1 EXHIBIT 4.12 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

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EXHIBIT 4.12

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

BETWEEN

AIR SOUTH AIRLINES, INC.

AND

H&Q AIR SOUTH INVESTORS, L.P.

DATED AS OF AUGUST 16, 1996

TABLE OF CONTENTS

Page

ARTICLE I DEFINITIONS
SECTION 1.01. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II PURCHASE AND SALE OF CONVERTIBLE DEBENTURES
SECTION 2.01. ISSUANCE, SALE AND DELIVERY OF THE CONVERTIBLE
DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SECTION 2.02. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE III CONVERSION
SECTION 3.01. CONVERSION; NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.02. CONVERSION PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 3.03. REPRESENTATIONS, WARRANTIES, COVENANTS, NO
DEFAULT; CONDITIONS PRECEDENT TO CONVERSION . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY
SECTION 4.01. ORGANIZATION, QUALIFICATIONS AND CORPORATE
POWER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.02. AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4.03. VALIDITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4.04. CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 4.05. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.06. EVENTS SUBSEQUENT TO THE DATE OF THE BALANCE
SHEET . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.07. COMPLIANCE WITH INSTRUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4.08. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.09. COMPLIANCE WITH LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.10. TITLE TO PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.11. LEASEHOLD INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 4.12. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4.13. PATENTS, TRADEMARKS, ETC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 4.14. OUTSTANDING DEBT; LOANS AND ADVANCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.15. GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.16. GOVERNMENTAL APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.17. DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.18. BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.19. SECURITIES ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 4.20. MARGIN REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.21. INSURANCE COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4.22. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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SECTION 4.23. ENVIRONMENTAL COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 4.24. PERMITS AND LICENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 4.25. BOARD COMPOSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 5.01. REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF THE PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SECTION 6.01. CONDITIONS TO THE OBLIGATION OF THE PURCHASER . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE VII CONDITIONS TO THE OBLIGATIONS OF THE COMPANY
SECTION 7.01. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . 18

ARTICLE VIII COVENANTS OF THE COMPANY
SECTION 8.01. FINANCIAL STATEMENTS AND REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 8.02. CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8.03. MAINTENANCE OF PROPERTIES AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8.04. INSPECTION, CONSULTATION AND ADVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 8.05. RESTRICTIVE AGREEMENTS PROHIBITED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.06. TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.07. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.08. SUBSIDIARIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.09. COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.11. OBLIGATIONS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 8.12. TRANSFER AND EXCHANGE OF CONVERTIBLE
DEBENTURES; LOST CONVERTIBLE DEBENTURES . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 8.13. LIMITATION ON DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 8.14. LIMITATION ON LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 8.15. LIMITATION ON RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8.16. COVENANT REGARDING STOCKHOLDER VOTE AND
FILING OF CERTIFICATE OF DESIGNATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 8.17. BOARD NOMINEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

ARTICLE IX EVENTS OF DEFAULT
SECTION 9.01. ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 9.02. RESCISSION OF ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 9.03. NOTICE OF ACCELERATION OR RESCISSION . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 9.04. OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE X MISCELLANEOUS

SECTION 10.01. PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 10.02. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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SECTION 10.03. CONSENT TO AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10.04. PERSONS DEEMED OWNERS; PARTICIPATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10.05. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 10.06. BROKERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 10.07. PARTIES IN INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 10.09. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 10.09. ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 10.10. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 10.11. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 10.12. DESCRIPTIVE HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 10.13. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 10.14. Gender; Plurals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

EXHIBITS
EXHIBIT A Form of Convertible Debenture
EXHIBIT B Form of Certificate of Designation
EXHIBIT C Certificate of Incorporation
EXHIBIT D Form of Investors Rights Agreement
EXHIBIT E Form of Opinion of General Counsel
(Series D Preferred Stock)
EXHIBIT F Form of Opinion of General Counsel
(Convertible Debentures)

SCHEDULES
SCHEDULE 4.04 Outstanding Options, Warrants, Etc.
SCHEDULE 4.06 Events Subsequent to Balance Sheet
SCHEDULE 4.07 Violations, Defaults
SCHEDULE 4.08 Defaults
SCHEDULE 4.10 Title to Properties
SCHEDULE 4.11 Leasehold Interests
SCHEDULE 4.14 Existing Debt

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CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("Agreement"), dated as of
August 16, 1996, between AIR SOUTH AIRLINES, INC., a Delaware corporation (the
"Company"), and H&Q AIR SOUTH INVESTORS, L.P., a Delaware limited partnership
(the "Purchaser").

RECITALS

WHEREAS, the Company wishes to issue and sell to the Purchaser its
convertible debentures (herein, together with any such convertible debentures
which may be issued pursuant to any provision of this Agreement, and any such
convertible debentures which may be used in substitution or exchange thereon,
collectively called the "Convertible Debentures" and individually called a
"Convertible Debenture") in the original aggregate principal amount of
$4,000,000, to be dated the date of issue, to mature August 16, 1999, to bear
interest on the unpaid balances thereof from the date thereof until the
principal shall have become due and payable at the rate of 6% per annum, which
interest shall be deferred and added to the outstanding principal balance of
the Convertible Debentures, and to be substantially in the form of Exhibit A
attached hereto; and

WHEREAS, the Purchaser wishes to purchase the Convertible Debenture on
the terms and subject to the conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the above recitals, the mutual
promises contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:

ARTICLE I

DEFINITIONS

SECTION 1.01. DEFINITIONS. As used herein, unless the context
otherwise requires, the following terms have the following meanings specified
with respect thereto below:

"Agreement" shall mean this Convertible Debenture Purchase Agreement,
as the same may be amended or supplemented and in effect from time to time.

"Amendment" shall have the meaning ascribed thereto in Section 8.16.

"BALANCE SHEET" shall have the meaning ascribed thereto in Section
4.05.

"BANKRUPTCY LAW" shall have the meaning ascribed thereto in Section
9.01.

"BLANK CHECK PREFERRED STOCK" shall have the meaning ascribed thereto
in Section 4.04.

"BUSINESS DAY" shall mean any day which is not a Saturday or Sunday or
a national banking holiday.

"BY-LAWs" shall mean the By-laws of the Company, as amended.

"CERTIFICATE OF DESIGNATION" shall mean the Certificate of Designation
of the Company to be substantially in the form of Exhibit B attached hereto.

"CERTIFICATE OF INCORPORATION" shall mean the Certificate of
Incorporation of the Company, including all amendments thereto through the date
hereof, including any amendments effected by means of a certificate of
designation, a copy of which is attached hereto as Exhibit C.

"CLOSING" shall have the meaning ascribed thereto in Section 2.02.

"CLOSING DATE" shall have the meaning ascribed thereto in Section
2.02.

"CODE" shall mean the Internal Revenue Code of 1986, as amended.

"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.

"COMMON CONVERSION SHARES" shall mean the shares of Common Stock
issuable upon conversion of the Preferred Conversion Shares.

"COMMON STOCK" shall mean the Common Stock, par value $0.001 per
share, of the Company.

"COMPANY" shall have the meaning ascribed thereto in the preamble.

"CONVERTIBLE DEBENTURE" shall have the meaning ascribed thereto in the
preamble.

"CONVERSION" shall have the meaning ascribed thereto in Section 3.01.

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"CONVERSION NOTICE" shall mean the notice of conversion in the form
attached to the Convertible Debenture, which notice shall set forth the name of
the registered owner of the Convertible Debenture being converted and the
principal balance, or portion thereof, being converted.

"CURRENT DEBT" shall mean, with respect to any Person, all
Indebtedness of such Person for borrowed money which by its terms or by the
terms of any instrument or agreement relating thereto matures on demand or
within one year from the date of the creation thereof and is not directly or
indirectly renewable or extendible at the option of the debtor to a date more
than one year from the date of the creation thereof.

"DEBT" shall mean Current Debt and Funded Debt.

"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended.

"ERISA AFFILIATE" shall mean any corporation which is a member of the
same controlled group of corporations as the Company within the meaning of
Section 414(b) of the Code, or any trade or business which is under common
control with the Company within the meaning of Section 414(c) of the Code, or
any other entity which is considered to be a single employer with the Company
pursuant to Sections 414(m), (n) or (o) of the Code.

"EVENT OF DEFAULT" shall mean any of the events specified in Section
9.01 provided that there has been satisfied any requirement in connection with
such event for the giving of notice, or the lapse of time, or the happening of
any further condition, event or act, and "DEFAULT" shall mean any of such
events, whether or not any such requirement has been satisfied.

"EXISTING DEBT" shall have the meaning ascribed thereto in Section
4.14.

"FUNDED DEBT" shall mean, with respect to any Person, all Indebtedness
of such Person which by its terms or by the terms of any instrument or
agreement relating thereto matures, or which is otherwise payable or unpaid,
more than one year from, or is directly or indirectly renewable or extendible
at the option of the debtor to a date more than one year from, the date of the
creation thereof.

"GUARANTEE" shall mean, with respect to any Person, any direct or
indirect liability, contingent or otherwise, of such Person with respect to any
indebtedness, lease, dividend or other obligation of another, including,
without limitation, any such obligation directly or indirectly guaranteed,
endorsed (otherwise than for collection or deposit in the ordinary course of
business) or discounted or sold with

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recourse by such Person, or in respect of which such Person is otherwise
directly or indirectly liable, including, without limitation, any such
obligation in effect guaranteed by such Person through any agreement
(contingent or otherwise) to purchase, repurchase or otherwise acquire such
obligation or any security therefor, or to provide funds for the payment or
discharge of such obligation (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise), or to maintain the solvency or
any balance sheet or other financial condition of the obligor of such
obligation, or to make payment for any products, materials or supplies or for
any transportation or services regardless of the non-delivery or non-furnishing
thereof, in any such case if the purpose or intent of such agreement is to
provide assurance that such obligation will be paid or discharged, or that any
agreements relating thereto will be complied with, or that the holders of such
obligation will be protected against loss in respect thereof.

"HUD LOAN" shall mean that certain loan to the Company by Lexington
County, South Carolina pursuant to the United States Department of Housing and
Urban Development Section 108 Loan Program.

"INDEBTEDNESS" shall mean, with respect to any Person, without
duplication, (i) all items which in accordance with generally accepted
accounting principles would be included in determining total liabilities as
shown on the liability side of a balance sheet of such Person as of the date on
which Indebtedness is to be determined, (ii) all indebtedness secured by any
Lien on any property or asset owned or held by such Person subject thereto,
whether or not the indebtedness secured thereby shall have been assumed, and
(iii) all indebtedness of others with respect to which such Person has become
liable by way of a Guarantee.

"INTELLECTUAL PROPERTY" shall have the meaning ascribed thereto in
Section 4.13.

"INVESTOR'S RIGHT AGREEMENT" shall mean the Investor's Right
Agreement, dated the date hereof, between the Company and the Purchaser, a copy
of which is attached hereto as Exhibit D.

"LIEN" shall mean any mortgage, pledge, priority, security interest,
encumbrance, lien (statutory or otherwise) or charge of any kind (including any
agreement to give any of the foregoing, any conditional sale or other title
retention agreement, any lease in the nature thereof, and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction) or any other type of preferential arrangement for the
purpose, or having the effect, of protecting a creditor against loss or
securing the payment or performance of an obligation.

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"MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the
assets, business, operations or financial condition of the Company.

"MULTIEMPLOYER PLAN" shall mean any Plan which is a "multiemployer
plan" (as such term is defined in Section 4001(a)(3) of ERISA).

"OFFICER'S CERTIFICATE" shall mean a certificate signed in the name of
the Company by its Chief Executive Officer, President, Chief Financial Officer
or one of its Vice Presidents.

"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor entity.

"PERSON" shall mean a corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.

"PLAN" shall mean any "employee pension benefit plan" (as such term is
defined in Section 3(2) of ERISA) which is or has been established or
maintained, or to which contributions are or have been made, by the Company or
any ERISA Affiliate.

"PREFERRED CONVERSION SHARES" shall mean the shares of Series D
Preferred Stock issuable upon conversion of the Convertible Debentures as set
forth in Article III hereof.

"PREFERRED STOCK" shall mean all classes or series of preferred stock,
par value $0.001 per share, of the Company.

"PURCHASER" shall have the meaning ascribed thereto in the preamble.

"REQUIRED HOLDER(S)" shall mean the holder or holders of at least 51%
of the aggregate principal amount of the Convertible Debentures from time to
time outstanding.

"RESTRICTED PAYMENT" shall mean (i) the declaration, payment or
setting apart of any sum for payment of dividend (including a dividend payable
in capital stock of the Company) on, or any distribution (including a
distribution in capital stock of the Company) in respect of, any shares of
capital stock of the Company or any warrants, rights or options to purchase any
shares of capital stock of the Company or (ii) the redemption, repurchase,
retirement or other acquisition of (or the setting apart of any sum in respect
of any of the foregoing actions) any shares

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of capital stock of the Company or any warrants, rights or options to
purchase or acquire any shares of capital stock.

"SECURITIES" shall have the meaning ascribed thereto in Section 4.19.

"SECURITIES ACT" shall have the meaning ascribed thereto in Section
4.19.

"SERIES D PREFERRED STOCK" shall mean shares of Series D Preferred
Stock of the Company.

"STOCKHOLDER APPROVAL" shall have the meaning ascribed thereto in
Section 8.16.

"Subsidiary" shall mean, as to the Company, any corporation of which
more than 50% of the outstanding stock having ordinary voting power to
elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or
classes shall have or might have voting power by reason of the happening
of any contingency) is at the time directly or indirectly owned by the
Company, or by one or more of its subsidiaries.

"Transferee" shall mean any direct or indirect transferee of all or
any part of any Convertible Debenture purchased by the Purchaser under
this Agreement.

ARTICLE II

PURCHASE AND SALE OF CONVERTIBLE DEBENTURES

SECTION 2.01. ISSUANCE, SALE AND DELIVERY OF THE CONVERTIBLE DEBENTURES.
The Company agrees to issue and sell to the Purchaser and the Purchaser hereby
agrees to purchase from the Company, the Convertible Debentures in the
aggregate principal amount of $4,000,000 at 100% of such aggregate principal
amount.

SECTION 2.02. CLOSING. The closing shall take place at the offices of
Xxxxxx Godward Xxxxxx Xxxxxxxxx & Xxxxx, Palo Alto, CA, at 2 p.m., Pacific
time, on August 16, 1996, or at such other location, date and time as may be
agreed upon between the Purchaser and the Company (such closing being called
the "Closing" and such date and time being called the "Closing Date"). At the
Closing, the Company shall issue and deliver to the Purchaser one or more
Convertible Debentures, registered in the name of such Purchaser, evidencing
the aggregate principal amount of Convertible Debentures to be purchased by the
Purchaser at the Closing, and in the denomination or denominations specified in
writing by the Purchaser. As payment in full for the Convertible Debentures
being purchased by the Purchaser under this Agreement, on the Closing Date the

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Purchaser shall deliver to the Company a check payable to the order of the
Company, in the amount of the purchase price or shall transfer such sum to the
account of the Company by wire transfer, or shall deliver to the Company notes
evidencing indebtedness of the Company for cancellation thereof, or any
combination of the foregoing.

