qualified and is

authorized to do business and is in good standing as a foreign corporation, partnership or limited

liability company, as the case may be, in all jurisdictions in which the nature or location of its

activities and of its properties (both owned and leased) makes such qualification necessary,

except for those jurisdictions in which failure to do so has not, or could not reasonably be

expected to have, individually or in the aggregate, a material adverse effect on the business,

assets, liabilities, condition (financial or otherwise), properties, operations or prospects of the

Company and its Subsidiaries, taken individually and as a whole (a “Material Adverse Effect”).

4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the

direct owner of such Subsidiary and its percentage ownership thereof, is set forth on Schedule

4.2. For the purpose of this Agreement, a “Subsidiary” of any person or entity means (i) a

corporation or other entity whose shares of stock or other ownership interests having ordinary

voting power (other than stock or other ownership interests having such power only by reason of

the happening of a contingency) to elect a majority of the directors of such corporation, or other

persons or entities performing similar functions for such person or entity, are owned, directly or

indirectly, by such person or entity or (ii) a corporation or other entity in which such person or

entity owns, directly or indirectly, more than 50% of the equity interests at such time; provided

that, for so long as each of AVI Holding Corp., a Texas corporation (“AVI Holdings”), Line

One, Inc., a New York corporation (“Line One”) and TelcoSoftware.com Corp., a Delaware

corporation (“TelcoSoftware” and together with AVI Holdings and Line One, the “Inactive

Subsidiaries” and each, an “Inactive Subsidiary”) hold no significant assets or liabilities (other

than in respect of AVI Holdings, capitalized lease obligations not to exceed $35,000, and in

respect of Line One, liabilities not to exceed $50,000) and do not engage in any business

activities, the defined term “Subsidiary” as used in this Agreement and the Related Agreements

shall not include such Inactive Subsidiary; provided, further, that if any Inactive Subsidiary shall

at any time after the date hereof hold significant assets or liabilities or engage in any business

activities, such Inactive Subsidiary shall thereafter be deemed a Subsidiary hereunder and shall

otherwise be subject to all terms, agreements, representations, warranties and covenants

otherwise applicable to Subsidiaries under this Agreement and the Related Agreements and (y)

an “Issuer Party” means, the Company and each direct or indirect Subsidiary of the Company to

the extent party to the Master Security Agreement, the Subsidiary Guaranty, the Stock Pledge

Agreement and such other security documentation required by the Creditor Parties to grant to the

Agent, for the ratable benefit of the Creditor Parties, a first priority perfected security interest in

substantially all of such Subsidiary’s assets to secure the Obligations (as defined in the Master

Security Agreement).

4.3 Capitalization; Voting Rights.

(a) The authorized capital stock of the Company, as of the date hereof

consists of 51,000,000 shares, of which 50,000,000 are shares of Common Stock, par

value $0.10 per share, 25,768,791 shares of which are issued and outstanding, and

1,000,000 are shares of preferred stock, par value $0.10 per share of which none of the

shares of preferred stock are issued and outstanding. The authorized, issued and

outstanding capital stock of each Subsidiary of the Company is set forth on Schedule 4.3.

(b) Except as disclosed on Schedule 4.3, other than: (i) the shares

reserved for issuance under the Company’s stock option plans; and (ii) shares which may

be granted pursuant to this Agreement and the Related Agreements, there are no

outstanding options, warrants, rights (including conversion or preemptive rights and

rights of first refusal), proxy or stockholder agreements, or arrangements or agreements

of any kind for the purchase or acquisition from the Company of any of its securities.

Except as disclosed on Schedule 4.3, neither the offer, issuance or sale of any of the

Notes or the Warrants, or the issuance of any of the Warrant Shares, nor the

consummation of any transaction contemplated hereby will result in a change in the price

or number of any securities of the Company outstanding, under anti-dilution or other

similar provisions contained in or affecting any such securities.

Stock: (i) have been duly authorized and validly issued and are fully paid and non-

assessable; and (ii) were issued in compliance with all applicable state and federal laws

concerning the issuance of securities.

(d) The rights, preferences, privileges and restrictions of the shares of

the Common Stock are as stated in the Company’s Certificate of Incorporation (the

“Charter”). Those Warrant Shares to be obtained upon the exercise of Warrant A-1 and

B-1 (as more fully described on Schedule II hereof) have been duly and validly reserved

for issuance. Upon completion of the requirements set forth in Section 6.22, the balance

of the Warrant Shares will have been duly and validly reserved for issuance. When

issued in compliance with the provisions of this Agreement and the Company’s Charter,

the Securities will be validly issued, fully paid and non-assessable, and will be free of any

liens or encumbrances; provided, however, that the Securities may be subject to

restrictions on transfer under state and/or federal securities laws as set forth herein or as

otherwise required by such laws at the time a transfer is proposed.

4.4 Authorization; Binding Obligations. All corporate, partnership or limited

liability company, as the case may be, action on the part of the Company and each of its

Subsidiaries (including their respective officers and directors) necessary for the authorization of

this Agreement and the Related Agreements, the performance of all obligations of the Company

and its Subsidiaries hereunder and under the other Related Agreements at the Closing and, the

authorization, sale, issuance and delivery of the Notes and Warrants has been taken or will be

taken prior to the Closing. This Agreement and the Related Agreements, when executed and

delivered and to the extent it is a party thereto, will be valid and binding obligations of the

Company and each of its Subsidiaries, enforceable against each such person or entity in

accordance with their terms, except:

(a) as limited by applicable bankruptcy, insolvency, reorganization,

moratorium or other laws of general application affecting enforcement of creditors’

rights; and

(b) general principles of equity that restrict the availability of equitable

or legal remedies.

The sale of the Notes is not and will not be subject to any preemptive rights or rights of first

refusal that have not been properly waived or complied with. The issuance of the Warrants and

the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any

preemptive rights or rights of first refusal that have not been properly waived or complied with.

4.5 Liabilities; Solvency.

(a) Neither the Company nor any of its Subsidiaries has any liabilities,

except current liabilities incurred in the ordinary course of business and liabilities

disclosed in any of the Company’s filings under the Securities Exchange Act of 1934

(“Exchange Act”) made prior to the date of this Agreement (collectively, the “Exchange

Act Filings”), copies of which have been provided to the Agent.

(b) Both before and after giving effect to (a) the transactions

contemplated hereby that are to be consummated on the Closing Date, (b) the

disbursement of the proceeds of, or the assumption of the liability in respect of, the Notes

pursuant to the instructions or agreement of the Company and (c) the payment and

accrual of all transaction costs in connection with the foregoing, the Company and each

Subsidiary of the Company, is and will be, Solvent. For purposes of this Section 4.5(b),

“Solvent” means, with respect to any Person (as hereinafter defined) on a particular date,

that on such date (a) the fair value of the property of such Person is greater than the total

amount of liabilities, including contingent liabilities, of such Person; (b) the present fair

salable value of the assets of such Person is not less than the amount that will be required

to pay the probable liability of such Person on its debts as they become absolute and

matured; (c) such Person does not intend to, and does not believe that it will, incur debts

or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and

(d) such Person is not engaged in a business or transaction, and is not about to engage in

a business or transaction, for which such Person’s property would constitute and

unreasonably small capital. The amount of contingent liabilities (such as litigation,

guaranties and pension plan liabilities) at any time shall be computed as the amount that,

in light of all the facts and circumstances existing at the time, represents the amount that

can reasonably be expected to become an actual or matured liability.

4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as disclosed

in any Exchange Act Filings:

(a) there are no agreements, understandings, instruments, contracts,

proposed transactions, judgments, orders, writs or decrees to which the Company or any

of its Subsidiaries is a party or by which it is bound which may involve: (i) obligations

(contingent or otherwise) of, or payments to, the Company or any of its Subsidiaries in

excess of $50,000 (other than obligations of, or payments to, the Company or any of its

Subsidiaries arising from purchase or sale agreements entered into in the ordinary course

of business); or (ii) the transfer or license of any patent, copyright, trade secret or other

proprietary right to or from the Company or any of its Subsidiaries (other than licenses

arising from the purchase of “off the shelf” or other standard products); or (iii) provisions

restricting the development, manufacture or distribution of the Company’s or any of its

Subsidiaries products or services; or (iv) indemnification by the Company or any of its

Subsidiaries with respect to infringements of proprietary rights.

(b) Since November 30, 2006 (the “Balance Sheet Date”), neither the

Company nor any of its Subsidiaries has: (i) declared or paid any dividends, or

authorized or made any distribution upon or with respect to any class or series of its

capital stock; (ii) incurred any indebtedness for money borrowed or any other liabilities

(other than ordinary course obligations) individually in excess of $50,000 or, in the case

of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in

the aggregate; (iii) made any loans or advances to any person or entity not in excess,

individually or in the aggregate, of $100,000, other than ordinary course advances for

travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its assets or

rights, other than the sale of its inventory in the ordinary course of business.

liabilities, agreements, understandings, instruments, contracts and proposed transactions

involving the same person or entity (including persons or entities the Company or any

Subsidiary of the Company has reason to believe are affiliated therewith) shall be

aggregated for the purpose of meeting the individual minimum dollar amounts of such

subsections.

(d) The Company maintains disclosure controls and procedures

(“Disclosure Controls”) designed to ensure that information required to be disclosed by

the Company in the reports that it files or submits under the Exchange Act is recorded,

processed, summarized, and reported, within the time periods specified in the rules and

forms of the Securities and Exchange Commission (“SEC”).

(e) The Company makes and keeps books, records, and accounts, that,

in reasonable detail, accurately and fairly reflect the transactions and dispositions of the

Company’s assets. The Company maintains internal control over financial reporting

(“Financial Reporting Controls”) designed by, or under the supervision of, the

Company’s principal executive and principal financial officers, and effected by the

Company’s board of directors, management, and other personnel, to provide reasonable

assurance regarding the reliability of financial reporting and the preparation of financial

statements for external purposes in accordance with generally accepted accounting

principles (“GAAP”), including that:

(i) transactions are executed in accordance with management’s

general or specific authorization;

(ii) unauthorized acquisition, use, or disposition of the

Company’s assets that could have a material effect on the financial statements are

prevented or timely detected;

(iii) transactions are recorded as necessary to permit preparation

of financial statements in accordance with GAAP, and that the Company’s

receipts and expenditures are being made only in accordance with authorizations

of the Company’s management and board of directors;

(iv) transactions are recorded as necessary to maintain

accountability for assets; and

(v) the recorded accountability for assets is compared with the

existing assets at reasonable intervals, and appropriate action is taken with respect

to any differences.

(f) There is no weakness in any of the Company’s Disclosure Controls

or Financial Reporting Controls that is required to be disclosed in any of the Exchange

Act Filings, except as so disclosed.

4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7, there

are no obligations of the Company or any of its Subsidiaries to officers, directors, stockholders

or employees of the Company or any of its Subsidiaries other than:

(a) for payment of salary for services rendered and for bonus

payments;

(b) reimbursement for reasonable expenses incurred on behalf of the

Company and its Subsidiaries;

all employees (including stock option agreements outstanding under any stock option

plan approved by the Board of Directors of the Company and each Subsidiary of the

Company, as applicable); and

(d) obligations listed in the Company’s and each of its Subsidiary’s

financial statements or disclosed in any of the Company’s Exchange Act Filings.

Except as described above or set forth on Schedule 4.7, none of the officers, directors or, to the

best of the Company’s knowledge, key employees or stockholders of the Company or any of its

Subsidiaries or any members of their immediate families, are indebted to the Company or any of

its Subsidiaries, individually or in the aggregate, in excess of $50,000 or have any direct or

indirect ownership interest in any firm or corporation with which the Company or any of its

Subsidiaries is affiliated or with which the Company or any of its Subsidiaries has a business

relationship, or any firm or corporation which competes with the Company or any of its

Subsidiaries, other than passive investments in publicly traded companies (representing less than

one percent (1%) of such company) which may compete with the Company or any of its

Subsidiaries. Except as described above, no officer, director or stockholder of the Company or

any of its Subsidiaries, or any member of their immediate families, is, directly or indirectly,

interested in any material contract with the Company or any of its Subsidiaries and no

agreements, understandings or proposed transactions are contemplated between the Company or

any of its Subsidiaries and any such person. Except as set forth on Schedule 4.7, neither the

Company nor any of its Subsidiaries is a guarantor or indemnitor of any indebtedness of any

other person or entity.

4.8 Changes. Since the Balance Sheet Date, except as disclosed in any

Exchange Act Filing or in any Schedule to this Agreement or to any of the Related Agreements,

there has not been:

(a) any change in the business, assets, liabilities, condition (financial

or otherwise), properties, operations or prospects of the Company or any of its

Subsidiaries, which individually or in the aggregate has had, or could reasonably be

expected to have, individually or in the aggregate, a Material Adverse Effect;

(b) any resignation or termination of any officer, key employee or

group of employees of the Company or any of its Subsidiaries;

the contingent obligations of the Company or any of its Subsidiaries by way of guaranty,

endorsement, indemnity, warranty or otherwise;

(d) any damage, destruction or loss, whether or not covered by

insurance, which has had, or could reasonably be expected to have, individually or in the

aggregate, a Material Adverse Effect;

(e) any waiver by the Company or any of its Subsidiaries of a valuable

right or of a material debt owed to it;

(f) any direct or indirect loans made by the Company or any of its

Subsidiaries to any stockholder, employee, officer or director of the Company or any of

its Subsidiaries, other than advances made in the ordinary course of business;

(g) any material change in any compensation arrangement or

agreement with any employee, officer, director or stockholder of the Company or any of

its Subsidiaries;

(h) any declaration or payment of any dividend or other distribution of

the assets of the Company or any of its Subsidiaries;

(i) any labor organization activity related to the Company or any of its

Subsidiaries;

(j) any debt, obligation or liability incurred, assumed or guaranteed by

the Company or any of its Subsidiaries, except those for immaterial amounts and for

current liabilities incurred in the ordinary course of business;

(k) any sale, assignment, transfer, abandonment or other disposition of

any patents, trademarks, copyrights, trade secrets or other intangible assets owned by the

Company or any of its Subsidiaries;

(l) any change in any material agreement to which the Company or

any of its Subsidiaries is a party or by which either the Company or any of its

Subsidiaries is bound which either individually or in the aggregate has had, or could

reasonably be expected to have, individually or in the aggregate, a Material Adverse

Effect;

(m) any other event or condition of any character that, either

individually or in the aggregate, has had, or could reasonably be expected to have,

individually or in the aggregate, a Material Adverse Effect; or

(n) any arrangement or commitment by the Company or any of its

Subsidiaries to do any of the acts described in subsection (a) through (m) above.

4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on Schedule

4.9, the Company and each of its Subsidiaries has good and marketable title to its properties and

assets, and good title to its leasehold interests, in each case subject to no mortgage, pledge, lien,

lease, encumbrance or charge (each for the foregoing, a “Lien”) , other than the following (each

a “Permitted Encumbrance”):

(a) those in favor of the Agent, for the ratable benefit of the Creditor

Parties;

(b) those in favor of Laurus Master Fund, Ltd.

(d) minor Liens which do not materially detract from the value of the

property subject thereto or materially impair the operations of the Company or any of its

Subsidiaries, so long as in each such case, such Liens have no effect on the Lien priority

of the Agent, for the ratable benefit of the Creditor Parties, in such property; and

(e) those that have otherwise arisen in the ordinary course of business,

so long as they have no effect on the Lien priority of the Purchaser therein.

All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or

used by the Company and its Subsidiaries are in good operating condition and repair and are

reasonably fit and usable for the purposes for which they are being used. Except as set forth on

Schedule 4.9, the Company and its Subsidiaries are in compliance with all material terms of each

lease to which it is a party or is otherwise bound.

4.10 Intellectual Property.

(a) Except as set forth on Schedule 4.10, each of the Company and

each of its Subsidiaries owns or possesses sufficient legal rights to use all patents,

trademarks, service marks, trade names, copyrights, trade secrets, licenses, information

and other proprietary rights and processes necessary for its business as now conducted

and, to the Company’s knowledge, as presently proposed to be conducted (the

“Intellectual Property”). There are no settlements or consents, covenants not to sue, non-

assertion assurances, or releases to which the Company or any of its Subsidiaries is

bound which adversely affects its rights to own or use any Intellectual Property.

(b) To the Company’s knowledge, the conduct of the Company’s and

each of its Subsidiaries’ business as now conducted, and as presently proposed to be

conducted, does not (and will not) result in any infringement or other violation of the

rights of others.

from time to time) sets forth a true and complete list of (i) all registrations and

applications for Intellectual Property owned by the Company and each of its Subsidiaries

filed or issued by any Intellectual Property registry and (ii) all Intellectual Property

licenses which are either material to the business of the Company or relate to any

material portion of the Company’s or any of its Subsidiaries’ inventory, including

licenses for standard software having a replacement value of more than $10,000. None of

such Intellectual Property licenses are reasonably likely to be construed as an assignment

of the licensed Intellectual Property to the Company or any of its Subsidiaries.

(d) Except as set forth on Schedule 4.10, there are no claims pending

or, to the best of the Company’s knowledge, threatened and neither the Company nor any

of its Subsidiaries has received any other communications, alleging that, the Company or

any of its Subsidiaries has infringed, diluted, misappropriated, or otherwise violated any

Intellectual Property of any other person or entity, nor is the Company or any of its

Subsidiaries aware of any basis therefore.

(e) The Company is not aware of any infringement, misappropriation,

or other violation of its Intellectual Property by any other person or entity.

(f) Neither the Company nor any of its Subsidiaries utilizes any

inventions, trade secrets or other Intellectual Property of any of its employees, officers, or

contractors, except for inventions, trade secrets or other Intellectual Property that is

owned by the Company or any Subsidiary as a matter of law or have been rightfully

assigned to the Company or any of its Subsidiaries.

4.11 Compliance with Other Instruments. Neither the Company nor any of its

Subsidiaries is in violation or default of (x) any term of its Charter or Bylaws, or (y) any

provision of any indebtedness, mortgage, indenture, contract, agreement or instrument to which

it is party or by which it is bound or of any judgment, decree, order or writ, which violation or

default, in the case of this clause (y), has had, or could reasonably be expected to have, either

individually or in the aggregate, a Material Adverse Effect. The execution, delivery and

performance of and compliance with this Agreement and the Related Agreements to which it is a

party, and the issuance and sale of the Notes by the Company and the other Securities by the

Company each pursuant hereto and thereto, will not, with or without the passage of time or

giving of notice, result in any such material violation, or be in conflict with or constitute a

default under any such term or provision, or result in the creation of any Lien upon any of the

properties or assets of the Company or any of its Subsidiaries or the suspension, revocation,

impairment, forfeiture or non-renewal of any permit, license, authorization or approval

applicable to the Company, its business or operations or any of its assets or properties.

4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there is no action,

suit, proceeding or investigation pending or, to the Company’s knowledge, currently threatened

against the Company or any of its Subsidiaries that prevents the Company or any of its

Subsidiaries from entering into this Agreement or the other Related Agreements, or from

consummating the transactions contemplated hereby or thereby, or which has had, or could

reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect

or any change in the current equity ownership of the Company or any of its Subsidiaries, nor is

the Company aware that there is any basis to assert any of the foregoing. Neither the Company

nor any of its Subsidiaries is a party to or subject to the provisions of any order, writ, injunction,

judgment or decree of any court or government agency or instrumentality. There is no action,

suit, proceeding or investigation by the Company or any of its Subsidiaries currently pending or

which the Company or any of its Subsidiaries intends to initiate.

4.13 Tax Returns and Payments. The Company and each of its Subsidiaries has

timely filed all federal, state and, to the extent consistent and in accordance with industry

practice, local tax returns required to be filed by it. All taxes shown to be due and payable on

such returns, any assessments imposed, and all other taxes due and payable by the Company or

any of its Subsidiaries on or before the Closing, have been paid or will be paid prior to the time

they become delinquent. Except as set forth on Schedule 4.13, neither the Company nor any of

its Subsidiaries has been advised:

(a) that any of its returns, federal, state or other, have been or are

being audited as of the date hereof; or

(b) of any adjustment, deficiency, assessment or court decision in

respect of its federal, state or other taxes.

The Company has no knowledge of any liability for any tax to be imposed upon its properties or

assets as of the date of this Agreement that is not adequately provided for.

4.14 Employees. Except as set forth on Schedule 4.14, neither the Company

nor any of its Subsidiaries has any collective bargaining agreements with any of its employees.

There is no labor union organizing activity pending or, to the Company’s knowledge, threatened

with respect to the Company or any of its Subsidiaries. Except as disclosed in the Exchange Act

Filings or on Schedule 4.14, neither the Company nor any of its Subsidiaries is a party to or

bound by any currently effective employment contract, deferred compensation arrangement,

bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee

compensation plan or agreement. To the Company’s knowledge, no employee of the Company

or any of its Subsidiaries, nor any consultant with whom the Company or any of its Subsidiaries

has contracted, is in violation of any term of any employment contract, proprietary information

agreement or any other agreement relating to the right of any such individual to be employed by,

or to contract with, the Company or any of its Subsidiaries because of the nature of the business

to be conducted by the Company or any of its Subsidiaries; and to the Company’s knowledge the

continued employment by the Company and its Subsidiaries of their present employees, and the

performance of the Company’s and its Subsidiaries’ contracts with its independent contractors,

will not result in any such violation. Neither the Company nor any of its Subsidiaries is aware

that any of its employees is obligated under any contract (including licenses, covenants or

commitments of any nature) or other agreement, or subject to any judgment, decree or order of

any court or administrative agency that would interfere with their duties to the Company or any

of its Subsidiaries. Neither the Company nor any of its Subsidiaries has received any notice

alleging that any such violation has occurred. Except for employees who have a current effective

employment agreement with the Company or any of its Subsidiaries, no employee of the

Company or any of its Subsidiaries has been granted the right to continued employment by the

Company or any of its Subsidiaries or to any material compensation following termination of

employment with the Company or any of its Subsidiaries. Except as set forth on Schedule 4.14,

the Company is not aware that any officer, key employee or group of employees intends to

terminate his, her or their employment with the Company or any of its Subsidiaries, nor does the

Company or any of its Subsidiaries have a present intention to terminate the employment of any

officer, key employee or group of employees.