ARTICLE III

CONVERSION

SECTION 3.01. CONVERSION; NUMBER. The holder of any Convertible
Debenture, at its option, will be entitled at any time commencing three (3)
Business Days after Stockholder Approval and ending on the close of business on
the final maturity date of the Convertible Debentures to convert any
Convertible Debentures, or portions thereof, into shares of Series D Preferred
Stock. The Convertible Debenture will automatically be converted into shares
of Series D Preferred Stock upon the closing of a firmly underwritten public
offering of Common Stock on a Form S-1 Registration Statement at an aggregate
public offering price (after underwriting discounts and commissions) of at
least $10,000,000 and a per share price equal to or greater than $4.00 (as
appropriately adjusted for stock splits and the like). In either case (each of
which is sometimes hereinafter referred to as a "Conversion"), the number of
shares of Series D Preferred Stock to be issued upon such Conversion shall be
determined by dividing the aggregate principal balance of the Convertible
Debenture to then be converted by twenty-five hundredths (0.25). The Company is
not required to issue fractional shares of Series D Preferred Stock upon
conversion of any Convertible Debenture and, in lieu thereof, will pay a cash
adjustment.

SECTION 3.02. CONVERSION PROCEDURE. If the holder elects to convert any
Convertible Debenture such holder may do so by delivering the Convertible
Debenture at the specified office of the Company, accompanied by a duly signed
and completed Conversion Notice. The date of the Conversion shall be the date
on which the Convertible Debenture and the duly signed and completed Conversion
Notice are received by the Company. A holder delivering a Convertible
Debenture for conversion will not be required to pay any taxes or duties
payable with respect to the issue or delivery of Series D Preferred Stock on
Conversion and any such taxes or duties shall be paid by the Company.

SECTION 3.03. REPRESENTATIONS, WARRANTIES, COVENANTS, NO DEFAULT;
CONDITIONS PRECEDENT TO CONVERSION.

(a) On and as of the date of each Conversion, (i) the Company shall
be deemed to have (A) remade, ratified and confirmed all
representations and warranties of the Company contained in Article IV
of this Agreement, (B) certified compliance with all covenants
contained in Article VIII of this Agreement and (C)

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certified that no Event of Default or Default exists and is
continuing, and (ii) the Company shall deliver an Officer's
Certificate to the effects set forth in (A), (B) and (C) above.

(b) In addition to the provisions of Section 3.03(a) above, on
and as of the date of each Conversion, the Company shall have caused
to be delivered to the Purchaser an opinion of the General Counsel of
the Company, substantially in the form of Exhibit E attached hereto.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Purchaser that:

SECTION 4.01. ORGANIZATION, QUALIFICATIONS AND CORPORATE POWER.

(a) The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of
Delaware and is duly qualified to transact business as a foreign
corporation and is in good standing in each jurisdiction in which the
nature of the business transacted by it or the character of the
properties owned or leased by it requires such qualification, except
where the failure to be so qualified would not have a Material Adverse
Effect. The Company has the corporate power and authority to own and
hold its properties and to carry on its business as now conducted and
as proposed to be conducted, to execute, deliver and perform its
obligations under this Agreement, to issue, sell and deliver the
Convertible Debentures and, subject to approval by the stockholders of
the Company of an amendment to the Certificate of Incorporation, to
increase the authorized number of shares of Common Stock and Preferred
Stock, to issue and deliver the Preferred Conversion Shares and the
Common Conversion Shares.

(b) The Company has no Subsidiaries. The Company does not (i)
own of record or beneficially, directly or indirectly (A) any shares of
capital stock or securities convertible into capital stock of any other
corporation or (B) any participating interest in any partnership, joint
venture or other non-corporate business enterprise or (ii) control,
directly or indirectly, any other entity.

SECTION 4.02. AUTHORIZATION. The execution and delivery by the Company
of this Agreement, the performance by the Company of its obligations hereunder,
the issuance, sale and delivery of the Convertible Debentures and, subject to
approval by the stockholders of the Company of an amendment to the Certificate
of Incorporation to increase the authorized number of shares of Common Stock
and Preferred Stock, the

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issuance and delivery of the Preferred Conversion Shares and the Common
Conversion Shares have been duly authorized by all requisite corporate action
and will not violate any provision of law, any order of any court or other
agency of government, the Certificate of Incorporation or the By-laws, or any
provision of any indenture, agreement or other instrument to which the Company,
any of its subsidiaries or any of their respective properties or assets is
bound, or conflict with, result in a breach of or constitute (with due notice
or lapse of time or both) a default under any such indenture agreement or other
instrument, or result in the creation or imposition of any lien, charge,
restriction, claim or encumbrance of any nature whatsoever upon any of the
properties or assets of the Company or any of its subsidiaries.

SECTION 4.03. VALIDITY. This Agreement has been duly executed and
delivered by the Company and constitutes the legal, valid and binding
obligation of the Company, enforceable in accordance with its terms.

SECTION 4.04. CAPITALIZATION. The authorized capital stock of the
Company consists of (i) 18,000,000 shares of Common Stock, par value $0.001 per
share; (ii) 1,250,000 shares of Series A Preferred Stock, par value $0.001 per
share; (iii) 625,000 shares of Series B Preferred Stock, par value $0.001 per
share; (iv) 120,000 shares of Series C Preferred Stock, par value $0.001 per
share; and (v) 5,000 shares of one or more series of Preferred Stock (the
"Blank Check Preferred Stock"). Immediately prior to the Closing, 6,917,182
shares of Common Stock, 1,250,000 shares of Series A Preferred Stock, 625,000
shares of Series B Preferred Stock and 120,000 shares of Series C Preferred
Stock were outstanding and have been validly issued and are fully paid and
nonassessable with no personal liability attaching to the ownership thereof.
The designations, powers, preferences, rights, qualifications, limitations and
restrictions in respect of each class and series of authorized capital stock of
the Company are as set forth in the Certificate of Incorporation, and all such
designations, powers, preferences, rights, qualifications, limitations and
restrictions are valid, binding and enforceable and in accordance with all
applicable laws. Except as set forth on Schedule 4.04, there are no
outstanding options, preemptive or other rights, warrants, agreements, voting
trusts, proxies, contracts, calls, commitments or demands of any character
relating to any shares of capital stock, or any other securities of the
Company, whether or not issued, including, but not limited to, securities
convertible into or evidencing the right to purchase any capital stock or other
securities of the Company. Except as set forth on Schedule 4.04, the Company
has no obligation (contingent or other) to purchase, redeem or otherwise
acquire any of its equity securities or any interest therein or to pay any
dividend or make any other distribution in respect thereof. There are no
voting trusts or agreements, stockholders' agreements, pledge agreements,
buy-sell agreements, rights of first refusal, preemptive rights or proxies
relating to any securities of the Company or any of its subsidiaries (whether
or not the Company or any of its subsidiaries is a party thereto). All of the
outstanding securities of the Company were issued in compliance with all
applicable federal and state securities laws.

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SECTION 4.05. FINANCIAL STATEMENTS. The Company has furnished to the
Purchaser the consolidated balance sheet of the Company as of December 31, 1995
(the "Balance Sheet"), and the related statements of income, stockholders'
equity and cash flows of the Company for the year ended December 31, 1995. All
such financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied and fairly present the
financial position of the Company as of December 31, 1995, and the results of
operations and cash flows of the Company for the year ended December 31, 1995.
Since the date of the Balance Sheet, (i) there has been no change in the
assets, liabilities or financial condition of the Company (on a consolidated
basis) from that reflected in the Balance Sheet, except for changes in the
ordinary course of business which in the aggregate have not been materially
adverse, and (ii) none of the business, prospects, financial condition,
operations, property or affairs of the Company (on a consolidated basis) has
been materially adversely affected by any occurrence or development,
individually or in the aggregate, whether or not insured against.

SECTION 4.06. EVENTS SUBSEQUENT TO THE DATE OF THE BALANCE SHEET. Since
the date of the Balance Sheet, the Company has not, except as set forth on
Schedule 4.06, (i) issued any stock, bond or other corporate security, (ii)
borrowed any amount or incurred or become subject to any liability (absolute,
accrued or contingent), except current liabilities incurred and liabilities
under contracts entered into in the ordinary course of business, (iii)
discharged or satisfied any lien or encumbrance or incurred or paid any
obligation or liability (absolute, accrued or contingent) other than current
liabilities shown on the Balance Sheet and current liabilities incurred since
the date of the Balance Sheet in the ordinary course of business, (iv) declared
or made any payment or distribution to stockholders or purchased or redeemed
any share of its capital stock or other security, (v) mortgaged, pledged or
subjected to lien any of its assets, tangible or intangible, other than liens
of current real property taxes not yet due and payable, (vi) sold, assigned or
transferred any of its tangible assets except in the ordinary course of
business, or canceled any debt or claim, (vii) sold, assigned, transferred or
granted any exclusive license with respect to any patent, trademark, trade
name, service xxxx, copyright, trade secret or other intangible asset, (viii)
suffered any loss of property or waived any right of substantial value whether
or not in the ordinary course of business, (ix) made any change in officer
compensation except in the ordinary course of business and consistent with past
practice, (x) made any material change in the manner of business or operations
of the Company, (xi) entered into any transaction except in the ordinary course
of business or as otherwise contemplated hereby or (xii) entered into any
commitment (contingent or otherwise) to do any of the foregoing.

SECTION 4.07. COMPLIANCE WITH INSTRUMENTS. The Company is not in
violation of any term of its Certificate of Incorporation or By-laws, or any
statute, rule or regulation applicable to the Company. Except as set forth on
Schedule 4.07, the Company is not in violation or in default of any term
contained in any instrument or contract to which it is a party. Except as set
forth on Schedule 4.07, no event or failure

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of performance has occurred which, with the passage of time or the giving of
notice or both, would constitute such a violation. None of the violations set
forth on Schedule 4.07 will have a Material Adverse Effect.

SECTION 4.08. LITIGATION. Except as set forth on Schedule 4.08, there
are no (i) actions, suits, claims, proceedings or investigations pending or, to
the best of the Company's knowledge, threatened against or affecting the
Company, at law or in equity, or before or by any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) arbitration proceedings relating to
the Company pending under collective bargaining agreements or otherwise or
(iii) governmental inquiries pending or, to the best of the Company's
knowledge, threatened against or affecting the Company (including without
limitation any inquiry as to the qualification of the Company to hold or
receive any license or permit), and the Company is not aware of any basis for
any of the foregoing. None of the actions, suits, claims, proceedings, or
investigations set forth on Schedule 4.08 will have a Material Adverse Effect.
The Company is not in default with respect to any order, writ, injunction or
decree known to or served upon the Company of any court or of any federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign.

SECTION 4.09. COMPLIANCE WITH LAW. The Company has complied with all
laws, rules, regulations and orders applicable to its business, operations,
properties, assets, products and services, and the Company has all necessary
permits, licenses and other authorizations required to conduct its business as
conducted and as proposed to be conducted to the extent failure to do so would
have a material adverse effect on the business of the Company. There is no
existing law, rule, regulation or order, and the Company is not aware of any
proposed law, rule, regulation or order, whether federal or state, which would
prohibit or restrict the Company from, or otherwise materially adversely affect
the Company in, conducting its business in any jurisdiction in which it is now
conducting business or in which it proposes to conduct business.

SECTION 4.10. TITLE TO PROPERTIES. The Company has good and marketable
title to its properties and assets reflected on the Balance Sheet or acquired
by it since the date of the Balance Sheet (other than properties and assets
disposed of in the ordinary course of business since the date of the Balance
Sheet), and all such properties and assets are free and clear of mortgages,
pledges, security interests, liens, charges, claims, restrictions and other
encumbrances, except (i) for Liens set forth on Schedule 4.10, (ii) for Liens
for taxes not yet due and payable and minor imperfections of title, if any, not
material in nature or amount and (iii) for Liens not materially detracting from
the value or impairing the use of the property subject thereto or impairing the
operations or proposed operations of the Company.

SECTION 4.11. LEASEHOLD INTERESTS. Each lease or agreement to which the
Company is a party under which it is a lessee of any property, real or
personal, is a valid

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and subsisting agreement without any default of the Company thereunder, except
as set forth on Schedule 4.11, and, to the best of the Company's knowledge,
without any default thereunder of any other party thereto. No event has
occurred and is continuing which, with due notice or lapse of time or both,
would constitute a default or event of default by the Company under any such
lease or agreement or, to the best of the Company's knowledge, by any other
party thereto. The Company's possession of such property has not been
disturbed and, to the best of the Company's knowledge, no claim has been
asserted against the Company adverse to its rights in such leasehold interests.

SECTION 4.12. TAXES. The Company has filed all tax returns, federal,
state, county and local, required to be filed by it, and the Company has paid
all taxes shown to be due by such returns as well as all other taxes,
assessments and governmental charges which have become due or payable,
including without limitation all taxes which the Company is obligated to
withhold from amounts owing to employees, creditors and third parties. All
such taxes with respect to which the Company has become obligated pursuant to
elections made by the Company in accordance with generally accepted practice
have been paid and adequate reserves have been established for all taxes
accrued but not yet payable. The Federal income tax returns of the Company
have never been audited by the Internal Revenue Service. No deficiency
assessment with respect to or proposed adjustment of the Company's Federal,
state, county or local taxes is pending or, to the best of the Company's
knowledge, threatened. There is no tax lien, whether imposed by any federal,
state, county or local taxing authority, outstanding against the assets,
properties or business of the Company.

SECTION 4.13. PATENTS, TRADEMARKS, ETC. The Company owns or possesses
adequate licenses or other rights to use all trademarks, trademark
applications, service marks, service xxxx applications, trade names,
copyrights, manufacturing processes, formulae, trade secrets and know how, and
all patents and patent applications known to the Company (collectively,
"Intellectual Property"), necessary to the conduct of its business as conducted
and as proposed to be conducted, and no claim is pending or, to the best of the
Company's knowledge, threatened to the effect that the operations of the
Company infringe upon or conflict with the asserted rights of any other person
under any Intellectual Property, and there is no known basis for any such claim
(whether or not pending or threatened). No claim is pending or threatened to
the effect that any such Intellectual Property owned or licensed by the
Company, or which the Company otherwise has the right to use, is invalid or
unenforceable by the Company, and there is no basis known to the Company for
any such claim (whether or not pending or threatened). To the best of the
Company's knowledge, all technical information developed by and belonging to
the Company which has not been patented has been kept confidential. Except as
set forth on Schedule 4.13, the Company has not granted or assigned to any
other person or entity any right to manufacture, have manufactured, assemble or
sell the products or proposed products or to provide the services or proposed
services of the Company.

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SECTION 4.14. OUTSTANDING DEBT; LOANS AND ADVANCES.

(a) All of the outstanding Debt of the Company is set
forth on Schedule 4.14 ("Existing Debt"). Except as set forth on
Schedule 4.14, there exists no default under the provisions of any
instrument evidencing such Existing Debt or of any agreement
relating thereto.

(b) The Company does not have any outstanding loans or
advances to any person and is not obligated to make any such
loans or advances, except, in each case, for advances to employees
of the Company in respect of reimbursable business expenses
anticipated to be incurred by them in connection with their
performance of services for the Company.

SECTION 4.15. GUARANTEES. The Company is not a party to any
Guarantee.