4.15 Registration Rights and Voting Rights. Except as set forth on Schedule

4.15 and except as disclosed in Exchange Act Filings, neither the Company nor any of its

Subsidiaries is presently under any obligation, and neither the Company nor any of its

Subsidiaries has granted any rights, to register any of the Company’s or its Subsidiaries’

presently outstanding securities or any of its securities that may hereafter be issued. Except as

set forth on Schedule 4.15 and except as disclosed in Exchange Act Filings, to the Company’s

knowledge, no stockholder of the Company or any of its Subsidiaries has entered into any

agreement with respect to the voting of equity securities of the Company or any of its

Subsidiaries.

4.16 Compliance with Laws; Permits. Neither the Company nor any of its

Subsidiaries is in violation of any provision of the Sarbanes-Oxley Act of 2002 or any SEC

related regulation or rule or any rule of the Principal Market (as hereafter defined) promulgated

thereunder or any other applicable statute, rule, regulation, order or restriction of any domestic or

foreign government or any instrumentality or agency thereof in respect of the conduct of its

business or the ownership of its properties which has had, or could reasonably be expected to

have, either individually or in the aggregate, a Material Adverse Effect. No governmental

orders, permissions, consents, approvals or authorizations are required to be obtained and no

registrations or declarations are required to be filed in connection with the execution and delivery

of this Agreement or any other Related Agreement and the issuance of any of the Securities,

except such as have been duly and validly obtained or filed, or with respect to any filings that

must be made after the Closing, as will be filed in a timely manner. The Company and its

Subsidiaries has all material franchises, permits, licenses and any similar authority necessary for

the conduct of its business as now being conducted by it, the lack of which could, either

individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

4.17 Environmental and Safety Laws. There are no pending actions, suits or

proceedings by or before any arbitrator or Governmental Authority pending, or to the knowledge

of Company threatened, against the Company or any of its Subsidiaries under Environmental

Law. The Company and its Subsidiaries (i) are and have been in full compliance with

Environmental Law and have no knowledge or any material expenditure that will be required to

maintain such compliance in the future; (ii) have not received any notice or claim alleging that

they are not in full compliance with or otherwise have liability under Environmental Law; and

(iii) have not knowledge of any facts or circumstances that could reasonably be expected to form

the basis of any such claim. No Hazardous Materials are present or are used or have been used,

stored, or released by the Company or its Subsidiaries, or to their knowledge by any other

Person, at any property currently or formerly owned, leased or operated by the Company or its

Subsidiaries or disposed of at any other location by the Company or its Subsidiaries except (i) in

compliance with Environmental Law; and (2) in quantities and under circumstances that would

not require investigation or remediation by the Company or its Subsidiaries. The Company and

its Subsidiaries have not assumed by contract or by operation of law the liabilities arising under

Environmental Law of any other Person. The Company and its Subsidiaries have provided to the

Agent all material report, audits and assessments in their possession or control regarding the

environmental condition of any property currently or formerly owned or operated by the

Company or any Subsidiary. “Environmental Law” means all laws, rules, regulations, codes,

ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued,

promulgated or entered into by any Governmental Authority, relating in any way to pollution or

the environment , preservation or reclamation of natural resources, the management, generation,

use, handling, treatment, transportation, storage, disposal or release or threatened release of or

exposure to Hazardous Materials, or occupational health and safety. “Governmental Authority”

means any nation or government, any state or other political subdivision thereof, and any agency,

department or other entity exercising executive, legislative, judicial, regulatory or administrative

functions of or pertaining to government. “Hazardous Materials” means materials, wastes or

pollutants listed or defined as “hazardous substances”, “hazardous wastes” ,”toxic substances” or

by words of similar import or any other substance or waste otherwise regulated by applicable

Environmental Law, including nuclear materials and radioactive substances or wastes, petroleum

or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls,

radon gas, infectious or medical wastes, and toxic mold. “Person” means any individual, sole

proprietorship, partnership, limited liability partnership, joint venture, trust, unincorporated

organization, association, corporation, limited liability company, institution, public benefit

corporation, entity or government (whether federal, state, county, city, municipal or otherwise,

including any instrumentality, division, agency, body or department thereof), and shall include

such Person’s successors and assigns.

4.18 Valid Offering. Assuming the accuracy of the representations and

warranties of the Purchasers contained in this Agreement, the offer, sale and issuance of the

Securities will be exempt from the registration requirements of the Securities Act of 1933, as

amended (the “Securities Act”), and will have been registered or qualified (or are exempt from

registration and qualification) under the registration, permit or qualification requirements of all

applicable state securities laws.

4.19 Full Disclosure. The Company and each of its Subsidiaries has provided

the Purchasers with all information requested by the Purchasers in connection with the

Purchasers’ decision to purchase the Notes and Warrants, including all information the Company

and its Subsidiaries believe is reasonably necessary to make such investment decision. Neither

this Agreement, the Related Agreements, the exhibits and schedules hereto and thereto nor any

other document including, without limitation, the responses contained in any questionnaire

provided to the Company by the Agent, delivered by the Company or any of its Subsidiaries to

Purchasers or their attorneys or agents in connection herewith or therewith or with the

transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor

omit to state a material fact necessary in order to make the statements contained herein or

therein, in light of the circumstances in which they are made, not misleading. Any financial

projections and other estimates provided to the Purchasers by the Company or any of its

Subsidiaries were based on the Company’s and its Subsidiaries’ experience in the industry and

on assumptions of fact and opinion as to future events which the Company or any of its

Subsidiaries, at the date of the issuance of such projections or estimates, believed to be

reasonable.

4.20 Insurance. The Company and each of its Subsidiaries has general

commercial, product liability, fire and casualty insurance policies with coverages which the

Company and each of its Subsidiaries believe are customary for companies similarly situated to

the Company and its Subsidiaries in the same or similar business.

4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company has

filed all proxy statements, reports and other documents required to be filed by it under the

Exchange Act. The Company has furnished the Agent copies of: (i) its Annual Report on Form

10-K for its fiscal year ended November 30, 2006; and (ii) its Quarterly Reports on Form 10-Q

for its fiscal quarters ended February 28, 2007 and May 31, 2007, and the Form 8-K filings

which it has made during the fiscal year ending November 30, 2007 to date (collectively, the

“SEC Reports”). Except as set forth on Schedule 4.21, each SEC Report was, at the time of its

filing, in substantial compliance with the requirements of its respective form and none of the

SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as

of their respective filing dates, contained any untrue statement of a material fact or omitted to

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

light of the circumstances under which they were made, not misleading.

4.22 Listing. The Common Stock is listed or quoted, as applicable, on a

Principal Market (as hereafter defined) and satisfies and at all times hereafter will satisfy, all

requirements for the continuation of such listing or quotation, as applicable. The Company has

not received any notice that its Common Stock will be delisted from, or no longer quoted on, as

applicable, the Principal Market or that its Common Stock does not meet all requirements for

such listing or quotation, as applicable. For purposes hereof, the term “Principal Market” means

the NASD Over The Counter Bulletin Board, NASDAQ Capital Market, NASDAQ National

Markets System, American Stock Exchange or New York Stock Exchange (whichever of the

foregoing is at the time the principal trading exchange or market for the Common Stock).

4.23 No Integrated Offering. Neither the Company, nor any of its Subsidiaries

or affiliates, nor any person acting on its or their behalf, has directly or indirectly made any

offers or sales of any security or solicited any offers to buy any security under circumstances that

would cause the offering of the Securities pursuant to this Agreement or any of the Related

Agreements to be integrated with prior offerings by the Company for purposes of the Securities

Act which would prevent the Company from selling the Securities pursuant to Rule 506 under

the Securities Act, or any applicable exchange-related stockholder approval provisions, nor will

the Company or any of its affiliates or Subsidiaries take any action or steps that would cause the

offering of the Securities to be integrated with other offerings.

4.24 Stop Transfer. The Securities are restricted securities as of the date of this

Agreement. Neither the Company nor any of its Subsidiaries will issue any stop transfer order or

other order impeding the sale and delivery of any of the Securities at such time as the Securities

are registered for public sale or an exemption from registration is available, except as required by

state and federal securities laws.

4.25 Dilution. The Company specifically acknowledges that its obligation to

issue the shares of Common Stock upon exercise of the Warrants is binding upon the Company

and enforceable regardless of the dilution such issuance may have on the ownership interests of

other shareholders of the Company.

4.26 Patriot Act. The Company certifies that, to the best of Company’s

knowledge, neither the Company nor any of its Subsidiaries has been designated, nor is or shall

be owned or controlled, by a “suspected terrorist” as defined in Executive Order 13224. The

Company hereby acknowledges that each of the Creditor Parties seeks to comply with all

applicable laws concerning money laundering and related activities. In furtherance of those

efforts, the Company hereby represents, warrants and covenants that: (i) none of the cash or

property that the Company or any of its Subsidiaries will pay or will contribute to any Creditor

Party has been or shall be derived from, or related to, any activity that is deemed criminal under

United States law; and (ii) no contribution or payment by the Company or any of its Subsidiaries

to any Creditor Party, to the extent that they are within the Company’s and/or its Subsidiaries’

control shall cause any Creditor Party to be in violation of the United States Bank Secrecy Act,

the United States International Money Laundering Control Act of 1986 or the United States

International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. The

Company shall promptly notify the Agent if any of these representations, warranties or covenants

ceases to be true and accurate regarding the Company or any of its Subsidiaries. The Company

shall provide any Creditor Party all additional information regarding the Company or any of its

Subsidiaries that such Creditor Party deems necessary or convenient to ensure compliance with

all applicable laws concerning money laundering and similar activities. The Company

understands and agrees that if at any time it is discovered that any of the foregoing

representations, warranties or covenants are incorrect, or if otherwise required by applicable law

or regulation related to money laundering or similar activities, the Creditor Parties may

undertake appropriate actions to ensure compliance with applicable law or regulation, including

but not limited to segregation and/or redemption of any Purchaser’s investment in the Company.

The Company further understands that the Creditor Parties may release confidential information

about the Company and its Subsidiaries and, if applicable, any underlying beneficial owners, to

proper authorities if such Creditor Party, in its sole discretion, determines that it is in the best

interests of such Creditor Party in light of relevant rules and regulations under the laws set forth

in subsection (ii) above.

4.27 ERISA. Based upon the Employee Retirement Income Security Act of

1974 (“ERISA”), and the regulations and published interpretations thereunder: (i) neither the

Company nor any of its Subsidiaries has engaged in any Prohibited Transactions (as defined in

Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986, as amended (the

“Code”)); (ii) each of the Company and each of its Subsidiaries has met all applicable minimum

funding requirements under Section 302 of ERISA in respect of its plans; (iii) neither the

Company nor any of its Subsidiaries has any knowledge of any event or occurrence which would

cause the Pension Benefit Guaranty Corporation to institute proceedings under Title IV of

ERISA to terminate any employee benefit plan(s); (iv) neither the Company nor any of its

Subsidiaries has any fiduciary responsibility for investments with respect to any plan existing for

the benefit of persons other than the Company’s or such Subsidiary’s employees; and (v) neither

the Company nor any of its Subsidiaries has withdrawn, completely or partially, from any multi-

employer pension plan so as to incur liability under the Multiemployer Pension Plan

Amendments Act of 1980.

5. Representations and Warranties of each Purchaser. Each Purchaser hereby

represents and warrants, severally and not jointly, to the Company as follows (such

representations and warranties do not lessen or obviate the representations and warranties of the

Company set forth in this Agreement):

5.1 No Shorting. Neither such Purchaser nor any of its affiliates and

investment partners has, nor will cause any person or entity, to directly engage in “short sales” of

the Common Stock as long as any Note shall be outstanding.

5.2 Requisite Power and Authority. Such Purchaser has all necessary power

and authority under all applicable provisions of law to execute and deliver this Agreement and

the Related Agreements and to carry out their provisions. All corporate action on such

Purchaser’s part required for the lawful execution and delivery of this Agreement and the

Related Agreements have been or will be effectively taken prior to the Closing. Upon their

execution and delivery, this Agreement and the Related Agreements will be valid and binding

obligations of such Purchaser, enforceable in accordance with their terms, except:

(a) as limited by applicable bankruptcy, insolvency, reorganization,

moratorium or other laws of general application affecting enforcement of creditors’

rights; and

(b) as limited by general principles of equity that restrict the

availability of equitable and legal remedies.

5.3 Investment Representations. Such Purchaser understands that the

Securities are being offered and sold pursuant to an exemption from registration contained in the

Securities Act based in part upon such Purchaser’s representations contained in this Agreement,

including, without limitation, that such Purchaser is an “accredited investor” within the meaning

of Regulation D under the Securities Act. Such Purchaser confirms that it has received or has

had full access to all the information it considers necessary or appropriate to make an informed

investment decision with respect to the applicable Note and Warrant to be purchased by it under

this Agreement and the Warrant Shares acquired by it upon the exercise of such Warrant,

respectively. Such Purchaser further confirms that it has had an opportunity to ask questions and

receive answers from the Company regarding the Company’s and its Subsidiaries’ business,

management and financial affairs and the terms and conditions of the Offering, the Notes, the

Warrants and the Securities and to obtain additional information (to the extent the Company

possessed such information or could acquire it without unreasonable effort or expense) necessary

to verify any information furnished to such Purchaser or to which such Purchaser had access.

5.4 The Purchaser Bears Economic Risk. Such Purchaser has substantial

experience in evaluating and investing in private placement transactions of securities in

companies similar to the Company so that it is capable of evaluating the merits and risks of its

investment in the Company and has the capacity to protect its own interests. Such Purchaser

must bear the economic risk of this investment until the Securities are sold pursuant to: (i) an

effective registration statement under the Securities Act; or (ii) an exemption from registration is

available with respect to such sale.

5.5 Acquisition for Own Account. Such Purchaser is acquiring the applicable

Note and Warrant and the Warrant Shares for such Purchaser’s own account for investment only,

and not as a nominee or agent and not with a view towards or for resale in connection with their
distribution.

5.6 The Purchaser Can Protect Its Interest. Such Purchaser represents that by

reason of its, or of its management’s, business and financial experience, such Purchaser has the

capacity to evaluate the merits and risks of its investment in the applicable Note, the Warrant and

the Securities and to protect its own interests in connection with the transactions contemplated in

this Agreement and the Related Agreements. Further, such Purchaser is aware of no publication

of any advertisement in connection with the transactions contemplated in the Agreement or the

Related Agreements.

5.7 Accredited Investor. Such Purchaser represents that it is an accredited

investor within the meaning of Regulation D under the Securities Act.

5.8 Legends.

(a) The applicable Note shall bear substantially the following legend:

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE

SECURITIES ACT OF 1933, AS AMENDED, OR ANY

APPLICABLE STATE SECURITIES LAWS. THIS NOTE MAY

NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR

HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE

REGISTRATION STATEMENT AS TO THIS NOTE UNDER

SAID ACT AND APPLICABLE STATE SECURITIES LAWS

OR (B) AN EXEMPTION FROM SUCH REGISTRATION.”

(b) The applicable Warrant Shares, if not issued by DWAC system (as

hereinafter defined), shall bear a legend which shall be in substantially the following

form until such shares are covered by an effective registration statement filed with the

SEC:

“THE SHARES REPRESENTED BY THIS CERTIFICATE

HAVE NOT BEEN REGISTERED UNDER THE SECURITIES

ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE

SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD,

OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN

THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION

STATEMENT UNDER SUCH SECURITIES ACT AND

APPLICABLE STATE LAWS OR (B) AN EXEMPTION FROM

SUCH REGISTRATION.”

legend:

“THIS WARRANT AND THE COMMON SHARES ISSUABLE

UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN

REGISTERED UNDER THE SECURITIES ACT OF 1933, AS

AMENDED, OR ANY APPLICABLE STATE SECURITIES

LAWS. THIS WARRANT AND THE COMMON SHARES

ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT

BE SOLD, OFFERED FOR SALE, PLEDGED OR

HYPOTHECATED IN THE ABSENCE OF (A) AN EFFECTIVE

REGISTRATION STATEMENT AS TO THIS WARRANT OR

THE UNDERLYING SHARES OF COMMON STOCK UNDER

SAID ACT AND APPLICABLE STATE SECURITIES LAWS

OR (B) AN EXEMPTION FROM SUCH REGISTRATION.”

6. Covenants of the Company. The Company covenants and agrees with each

Creditor Party as follows:

6.1 Stop-Orders. The Company will, by written notice, advise the Agent,

promptly after it receives notice of issuance by the SEC, any state securities commission or any

other regulatory authority of any stop order or of any order preventing or suspending any

offering of any securities of the Company, or of the suspension of the qualification of the

Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any

proceeding for any such purpose.

6.2 Listing. The Company shall promptly secure the listing or quotation, as

applicable, of the shares of Common Stock issuable upon the exercise of the Warrants on the

Principal Market upon which shares of Common Stock are listed or quoted for trading, as

applicable (subject to official notice of issuance) and shall maintain such listing or quotation, as

applicable, so long as any other shares of Common Stock shall be so listed or quoted, as

applicable. The Company will maintain the listing or quotation, as applicable, of its Common

Stock on the Principal Market, and will comply in all material respects with the Company’s

reporting, filing and other obligations under the bylaws or rules of the National Association of

Securities Dealers (“NASD”) and such exchanges, as applicable.

6.3 Market Regulations. The Company shall notify the SEC, NASD and

applicable state authorities, in accordance with their requirements, of the transactions

contemplated by this Agreement, and shall take all other necessary action and proceedings as

may be required and permitted by applicable law, rule and regulation, for the legal and valid

issuance of the applicable Securities to each Purchaser and promptly provide copies thereof to

such Purchaser.

6.4 Reporting Requirements. The Company will deliver, or cause to be

delivered, to the Agent each of the following, which shall be in form and detail acceptable to the

Agent:

(a) As soon as available, and in any event within ninety (90) days after

the end of each fiscal year of the Company, the Company’s and each of its Subsidiaries’

audited financial statements with a report of independent registered accounting firm of

recognized standing selected by the Company and acceptable to the Agent (the

“Accountants”), which annual financial statements shall include the Company’s and each

of its Subsidiaries’ balance sheet as at the end of such fiscal year and the related

statements of the Company’s and each of its Subsidiaries’ income, retained earnings and

cash flows for the fiscal year then ended, prepared on a consolidated basis to include the

Company, each Subsidiary of the Company and each of their respective affiliates, all in

reasonable detail and prepared in accordance with GAAP, together with (i) if and when

available, copies of any management letters prepared by the Accountants; and (ii) a

certificate of the Company’s President, Chief Executive Officer or Chief Financial

Officer stating that such financial statements have been prepared in accordance with

GAAP and whether or not such officer has knowledge of the occurrence of any Event of

Default (as defined in each Note) and, if so, stating in reasonable detail the facts with

respect thereto;

(b) As soon as available and in any event within forty five (45) days

after the end of each fiscal quarter of the Company, an unaudited/internal balance sheet

and statements of income, retained earnings and cash flows of the Company and each of

its Subsidiaries as at the end of and for such quarter and for the year to date period then

ended, prepared on a consolidating and consolidated basis to include all the Company,

each Subsidiary of the Company and each of their respective affiliates, in reasonable

detail and stating in comparative form the figures for the corresponding date and periods

in the previous year, all prepared in accordance with GAAP, subject to year-end

adjustments and accompanied by a certificate of the Company’s President, Chief

Executive Officer or Chief Financial Officer, stating (i) that such financial statements

have been prepared in accordance with GAAP, subject to year-end audit adjustments, and

(ii) whether or not such officer has knowledge of the occurrence of any Event of Default

(as defined in each Note) not theretofore reported and remedied and, if so, stating in

reasonable detail the facts with respect thereto;

the end of each calendar month, an unaudited/internal balance sheet and statements of

income, retained earnings and cash flows of the Company and its Subsidiaries as at the

end of and for such month and for the year to date period then ended, prepared on a

consolidating and consolidated basis to include the Company, each Subsidiary of the

Company and each of their respective affiliates, in reasonable detail and stating in

comparative form the figures for the corresponding date and periods in the previous year,

all prepared in accordance with GAAP, subject to year-end adjustments and accompanied

by a certificate of the Company’s President, Chief Executive Officer or Chief Financial

Officer, stating (i) that such financial statements have been prepared in accordance with

GAAP, subject to year-end audit adjustments, and (ii) whether or not such officer has

knowledge of the occurrence of any Event of Default (as defined in each Note) not

theretofore reported and remedied and, if so, stating in reasonable detail the facts with

respect thereto;

(d) The Company shall timely file with the SEC all reports required to

be filed pursuant to the Exchange Act and refrain from terminating its status as an issuer

required by the Exchange Act to file reports thereunder even if the Exchange Act or the

rules or regulations thereunder would permit such termination. Promptly after (i) the

filing thereof, copies of the Company’s most recent registration statements and annual,

quarterly, monthly or other regular reports which the Company files with the SEC, and

(ii) the issuance thereof, copies of such financial statements, reports and proxy statements

as the Company shall send to its stockholders; and

(e) The Company shall deliver, or cause the applicable Subsidiary of

the Company to deliver, such other information as any Creditor Party shall reasonably

request.

6.5 Use of Funds. The Company shall use the proceeds of the sale of the

Notes and the Warrants for general working capital purposes only (it being understood that

$2,664,035.38 of the proceeds of the Notes will be deposited in the Restricted Account on the

Closing Date and shall be subject to the terms and conditions of the Restricted Account

Agreement and the Restricted Account Side Letter).

6.6 Access to Facilities. The Company and each of its Subsidiaries will

permit any representatives designated by the Agent (or any successor of the Agent), upon

reasonable notice and during normal business hours, at such person’s expense and accompanied

by a representative of the Company or any Subsidiary (provided that no such prior notice shall be

required to be given and no such representative of the Company or any Subsidiary shall be

required to accompany the Agent, except in the case of access to switching facilities, in the event

the Agent believes such access is necessary to preserve or protect the Collateral (as defined in the

Master Security Agreement) or following the occurrence and during the continuance of an Event

of Default (as defined in each Note)), to:

(a) visit and inspect any of the properties of the Company or any of its

Subsidiaries;

(b) examine the corporate and financial records of the Company or any

of its Subsidiaries (unless such examination is not permitted by federal, state or local law

or by contract) and make copies thereof or extracts therefrom; and

its Subsidiaries with the directors, officers and independent accountants of the Company

or any of its Subsidiaries.

Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries will provide any

material, non-public information to any Creditor Party unless such Creditor Party signs a

confidentiality agreement and otherwise complies with Regulation FD, under the federal

securities laws.