SECTION 4.16. GOVERNMEENTAL APPROVALS. No registration or filing
with, or consent or approval of or other action by, any federal, state or other
governmental agency or instrumentality is or will be necessary for the valid
execution, delivery and performance by the Company of this Agreement, the
issuance, sale and delivery of the Convertible Debentures, the issuance and
delivery of the Preferred Conversion Shares upon the conversion of the
Convertible Debentures, or the issuance and delivery of the Common Conversion
Shares upon conversion of the Preferred Conversion Shares, other than the
approval by the stockholders of the Company of an amendment to the Certificate
of Incorporation to increase the authorized number of shares of Common Stock
and Preferred Stock.

SECTION 4.17. DISCLOSURE. Neither this Agreement, nor any
Schedule or Exhibit to this Agreement contains an untrue statement of a
material fact or omits a material fact necessary to make the statements
contained herein or therein not misleading. None of the statements, documents,
certificates or other items prepared or supplied by the Company with respect
to the transactions contemplated hereby contains an untrue statement of a
material fact or omits a material fact necessary to make the statements
contained therein not misleading. There is no fact which the Company has not
disclosed to the Purchaser and its counsel in writing and of which the Company
is aware which materially and adversely affects or could materially and
adversely affect the business, prospects, financial condition, operations,
property or affairs of the Company or any of its subsidiaries.

SECTION 4.18. BROKERS. The Company has no contract, arrangement or
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.

SECTION 4.19. SECURITIES ACT. The offer, sale and issuance of
the Convertible Debentures, the Preferred Conversion Shares and the Common
Conversion Shares

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(collectively, 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
any applicable state securities laws. Neither the Company nor any agent on its
behalf has solicited or will solicit any offers to sell or has offered to sell
or will offer to sell all or any part of the Securities to any Person so as to
bring the sale of such Securities by the Company within the registration
provisions of the Securities Act.

SECTION 4.20. MARGIN REGULATIONS. The Company will not, directly or
indirectly, use any of the proceeds of the Securities for the purpose, whether
immediate, incidental or ultimate, of maintaining, purchasing or carrying any
stock that is currently a "margin stock" within the meaning of Regulation G of
the Board of Governors of the Federal Reserve System (12 C.F.R. 207, as
amended) or Regulation U of such Board (12 C.F.R. 221, as amended), or
otherwise take or permit to be taken any action which would result in the
carrying out of any of the other transactions contemplated hereby or thereby
being violative of such Regulation G or Regulation U, or of Regulation T (12
C.F.R. 220, as amended), Regulation X (12 C.F.R. 224, as amended) or any other
regulation of such Board. The Company and its Subsidiaries do not own or
intend to acquire any "margin stock" within the meaning of such Regulation G or
such Regulation U.

SECTION 4.21. INSURANCE COVERAGE. Each property of the Company is
insured for the benefit of the Company in amounts deemed adequate by the
Company's management against risks usually insured against by persons operating
businesses similar to those of the Company in the localities where such
properties are located.

SECTION 4.22. ERISA. No accumulated funding deficiency (as defined in
Section 302 of ERISA and Section 412 of the Code), whether or not waived,
exists with respect to any Plan (other than a Multiemployer Plan). No
liability to the PBGC has been or is expected by the Company or any ERISA
Affiliate to be incurred with respect to any Plan (other than a Multiemployer
Plan) by the Company or any ERISA Affiliate which would have a Material
Adverse Effect. Neither the Company nor any ERISA Affiliate is a participant
in any Multiemployer Plan. The execution and delivery of this Agreement and
the issuance and sale of the Convertible Debentures will be exempt from, or
will not involve any transaction which is subject to, the prohibitions of
Section 406 of ERISA and will not involve any transaction in connection with
which a penalty could be imposed under Section 502(i) of ERISA or a tax could
be imposed pursuant to Section 4975 of the Code. The Company and its ERISA
Affiliates do not provide any benefits to former employees except as may be
required by COBRA (Section 4980B of the Code and Sections 601 et seq. of
ERISA). Neither the Company nor any ERISA Affiliate is a party to a collective
bargaining agreement or is required to bargain with any collective bargaining
unit.

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SECTION 4.23. ENVIRONMENTAL COMPLIANCE. The Company and its properties
and facilities have complied at all times and in all respects with all federal,
state, local and regional statutes, laws, ordinances and judicial or
administrative orders, judgments, rulings and regulations relating to
protection of the environment except, in any such case, where failure to comply
would not have a Material Adverse Effect.

SECTION 4.24. PERMITS AND LICENSES. The Company has all federal, state
and local governmental permits, licenses, certificates of authority any similar
authority necessary for the conduct of its business as now being conducted and
as proposed to be conducted. The Company is not in default in any material
respect under any such permit, license, certificate of authority or other
similar authority.

SECTION 4.25. BOARD COMPOSITION. Article III, Section 1 of the By-laws
provides that the number of directors which shall constitute the whole Board of
Directors of the Company (the "Board") shall be not less that three (3) nor
more than fifteen (15), with the specific number determined by a resolution of
the Board, or by the shareholders of the Company at the annual meeting.
Effective immediately upon the Closing, the current Board members will be
Xxxxxx Xxxxx, Xxxxx X. Xxxxxx, Xxxxxxx X. Xxxxx, Xxxxxxx X. Xxxxxxxxx, Xxxxxxx
X. X'Xxxx, Xxxxxx X. Xxxxx and Xxxx Xxxxx.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

SECTION 5.01. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchaser represents and warrants to the Company that:

(a) the Convertible Debentures being purchased by it are being
acquired for its own account for the purpose of investment and not with
a view to or for sale in connection with any distribution thereof;

(b) it has not employed any broker or finder in connection
with the transactions contemplated by this Agreement; and

(c) the execution, delivery and performance by it of this
Agreement have been duly authorized by all requisite action by it and
this Agreement constitutes the valid and binding obligation of it,
enforceable in accordance with its terms.

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20

ARTICLE VI

CONDITIONS TO THE OBLIGATIONS
OF THE PURCHASER

SECTION 6.01. CONDITIONS TO THE OBLIGATION OF THE PURCHASER. The
obligation of the Purchaser to purchase and pay for the Convertible Debentures
being purchased by it on the Closing Date is, at its option, subject to the
satisfaction, on or before the Closing Date, of the following conditions:

(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties of the Company contained in Article IV
shall be true, complete and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been
made on and as of such date.

(b) PERFORMANCE. The Company shall have performed and complied
with all agreements contained herein required to be performed or
complied with by it prior to or at the Closing Date.

(c) OFFICER'S CERTIFICATE. The Company shall have executed and
delivered to the Purchaser an Officer's Certificate to the effects set
forth in (a) and (b) above.

(d) INVESTOR'S RIGHTS AGREEMENT. The Company shall have executed
and delivered the Investor's Rights Agreement to the Purchaser.

(e) OPINION OF COUNSEL. The Purchaser shall have received an
opinion of the General Counsel of the Company, such opinion to be
substantially in the form of Exhibit F attached hereto.

(f) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
proceedings to be taken by the Company in connection with the
transactions contemplated hereby and all documents incident thereto shall
be satisfactory in form and substance to the Purchaser and its counsel,
and the Purchaser and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as
they reasonably may request.

(g) SUPPORTING DOCUMENTS. The Purchaser and its counsel shall
have received copies of the following documents:

(i) (A) the Certificate of Incorporation (other than the
Certificate of Designation), certified as of a recent date by
the Secretary of State of the State of Delaware, and (B) a
certificate of said Secretary dated as of a recent date as to the
due incorporation and good standing of the Company;

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(ii) a certificate of the Secretary or an Assistant
Secretary of the Company dated the Closing Date and certifying:
(A) that attached thereto is a true and complete copy of the
By-laws of the Company as in effect on the date of such
certification; (B) that attached thereto is a true and complete
copy of all resolutions adopted by the Board of Directors or the
stockholders of the Company authorizing the execution, delivery and
performance of this Agreement, and the issuance, sale and delivery
of the Convertible Debentures and that all such resolutions are in
full force and effect and are all the resolutions adopted in
connection with the transactions contemplated by this Agreement;
(C) that the Certificate of Incorporation has not been amended
since the date of the last amendment referred to in the certificate
delivered pursuant to clause (i)(A) above; and (D) to the
incumbency and specimen signature of each officer of the Company
executing this Agreement, the Convertible Debentures and any
certificate or instrument furnished pursuant hereto, and a
certification by another officer of the Company as to the
incumbency and signature of the officer signing the certificate
referred to in this clause (ii); and

(iii) such additional supporting documents and other
information with respect to the operations and affairs of the
Company as the Purchaser or its counsel reasonably may request.

(h) THIRD PARTY CONSENTS, PERMITS AND WAIVERS. The Company shall
have obtained any and all consents, permits and waivers necessary or
appropriate for the consummation of the transactions contemplated by this
Agreement.

(i) NO INJUNCTIONS OR RESTRAINTS. There shall be no action, suit,
investigation or proceeding pending, or, to the best of the Company's
knowledge, threatened, against or affecting the Company, any of the
Company's properties or rights, or any of the Company's officers or
directors, before any court, arbitrator or administrative or governmental
body which (i) seeks to restrain, enjoin, or prevent the consummation of
the transactions contemplated by this Agreement or (ii) questions the
validity or legality of any such transactions or seeks to recover damages
or to obtain other relief in connection with any such transactions and, to
the best of the Company's knowledge, there shall be no valid basis for any
such action, proceeding or investigation.

All such documents shall be satisfactory in form and substance to the Purchaser
and its counsel.

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ARTICLE VII

CONDITIONS TO THE OBLIGATIONS OF THE COMPANY

SECTION 7.01. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY. The
obligation of the Company to issue and sell the Convertible Debentures on the
Closing Date is, at its option, subject to the satisfaction, on or before the
Closing Date, of the following conditions:

(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT. The
representations and warranties of the Purchaser contained in Article V
shall be true, complete and correct on and as of the Closing Date with
the same effect as though such representations and warranties had been
made on and as of such date.

(b) PERFORMANCE. The Purchaser shall have performed and complied
with all agreements contained herein required to be performed or
complied with by it prior to or at the Closing Date.

(c) OFFICER'S CERTIFICATE. The Purchaser shall have delivered to
the Company a certificate of an officer of the Purchaser to the effects
set forth in (a) and (b) above.

(d) ALL PROCEEDINGS TO BE SATISFACTORY. All corporate and other
proceedings to be taken by the Purchaser in connection with the
transactions contemplated hereby and all documents incident thereto
shall be satisfactory in form and substance to the Company and its
counsel, and the Company and its counsel shall have received all such
counterpart originals or certified or other copies of such documents as
they reasonably may request.

(e) NO INJUNCTIONS OR RESTRAINTS. There shall be no action, suit,
investigation or proceeding pending, or, to the best of the Company's
knowledge, threatened, against or affecting the Company, any of the
Company's properties or rights, or any of the Company's officers or
directors, before any court, arbitrator or administrative or
governmental body which (i) seeks to restrain, enjoin, or prevent the
consummation of the transactions contemplated by this Agreement or (ii)
questions the validity or legality of any such transactions or seeks to
recover damages or to obtain other relief in connection with any such
transactions and, to the best of the Company's knowledge, there shall be
no valid basis for any such action, proceeding or investigation.

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ARTICLE VIII

COVENANTS OF THE COMPANY

The Company covenants and agrees with the Purchaser that so long as any
Convertible Debenture is outstanding:

SECTION 8.01. FINANCIAL STATEMENTS AND REPORTS. The Company shall
furnish to each holder of a Convertible Debenture:

(a) as soon as practicable, and in any event at least 30 days prior
to the beginning of each fiscal year of the Company, consolidated
statements of forecasted income and cash flow and consolidated
forecasted balance sheet of the Company for each month and each fiscal
quarter in such fiscal year and for the period from the beginning of
such fiscal year to the end of each such month and end of each such
fiscal quarter, in each case as at the end of each such month and fiscal
quarter;

(b) as soon as practicable after the end of each month in each
fiscal year (other than the last month in each fiscal year), and in any
event within 30 days thereafter, consolidated statements of income and
cash flow of the Company for such month and for the period from the
beginning of the current fiscal year to the end of such month and a
consolidated balance sheet of the Company as at the end of such month,
and setting forth, in each case, in comparative form, figures for the
corresponding months in the preceding fiscal year (other than any such
corresponding months ended prior to the Closing) and figures in the
Company's budget for the corresponding months in the current fiscal
year;

(c) as soon as practicable after the end of each fiscal quarter of
the Company in each fiscal year (other than the last fiscal quarter in
each fiscal year), and in any event within forty-five (45) days
thereafter, a consolidated balance sheet of the Company and the related
consolidated statements of income, stockholders' equity and cash flows,
unaudited but prepared in accordance with generally accepted accounting
principles and certified by the Chief Financial Officer of the Company,
such consolidated balance sheet to be as of the end of such fiscal
quarter and such consolidated statements of income, stockholders' equity
and cash flows to be for such fiscal quarter and for the period from the
beginning of the fiscal year to the end of such fiscal quarter, in each
case with comparative statements for the corresponding period in the
prior fiscal year;

(d) as soon as practicable after the end of each fiscal year of the
Company, and in any event within ninety (90) days thereafter, a
consolidated balance sheet of the Company as of the end of such fiscal
year and the related consolidated statements of income, stockholders'
equity and cash flows for the

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fiscal year then ended, prepared in accordance with generally accepted
accounting principles and certified by a firm of independent public
accountants of recognized national standing selected by the Board of
Directors of the Company;

(e) promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices and reports as it shall
send to its stockholders and copies of all registration statements
(without exhibits) and all reports which it files with the Commission;

(f) promptly upon sending, all press releases that the Company
disseminates;

(g) promptly upon receipt thereof, a copy of each other report
submitted to the Company or any subsidiary by independent accountants
in connection with any annual, interim or special audit made by them of
the books of the Company or any subsidiary;

(h) as soon as practicable and in any event within five days after
any officer of the Company obtaining knowledge (i) of any condition or
event which, in the opinion of management of the Company, would have a
Material Adverse Effect (ii) that any Person has given any notice from
any Person to the Company or taken any other action with respect to a
claimed default or event or condition of the type referred to in Section
9.01(ii), (iii) of the institution of any litigation involving claims
against the Company equal to or greater than $100,000 with respect to
any single cause of action or of any adverse determination in any court
proceeding in any litigation involving a potential liability to the
Company equal to or greater than $100,000 with respect to any single
cause of action which makes the likelihood of an adverse determination
in such litigation against the Company substantially more probable, or
(iv) of any regulatory proceeding which may have a Material Adverse
Effect on the Company, an Officer's Certificate specifying the nature
and period of existence of any such condition or event, or specifying
the notice given or action taken by such Person and the nature of any
such claimed default, event or condition, or specifying the details of
such proceeding, litigation or dispute and what action the Company has
taken, is taking or proposes to take with respect thereto;

(i) promptly after the filing or receiving thereof, copies of all
reports and notices which the Company files under ERISA with the
Internal Revenue Service or the PBGC or the U.S. Department of Labor or
which the Company receives from such corporation; and

(j) with reasonable promptness, such other information respecting
the condition or operations, financial or otherwise, of the Company as
such holder may reasonably request.