6.7 Taxes.

(a) The Company and each of its Subsidiaries will promptly pay and

discharge, or cause to be paid and discharged, when due and payable, all taxes,

assessments and governmental charges or levies imposed upon the income, profits,

property or business of the Company and its Subsidiaries; provided, however, that any

such tax, assessment, charge or levy need not be paid currently if (i) the validity thereof

shall currently and diligently be contested in good faith by appropriate proceedings, (ii)

such tax, assessment, charge or levy shall have no effect on the lien priority of the Agent

in any property of the Company or any of its Subsidiaries and (iii) if the Company and/or

such Subsidiary shall have set aside on its books adequate reserves with respect thereto in

accordance with GAAP; and provided, further, that the Company and its Subsidiaries will

pay all such taxes, assessments, charges or levies forthwith upon the commencement of

proceedings to foreclose any lien which may have attached as security therefor.

Notwithstanding the foregoing, all state and local telecom taxes need only be paid in

accordance with industry practices.

(b) All payments made by the Company under this Agreement or any

Note shall be made free and clear of, and without deduction or withholding for or on

account of, any present or future Taxes (as defined below) now or hereafter imposed,

levied, collected, withheld or assessed by any Governmental Authority, other than

Excluded Taxes (as defined below). If any Non-Excluded Taxes (as defined below) or

Other Taxes (as defined below) are required to be withheld from any amounts payable to

any Creditor Party under this Agreement or any Note, the amounts so payable to such

Creditor Party shall be increased to the extent necessary to yield to such Creditor Party

(after payment of all Non-Excluded Taxes and Other Taxes, including those imposed on

payments made pursuant to this paragraph (b) of this Section 6.7 or any such other

amounts payable in this Agreement or any Note at the rates or in the amounts specified

herein or therein), an amount equal to the sum it would have received had no such

withholding or deductions been made; provided, however, that no Company shall be

required to increase any such amounts payable to any Creditor Party with respect to any

Non-Excluded Taxes (i) that are attributable to such Creditor Party’s failure to comply

with the requirements of paragraph (e) of this Section 6.7 or (ii) that are United States

withholding taxes imposed on amounts payable to such Creditor Party at the time such

Creditor Party becomes a party to Purchase Agreement, except to the extent that such

Creditor Party’s assignor (if any) was entitled, at the time of assignment, to receive

additional amounts from the Company with respect to such Non-Excluded Taxes

pursuant to this paragraph (b).

Governmental Authority in accordance with applicable law.

(d) Whenever any Non-Excluded Taxes or Other Taxes are payable by

the Company, as promptly as possible thereafter the Company shall send to the Agent for

its own account or for the account of the relevant Purchaser, as the case may be, a

certified copy of an original official receipt received by the Company showing payment

thereof (or such other evidence reasonably satisfactory to the Agent). If the Company

fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing

authority or fails to remit to the Agent the required receipts or other required

documentary evidence, the Company shall indemnify the Creditor Parties for any

incremental taxes, interest or penalties that may become payable by any Creditor Party as

a result of any such failure.

(e) Each Purchaser (or its assignee) that is not a “United States

Person” as defined in Section 7701(a)(30) of the Code (a “Non-U.S. Purchaser”) shall

deliver to the Company and the Agent two completed originals of an appropriate U.S.

Internal Revenue Service Form W-8, as applicable, or any subsequent versions thereof or

successors thereto, properly completed and duly executed by such Non-U.S. Purchaser.

Such forms shall be delivered by each Non-U.S. Purchaser on or before the date it

becomes a party to this Agreement. In addition, each Non-U.S. Purchaser shall deliver

such forms promptly upon the obsolescence or invalidity of any form previously

delivered by such Non-U.S. Purchaser. Each Non-U.S. Purchaser shall promptly notify

the Company at any time it determines that it is no longer in a position to provide any

previously delivered certificate to the Company (or any other form of certification

adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other

provision of this paragraph (e), a Non-U.S. Purchaser shall not be required to deliver any

form pursuant to this paragraph that such Non-U.S. Purchaser is not legally able to

deliver.

(f) The agreements in the preceding paragraphs (b), (c), (d), (e) and

this paragraph (f) shall survive the termination of this Agreement and the payment of the

Notes and all other amounts payable hereunder or thereunder or under any other Related

Agreement.

As used in this Section 6.7, the following terms shall have the following meanings (such

meanings to be equally applicable to both the singular and plural forms of the terms defined):

“Excluded Taxes” means, with respect to any Creditor Party, taxes imposed on or

measured by its overall net income and franchise taxes imposed on it in lieu of net income taxes,

by the jurisdiction (or any political subdivision thereof) under the laws of which such Creditor

Party is incorporated or organized or by the jurisdiction (or any political subdivision thereof) in

which the principal place of management or applicable lending office of such Creditor Party is

located.

“Non-Excluded Taxes” means all Taxes other than (i) Excluded Taxes and (ii) Other

Taxes.

“Other Taxes” means any and all present or future stamp or documentary taxes or any

other excise or property taxes, charges or similar levies arising from any payment made

hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this

Agreement or any other Related Agreement.

“Taxes” means any and all present or future taxes, duties, levies, imposts, deductions,

assessments, fees, withholdings or similar charges, and all liabilities with respect thereto.

6.8 Insurance. Each of the Company and its Subsidiaries will keep its assets

which are of an insurable character insured by financially sound and reputable insurers against

loss or damage by fire, explosion and other risks customarily insured against by companies in

similar business similarly situated as the Company and its Subsidiaries; and the Company and its

Subsidiaries will maintain, with financially sound and reputable insurers, insurance against other

hazards and risks and liability to persons and property to the extent and in the manner which the

Company reasonably believes is customary for companies in similar business similarly situated

as the Company and its Subsidiaries and to the extent available on commercially reasonable

terms. The Company, and each of its Subsidiaries, will jointly and severally bear the full risk of

loss from any loss of any nature whatsoever with respect to the assets pledged to the Purchaser as

security for their respective obligations hereunder and under the Related Agreements. At the

Company’s and each of its Subsidiaries’ joint and several cost and expense in amounts and with

carriers reasonably acceptable to the Purchaser, each of the Company and each of its Subsidiaries

shall (i) keep all its insurable properties and properties in which it has an interest insured against

the hazards of fire, flood, sprinkler leakage, those hazards covered by extended coverage

insurance and such other hazards, and for such amounts, as is customary in the case of

companies engaged in businesses similar to the Company’s or the respective Subsidiary’s

including business interruption insurance; (ii) maintain a bond in such amounts as is customary

in the case of companies engaged in businesses similar to the Company’s or the respective

Subsidiary’s insuring against larceny, embezzlement or other criminal misappropriation of

insured’s officers and employees who may either singly or jointly with others at any time have

access to the assets or funds of the Company or any of its Subsidiaries either directly or through

governmental authority to draw upon such funds or to direct generally the disposition of such

assets; (iii) maintain public and product liability insurance against claims for personal injury,

death or property damage suffered by others; (iv) maintain all such worker’s compensation or

similar insurance as may be required under the laws of any state or jurisdiction in which the

Company or the respective Subsidiary is engaged in business; and (v) furnish the Purchaser with

(x) copies of all policies and evidence of the maintenance of such policies at least thirty (30)

days before any expiration date, (y) excepting the Company’s workers’ compensation policy,

endorsements to such policies naming the Purchaser as “co-insured” or “additional insured” and

appropriate loss payable endorsements in form and substance satisfactory to the Purchaser,

naming the Purchaser as loss payee, and (z) evidence that as to the Purchaser the insurance

coverage shall not be impaired or invalidated by any act or neglect of the Company or any

Subsidiary and the insurer will provide the Purchaser with at least thirty (30) days notice prior to

cancellation. The Company and each Subsidiary shall instruct the insurance carriers that in the

event of any loss thereunder, the carriers shall make payment for such loss to the Company

and/or the Subsidiary and the Purchaser jointly. In the event that as of the date of receipt of each

loss recovery upon any such insurance, the Purchaser has not declared an event of default with

respect to this Agreement or any of the Related Agreements, then the Company and/or such

Subsidiary shall be permitted to direct the application of such loss recovery proceeds toward

investment in property, plant and equipment that would comprise “Collateral” secured by the

Purchaser’s security interest pursuant to the Master Security Agreement or such other security

agreement as shall be required by the Purchaser, with any surplus funds to be applied toward

payment of the obligations of the Company to the Purchaser. In the event that the Purchaser has

properly declared an event of default with respect to this Agreement or any of the Related

Agreements, then all loss recoveries received by the Purchaser upon any such insurance

thereafter may be applied to the obligations of the Company hereunder and under the Related

Agreements, in such order as the Purchaser may determine. Any surplus (following satisfaction

of all Company obligations to the Purchaser) shall be paid by the Purchaser to the Company or

applied as may be otherwise required by law. Any deficiency thereon shall be paid by the

Company or the Subsidiary, as applicable, to the Purchaser, on demand.

6.9 Intellectual Property.

(a) The Company and each of its Subsidiaries shall maintain in full

force and effect its existence, rights and franchises and all licenses and other rights to

own or use Intellectual Property including registrations and applications therefore, that

are necessary to the conduct of its business, as now conducted or as presently proposed to

be conducted, and shall not do any act or omit to do any act whereby any of such

Intellectual Property may lapse, or become abandoned, dedicated to the public, or

unenforceable, or the Lien therein in favor of the Agent, for the ratable benefit of the

Creditor Parties, would be adversely affected,

(b) The Company shall report to the Agent (i) the filing by the

Company or any of its Subsidiaries of any application to register a Copyright no later

than ten (10) days after such filing occurs (ii) the filing of any application to register any

other Intellectual Property with any other Intellectual Property registry, and the issuance

thereof, no later than thirty (30) days after such filing or issuance occurs and, in each

case, shall, simultaneously with such report, deliver to the Agent fully-executed

documents required to acknowledge, confirm, register, record or perfect the Lien in such

Intellectual Property. In addition, the Company and its Subsidiaries hereby authorize the

Agent to modify this Agreement by amending Schedule 4.10 to include any registrations

or applications for Intellectual Property inadvertently omitted from such Schedule or

filed, registered, acquired by the Company or any of its Subsidiaries after the date hereof

and agree to cooperate with the Agent in effecting any such amendment to include any

new item of Intellectual Property included in the Collateral.

promptly upon the reasonable request of the Agent, execute and deliver to the Agent any

document or instrument required to acknowledge, confirm, register, record, or perfect the

Lien of the Agent in any part of the Intellectual Property owned by the Company and its

Subsidiaries.

(d) The Company shall not, and shall not permit any of its Subsidiaries

to, sell, assign, transfer, license, grant any option, or create or suffer to exist any Lien

upon or with respect to Intellectual Property, except for the Permitted Encumbrances or

with the written consent of the Agent.

6.10 Properties. The Company and each of its Subsidiaries will keep its

properties in good repair, working order and condition, reasonable wear and tear excepted, and

from time to time make all needful and proper repairs, renewals, replacements, additions and

improvements thereto; and each of the Company and each of its Subsidiaries will at all times

comply with each provision of all leases to which it is a party or under which it occupies

property if the breach of such provision could, either individually or in the aggregate, reasonably

be expected to have a Material Adverse Effect.

6.11 Confidentiality. The Company will not, and will not permit any of its

Subsidiaries to, disclose, and will not include in any public announcement, the name of any

Creditor Party, unless expressly agreed to by such Creditor Party or unless and until such

disclosure is required by law or applicable regulation, and then only to the extent of such

requirement. Notwithstanding the foregoing, (i) the Company may disclose any Creditor Party’s

identity and the terms of this Agreement and the Related Agreements to its current and

prospective debt and equity financing sources, and (ii) the Company (and each employee,

representative, or other agent of the Company) may disclose to any and all Persons, without

limitation of any kind, the tax treatment and any facts that may be relevant to the tax structure of

the transactions contemplated by this Agreement and the Related Agreements and the

agreements referred to therein; provided, however, that the Company (and no employee,

representative or other agent of the Company) disclose pursuant to this clause (ii) any other

information that is not relevant to understanding the tax treatment or tax structure of such

transactions (including the identity of any party or any information that could lead another to

determine the identity of any party); and, provided, further, that the Company will not, and will

not permit any of its Subsidiaries to, disclose any information to the extent that such disclosure

could reasonably be expected to result in a violation of any U.S. federal or state securities law or

similar law of another jurisdiction. Each Creditor Party shall be permitted to discuss, distribute

or otherwise transfer any non-public information of the Company and its Subsidiaries in such

Creditor Party’s possession now or in the future to potential or actual (i) direct or indirect

investors in such Creditor Party and (ii) third party assignees or transferees of all or a portion of

the obligations of the Company and/or any of its Subsidiaries hereunder and under the Related

Agreements, provided, that such entities who receive such non-public information shall be bound

by the same confidentiality requirements imposed on the Creditor Parties by the terms of this

Agreement and the Related Agreements.

6.12 Required Approvals. (I) The Company, without the prior written consent

of the Agent, shall not, and shall not permit any of its Subsidiaries to:

(a) (i) directly or indirectly declare or pay any dividends, other than

dividends paid to the Company or any of its wholly-owned Subsidiaries, (ii) issue any

preferred stock that is mandatorily redeemable prior to the one year anniversary of the

Maturity Date (as defined in each Note) or (iii) redeem any of its preferred stock or other

equity interests;

(b) liquidate, dissolve or effect a material reorganization (it being

understood that in no event shall the Company or any of its Subsidiaries dissolve,

liquidate or merge with any other person or entity (unless, in the case of such a merger,

the Company or, in the case of merger not involving the Company, such Subsidiary, as

applicable, is the surviving entity);

amendment to or modification of) any agreement or instrument which by its terms would

(under any circumstances) restrict the Company’s or any of its Subsidiaries, right to

perform the provisions of this Agreement, any Related Agreement or any of the

agreements contemplated hereby or thereby;

(d) materially alter or change the scope of the business of the

Company and its Subsidiaries taken as a whole; or

(e) (i) create, incur, assume or suffer to exist any indebtedness

(exclusive of trade debt and debt incurred to finance the purchase of equipment (not in

excess of five percent (5%) of the fair market value of the Company’s and its

Subsidiaries’ assets; provided that, notwithstanding the foregoing, capitalized leases

and/or financing to purchase equipment in connection with the Company’s Voice Over IP

Point-of-Presence system shall be permitted to the extent not in excess of, when

aggregated with all other debt incurred to finance the purchase of equipment, twenty-five

percent (25%) of the fair market value of the Company’s and its Subsidiaries’ assets))

whether secured or unsecured other than (x) the Company’s obligations owed to each

Purchaser, (y) indebtedness set forth on Schedule 6.12(e) attached hereto and made a part

hereof and any refinancings or replacements thereof on terms no less favorable to the

Purchasers than the indebtedness being refinanced or replaced, and (z) any indebtedness

incurred in connection with the purchase of assets (other than equipment) in the ordinary

course of business, or any refinancings or replacements thereof on terms no less favorable

to the Purchasers than the indebtedness being refinanced or replaced, so long as any lien

relating thereto shall only encumber the fixed assets so purchased and no other assets of

the Company or any of its Subsidiaries; (ii) cancel any indebtedness owing to it in excess

of $50,000 in the aggregate during any twelve (12) month period; (iii) assume, guarantee,

endorse or otherwise become directly or contingently liable in connection with any

obligations of any other person or entity, except the endorsement of negotiable

instruments by the Company or any Issuer Party for deposit or collection or similar

transactions in the ordinary course of business or guarantees of indebtedness otherwise

permitted to be outstanding pursuant to this clause (e); (iv) make any payment or

distribution in respect of any subordinated indebtedness of the Company or its

Subsidiaries in violation of any subordination or other agreement made in favor of any

Creditor Party; and (v) except as set forth on Schedule 6.12(e), make any optional

payment or prepayment on or redemption (including, without limitation, by making

payments to a sinking fund or analogous fund) or repurchase of any indebtedness for

borrowed money other than indebtedness pursuant to this Agreement;

(f) purchase or hold beneficially any Stock or other securities or

evidences of indebtedness of, make or permit to exist any loans or advances to, or make

any investment or acquire any interest whatsoever in, any other Person, including any

partnership or joint venture, except (x) travel advances, (y) loans to its and its

Subsidiaries’ officers and employees not exceeding at any one time an aggregate of

$10,000, and (z) loans or advances to any Issuer Parties (as used herein, “Stock” means

all certificated and uncertificated shares, options, warrants, membership interests, general

or limited partnership interests, participation or other equivalents (regardless of how

designated) of or in a corporation, partnership, limited liability company or equivalent

entity whether voting or nonvoting, including common stock, preferred stock, or any

other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and

Regulations promulgated by the SEC under the Exchange Act);

(g) enter into any transaction with any employee, director or Affiliate,

except in the ordinary course on arms-length terms (as used herein (x) “Affiliate” means,

with respect to any Person, (a) any other Person (other than a Subsidiary) which, directly

or indirectly, is in control of, is controlled by, or is under common control with such

Person or (b) any other Person who is a director or officer (i) of such Person, (ii) of any

Subsidiary of such Person or (iii) of any Person described in clause (a) above. For the

purposes of this definition, control of a Person shall mean the power (direct or indirect) to

direct or cause the direction of the management and policies of such Person whether by

contract or otherwise and (y) “Person” means any individual, sole proprietorship,

partnership, limited liability partnership, joint venture, trust, unincorporated organization,

association, corporation, limited liability company, institution, public benefit corporation,

entity or government (whether federal, state, county, city, municipal or otherwise,

including any instrumentality, division, agency, body or department thereof), and shall

include such Person’s successors and assigns);

(h) permit any Inactive Subsidiary to hold significant assets or

liabilities (other than in respect of AVI Holdings, capitalized lease obligations not to

exceed $35,000, and in respect of Line One, liabilities not to exceed $50,000) or engage

in any business activities; and

(i) sell, lease, transfer or otherwise dispose of any of its properties or

assets, or any of the properties or assets of its Subsidiaries, except for (1) sales, leases,

transfer or dispositions by any Issuer Party to any other Issuer Party, (2) the sale of

Inventory (as defined in the Master Security Agreement) in the ordinary course of

business and (3) the disposition or transfer in the ordinary course of business during any

fiscal year of obsolete and worn-out Equipment (as defined in the Master Security

Agreement) and only to the extent that (x) the proceeds of any such disposition are used

to acquire replacement Equipment which is subject to the Purchaser’s first priority

security interest or are used to repay the Purchaser or to pay general corporate expenses,

or (y) following the occurrence of an Event of Default (as defined in the Note) which

continues to exist, the proceeds of which are remitted to the Purchaser to be held as cash

collateral for the Obligations (as defined in the Master Security Agreement).

(II) The Company, without the prior written consent of the Agent, shall not, and shall not

permit any of its Subsidiaries to, create or acquire any Subsidiary after the date hereof unless (i)

such Subsidiary is a wholly-owned Subsidiary of the Company and (ii) such Subsidiary becomes

a party to (A) the Master Security Agreement and the Stock Pledge Agreement (either by

executing a counterpart thereof or an assumption or joinder agreement in respect thereof); (B) a

Subsidiary Guaranty in favor of the Purchasers in form and substance satisfactory to the Agent

and (c) to the extent required by the Agent, satisfies each condition of this Agreement and the

Related Agreements as if such Subsidiary were a Subsidiary on the Closing Date.

6.13 Reissuance of Securities. The Company agrees to reissue certificates

representing the Securities without the legends set forth in Section 5.8 above at such time as:

(a) the holder thereof is permitted to dispose of such Securities

pursuant to Rule 144(k) under the Securities Act; or

(b) upon resale subject to an effective registration statement after such

Securities are registered under the Securities Act.

The Company agrees to cooperate with the Purchasers in connection with all resales pursuant to

Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided

the Company and its counsel receive reasonably requested representations from the applicable

Purchasers and broker, if any.

6.14 Opinion. On the Closing Date, the Company will deliver to the Creditor

Parties an opinion substantially in the form of Exhibit C hereto acceptable to the Agent from the

Company’s external legal counsel. The Company will provide, at the Company’s expense, such

other legal opinions in the future as are deemed reasonably necessary by the Agent (and

acceptable to the Agent) in connection with the exercise of the any Warrant.

6.15 Margin Stock. The Company will not permit any of the proceeds of the

Notes or the Warrants to be used directly or indirectly to “purchase” or “carry” “margin stock” or

to repay indebtedness incurred to “purchase” or “carry” “margin stock” within the respective

meanings of each of the quoted terms under Regulation U of the Board of Governors of the

Federal Reserve System as now and from time to time hereafter in effect.

6.16 FIRPTA. Neither the Company, nor any of its Subsidiaries, is a “United

States real property holding corporation” as such term is defined in Section 897(c)(2) of the

Code and Treasury Regulation Section 1.897-2 promulgated thereunder and neither the Company

nor any of its Subsidiaries shall at any time take any action or otherwise acquire any interest in

any asset or property to the extent the effect of which shall cause the Company and/or such

Subsidiary, as the case may be, to be a “United States real property holding corporation” as such

term is defined in Section 897(c)(2) of the Code and Treasury Regulation Section 1.897-2

promulgated thereunder.

6.17 Restricted Cash Disclosure. The Company agrees that, in connection with

its filing of its 8-K Report with the SEC concerning the transactions contemplated by this

Agreement and the Related Agreements (such report, the “Transaction 8-K”) in a timely manner

after the date hereof, it will disclose in such Transaction 8-K the amount of the proceeds of the

Notes issued to the Purchasers that has been placed in a restricted cash account and is subject to

the terms and conditions of this Agreement and the Related Agreements. Furthermore, the

Company agrees to disclose in all public filings required by the SEC (where appropriate)

following the filing of the Transaction 8-K, the existence of the restricted cash referred to in the

immediately preceding sentence, together with the amount thereof.

6.18 No Restrictions on Additional Financing. The Company will not, and will

not permit its Subsidiaries to, agree, directly or indirectly, to any restriction with any person or

entity which limits the ability of the Purchaser to extend any additional indebtedness to the

Company or any of its Subsidiaries and/or the ability of the Company or any of its Subsidiaries

to sell or issue any equity interests of the Company or any of its Subsidiaries to the Purchaser.