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Together with each delivery of financial statements required by clauses (c) and
(d) above, the Company will deliver to each holder of a Convertible Debenture
an Officer's Certificate stating that there exists no Event of Default or
Default, or, if any Event of Default or Default exists, specifying the nature
and period of existence thereof and what action the Company proposes to take
with respect thereto. Together with each delivery of financial statements
required by clause (d) above, the Company will deliver to each holder of a
Convertible Debenture a certificate of such accountants stating that, in making
the audit necessary for their report on such financial statements, they have
obtained no knowledge of any Event of Default or Default, or, if they have
obtained knowledge of any Event of Default or Default, specifying the nature
and period of existence thereof.

The Company also covenants that immediately after any officer obtains
knowledge of an Event of Default or Default, it will deliver to each holder of
a Convertible Debenture an Officer's Certificate specifying the nature and
period of existence thereof and what action the Company proposes to take with
respect thereto.

SECTION 8.02. CORPORATE EXISTENCE. The Company shall maintain its
corporate existence, rights and franchises in full force and effect.

SECTION 8.03. MAINTENANCE OF PROPERTIES AND INSURANCE. The Company will
maintain or cause to be maintained in good repair, working order and condition
all properties used or useful in the business of the Company and from time to
time will make or cause to be made appropriate repairs, renewals and
replacements thereof. The Company shall maintain its properties and business,
with financially sound and reputable insurers, insurance against such
casualties and contingencies and of such types and in such amounts as is
customary for companies similarly situated, including but not limited to fire
and other risks insured against by extended coverage, product liability
insurance and public liability insurance against claims for personal injury or
death or property damage occurring upon, in, about or in connection with the
use of any properties owned, occupied or controlled by the Company, which
insurance shall be deemed by the Company to be sufficient; and maintain
workers' compensation insurance and such other insurance as may be required by
law.

SECTION 8.04. INSPECTION, CONSULTATION AND ADVICE. The Company shall
permit any holder of a Convertible Debenture to visit and inspect any of the
properties of the Company, examine its books and take copies and extracts
therefrom, discuss the affairs, finances and accounts of the Company with its
officers, employees and public accountants (and the Company hereby authorizes
said accountants to discuss with any holder of a Convertible Debenture such
affairs, finances and accounts), and consult with and advise the management of
the Company as to its affairs, finances and accounts, all at reasonable times
and upon reasonable notice.

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SECTION 8.05. RESTRICTIVE AGREEMENTS PROHIBITED. The Company shall not
become a party to any agreement which by its terms restricts the Company's
performance of this Agreement.

SECTION 8.06. TRANSACTIONS WITH AFFILIATES. Except for transactions
contemplated by this Agreement, the Company shall not enter into any
transaction with any director, officer, employee or holder of more than 5% of
the outstanding capital stock of any class or series of capital stock of the
Company, member of the family of any such person, or any corporation,
partnership, trust or other entity in which any such person, or member of the
family of any such person is a director, officer, trustee, partner or holder of
more than 5% of the outstanding capital stock thereof.

SECTION 8.07. USE OF PROCEEDS. The Company shall use the proceeds from
the sale of the Convertible Debentures solely for working capital or other such
uses as may be authorized by the Board of Directors.

SECTION 8.08. SUBSIDIARIES. The Company shall not create or have any
Subsidiaries.

SECTION 8.09. COMPLIANCE WITH LAWS. The Company shall comply with all
applicable laws, rules, regulations and orders, noncompliance with which could
have a Material Adverse Effect.

SECTION 8.10. KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Company
shall keep true records and books of account, in which full and complete
entries will be made in accordance with generally accepted accounting
principles consistently applied, reflecting all financial and business
transactions of the Company, and in which, for each fiscal year, all proper
accruals and reserves for depreciation, depletion, obsolescence, amortization,
taxes, bad debts and other purposes in connection with its business shall be
made as shall be required under generally accepted accounting principles
consistently applied.

SECTION 8.11. OBLIGATIONS AND TAXES. The Company shall pay all of its
indebtedness and obligations promptly and in accordance with their terms and
pay and discharge promptly all taxes, assessments and governmental charges or
levies imposed upon it or its income or profits or in respect of its property,
before the same shall become in default, as well as all lawful claims for labor
and supplies or otherwise which, if unpaid, might become a lien or charge upon
such properties or any part thereof; provided, however, that the Company shall
not be required to pay and discharge or to cause to be paid and discharged any
tax, assessment, charge, levy or claim so long as the validity or amount
thereof shall be contested in good faith by appropriate proceedings and the
Company shall set aside on its books such reserves as are required by generally
accepted accounting principles with respect to any such tax, assessment,
charge, levy or claim so contested.

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SECTION 8.12. TRANSFER AND EXCHANGE OF CONVERTIBLE DEBENTURES; LOST
CONVERTIBLE DEBENTURES. Upon surrender for registration of transfer of any
Convertible Debenture at the principal office of the Company, the Company
shall, at its expense, execute and deliver one or more new Convertible
Debentures of like tenor and of a like aggregate principal amount, registered
in the name of such transferee or transferees. At the option of the holder of
any Convertible Debenture, such Convertible Debenture may be exchanged for
other Convertible Debentures of like tenor and of any authorized denominations,
of a like aggregate principal amount, upon surrender of the Convertible
Debenture to be exchanged at the principal office of the Company. Whenever any
Convertible Debentures are so surrendered for exchange, the Company shall, at
its expense, execute and deliver the Convertible Debentures which the holder
making the exchange is entitled to receive. Every Convertible Debenture
surrendered for registration of transfer or exchange shall be duly endorsed, or
be accompanied by a written instrument of transfer duly executed, by the holder
of such Convertible Debenture or such holder's attorney duly authorized in
writing. Any Convertible Debenture or Convertible Debentures issued in
exchange for any Convertible Debenture or upon transfer thereof shall carry the
rights to unpaid interest and interest to accrue which were carried by the
Convertible Debenture so exchanged or transferred, so that neither gain nor
loss of interest shall result from any such transfer or exchange. Upon receipt
of written notice from the holder of any Convertible Debenture of the loss,
theft, destruction or mutilation of such Convertible Debenture and, in the case
of any such loss, theft or destruction, upon receipt of such holder's unsecured
indemnity agreement, or in the case of any such mutilation upon surrender and
cancellation of such Convertible Debenture, the Company will make and deliver a
new Convertible Debenture, of like tenor, in lieu of the lost, stolen,
destroyed or mutilated Convertible Debenture. The Purchaser's own agreement of
indemnity shall constitute indemnity satisfactory to the Company for purposes
of this Section 8.12.

SECTION 8.13. LIMITATION ON DEBT. The Company will not create, incur,
assume or otherwise become or be liable with respect to any Debt except (i)
Debt represented by the Convertible Debentures; (ii) Existing Debt of the
Company; and (iii) Debt of the Company aggregating not more than $500,000 in
unpaid principal amount at any time outstanding.

SECTION 8.14. LIMITATION ON LIENS. The Company will not create,
assume or suffer to exist any Lien upon any of its properties or assets,
whether now owned or hereafter acquired and whether or not provision is made by
equally and ratably securing the Convertible Debentures; provided, however,
that the foregoing restriction and limitation shall not apply to the following
Liens:

(i) Liens for taxes, assessments or governmental charges
or levies not yet delinquent or which are being contested in good
faith by appropriate proceedings;

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(ii) other Liens incidental to the conduct of their
business or the ownership of their properties and assets which were
not incurred in connection with the borrowing of money or the
obtaining of advances or credit, and which do not in the aggregate
materially detract from the value of their properties or assets, or
materially impair the use thereof in the operation of their business;
and

(iii) any Lien existing at the time of acquisition upon any
real or personal property acquired by the Company through purchase,
merger or consolidation or otherwise, whether or not assumed by the
Company, or placed upon real or personal property being acquired by
the Company (within six months of such acquisition) to secure all or a
portion of the purchase price thereof or any Debt incurred to finance
all or any portion of such purchase price; provided, however, that (x)
such property is not and shall not thereby become encumbered in an
amount in excess of the lesser of the cost thereof or fair value
thereof (as determined in good faith by the Company), and (y) any such
Lien shall not encumber any other property of the Company;
and provided, further, that the aggregate amount at any time of all
such Debt secured under this subparagraph (iii) shall be permitted by
Section 8.13 (and any Lien renewing, extending or refunding any Lien
permitted by this clause (iii), provided that the principal amount
secured it not increased, the Lien is not extended to other property
and the Debt secured thereby would be permitted under the provisions
of Section 8.13).

SECTION 8.15. LIMITATION ON RESTRICTED PAYMENTS. The Company will not
directly or indirectly make any Restricted Payments.

SECTION 8.16. COVENANT REGARDING STOCKHOLDER VOTE AND FILING OF
CERTIFICATE OF DESIGNATION.

(a) On or prior to February 1, 1997 the Company will have
solicited and obtained the requisite approval of its stockholders (the
"Stockholder Approval") to an amendment to the Certificate of
Incorporation (the "Amendment") to increase (i) the number of
authorized shares of Common Stock by at least 20 million shares and
(ii) the number of authorized shares of Preferred Stock by at least 18
million shares.

(b) Within two (2) Business Days after obtaining the
Stockholder Approval, the Company shall (i) file the Amendment and the
Certificate of Designation with the Secretary of State of the State of
Delaware, and (ii) take such other action as may be necessary to
enable the Purchaser, in its sole discretion, to convert any
Convertible Debenture into Series D Preferred Stock at any time
thereafter and from time to time.

(c) After giving effect to Sections 8.16(a) and (b)
above, upon the conversion of any Convertible Debenture, the Preferred
Conversion Shares and,

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upon conversion of the Preferred Conversion Shares, the Common
Conversion Shares, will have been duly authorized and will be validly
issued, fully paid and nonassessable with no personal liability
attaching to the ownership thereof and will be free and clear of all
Liens imposed by or through the Company. In addition, after giving
effect to Sections 8.16(a) and (b), the Preferred Conversion Shares
and the Common Conversion Shares will have been duly reserved for
issuance upon conversion of the Convertible Debenture or conversion of
the Preferred Conversion Shares, respectively. Neither the issuance,
sale or delivery of the Preferred Conversion Shares or the Common
Conversion Shares will be subject to any preemptive right of
stockholders of the Company or to any right of first refusal or other
right in favor of any person.

SECTION 8.17. BOARD NOMINEES. On the Closing Date, the Board will
adopt a resolution fixing the number of members of the Board at seven. Subject
to the right of the holders of Preferred Stock, the Company will only nominate
for election as directors of the Company persons approved in advance and in
writing by the Purchaser.

ARTICLE IX

EVENTS OF DEFAULT

SECTION 9.01. ACCELERATION. If any of the following events shall
occur and be continuing for any reason whatsoever (and whether such occurrence
shall be voluntary or involuntary or come about or be effected by operation of
law or otherwise):

(i) the Company defaults in the payment of any principal
of or interest on any Convertible Debenture when the same shall become
due, either by the terms thereof or otherwise as herein provided; or

(ii) the Company defaults (whether as primary obligor or
as guarantor or other surety) in any payment of principal of or
interest on any other obligation for money borrowed beyond any period
of grace provided with respect thereto, or the Company fails to
perform or observe any other agreement, term or condition contained in
any agreement under which any such obligation is created (or if any
other event thereunder or under any such agreement shall occur and be
continuing) and the effect of such failure or other event is to cause,
or to permit the holder or holders of such obligation (or a trustee on
behalf of such holder or holders) to cause, such obligation to become
due (or to be repurchased by the Company) prior to any stated
maturity; or

(iii) any representation or warranty made by the Company
herein or by the Company or any of its officers in any writing
furnished in connection with or

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30

pursuant to this Agreement shall be false in any material respect on
the date as of which made; or

(iv) the Company fails to perform or observe (A) any term,
covenant or agreement contained in Sections 8.01(h)(i), 8.02, 8.04,
8.08, 8.09, 8.11, 8.13, 8.14, 8.15, 8.16 or 8.17, or (B) any other
agreement, covenant, term or condition contained herein and such
failure shall not be remedied within 30 days after any officer obtains
actual knowledge thereof; or

(v) a majority of the members of the Board of Directors
shall be persons nominated by a person or entity other than the
Company; or

(vi) the Company makes an assignment for the benefit of
creditors or is generally not paying its debts as such debts become
due; or

(vii) any decree or order for relief in respect of the
Company is entered under any bankruptcy reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or
liquidation or similar law, whether now or hereafter in effect (the
"Bankruptcy Law"), of any jurisdiction; or

(viii) the Company petitions or applies to any tribunal for,
or consents to, the appointment of, or taking possession by, a
trustee, receiver, custodian, liquidator or similar official of the
Company, or of any substantial part of the assets of the Company, or
commences a voluntary case under the Bankruptcy Law of the United
States or any proceedings relating to the Company under the Bankruptcy
Law of any other jurisdiction; or

(ix) any such petition or application is filed, or any
such proceedings are commenced, against the Company and the Company by
any act indicates its approval thereof, consent thereto or
acquiescence therein, or an order, judgment or decree is entered
appointing any such trustee, receiver, custodian, liquidator or
similar official, or approving the petition in any such proceedings,
and such order, judgment or decree remains unstayed and in effect for
more than 30 days; or

(x) any order, judgment or decree is entered in any
proceedings against the Company decreeing the dissolution of the
Company and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or

(xi) any order, judgment or decree is entered in any
proceedings against the Company decreeing a split-up of the Company
which requires the divestiture of assets representing a substantial
part of the consolidated assets of the Company (determined in
accordance with generally accepted accounting principles) for any of
the three fiscal years then most recently ended, and such order,
judgment or decree remains unstayed and in effect for more than 60
days; or

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(xii) any judgment or order, or series of judgments or
orders, is rendered against the Company and either (A) enforcement
proceedings have been commenced by any creditor upon such judgment or
order or (B) within 60 days after entry thereof, such judgment is not
discharged or execution thereof stayed pending appeal, or within 60
days after the expiration of any such stay, such judgment is not
discharged;

then (a) if such event is an Event of Default specified in clause (i) of this
Section 9.01 the holder of any Convertible Debenture (other than the Company or
affiliates) may at its option, by notice in writing to the Company, declare
such Convertible Debenture to be, and such Convertible Debenture shall
thereupon be and become, immediately due and payable at par together with
interest accrued thereon, without presentment, demand, protest or other notice
of any kind, all of which are hereby waived by the Company, (b) if such event
is an Event of Default specified in clause (vi), (vii), (viii) or (ix) of
this Section 9.01 with respect to the Company, all of the Convertible
Debentures at the time outstanding shall automatically become immediately due
and payable at par together with interest accrued thereon, without presentment,
demand, protest or notice of any kind, all of which are hereby waived by the
Company, and (c) if such event is not an Event of Default specified in clause
(vi), (vii), (viii) or (ix) of this Section 9.01 with respect to the Company,
the Required Holder(s) may at its or their option, by notice in writing to the
Company, declare all of the Convertible Debentures to be, and all of the
Convertible Debentures shall thereupon be and become, immediately due and
payable together with interest accrued thereon with respect to each Convertible
Debenture, without presentment, demand, protest or other notice of any kind,
all of which are hereby waived by the Company.

SECTION 9.02. RESCISSION OF ACCELERATION. At any time after any or
all of the Convertible Debentures shall have been declared immediately due and
payable pursuant to Section 9.01, the Required Holder(s) may, by notice in
writing to the Company, rescind and annul such declaration and its consequences
if (i) the Company shall have paid all overdue interest on the Convertible
Debentures, the principal payable with respect to any Convertible Debentures
which have become due otherwise than by reason of such declaration, and
interest on such overdue interest and overdue principal at the rate specified
in the Convertible Debentures, (ii) the Company shall not have paid any amounts
which have become due solely by reason of such declaration, (iii) all Events of
Default and Defaults, other than non-payment of amounts which have become due
solely by reason of such declaration, shall have been cured or waived pursuant
to Section 10.03, and (iv) no judgment or decree shall have been entered for
the payment of any amounts due pursuant to the Convertible Debentures or this
Agreement. No such rescission or annulment shall extend to or affect any
subsequent Event of Default or Default or impair any right arising therefrom.

SECTION 9.03. NOTICE OF ACCELERATION OR RESCISSION. Whenever any
Convertible Debenture shall be declared immediately due and payable pursuant to
Section

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9.01 or any such declaration shall be rescinded and annulled pursuant to
Section 9.02, the Company shall forthwith give written notice thereof to the
holder of each Convertible Debenture at the time outstanding.

SECTION 9.04. OTHER REMEDIES. If any Event of Default or Default
shall occur and be continuing, the holder of any Convertible Debenture may
proceed to protect and enforce its rights under this Agreement and such
Convertible Debenture by exercising such remedies as are available to such
holder in respect thereof under applicable law, either by suit in equity or by
action at law, or both, whether for specific performance of any covenant or
other agreement contained in this Agreement or in aid of the exercise of any
power granted in this Agreement. No remedy conferred in this Agreement upon
the holder of any Convertible Debenture is intended to be exclusive of any
other remedy, and each and every such remedy shall be cumulative and shall be
in addition to every other remedy conferred herein or now or hereafter existing
at law or in equity or by statute or otherwise.

ARTICLE X

MISCELLANEOUS

SECTION 10.01. PAYMENTS. The Company will make payments of principal
of and interest on any Convertible Debenture by wire transfer of immediately
available funds for credit (not later than 12:00 noon, New York City time, on
the date due) (i) in the case of the Purchaser to the account or accounts as
specified by the Purchaser in writing and (ii) in the case of any other holder
of a Convertible Debenture pursuant to the payments instructions provided by
such holder. The Purchaser agrees that, before disposing of any Convertible
Debenture, the Purchaser will make a notation thereon (or on a schedule
attached thereto) of all principal payments previously made thereon and of the
date to which interest thereon has been paid. Anything in this Agreement or in
the Convertible Debenture to the contrary notwithstanding, any payment in
respect of the Convertible Debenture that is due on a date other than a
Business Day shall be made on the next succeeding Business Day. If the date
for any payment is extended to the next succeeding Business Day by reason of
the preceding sentence, the period of such extension shall be included on the
computation of the amount payable on such Business Day. The Company agrees to
afford the benefits of this Section 10.01 to any Transferee which shall have
made the same agreement as the Purchaser has made in this Section 10.01.

SECTION 10.02. EXPENSES. The Company agrees, whether or not the
transactions contemplated hereby shall be consummated, to pay, and save you and
any Transferee harmless against liability for the payment of, all out-of-pocket
expenses arising in connection with such transactions, including (i) all
document production and duplication charges and the fees and expenses of any
special counsel engaged by you or

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33

such Transferee in connection with this Agreement, the transactions
contemplated hereby and any subsequent proposed modification of, or proposed
consent under, this Agreement, whether or not such proposed modification shall
be effected or proposed consent granted, and (ii) the costs and expenses,
including attorneys' fees, incurred by you or such Transferee in enforcing (or
determining whether or how to enforce) any rights under this Agreement or the
Convertible Debentures or in responding to any subpoena or other legal process
or informal investigative demand issued in connection with this Agreement or
the transactions contemplated hereby or by reason of your or such Transferee's
having acquired any Convertible Debenture, including without limitation costs
and expenses incurred in any bankruptcy case. The obligations of the Company
under this Section 10.02 shall survive the transfer of any Convertible
Debenture or portion thereof or interest therein by you or any Transferee and
the payment of any Convertible Debenture.

SECTION 10.03. CONSENT TO AMENDMENTS. This Agreement may be amended,
and the Company may take any action herein prohibited, or omit to perform any
act herein required to be performed by it, if the Company shall obtain the
written consent to such amendment, action or omission to act, of the Required
Holder(s) except that, without the written consent of the holder or holders of
all Convertible Debentures at the time outstanding, no amendment to this
Agreement shall change the maturity of any Convertible Debenture, or change the
principal of, or the rate or time of payment of interest on any Convertible
Debenture, or change the proportion of the principal amount of the Convertible
Debentures required with respect to any consent, amendment, waiver or
declaration. Each holder of any Convertible Debenture at the time or
thereafter outstanding shall be bound by any consent authorized by this Section
10.03, whether or not such Convertible Debenture shall have been marked to
indicate such consent, but any Convertible Debentures issued thereafter may
bear a notation referring to any such consent. No course of dealing between
the Company and the holder of any Convertible Debenture nor any delay in
exercising any rights hereunder or under any Convertible Debenture shall
operate as a waiver of any rights of any holder of such Convertible Debenture.

SECTION 10.04. PERSONS DEEMED OWNERS; PARTICIPATIONS. Prior to due
presentment for registration of transfer, the Company may treat the Person in
whose name any Convertible Debenture is registered as the owner and holder of
such Convertible Debenture for the purpose of receiving payment of principal
of, interest on such Convertible Debenture and for all other purposes
whatsoever, whether or not such Convertible Debenture shall be overdue, and the
Company shall not be affected by notice to the contrary. Subject to the
preceding sentence, the holder of any Convertible Debenture may from time to
time grant participations in such Convertible Debenture to any Person on such
terms and conditions as may be determined by such holder in its sole and
absolute discretion.

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SECTION 10.05. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made herein or any certificate or instrument
delivered by the parties pursuant to or in connection with this Agreement shall
survive the execution and delivery of this Agreement, the issuance, sale and
delivery of the Convertible Debenture, the transfer by the Purchaser of any
Convertible Debenture or portion thereof or interest therein and the payment of
any Convertible Debenture, and may be relied upon by any Transferee, regardless
of any investigation made at any time by or on behalf of you or any Transferee.

SECTION 10.06. BROKERAGE. Each party hereto will indemnify and hold
harmless the others against and in respect of any claim for brokerage or other
commissions relative to this Agreement or the transactions contemplated hereby,
based in any way on agreements, arrangements or understandings made or claimed
to have been made by such party with any third party.

SECTION 10.07. PARTIES IN INTEREST. All representations, covenants
and agreements contained in this Agreement by or on behalf of any of the
parties hereto shall bind and inure to the benefit of the respective successors
and assigns of the parties hereto whether so expressed or not. Without
limiting the generality of the foregoing but subject to the proviso contained
therein, all representations, covenants and agreements benefiting the Purchaser
shall inure to the benefit of any Transferee.

SECTION 10.09. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed effectively
given: (i) upon personal delivery to the party to be notified; (ii) upon
receipt at the address specified below after having been sent by certified or
registered mail, return receipt requested, postage prepaid; or (iii) 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 to the party to be notified at the address set forth below:

(a) if to the Purchaser, to

H&Q Air South Investors, L.P.
Xxx Xxxx Xxxxxx
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000

with a copy to

Xxxxxxx X. Xxxxxx, Esq.
Xxxxxx Godward Xxxxxx Xxxxxxxxx & Xxxxx
Five Palo Alto Square
0000 Xx Xxxxxx Xxxx
Xxxx Xxxx, Xxxxxxxxxx 00000-0000
(000) 000-0000

(000) 000-0000 (fax)

(b) if to the Company, to

Air South Airlines, Inc.
0000 Xxxxxxx Xxxxxxxxx
Xxxx Xxxxxxxx, Xxxxx Xxxxxxxx 00000

with a copy to

Xxxxx X. Xxxxxxxx, Esq.
Monteith Law Offices
0000 Xxxxxxxx Xxxxxx
Xxxxxxxx, Xxxxx Xxxxxxxx 00000

(c) if to any holder of any Convertible Debenture
(other than the Purchaser), at such addresses
as shall have been furnished in writing to
the Company;

or, in any such case, at such other address or addresses as shall have been
furnished in writing by such party to the others.

SECTION 10.09. ENTIRE AGREEMENT. This Agreement, including the
Schedules and Exhibits hereto, constitutes the sole and entire agreement of the
parties with respect to the subject matter hereof. All Schedules and Exhibits
hereto are hereby incorporated herein by reference.

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

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SECTION 10.10. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.

SECTION 10.11. SEVERABILITY. If any provision of this Agreement shall
be declared void or unenforceable by any judicial or administrative authority,
the validity of any other provision and of the entire Agreement shall not be
affected thereby.

SECTION 10.12. DESCRIPTIVE HEADINGS. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted for reference
only and shall not limit or otherwise affect the meaning hereof.

SECTION 10. 13. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE.

SECTION 10.14. GENDER; PLURALS. Words of the masculine gender shall
be deemed and construed to include correlative words of the feminine and neuter
genders. Words importing the singular number shall include the plural number
and vice versa.

IN WITNESS WHEREOF, the Company and the Purchaser have executed this
Agreement as of the day and year first above written.

AIR SOUTH AIRLINES INC.

By: /s/ Xxxxxxx X. Xxxxx
----------------------------------
Name: Xxxxxxx X. Xxxxx
Title: Chairman

H&Q AIR SOUTH AIRLINES, L.P.

By: /s/ Xxxxxx Xxxxxxxxxxxx
----------------------------------
Name: Xxxxxx Xxxxxxxxxxxx
Title: Attorney-in-Fact

32
37
EXHIBIT A
38

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON
OTHER WRITTEN EVIDENCE IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION DOES NOT REQUIRE REGISTRATION.

EXHIBIT A

FORM OF CONVERTIBLE DEBENTURE

AIR SOUTH AIRLINES, INC.

6% CONVERTIBLE DEBENTURE DUE AUGUST __, 1999

No. _____________ August __, 1996
$________________

FOR VALUE RECEIVED, the undersigned, AIR SOUTH AIRLINES, INC. (the
"Company"), a corporation organized and existing under the laws of the State of
Delaware, hereby promises to pay ________________________________, or
registered assigns, the principal sum of _________________________________
DOLLARS (together with all additional sums of deferred interest, if any, added
to the principal balance of this Convertible Debenture as provided below) on
August __, 1999, (the "Maturity Date") with interest (computed on the basis of
a 360-day year of 12 30-day months) (a) on the unpaid balance thereof at the
rate of 6% per annum from the date hereof, payable quarterly on the last day of
March, June, September and December in each year, commencing with the March 31,
June 30, September 30 or December 31 next succeeding the date hereof, until
the principal hereof shall have become due and payable, and (b) on any overdue
payment of principal or any overdue payment of interest, payable quarterly as
aforesaid (or, at the option of the registered holder hereof, on demand), at a
rate per annum from time to time equal to the greater of (i) 8% or (ii) 2.0%
over the rate of interest publicly announced by Xxxxxx Guaranty Trust Company
of New York from time to time in New York City as its Prime Rate; but in no
event shall the rate of interest exceed the maximum rate of nonusurious
interest permitted by law to be paid by the Company (and to the extent
permitted by law, interest on any overdue principal or interest thereon).
39

This convertible debenture is one of a series of convertible
debentures (the "Convertible Debentures") issued pursuant to a Convertible
Debenture Purchase Agreement, dated as of August __, 1996 (the "Agreement"),
between the Company and H&Q Air South Investors, L.P. and is entitled to the
benefits thereof. Capitalized terms used herein and not otherwise defined
shall have the meaning ascribed thereto in the Agreement.

Interest accruing on this Convertible Debenture and remaining unpaid
on the last day of March, June, September and December in each year, commencing
with the March 31, June 30, September 30 or December 31 next succeeding the
date hereof and extending through the Maturity Date, shall be added to the
outstanding principal balance of this Convertible Debenture with effect as of
such date and any interest thereafter shall be due and payable in cash
according with the terms hereof.

Payments of principal of and interest on this Convertible Debenture
are to be made at H&Q Air South Investors, L.P., Xxx Xxxx Xxxxxx, Xxx
Xxxxxxxxx, Xxxxxxxxxx, 00000, or at such other place as the holder hereof shall
designate to the Company in writing, in lawful money of the United States of
America. All payments made hereunder, whether at maturity or as a result of
acceleration, shall be allocated first to costs and expenses of the holder
resulting from collection efforts with respect to this Convertible Debenture,
second to accrued but unpaid interest, and third to principal.

This Convertible Debenture is a registered Convertible Debenture and,
as provided in the Agreement, upon surrender of this Convertible Debenture for
registration of transfer, duly endorsed, or accompanied by a written instrument
of transfer duly executed, by the registered holder hereof or such holder's
attorney duly authorized in writing, a new Convertible Debenture for a like
principal amount will be issued to, and registered in the name of, the
transferee. Prior to due presentment for registration of transfer, the Company
may treat the person in whose name this Convertible Debenture is registered as
the owner hereof for the purpose of receiving payment and for all other
purposes, and the Company shall not be affected by any notice to the contrary.

This Convertible Debenture may be prepaid, in whole or in part from
time to time, without penalty.

The outstanding principal balance and accrued interest on this
Convertible Debenture may be converted in whole or in part at any time or from
time to time at the option of the holder or may automatically be converted into
shares of Series D Preferred Stock, all as set forth in the Agreement.

2
40

If an Event of Default, as defined in the Agreement, shall occur and
be continuing, the principal of this Convertible Debenture may be declared or
otherwise become due and payable in the manner and with the effect provided in
the Agreement.

THIS CONVERTIBLE DEBENTURE IS INTENDED TO BE PERFORMED IN THE STATE OF
DELAWARE AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAW OF SUCH
STATE.

AIR SOUTH AIRLINES, INC.

By:
----------------------------------
Name: Xxxxxxx X. Xxxxx
Title: Chairman of the Board

3
41

FORM OF

NOTICE OF CONVERSION

TO BE EXECUTED IF HOLDER DESIRES TO CONVERT
THIS CONVERTIBLE DEBENTURE)

TO: AIR SOUTH AIRLINES, INC.

The undersigned hereby irrevocably elects to convert the principal
balance, or portion thereof specified below, of this Convertible Debenture into
the number of shares of Series D Preferred Stock of the Company determined in
accordance with and under the Agreement and requests that certificates for the
shares of Series D Preferred Stock to be issued upon such conversion be issued
in the name of:

----------------------------------
(Please Print Name)

Address (print):

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

----------------------------------
Social Security Number

----------------------------------
(Please print principal balance of
this Convertible Debenture being
converted)

----------------------------------
Signature

(Signature must conform in all respects to name of holder as
specified on the face of this Convertible Debenture.)

4
42
EXHIBIT B
43

EXHIBIT B

CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF SERIES D PREFERRED STOCK

AIR SOUTH AIRLINES, INC

a corporation organized and existing under the General Corporation Law of the
State of Delaware.