6.19 Authorization and Reservation of Shares. The Company shall at all times

have authorized and reserved a sufficient number of shares of Common Stock to provide for the

exercise of the Warrant A-1 and B-1 by each applicable Purchaser. No later than June 30, 2008,

the Company shall at all times have authorized and reserved a sufficient number of shares of

Common Stock to provide for the exercise of the Warrant A-2, B-2, A-3 and B-3 by each

applicable Purchaser.

6.20 Intentionally Omitted.

6.21 Board Observation Rights. Until such time as all Obligations (as defined

in the Master Security Agreement) have been indefeasibly paid in full, the Purchasers will be

entitled to the following board observation rights (“Board Observation Rights”): the Company

shall, upon the request of the Agent, permit one representative of the Purchasers to attend all

meetings of the board of directors of the Company (the “Board of Directors”) in a non-voting

observer capacity, which observation right shall include the ability to observe discussions of the

Board of Directors, and shall provide such representative with copies of all notices, minutes,

written consents, and other materials that it provides to members of the Board of Directors, at the

time it provides them to such members. The observation right may be exercised in person or via

telephone or videophone participation. Each Purchaser agrees, on behalf of itself and any

representative exercising the observation rights set forth herein, that so long as it shall exercise

its observation right (i) it shall hold in strict confidence pursuant to a confidentiality and non-

disclosure agreement (in form and substance satisfactory to each Purchaser) all information and

materials that it may receive or be given access to in connection with meetings of the Board of

Directors and to act in a fiduciary manner with respect to all information so provided (provided

that this shall not limit its ability to discuss such matters with its officers, directors or legal

counsel, as necessary), and (ii) the Board of Directors may withhold from it certain information

or material furnished or made available to the Board of Directors or exclude it from certain

confidential “closed sessions” of the Board of Directors if the furnishing or availability of such

information or material or its presence at such “closed sessions” would jeopardize such

Company’s attorney-client privilege or if the Board of Directors otherwise reasonably so

requires. The Board Observation Rights set forth in this Section shall automatically terminate

and be of no further force or effect upon the indefeasibly payment in full of all Obligations (as

defined in the Master Security Agreement).

6.22 Share Increase.

(a) No later than June 30, 2008, the Company shall deliver to the

Agent evidence of the filing of a Proxy Statement with respect to an increase in the

Company’s authorized common stock to an aggregate amount of not less than

250,000,000.

(b) No later than June 30, 2008, the Company shall deliver to the

Agent evidence that the Company's Certificate of Incorporation has been amended to

increase the authorized Common Stock to an aggregate amount of not less than

250,000,000.

7. Covenants of the Purchasers. Each Purchaser covenants and agrees with the

Company as follows:

7.1 Confidentiality. No Purchaser will disclose, nor will it include in any

public announcement, the name of the Company, unless expressly agreed to by the Company or

unless and until such disclosure is required by law or applicable regulation, and then only to the

extent of such requirement.

7.2 Non-Public Information. No Purchaser will effect any sales in the shares

of the Common Stock while in possession of material, non-public information regarding the

Company if such sales would violate applicable securities law.

7.3 Limitation on Acquisition of Common Stock of the Company.

Notwithstanding anything to the contrary contained in this Agreement, any Related Agreement

or any document, instrument or agreement entered into in connection with any other transactions

with a Purchaser and the Company, no Purchaser (and/or Subsidiaries or Affiliates of such

Purchaser) may acquire stock in the Company (including, without limitation, pursuant to a

contract to purchase, by exercising an option or warrant, by converting any other security or

instrument, by acquiring or exercising any other right to acquire, shares of stock or other security

convertible into shares of stock in the Company, or otherwise, and such contracts, options,

warrants, conversion or other rights shall not be enforceable or exercisable) to the extent such

stock acquisition would cause any interest (including any original issue discount) payable by the

Company to a Non-U.S. Purchaser not to qualify as “portfolio interest” within the meaning of

Section 871(h)(2) or Section 881(c)(2) of the Code, by reason of Section 871(h)(3) or Section

881(c)(3) of the Code, as applicable, taking into account the constructive ownership rules under

Section 871(h)(3)(C) of the Code (the “Stock Acquisition Limitation”). The Stock Acquisition

Limitation shall automatically become null and void without any notice to the Company upon the

earlier to occur of either (a) the Company’s delivery to the Purchaser of a Notice of Redemption

(as defined in the Note) or (b) the existence of an Event of Default (as defined in each Note) at a

time when the average closing price of the Common Stock as reported by Bloomberg, L.P. on

the Principal Market for the immediately preceding five trading days is greater than or equal to

150% of the Exercise Price (as defined in the Warrant).

8. Covenants of the Company and the Purchasers Regarding Indemnification.

8.1 Company Indemnification. The Company agrees to indemnify, hold

harmless, reimburse and defend each Creditor Party, each of such Creditor Party’s officers,

directors, agents, affiliates, control persons, and principal shareholders, against all claims, costs,

expenses, liabilities, obligations, losses or damages (including reasonable legal fees) of any

nature, incurred by or imposed upon such Creditor Party which result, arise out of or are based

upon: (i) any misrepresentation by the Company or any of its Subsidiaries or breach of any

warranty by the Company or any of its Subsidiaries in this Agreement, any other Related

Agreement or in any exhibits or schedules attached hereto or thereto; or (ii) any breach or default

in performance by Company or any of its Subsidiaries of any covenant or undertaking to be

performed by Company or any of its Subsidiaries hereunder, under any other Related Agreement

or any other agreement entered into by the Company and/or any of its Subsidiaries and such

Creditor Party relating hereto or thereto.

8.2 Purchaser Indemnification. Each Creditor Party agrees to indemnify, hold

harmless, reimburse and defend the Company and each of the Company’s officers, directors,

agents, affiliates, control persons and principal shareholders, at all times against any claims,

costs, expenses, liabilities, obligations, losses or damages (including reasonable legal fees) of

any nature, incurred by or imposed upon the Company which result, arise out of or are based

upon: (i) any misrepresentation by such Creditor Party or breach of any warranty by such

Creditor Party in this Agreement or in any exhibits or schedules attached hereto or any Related

Agreement; or (ii) any breach or default in performance by such Creditor Party of any covenant

or undertaking to be performed by such Creditor Party hereunder, or any other agreement entered

into by the Company and such Creditor Party relating hereto.

9. Exercise of Warrant; Cancellation of Warrant.

9.1 Mechanics of Exercise. Provided the Warrant Shares are included in an

effective registration statement or are otherwise exempt from registration when sold,

(a) Provided such Purchaser has notified the Company of such

Purchaser’s intention to sell: (i) upon the exercise of the applicable Warrant or part

thereof, the Company shall, at its own cost and expense, take all necessary action

(including the issuance of an opinion of counsel reasonably acceptable to such Purchaser

following a request by such Purchaser) to assure that the Company’s transfer agent shall

issue shares of the Common Stock in the name of such Purchaser (or its nominee) or such

other Persons as designated by such Purchaser in accordance with Section 9.1(b) hereof

and in such denominations to be specified representing the number of Warrant Shares

issuable upon such exercise; and (ii) the Company warrants that no instructions other

than these instructions have been or will be given to the transfer agent of the Common

Stock and that the applicable Warrant Shares issued will be freely transferable, subject to

the prospectus delivery requirements of the Securities Act if the Warrant Shares are

included in an effective registration statement and the provisions of this Agreement, and

will not contain a legend restricting the resale or transferability of the Warrant Shares.

(b) Such Purchaser will give notice of its decision to exercise its right

to exercise the applicable Warrant or part thereof by telecopying or otherwise delivering

an executed and completed notice of the number of shares to be exercised to the

Company (the “Form of Subscription”) and by either remitting payment to the Company

for the purchase of the Warrant Shares or electing the cashless exercise provisions of the

applicable Warrant. Such Purchaser will not be required to surrender the applicable

Warrant until such Purchaser receives a credit to the account of the Purchaser’s prime

broker through the DWAC system (as defined below), representing all the Warrant

Shares issuable under the Warrant. Each date on which a Form of Subscription is

telecopied or delivered to the Company in accordance with the provisions hereof shall be

deemed an “Exercise Date.” Pursuant to the terms of the Form of Subscription, the

Company will issue instructions to the transfer agent accompanied by an opinion of

counsel within one (1) business day of the date of the delivery to the Company of the

Form of Subscription and shall cause the transfer agent to transmit the certificates

representing the Warrant Shares set forth in the applicable Form of Subscription to the

Holder by crediting the account of such Purchaser’s prime broker with the Depository

Trust Company (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”)

system within three (3) business days after receipt by the Company of the Form of

Subscription (the “Delivery Date”).

Warrant Shares in the form required pursuant to Section 9 hereof beyond the Delivery

Date could result in economic loss to such Purchaser. In the event that the Company fails

to direct its transfer agent to deliver the applicable Warrant Shares to such Purchaser via

the DWAC system within the time frame set forth in Section 9.1(b) above and the

applicable Warrant Shares are not delivered to such Purchaser by the Delivery Date, as

compensation to such Purchaser for such loss, the Company agrees to pay late payments

to such Purchaser for late issuance of the applicable Warrant Shares in the form required

pursuant to Section 9 hereof upon exercise of the applicable Warrant in the amount equal

to the greater of: (i) $500 per business day after the Delivery Date; or (ii) such

Purchaser’s actual damages from such delayed delivery. The Company shall pay any

payments incurred under this Section in immediately available funds upon demand and,

in the case of actual damages, accompanied by reasonable documentation of the amount

of such damages. Such documentation shall show the number of shares of Common

Stock such Purchaser is forced to purchase (in an open market transaction) which such

Purchaser anticipated receiving upon such exercise, and shall be calculated as the amount

by which (A) such Purchaser’s total purchase price (including customary brokerage

commissions, if any) for the shares of Common Stock so purchased exceeds (B) the

aggregate exercise price of the applicable Warrant, for which such Form of Subscription

was not timely honored.

9.2 Warrant Cancellations.

(a) If the Company’s Operating Cash Flow (as defined below) for any

two (2) consecutive months during the thirteen (13) month period following the Closing

Date is greater than $0 (as reflected in the Company’s financial statements delivered in

accordance with Section 6.4), then Warrants A-2 and B-2 (as more fully described on

Schedule II) shall automatically, and without the requirement of any further action by any

party, be cancelled and terminated.

(b) If, prior to the second anniversary of the Closing Date, the

Company repays the Obligations, then both Warrants A-3 and B-3 (as more fully

described on Schedule II) shall automatically, and without the requirement of any further

action by any party, be cancelled and terminated.

mean net cash flow from operations according to GAAP as it appears on the Company's

cash flow statement delivered to Agent in accordance with Section 6.4.

(d) Upon cancellation of any Warrant, the Purchaser then holding such

Warrants shall cause the original of such Warrants to be returned to the Company.

10. Offering Restrictions. Except as previously disclosed in the SEC Reports or in

the Exchange Act Filings, or stock or stock options granted to employees or directors of the

Company (these exceptions hereinafter referred to as the “Excepted Issuances”), neither the

Company nor any of its Subsidiaries will, prior to the full exercise by the Purchasers of the

Warrants, (x) enter into any equity line of credit agreement or similar agreement or (y) issue, or

enter into any agreement to issue, any securities with a variable/floating conversion and/or

pricing feature which are or could be (by conversion or registration) free-trading securities (i.e.

common stock subject to a registration statement).