DOES HEREBY CERTIFY

That, pursuant to authority conferred upon the Board of Directors by
the Certificate of Incorporation of said corporation, and pursuant to the
provisions of Section 151 of Title 8 of the Delaware Code of 1953, said Board
of Directors has established a class of preferred stock of this Corporation
designated Series D Preferred Stock ("Series D Preferred") consisting of
Eighteen Million (18,000,000) shares of such Series D Preferred. Such Series D
Preferred was established with the powers, designations, preferences and
relative participating optional or other rights contained in Exhibit I attached
hereto.

IN WITNESS WHEREOF, said Air South Airlines, Inc. has caused this
Certificate to be signed by ______________, its President and Chief Executive
Officer, this ______ day of August, 1996.

By:
----------------------------------
44

EXHIBIT I

AIR SOUTH AIRLINES, INC. SERIES D PREFERRED STOCK

SECTION 1. CLASS OF PREFERRED STOCK. The Air South Airlines Series D
Preferred Stock shall have such voting powers, and such other powers,
designations, preferences and other special rights set out below.

SECTION 2. DIVIDENDS. The holders of outstanding shares of Series D
Preferred stock shall be entitled to receive dividends at the rate of two cents
($0.02) per share (as adjusted for any stock dividends, combinations or splits
with respect to such shares) per annum, when, if and as declared by the Board
of Directors, out of funds legally available therefor. The right to such
dividends on the Series D Preferred Stock shall not be cumulative. No cash
dividend shall be paid on the Common Stock in any year unless an equal dividend
is paid with respect to all outstanding shares of Series D Preferred Stock in
an amount for each such share to a holder of the number of shares of Common
Stock into which such share of Series D Preferred Stock could then be
converted.

SECTION 3. LIQUIDATION RIGHTS.

a. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, the holders of
the Series D Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock, the amount of twenty-five cents
($0.25) per share (the "Original Issue Price") (as adjusted for any stock
dividends, combinations or splits with respect to such shares) plus all accrued
or declared but unpaid dividends on each share of Series D Preferred Stock held
by such holders (the "Preferential Amount"). The right of the holders of
Shares of Series D Preferred Stock to a preference in such a liquidation
dissolution or winding up shall in all respects be pari passu with the rights
of the holders of shares of Series A Preferred Stock, Series B-Preferred Stock
and Series C Preferred Stock. If upon the occurrence of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the assets and funds to be distributed among the holders of Series D Preferred
Stock shall be insufficient to permit the payment to such holders of the full
Preferential Amount, the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of
the Series D Preferred Stock in proportion to the Preferential Amount each such
holder is otherwise entitled to receive.

b. After payment to the holders of the Series D
Preferred Stock of the Preferential Amount, the entire remaining assets and
funds of the Corporation legally available for distribution, if any, shall be
distributed ratably among the holders of Series D Preferred Stock and the
Common Stock in proportion to the shares of Series D Preferred Stock and Common
Stock then held by such holders.

c. For purposes of this Section 3, (i) a merger or
consolidation of the Corporation into or with another corporation (other than
with a wholly owned subsidiary of this

I-1
45

Corporation), or any other corporate reorganization in which the stockholders
of the Corporation will not own a majority of the outstanding shares of the
surviving entity of such merger, consolidation or reorganization, or (ii) a
sale, transfer or other disposition of all or substantially all of the assets
of the Corporation, shall be deemed to be a liquidation, dissolution or winding
up of the Corporation.

SECTION 4. CONVERSION.

a. Right to Convert. Each share of Series D Preferred
Stock shall initially be convertible, at the option of the holder, at any time
after the date of issuance of such share, at the office of the Corporation or
any transfer agent for the Series D Preferred Stock, into one (1) fully paid
and nonassessable shares of Common Stock (subject to adjustment as set forth
herein). The number of shares of Common Stock into which one share of Series D
Preferred Stock may be converted hereinafter is referred to as the "Series D
Conversion Rate". The price at which shares of Common Stock shall be
deliverable upon conversion of shares of Series D Preferred shall initially be
twenty-five cents ($0.25) per share of Common Stock (the "Series D Conversion
Price"). Such initial Series D Conversion Price shall be subject to adjustment
from time to time, as hereinafter provided.

b. Automatic Conversion. Each share of Series D
Preferred Stock shall automatically be converted into shares of Common Stock at
the then effective Series D Conversion Rate upon the earlier of (i) the closing
of a firmly underwritten public offering of the Corporation's Common Stock on a
Form S-1 Registration Statement at an aggregate public offering price (after
underwriting discounts and commission) of at least $10,000,000 and a per share
price equal to or greater than fifty cents ($0.50) (as appropriately adjusted
for stock splits and the like) (an "Initial Public Offering"); (ii) the vote or
written consent of the holders of at least 50% of the then outstanding shares
of Series D Preferred Stock; or (iii) the date as of which less than 20% of the
maximum number of shares of Series D Preferred Stock issued by the Company (or
issuable upon conversion or exchange of securities of the Company) prior to
such date remain outstanding (the "Automatic Conversion Event").

c. Mechanics of Conversion. Before any holder of Series
D Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates for such
shares, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series D Preferred Stock, or notify the Corporation or its
transfer agent that such Series D Preferred Stock certificates have been lost,
stolen or destroyed and execute an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates, and shall give written notice to the Corporation at such office
that such holder elects to convert the same and shall state in the notice the
name or names in which such holder wishes the certificate or certificates for
shares of Common Stock to be issued. The Corporation shall then, as soon as is
practicable, issue and deliver at such office to such holder of Series D
Preferred Stock, or to such holder's nominee or nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of surrender of the
shares of Series D Preferred Stock

I-2
46

to be converted, and the person or persons entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date;
provided, however, that in the event of automatic conversion pursuant to
Section 4(b), such conversion shall be deemed to have been made upon the
occurrence of the Automatic Conversion Event triggering such conversion without
any further action by the holders of shares of Series D Preferred Stock,
although the Corporation shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such automatic conversion
unless the certificates evidencing such shares of Series D Preferred Stock are
delivered to the Corporation or its transfer agent as provided above, or the
holder notifies the Corporation or its transfer agent that such Series D
Preferred Stock certificates have been lost, stolen or destroyed and executes
an agreement satisfactory to the Corporation to indemnify the Corporation from
any loss incurred by it in connection with such certificates. If the
conversion is in connection with an underwritten offering of securities
pursuant to the Securities Act, the conversion may, at the option of any holder
tendering shares of Series D Preferred Stock for conversion, be conditioned
upon the closing with the underwriters of the sale of securities pursuant to
such offering, in which event the person(s) entitled to receive the Common
Stock upon conversion of Series D Preferred Stock shall not be deemed to have
converted such Series D Preferred Stock until immediately prior to the closing
of such sale of securities.

D. ADJUSTMENTS TO THE SERIES D CONVERSION PRICE FOR
CERTAIN DILUTING ISSUES.

(i) SPECIAL DEFINITIONS. For purposes of this
Section 4(d), the following definitions apply:

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

(2) "Original Issue Date" shall mean the
date on which a share of Series D Preferred Stock was first issued or
securities convertible or exchangeable for Series D Preferred Stock were first
issued.

(3) "Convertible Securities" shall mean
any evidences of indebtedness, shares or other securities directly or
indirectly convertible into or exchangeable for Common Stock.

(4) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Section
(4)(d)(iii), deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:

(A) upon conversion of shares of
Series D Preferred Stock;

I-3
47

(B) to officers, directors or
employees of, or consultants to, the Corporation pursuant to stock option or
stock purchase plans or agreements on terms approved by the Board of Directors;

(C) as a dividend or distribution
on Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
or Series D Preferred Stock;

(D) for which adjustment of the
Series D Conversion Price is made pursuant to Section 4(e) or for which
adjustment of the Series A Conversion Price, Series B Conversion Price or
Series C Conversion Price is made pursuant to the counterpart of Section 4(e)
in the charter documents of the Company;

(E) upon the closing of an
Initial Public Offering;

(F) upon conversion of up to an
aggregate of $4.0 million in convertible notes originally issued to Xxxxxxxxx
& Xxxxx Group and its affiliates; or

(G) in connection with an
acquisition of another company on terms approved by the Board of Directors.

(ii) NO ADJUSTMENT OF THE SERIES D CONVERSION
PRICE. Any provisions herein to the contrary notwithstanding, no adjustment in
the Series D Conversion Price shall be made in respect of the issuance of
Additional Shares of Common Stock unless the consideration per share
(determined pursuant to Section 4(d)(v) hereof) for an Additional Share of
Common Stock issued or deemed to be issued by the Corporation is less than the
Series D Conversion Price in effect on the date of, and immediately prior to,
such issue.

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

(1) no further adjustment in the Series
D Conversion Price shall be made upon the upon the exercise of such Options or
conversion or exchange of such Convertible Securities to the extent that
adjustment had been previously made pursuant to this Section 4(d);

I-4
48

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

(3) upon the expiration of any such
Options or any rights of conversion or exchange under such Conversion
Securities which shall not have been exercised, the Series D Conversion Price
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto), and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:

(A) in the case of Convertible
Securities or Options for Common Stock, the only Additional Shares of Common
Stock issued were the shares of Common Stock, if any, actually issued upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities and the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration actually received by the Corporation
upon such exercise, or for the issue of all such Convertible Securities and the
additional consideration, if any, actually received by the Corporation upon
such conversion or exchange; and

(B) in the case of Options for
Convertible Securities, only the Convertible Securities, if any, actually
issued upon the exercise thereof were issued at the time of issue of such
Options, and the consideration received by the Corporation for the Additional
Shares of Common Stock deemed to have been then issued was the consideration
actually received by the Corporation for the issue of all such Options, whether
or not exercised, plus the consideration deemed to have been received by the
Corporation (determined pursuant to Section 4(d) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised;

(4) no readjustment pursuant to clause
(2) or (3) above shall have the effect of increasing the Series D Conversion
Price to an amount which exceeds the lower of (a) the Series D Conversion Price
on the original adjustment date, or (b) the Series D Conversion Price that
would have resulted from any issuance of Additional Shares of Common Stock
between the original adjustment date and such adjustment date;

(5) in the case of any Options which
expire by their terms not more than 30 days after the date of issue thereof, no
adjustment of the Series D Conversion Price shall be made until the expiration
or exercise of all such Options whereupon such adjustment shall be made in the
same manner provided in clause (3) above.

I-5
49

(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE
OF ADDITIONAL SHARES OF COMMON STOCK. In the event this Corporation, at any
time after the Original Issue Date, shall issue Additional Shares of Common
Stock (including Additional Shares of Common Stock deemed to be issued pursuant
to Section 4 without consideration or for a consideration per share less than
the Series D Conversion Price in effect on the date of and immediately prior to
such issue, then and in such event, the Series D Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying the Series D Conversion Price by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration received by the Corporation for the
total number of Additional Shares of Common Stock so issued would purchase at
such Series D Conversion Price in effect immediately prior to such issuance,
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common Stock so issued. For the purpose of the above calculation,
the number of shares of Common Stock outstanding immediately prior to such
issue shall be calculated on a fully diluted basis, as if all shares of Series
D Preferred and all Convertible Securities had been fully converted into shares
of Common Stock immediately prior to such issuance and any outstanding Options
had been fully exercised immediately prior to such issuance (and the resulting
securities fully converted into shares of Common Stock, if so convertible) as
of such date, but not including in such calculation any additional shares of
Common Stock issuable with respect to shares of Series D Preferred, Convertible
Securities, or outstanding Options, solely as a result of the adjustment of the
Series D Conversion Price (or other conversion ratio) resulting from the
issuance of the Additional Shares of Common Stock causing the adjustment in
question.

(v) DETERMINATION OF CONSIDERATION. For purpose
of this Section 4(d), the consideration received by the Corporation for the
issuance of any Additional Shares of Common Stock shall be computed as follows:

(1) CASH AND PROPERTY. Such
consideration shall:

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

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

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

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50

(2) OPTIONS AND CONVERTIBLE SECURITIES.
The consideration per share received by the Corporation for Additional Shares
of Common Stock deemed to have been issued pursuant to Section 4(d)(iii),
relating to Options and Convertible Securities shall be determined by dividing:

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

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

E. ADJUSTMENT TO SERIES D CONVERSION PRICE FOR STOCK
DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event
that this Corporation at any time or from time to time after the Original Issue
Date shall declare or pay, without consideration, any dividend on the Common
Stock payable in Common Stock or in any right to acquire Common Stock for no
consideration, or shall effect a subdivision of the outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares
of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Series D
Conversion Price in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately decreased or
increased, as appropriate. In the event that this Corporation shall declare or
pay, without consideration, any dividend on the Common Stock payable in any
right to acquire Common Stock for no consideration, then the Corporation shall
be deemed to have made a dividend payable in Common Stock in an amount of
shares equal to the maximum number of shares issuable upon exercise of such
rights to acquire Common Stock.

F. ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION.
If the Common Stock issuable upon conversion of Series D Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of shares, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for in
Section 4(e) above or a merger or other reorganization referred to in Section 3
(c) above), the Series D Conversion Price than in affect shall, concurrently
with the effectiveness of such reorganization or reclassification, be
proportionately adjusted so that the Series D Preferred shall be convertible
into, in lieu of the number of shares of Common Stock which the

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51

holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Series D Preferred Stock immediately before that change.

G. OTHER DISTRIBUTIONS. In the event the Corporation
shall at anytime or from time to time make or issue, or fix a record date for
the determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities (including evidences of indebtedness)
of the Corporation other than Common Stock, then in each such event provision
shall be made so that the holders of Series D Preferred Stock shall receive,
upon the conversion thereof, the securities of the Corporation which they would
have received had their Series D Preferred Stock been converted into Common
Stock on the date of such event.

H. NO IMPAIRMENT. The Corporation will not, by
amendment of its Certificate of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as
may be necessary or appropriate to protect the holders of the Series D
Preferred Stock against impairment of the rights afforded them by this Section
A.

I. CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence
of each adjustment or readjustment pursuant to Section 4(d) of the Series D
Conversion Rate or in the other securities or property (including cash)
deliverable upon the conversion of the shares of Series D Preferred Stock, the
Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms thereof, and cause independent
certified public accountants selected by the Corporation to verify such
computation and prepare and furnish to each holder of Series D Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based.

J. NOTICES OF RECORD DATE. In the event of any taking
by the Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any security
or right convertible into or entitling the holder thereof to receive shares of
Common Stock, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, the
Corporation shall cause to be mailed by first class mail to each holder of
Series D Preferred Stock, at least twenty (20) days prior to the applicable
record date, a notice specifying the date on which any such record was to be
taken for the purpose of such dividend, distribution, security or right, and
the amount and character of such dividend, distribution, security or right.

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K. ISSUE TAXES. The Corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue of delivery
of shares of Common Stock on conversion of shares of Series D Preferred Stock
pursuant hereto.

L. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall take such corporate action as may be necessary, in the
opinion of its counsel, to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient to effect the
conversion of all the outstanding shares of Series D Preferred Stock into
shares of Common Stock at such time as the Corporation elects to effect such
conversion, including, without limitation, using its best efforts to obtain the
requisite stockholder approval of any necessary amendment to its Certificate
of Incorporation.

M. FRACTIONAL SHARES. No fractional share shall be
issued upon the conversion of any share of Series D Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion
of more than one share of Series D Preferred Stock by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of any fractional share. If, after the aforementioned
aggregation, the conversion should result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal
to such fraction multiplied by the Series D Conversion Price then in effect.

N. NOTICES. Any notice required by the provisions of
this Section C to be given to the holders of shares of Series D Preferred Stock
shall be deemed given if deposited in the United States mail, postage prepaid
and addressed to each holder of record at such holder's address appearing on
the books of the Corporation.

SECTION 5. AMENDMENT. Any term relating to the Series D
Preferred Stock may be amended only with the vote or written consent of holders
of at least a majority of all shares of Series D Preferred Stock then
outstanding. Any such amendment shall be binding upon the Corporation and any
holder of Series D Preferred Stock.

SECTION 6. VOTING RIGHTS. Except as otherwise provided herein or
as required by law, the holders of Series D Preferred Stock shall be entitled
to notice of any stockholders' meeting and to vote together with the holders of
Common Stock as single class of capital stock upon the election of directors
and upon any other matter submitted to the stockholders for a vote, on the
following basis:

a. Holders of Common Stock shall have one (1) vote per
share; and

b. Holders of Series D Preferred Stock shall have the
number of votes per share as is equal to the number of full shares of Common
Stock into which each such share of Series D Preferred Stock held by such
holder is convertible at the record date for the determination of the
stockholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken or any written consent to
stockholders is solicited.

I-9
53

c. In addition to any other vote or consent required
herein or by law, the vote or written consent of the holders of at least a
majority of the outstanding shares of Series D Preferred Stock shall be
necessary:

(i) for any amendment, alteration, or repeal of
any provision of the Certificate of Incorporation (including any Certificates
of Designation of Preferred Stock) or Bylaws of the Corporation (including any
filing of a Certificate of Designation);

(ii) to alter or change the rights, preferences or
privileges of the Series D Preferred Stock;

(ii) to create any new series of Preferred Stock
having preferences over the Series D Preferred Stock;

(iv) to increase the authorized number of shares
of Series D Preferred Stock;

(v) for any action that results in any
liquidation, acquisition, merger or sale of the Corporation or all or
substantially all of its assets;

(vi) for any action that results in any change in
the principal business of the Corporation; or

(vii) for any action that results in the repurchase
of equity securities of the Corporation (other than the repurchase of stock
from employees of the Corporation at original cost or pursuant to a Board
approved incentive stock option plan).

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54
EXHIBIT C
55
SEE TAB 5
56
EXHIBIT D
57

EXHIBIT D

AIR SOUTH AIRLINES, INC.

INVESTOR'S RIGHTS AGREEMENT
58

TABLE OF CONTENTS

Page

I. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. Restrictions On Transfer; Registration . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.1 Restrictions on Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.2 Demand Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Piggyback Registrations . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Form S-3 Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Obligations of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.6 Furnish Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.7 Delay of Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.8 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.9 Assignment of Registration Rights . . . . . . . . . . . . . . . . . . . . . 9
2.10 Amendment of Registration Rights . . . . . . . . . . . . . . . . . . . . . . 10
2.11 "Market Stand-Off" Agreement . . . . . . . . . . . . . . . . . . . . . . . . 10

III. Covenants Of The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3.1 Basic Financial Information and Reporting . . . . . . . . . . . . . . . . . 10
3.2 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.3 Confidentiality of Records . . . . . . . . . . . . . . . . . . . . . . . . . 11
3.4 Reservation of Series D, Preferred Stock . . . . . . . . . . . . . . . . . . 11
3.5 Reservation of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 11

IV. Rights Of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.1 Subsequent Offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.2 Exercise of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.3 Issuance of Equity Securities to Other Persons . . . . . . . . . . . . . . . 12
4.4 Termination of Rights of First Refusal . . . . . . . . . . . . . . . . . . . 12
4.5 Transfer of Rights of First Refusal . . . . . . . . . . . . . . . . . . . . 12
4.6 Excluded Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

V. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.1 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.2 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.3 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.4 Separability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
5.5 Amendment and Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.6 Delays or Omissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.8 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.9 Titles and Subtitles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.10 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

INVESTOR'S RIGHTS AGREEMENT

THIS INVESTOR'S RIGHTS AGREEMENT (the "Agreement") is entered into as
of the 16th day of August 1996, by and among AIR SOUTH AIRLINES, INC., a
Delaware corporation (the "Company") and H&Q AIR SOUTH INVESTORS, L.P.
("Purchaser").

RECITALS

WHEREAS, the Company proposes to sell and issue an aggregate of
$4,000,000 principal amount of convertible debentures (the "Convertible
Debentures") pursuant to that certain Convertible Debenture Purchase Agreement
(the "Purchase Agreement") of even date herewith between the Company and
Purchaser (the "Purchase Agreement"); and

WHEREAS, as a condition to entering into the Purchase Agreement, the
Purchaser has requested that the Company extend to it registration rights,
information rights and a right of first refusal as set forth herein.

Now, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants, and conditions set forth in this
Agreement and in the Purchase Agreement, the parties mutually agree as follows:

1. GENERAL.

1.1 Definitions. As used in this Agreement the following terms
shall have the following respective meanings:

"1934 Act" means the Securities Exchange Act of 1934.

"Equity Securities" means (i) any stock or similar security of the
Company, (ii) any security convertible, with or without consideration, into any
stock or similar security (including any option to purchase such a convertible
security), (iii) any security carrying any warrant or right to subscribe to or
purchase any stock or similar security or (iv) any such warrant or right.

"Family Member" means a Holder's spouse, children, stepchildren and
grandchildren.

"Final Prospectus" means an amended prospectus filed with the SEC
pursuant to SEC Rule 424(b) of the Securities Act.

"Holder" means any person owning of record Registrable Securities.

"Initial Offering" means the first underwritten public offering of the
Company's securities.

"Initiating Holders" means the Holder or Holders of at least forty
percent (40%) of the Registrable Securities then outstanding.
60

"Register," "registered," and "registration" refer to a registration
effected by preparing and filing a registration statement in compliance with
the Securities Act, and the declaration or ordering of effectiveness by the SEC
of such registration statement or document.

"Registrable Securities" means (i) the Shares; (ii) Common Stock of
the Company issued or issuable upon conversion of the Shares; and (iii) any
Common Stock of the Company issued as (or issuable upon the conversion or
exercise of any warrant, right or other security which is issued as) a dividend
or other distribution with respect to, or in exchange for or in replacement of,
such above-described securities. Notwithstanding the foregoing, Registrable
Securities shall not include any securities sold by a person to the public
either pursuant to a registration statement or Rule 144 or sold in a private
transaction in which the transferror's rights under Article II of this
Agreement are not assigned. Outstanding Shares and warrants, rights and other
securities issued as a dividend or other distribution with respect to
outstanding Shares, or in exchange or replacement of outstanding Shares, shall
be deemed to represent a number of shares of Registrable Securities equal to
the number of shares of Common Stock into which such Shares, warrants, rights
or other securities are convertible as of the time such determination is made.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Shares" shall mean the Company's Series D Preferred Stock issuable
assuming the conversion of the Convertible Debentures.

"Form S-3" means such form under the Securities Act as in effect on
the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by the Company
with the SEC.

"SEC" or "Commission" means the Securities and Exchange Commission.

II. RESTRICTIONS ON TRANSFER; REGISTRATION.

2.1 Restrictions on Transfer.

(a) Each Holder agrees not to make any disposition of all
or any portion of the Registrable Securities unless and until the transferee
has agreed in writing for the benefit of the Company to be bound by this
Section 2.1, provided and to the extent such Section is then applicable and:

(i) There is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or

(ii) (A) Such Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition,
and (B) if reasonably requested by the Company, such Holder shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to
the Company, that such disposition will not require registration of such shares
under the Securities Act.

(iii) Notwithstanding the provisions of paragraphs
(i) and (ii) above, no such registration statement or opinion of counsel shall
be necessary for a transfer by a Holder (A) which is

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a partnership to its partners in accordance with partnership interests, (B) to
the Holder's family member or trust for the benefit of an individual Holder or
(C) to an affiliate of the Holder (as that term is defined in Rule 144 (a)(1)
of the Securities Act (an "Affiliate"), provided the transferee will be subject
to the terms of this Section 2.1 to the same extent as if he were an original
Holder hereunder.

(b) Each certificate representing Series B Preferred
Stock or Registrable Securities shall (unless otherwise permitted by the
provisions of the Agreement) be stamped or otherwise imprinted with a legend
substantially similar to the following (in addition to any legend required
under applicable state securities laws or as provided elsewhere in this
Agreement):

(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder
shall have obtained an opinion of counsel (which counsel may be counsel to the
Company) reasonably acceptable to the Company to the effect that the securities
proposed to be disposed of may lawfully be so disposed of without registration,
qualification or legend.

(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with
respect to such securities shall be removed upon receipt by the Company of an
order of the appropriate blue sky authority authorizing such removal.

2.2 Demand Registration.

(a) Subject to the conditions of this Section 2.2, if the
Company shall receive at any time after the later of December 31, 1996 or one
hundred twenty (120) days after the closing of the Initial Offering, a written
request from the Initiating Holders that the Company file a registration
statement under the Securities Act covering the registration of (i) at least
25% of the Registrable Securities held by such Initiating Holders or (ii) any
lesser number of shares if the anticipated aggregate offering price of such
shares, net of underwriting discounts and commissions, would exceed
$5,000,000), then the Company shall, within thirty (30) days of the receipt
thereof, give written notice of such request to all Holders, and subject to the
limitations of Section 2.2(b), effect, as soon as practicable, the registration
under the Securities Act; provided, however, that the Initiating Holders may
request registration of less than 25% of such Registrable Securities if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, exceeds $5,000,000.

(b) If the Initiating Holders intend to distribute the
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Company as a part of their request made pursuant to
this Section 2.2 and the Company shall include such information in the written
notice referred to in Section 2.2(a). In such event, the right of any Holder to
include such Holder's Registrable Securities in such registration shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Initiating Holders
and such Holder) to the extent provided herein.
62

All Holders proposing to distribute their securities through such underwriting
shall enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Holders (which underwriter or underwriters shall be
reasonably acceptable to the Company). Notwithstanding any other provision of
this Section 2.2, if the underwriter advises the Company in writing that
marketing factors require a limitation of the number of securities to be
underwritten (including Registrable Securities) then the Company shall so
advise all Holders of Registrable Securities which would otherwise be
underwritten pursuant hereto, and the number of shares that may be included in
the underwriting shall be allocated to the Holders of such Registrable
Securities on a pro rata basis based on the number of Registrable Securities
held by all such Holders (including the Initiating Holders). Any Registrable
Securities excluded or withdrawn from such underwriting shall be withdrawn from
the registration.

(d) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
2.2, a certificate signed by the Chairman of the Board stating that in the good
faith judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be filed and it is therefore essential to defer the filing of such
registration statement, the Company shall have the right to defer such filing
for a period of not more than thirty (30) days after receipt of the request of
the Initiating Holders; provided that such right to delay a request shall be
exercised by the Company no more than once in any one-year period.

(e) All expenses incurred in connection with a
registration pursuant to this Section 2.2 (excluding underwriters' discounts
and commissions, which shall be paid by the selling Holders pro rata with
respect to their included shares), including without limitation all
registration, filing, qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of a single counsel for the selling Holders, shall be borne by
the Company; provided, however, that the Company shall not be required to pay
for any expenses of any registration proceeding begun pursuant to Section 2.2
if the registration request is subsequently withdrawn, unless the withdrawal of
the registration request results from either (a) intentional actions by the
Company outside the normal course of business that materially reduce the
feasibility of the registration proceeding, or (b) the discovery of information
about the Company that was not known at the time of the Initiating Holders'
request made pursuant to Section 2.2(a), and such information materially
reduces the feasibility of the registration proceeding. If the Company is
required to pay the registration expenses pursuant to this Section 2.2(e), then
the Holders shall not forfeit their rights pursuant to this Section 2.2 to a
demand registration.

2.3 Piggyback Registrations.

(a) The Company shall notify all Holders in writing at
least thirty (30) days prior to the filing of any registration statement under
the Securities Act for purposes of a public offering of securities of the
Company (including, but not limited to, registration statements relating to
secondary offerings of securities of the Company, but excluding registration
statements relating to the Initial Offering, employee benefit plans and
corporate reorganizations) and will afford each such Holder who would have been
unable to sell all of such Registrable Securities on an unrestricted basis
pursuant to Rule 144 promulgated under the Securities Act, during the four-week
period immediately preceding the effective date of the registration statement,
an opportunity to include in such registration statement all or

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63

part of such Registrable Securities held by such Holder. Each Holder desiring
to include in any such registration statement all or any part of the
Registrable Securities held by it shall, within twenty (20) days after receipt
of the above-described notice from the Company, so notify the Company in
writing. Such notice shall state the intended method of disposition of the
Registrable Securities by such Holder. If a Holder decides not to include all
of its Registrable Securities in any registration statement thereafter filed by
the Company, such Holder shall nevertheless continue to have the right to
include any Registrable Securities in any subsequent registration statement or
registration statements as may be filed by the Company with respect to
offerings of its securities, all upon the terms and conditions set forth
herein. Notwithstanding anything to the contrary, the foregoing shall not
apply to any registrations occurring on or after the fifth anniversary of the
Initial Offering

(b) If the registration statement under which the Company
gives notice under this Section 2.3 is for an underwritten offering, the
Company shall so advise the Holders. In such event, the right of any such
Holder to be included in a registration pursuant to this Section 2.3 shall be
conditioned upon such Holder's participation in such underwriting and the
inclusion of such Holder's Registrable Securities in the underwriting to the
extent provided herein. All Holders proposing to distribute their Registrable
Securities through such underwriting shall enter into an underwriting agreement
in customary form with the underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of the Agreement, if the
underwriter determines in good faith that marketing factors require a
limitation of the number of shares to be underwritten, the number of shares
that may be included in the underwriting shall be allocated, first, to the
Company; second, to the Holders on a pro rata basis based on the total number
of Registrable Securities held by the Holders; and third, to any stockholder of
the Company (other than a Holder) on a pro rata basis. No such reduction shall
reduce the securities being offered by the Company for its own account to be
included in the registration and underwriting, except that in no event shall
the amount of securities of the selling Holders included in the registration be
reduced below twenty percent (20%) of the total amount of securities included
in such registration, unless such offering is the Initial Offering and such
registration does not include shares of any other selling stockholders, in
which event any or all of the Registrable Securities of the Holders may be
excluded in accordance with the immediately preceding sentence. In no event
will shares of any other selling stockholder be included in such registration
which would reduce the number of shares which may be included by Holders
without the written consent of Holders of not less than fifty percent (50%) of
the Registrable Securities proposed to be sold in the offering.

(c) The Company shall bear all fees and expenses incurred
in connection with any registration under this Section 2.3 (excluding
underwriters' discounts and commissions, which shall be paid by the selling
Holders pro rata with respect to their included shares), including without
limitation all registration, filing, qualification, printers' and accounting
fees, fees and disbursements of counsel to the Company, and the reasonable fees
and disbursements of a single counsel to the selling Holders (which counsel
shall also be counsel to the Company unless counsel to the Company has a
conflict of interest with respect to the representation of any selling Holder
or the underwriters object to the selling Holders representation by Company
counsel).