11. Miscellaneous.

11.1 Governing Law, Jurisdiction and Waiver of Jury Trial.

(a) THIS AGREEMENT AND THE OTHER RELATED

AGREEMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED

IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK

APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE,

WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS.

(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT

THE STATE OR FEDERAL COURTS LOCATED IN THE COUNTY OF NEW

YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE JURISDICTION TO

HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE

COMPANY, ON THE ONE HAND, AND ANY CREDITOR PARTY, ON THE

OTHER HAND, PERTAINING TO THIS AGREEMENT OR ANY OF THE

RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR

RELATED TO THIS AGREEMENT OR ANY OF THE OTHER RELATED

AGREEMENTS; PROVIDED, THAT EACH CREDITOR PARTY AND THE

COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS

MAY HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY

OF NEW YORK, STATE OF NEW YORK; AND FURTHER PROVIDED, THAT,

NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO

PRECLUDE ANY CREDITOR PARTY FROM BRINGING SUIT OR TAKING

OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO COLLECT THE

OBLIGATIONS, TO REALIZE ON THE COLLATERAL (AS DEFINED IN THE

MASTER SECURITY AGREEMENT) OR ANY OTHER SECURITY FOR THE

OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY AGREEMENT), OR

TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF ANY

CREDITOR PARTY. THE COMPANY EXPRESSLY SUBMITS AND CONSENTS

IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT

COMMENCED IN ANY SUCH COURT, AND THE COMPANY HEREBY WAIVES

ANY OBJECTION THAT IT MAY HAVE BASED UPON LACK OF PERSONAL

JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS. THE

COMPANY HEREBY WAIVES PERSONAL SERVICE OF THE SUMMONS,

COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR SUIT

AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER

PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED

TO THE COMPANY AT THE ADDRESS SET FORTH IN SECTION 11.8 AND

THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE

EARLIER OF THE COMPANY’S ACTUAL RECEIPT THEREOF OR THREE (3)

DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE,

TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL

SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS

TO TRIAL BY JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO

RESOLVE ANY DISPUTE, WHETHER ARISING IN CONTRACT, TORT, OR

OTHERWISE BETWEEN ANY CREDITOR PARTY AND/OR THE COMPANY

ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE

RELATIONSHIP ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS

AGREEMENT, ANY OTHER RELATED AGREEMENT OR THE TRANSACTIONS

RELATED HERETO OR THERETO.

11.2 Severability. Wherever possible each provision of this Agreement and the

Related Agreements shall be interpreted in such manner as to be effective and valid under

applicable law, but if any provision of this Agreement or any Related Agreement shall be

prohibited by or invalid or illegal under applicable law such provision shall be ineffective to the

extent of such prohibition or invalidity or illegality, without invalidating the remainder of such

provision or the remaining provisions thereof which shall not in any way be affected or impaired

thereby.

11.3 Survival. The representations, warranties, covenants and agreements

made herein shall survive any investigation made by any Creditor Party and the closing of the

transactions contemplated hereby to the extent provided therein. All statements as to factual

matters contained in any certificate or other instrument delivered by or on behalf of the Company

pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be

representations and warranties by the Company hereunder solely as of the date of such certificate

or instrument. All indemnities set forth herein shall survive the execution, delivery and

termination of this Agreement and the Notes and the making and repayment of the obligations

arising hereunder, under the Notes and under the other Related Agreements.

11.4 Successors.

(a) Except as otherwise expressly provided herein, the provisions

hereof shall inure to the benefit of, and be binding upon, the successors, heirs, executors

and administrators of the parties hereto and shall inure to the benefit of and be

enforceable by each person or entity which shall be a holder of the Securities from time

to time, other than the holders of Common Stock which has been sold by any Purchaser

pursuant to Rule 144 or an effective registration statement. Each Purchaser may assign

any or all of the Obligations to any Person and, subject to acceptance and recordation

thereof by the Agent pursuant to Section 11.4(b) and receipt by the Agent of a copy of the

agreement or instrument pursuant to which such assignment is made (each such

agreement or instrument, an “Assignment Agreement”), any such assignee shall succeed

to all of such Purchaser’s rights with respect thereto; provided that no Purchaser shall be

permitted to assign its rights hereunder or under any Related Agreement to a competitor

of the Company unless an Event of Default (as defined in each Note) has occurred and is

continuing. Upon such assignment, such Purchaser shall be released from all

responsibility for the Collateral (as defined in the Master Security Agreement, the Stock

Pledge Agreement and each other security agreement, mortgage, cash collateral deposit

letter, pledge and other agreements which are executed by the Company or any of its

Subsidiaries in favor of any Creditor Party) to the extent same is assigned to any

transferee. Each Purchaser may from time to time sell or otherwise grant participations

in any of the Obligations (as defined in the Master Security Agreement) and the holder of

any such participation shall, subject to the terms of any agreement between such

Purchaser and such holder, be entitled to the same benefits as such Purchaser with respect

to any security for the Obligations (as defined in the Master Security Agreement) in

which such holder is a participant. The Company agrees that each such holder may

exercise any and all rights of banker’s lien, set-off and counterclaim with respect to its

participation in the Obligations (as defined in the Master Security Agreement) as fully as

though the Company were directly indebted to such holder in the amount of such

participation. The Company may not assign any of its rights or obligations hereunder

without the prior written consent of the Agent. All of the terms, conditions, promises,

covenants, provisions and warranties of this Agreement shall inure to the benefit of each

of the undersigned, and shall bind the representatives, successors and permitted assigns of

the Company.

(b) The Agent shall maintain, or cause to be maintained, for this

purpose only as agent of the Company, (i) a copy of each Assignment Agreement

delivered to it and (ii) a registry within the meaning of US Treasury Regulation Section

15f.103-1(c) (the “Register”), in which it will register the name and address of each

Purchaser and the name and address of each assignee of each Purchaser under this

Agreement, and the principal amount of the Notes owing to each such Purchase pursuant

to the terms hereof and each Assignment Agreement. The Company and each Creditor

Party shall treat each Person whose name is recorded in the Register as a Purchaser

pursuant to the terms hereof as a Purchaser hereunder for all purposes of this Agreement,

notwithstanding notice to the contrary or any notation of ownership or other writing or

any Note. The Register shall be available for inspection by the Company or any

Purchaser, at any reasonable time and from time to time, upon reasonable prior notice.

11.5 Entire Agreement; Maximum Interest. This Agreement, the Related

Agreements, the exhibits and schedules hereto and thereto and the other documents delivered

pursuant hereto constitute the full and entire understanding and agreement between the parties

with regard to the subjects hereof and no party shall be liable or bound to any other in any

manner by any representations, warranties, covenants and agreements except as specifically set

forth herein and therein. Nothing contained in this Agreement, any Related Agreement or in any

document referred to herein or delivered in connection herewith shall be deemed to establish or

require the payment of a rate of interest or other charges in excess of the maximum rate

permitted by applicable law. In the event that the rate of interest or dividends required to be paid

or other charges hereunder exceed the maximum rate permitted by such law, any payments in

excess of such maximum shall be credited against amounts owed by the Company to the

Purchasers and thus refunded to the Company.

11.6 Amendment and Waiver.

(a) This Agreement may be amended or modified only upon the

written consent of the Company and the Agent.

(b) The obligations of the Company and the rights of the Creditor

Parties under this Agreement may be waived only with the written consent of the Agent.

Company under this Agreement may be waived only with the written consent of the

Company.

11.7 Delays or Omissions. It is agreed that no delay or omission to exercise

any right, power or remedy accruing to any party, upon any breach, default or noncompliance by

another party under this Agreement or the Related Agreements, shall impair any such right,

power or remedy, nor shall it be construed to be a waiver of any such breach, default or

noncompliance, or any acquiescence therein, or of or in any similar breach, default or

noncompliance thereafter occurring. All remedies, either under this Agreement or the Related

Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative.

11.8 Notices. All notices required or permitted hereunder shall be in writing

and shall be deemed effectively given:

(a) upon personal delivery to the party to be notified;

(b) when sent by confirmed facsimile if sent during normal business
hours of the recipient, if not, then on the next business day;

(c) three (3) business days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or

(d) one (1) day after deposit with a nationally recognized overnight
courier, specifying next day delivery, with written verification of receipt.

All communications shall be sent as follows:

If to the Company, to:				eLEC Communications Corp.
				75 South Broadway, Suite 302
				White Plains, NY 10601
				Attention: Chief Executive Officer
				Facsimile: 914-682-0820

with a copy to:				Pryor Cashman LLP
				410 Park Avenue
				New York, NY 10022
				Attention: Eric M. Hellige, Esq.
				Facsimile: 212-798-6380

If to the Agent, to:				LV Administrative Services, Inc.
				335 Madison Avenue, 10th Floor
				New York, NY 10017
				Facsimile No.: 212-581-5037

with a copy to:				Loeb & Loeb, LLP
				345 Park Avenue
				New York, NY 10154
				Attention: Scott J. Giordano, Esq.
				Facsimile No.: 212-407-4990

If to a Purchaser:				To the address indicated under its signature
				on the signature pages hereto

or at such other address as the Company or the applicable Creditor Party may designate by
written notice to the other parties hereto given in accordance herewith.

11.9 Attorneys’ Fees. In the event that any suit or action is instituted to enforce
any provision in this Agreement or any Related Agreement, the prevailing party in such dispute
shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any
right of such prevailing party under or with respect to this Agreement and/or such Related
Agreement, including, without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and expenses of appeals.


37

11.10 Titles and Subtitles. The titles of the sections and subsections of this

Agreement are for convenience of reference only and are not to be considered in construing this

Agreement.

11.11 Facsimile Signatures; Counterparts. This Agreement may be executed by

facsimile signatures and in any number of counterparts, each of which shall be an original, but all

of which together shall constitute one agreement.

11.12 Broker’s Fees. Except as set forth on Schedule 11.12 hereof, each party

hereto represents and warrants that no agent, broker, investment banker, person or firm acting on

behalf of or under the authority of such party hereto is or will be entitled to any broker’s or

finder’s fee or any other commission directly or indirectly in connection with the transactions

contemplated herein. Each party hereto further agrees to indemnify each other party for any

claims, losses or expenses incurred by such other party as a result of the representation in this

Section 11.12 being untrue.

11.13 Construction. Each party acknowledges that its legal counsel participated

in the preparation of this Agreement and the Related Agreements and, therefore, stipulates that

the rule of construction that ambiguities are to be resolved against the drafting party shall not be

applied in the interpretation of this Agreement or any Related Agreement to favor any party

against the other.

11.14 Agency. Each Purchaser has pursuant to an Administrative and Collateral

Agency Agreement designated and appointed the Agent as the administrative and collateral agent

of such Purchaser under this Agreement and the Related Agreements.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES
PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof.

COMPANY:		PURCHASER:


eLEC COMMUNICATIONS CORP.		CALLIOPE CAPITAL CORPORATION


By:	/s/ Paul H. Riss	By:	/s/ Pat Regan
Name: Paul H. Riss		Name: Pat Regan
Title: Chief Executive Officer		Title: Senior Managing Director




AGENT:		PURCHASER:


LV ADMINISTRATIVE SERVICES, INC.,		VALENS OFFSHORE SPV II. CORP.
as Agent


By:	/s/ Pat Regan	By:	/s/ Pat Regan
Name: Pat Regan		Name: Pat Regan
Title: Senior Managing Director		Title: Authorized Signatory