2.4 Form S-3 Registration. In case the Company shall receive from
the Holders at least ten percent (10%) of the Registrable Securities a written
request or requests that the Company effect a registration on Form S-3 and any
related qualification or compliance with respect to all or a part of the
Registrable Securities owned by such Holder or Holders, the Company will:

(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other Holders
of Registrable Securities; and

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64

(b) as soon as practicable, effect such registration and
all such qualifications and compliances as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Holder's or Holders' Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any other
Holder or Holders joining in such request as are specified in a written request
given within fifteen (15) days after receipt of written notice from the Company
pursuant to Section 2.4(a); provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance pursuant
to this Section 2.4: (i) if Form S-3 is not available under the Securities Act
or rules or regulations promulgated thereunder for such offering by the
Holders; (ii) if the Holders, together with the holders of any other securities
of the Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) at an aggregate price
to the public of less than $500,000; (iii) if the Company shall furnish to the
Holders a certificate signed by the Chairman of the Board of Directors of the
Company stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
stockholders for such Form S-3 Registration to be effected at such time, in
which event the Company shall have the right to defer the filing of the Form
S-3 registration statement for a period of not more than thirty (30) days after
receipt of the request of the Holder or Holders under this Section 2.4,
provided that, such right to defer the filing may be exercised by the Company
no more than once in any one-year period; (iv) if the Company has, within the
six (6) month period preceding the date of such request, already effected one
(1) registrations on Form S-3 for the Holders pursuant to this Section 2.4; or
(v) in any particular jurisdiction in which the Company would be required to
qualify to do business or to execute a general consent to service of process in
effecting such registration, qualification or compliance.

(c) Subject to the foregoing, the Company shall file a
Form S-3 registration statement covering the Registrable Securities and other
securities so requested to be registered as soon as practicable after receipt
of the request or requests of the Holders. All such expenses incurred in
connection with registrations requested pursuant to this Section 2.4 shall be
paid by the selling Holders (and any other selling stockholders pro rata with
respect to their included shares, including without limitation all
registration, filing, qualification, printers' and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of a single counsel for the selling Holder or Holders.

2.5 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities, the Company shall, as expeditiously
as reasonably possible:

(a) Prepare and file with the SEC a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective, and, upon the request
of the Holders of a majority of the Registrable Securities registered
thereunder, keep such registration statement effective for up to ninety (90)
days.

(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.

(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.

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65

(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or state blue sky laws of such jurisdictions as shall be reasonably requested
by the Holders, provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter(s) of such offering.
Each Holder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto
is required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.

(g) Furnish, at the request of a majority of the Holders
participating in the registration, on the date that such Registrable Securities
are delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to such
securities becomes effective, (i) an opinion, dated as of such date, of the
counsel representing the Company for the purposes of such registration, in form
and substance as is customarily given to underwriters in an underwritten public
offering and reasonably satisfactory to a majority in interest of the Holders
requesting registration, addressed to the underwriters, if any, and to the
Holders requesting registration of Registrable Securities and (ii) a letter
dated as of such date, from the independent certified public accountants of the
Company, in form and substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders requesting
registration, addressed to the underwriters, if any, and to the Holders
requesting registration of Registrable Securities.

2.6 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or
2.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to effect the
registration of their Registrable Securities.

2.7 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Article II.

2.8 Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:

(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers and directors
of each Holder, any underwriter (as defined in the Securities Act) for such
Holder and each person, if any, who controls such Holder or underwriter within
the meaning of the Securities Act or the 1934 Act, against any losses, claims,
damages, or liabilities (joint

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66

or several) to which they may become subject under the Securities Act, the 1934
Act or other federal or state law, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation") by the Company: (i) any untrue statement or alleged untrue
statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading, or (iii) any violation or alleged
violation by the Company of the Securities Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the 1934 Act or any state securities law in connection with the offering
covered by such registration statement; and the Company will reimburse each
such Holder, partner, officer or director, underwriter or controlling person
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section 2.8(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished to the Company expressly for use in connection with such registration
by such Holder, partner, officer, director, underwriter or controlling person
of such Holder.

(b) To the extent permitted by law, each selling Holder
will indemnify and hold harmless the Company, each of its directors, each of
its officers, each person, if any, who controls the Company within the meaning
of the Securities Act, any underwriter and any other Holder selling securities
under such registration statement or any of such other Holder's partners,
directors or officers or any person who controls such Holder, against any
losses, claims, damages or liabilities (joint or several) to which the Company
or any such director, officer, controlling person, underwriter or other such
Holder, or partner, director, officer or controlling person of such other
Holder may become subject under the Securities Act, the 1934 Act or other
federal or state law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Holder expressly for use in connection with such registration;
and each such Holder will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person,
underwriter or other Holder, or partner, officer, director or controlling
person of such other Holder in connection with investigating or defending any
such loss, claim, damage, liability or action if it is judicially determined
that there was such a Violation; provided, however, that the indemnity
agreement contained in this Section 2.8(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent shall
not be unreasonably withheld; provided further, that in no event shall any
indemnity under this Section 2.8 exceed the proceeds from the offering received
by such Holder.

(c) Promptly after receipt by an indemnified party under
this Section 2.8 of notice of the commencement of any action (including any
governmental action) as to which indemnity may be sought, such indemnified
party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 2.8, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties;
provided, however, that an indemnified

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party shall have the right to retain its own counsel, with the fees and
expenses to be paid by the indemnifying party, if representation of such
indemnified party by the counsel retained by the indemnifying party would be
inappropriate due to actual or potential differing interests between such
indemnified party and any other party represented by such counsel in such
proceeding. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action, if materially
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.8.

(d) If the indemnification provided for in this Section
2.8 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission; provided that, in
no event shall any contribution by a Holder hereunder exceed the proceeds from
the offering received by such Holder.

(e) The foregoing indemnity agreements of the Company and
Holders are subject to the condition that, insofar as they relate to any
Violation made in a preliminary prospectus but eliminated or remedied in the
amended prospectus on file with the SEC at the time the registration statement
in question becomes effective or the Final Prospectus, such indemnity agreement
shall not inure to the benefit of any person obligated under the Securities Act
to furnish to the person asserting the loss, liability, claim or damage a copy
of the Final Prospectus if a copy of the Final Prospectus was furnished to the
indemnified party and was not furnished to the person asserting the loss,
liability, claim or damage at or prior to the time such action is required by
the Securities Act.

(f) The obligations of the Company and Holders under this
Section 2.8 shall survive the completion of any offering of Registrable
Securities pursuant to a registration statement, or otherwise.

2.9 Assignment of Registration Rights. The rights to cause the
Company to register Registrable Securities pursuant to this Article II may be
assigned by a Holder to a transferee or assignee of Registrable Securities;
provided, however, that no such transferee or assignee shall be entitled to
registration rights under Sections 2.2, 2.3 or 2.4 hereof unless such
transferee or assignee: (i) is a Holder; (ii) holds after such transfer or
assignment at least five hundred thousand (500,000) shares of Registrable
Securities (as adjusted for stock dividends, splits and combinations); or (iii)
is a Family Member or a subsidiary, parent, general partner, Affiliate, or
limited partner of a Holder. In each such case, the Company shall, within
twenty (20) days after such transfer, be furnished with written notice of the
name and address of such transferee or assignee and the securities with respect
to which such registration rights are being assigned.

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2.10 Amendment of Registration Rights. Any provision of this
Article II may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Holders of
more than fifty percent (50%) of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 2.10 shall be binding upon each
Holder and the Company. By acceptance of any benefits under this Article II,
each Holder hereby agrees to be bound by the provisions hereunder.

2.11 "Market Stand-Off" Agreement. If requested by the Company and
an underwriter of Common Stock (or other securities) of the Company, the
Purchaser shall not sell or otherwise transfer or dispose of any Common Stock
(or other securities) of the Company held by such stockholder (other than those
included in the registration) for a period specified by the underwriters not to
exceed one hundred eighty (180) days following the effective date of a
registration statement of the Company filed under the Securities Act, provided
that all officers and directors of the Company and all holders of at least one
percent (1%) of the Company's voting securities enter into similar agreements.
The obligations described in this Section 2.11 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose stop-
transfer instructions with respect to the shares (or securities) subject to the
foregoing restriction until the end of said one hundred eighty (180) day
period.

III. COVENANTS OF THE COMPANY.

3.1 Basic Financial Information and Reporting.

(a) The Company will maintain true books and records of
account in which full and correct entries will be made of all its business
transactions pursuant to a system of accounting established and administered in
accordance with generally accepted accounting principles consistently applied,
and will set aside on its books all such proper accruals and reserves as shall
be required under generally accepted accounting principles consistently
applied.

(b) As soon as practicable after the end of each fiscal
year of the Company, and in any event within 90 days thereafter or, after the
Initial Offering, simultaneously with the filing of the Company's annual report
on Form 10-K with the SEC, the Company will furnish each Holder a consolidated
balance sheet of the Company, as at the end of such fiscal year, and a
consolidated statement of income and a consolidated statement of cash flows of
the Company for such year, all prepared in accordance with generally accepted
accounting principles and setting forth in each case in comparative form the
figures for the previous fiscal year, all in reasonable detail. Such financial
statements shall be accompanied by a report and opinion thereon by independent
public accountants of national standing selected by the Company's Board of
Directors.

(c) As soon as practicable after the end of each fiscal
quarter of the Company, and in any event within thirty days thereafter or,
after the Initial Offering, simultaneously with the filing of the Company's
reports on Form 10-Q with the SEC, the Company will furnish each Holder a
consolidated balance sheet of the Company, as at the end of such fiscal
quarter, and a consolidated statement of income and a consolidated statement of
cash flows of the Company for such quarter, prepared and presented in a manner
consistent with the financial statements described in Section 3.1(b). Such
statement shall be accompanied by a certificate signed by the Chairman of the
Board and Chief

10
69

Financial Officer of the Company stating that the preparation and presentation
of such statements is consistent with the financial statements described in
Section 3.1(b).

(d) So long as a Holder (with its Affiliates) shall own
not less than one million (1,000,000) shares of Registrable Securities, the
Company will furnish such Holder a consolidated balance sheet of the Company,
as at the end of each calendar month, and a consolidated statement of income
and a consolidated statement of cash flows of the Company for such month,
prepared and presented in a manner consistent with the financial statements
described in Section 3.1(b). Such statements shall be furnished as soon as
practicable after the end of each month and in any event within ten days
thereafter and shall be accompanied by a certificate signed by the Chairman of
the Board and Chief Financial Officer of the Company stating that the
preparation and presentation of such statements is consistent with the
financial statements described in Section 3.1(b). Prior to January 1st of
each year, the Company shall furnish such Holders an annual budget for the
Company for the following twelve month period, broken down by month. The
Company's obligations under this Section 3.1(d) shall terminate upon the
Initial Offering.

3.2 Inspection Rights. So long as a Holder (with its affiliates)
shall own not less than one hundred thousand (100,000) shares of Registrable
Securities, each such Holder shall have the right to visit and inspect any of
the properties of the Company or any of its subsidiaries, and to discuss the
affairs, finances and accounts of the Company or any of its subsidiaries with
its officers, all at such reasonable times and as often as may be reasonably
requested; provided, however, that the Company shall not be obligated under
this Section 3.2 with respect to a competitor of the Company or with respect to
information which the Board of Directors determines in good faith is
confidential and should not, therefore, be disclosed.

3.3 Confidentiality of Records. Each Holder agrees to use, and to
use its best efforts to insure that its authorized representatives use, the
same degree of care as such Holder uses to protect its own confidential
information to keep confidential any information furnished to it which the
Company identifies as being confidential or proprietary (so long as such
information is not in the public domain), except that such Holder may disclose
such proprietary or confidential information to any partner, subsidiary,
Affiliate or parent of such Holder for the purpose of evaluating its investment
in the Company as long as such partner, subsidiary or parent is advised of the
confidentiality provisions of this Section 3.3.

3.4 Reservation of Series D Preferred Stock. Upon filing by the
Company of the Certificate of Designation (as defined in the Purchase
Agreement) with the Secretary of State of the State of Delaware and at all
times thereafter, the Company will reserve and keep available, solely for
issuance and delivery upon the conversion of the Convertible Debentures, all
Series D Preferred Stock issuable from time to time upon such conversion.

3.5 Reservation of Common Stock. Upon filing by the Company of
the Certificate of Designation (as defined in the Purchase Agreement) with the
Secretary of State of the State of Delaware and at all times thereafter, the
Company will reserve and keep available, solely for issuance and delivery upon
the conversion of the Series D Preferred Stock issuable upon conversion of the
Convertible Debentures, all Common Stock issuable from time to time upon such
conversion.

70
IV. RIGHTS OF FIRST REFUSAL.

4.1 Subsequent Offerings. Each Holder shall have right of first
refusal to purchase its pro rata share of all Equity Securities that the
Company may, from time to time, propose to sell and issue after the date of
this Agreement, other than the Equity Securities excluded by Section 4.6
hereof. Each Holder's pro rata share is equal to the ratio of the number of
shares of Common Stock, assuming full conversion of all Convertible Debentures
and Registrable Securities owned by such Holder, held by such Holder
immediately prior to the issuance of such Equity Securities to the total number
of shares of the Company's outstanding Common Stock (including all shares of
Common Stock issuable upon conversion of the Convertible Debentures and
Registrable Securities).

4.2 Exercise of Rights. If the Company proposes to issue any
Equity Securities, it shall give each Holder written notice of its intention,
describing the Equity Securities, the price, and the terms and conditions upon
which the Company proposes to issue the same. Each Holder shall have fifteen
(15) days from the receipt of such notice to agree to purchase its pro rata
share of the Equity Securities for the price and upon the terms and conditions
specified in the notice by giving written notice to the Company and stating
therein the quantity of Equity Securities to be purchased. Notwithstanding the
foregoing, the Company shall not be required to offer or sell such Equity
Securities to any Holder who would cause the Company to be in violation of
applicable federal securities laws by virtue of such offer or sale.

4.3 Issuance of Equity Securities to Other Persons. If the Holders
fail to exercise in full the rights of first refusal, the Company shall have
ninety (90) days thereafter to sell the Equity Securities in respect of which
the Holders' rights were not exercised, at a price and upon terms and
conditions no more favorable to the purchaser thereof than specified in the
Company's notice to the Holders pursuant to Section 4.2 hereof. If the Company
has not sold such Equity Securities within such ninety (90) days, the Company
shall not thereafter issue or sell any Equity Securities, without first
offering such securities to the Holders in the manner provided above.

4.4 Termination of Rights of First Refusal. The rights of first
refusal established by this Article IV shall terminate upon the closing of the
Initial Offering.

4.5 Transfer or Rights of First Refusal. The rights of first
refusal of each Holder under this Article IV may be transferred to any
subsidiary or parent of such Holder, to any successor in interest to all or
substantially all the assets of such Holder, or to an assignee or transferee
who acquires Registrable Securities.

4.6 Excluded Securities. The rights of first refusal established
by this Article IV shall have no application to any of the following Equity
Securities:

(a) shares of Common stock (and/or options, warrants or
other Common Stock purchase rights issued pursuant to such options, warrants or
other rights) issued or to be issued to employees, officers or directors of, or
consultants or advisors to, the Company, pursuant to stock purchase or stock
option plans or other arrangements that are approved by the Board of Directors
of the Company;

(b) stock issued pursuant to any rights, options and
warrants granted after the date of this Agreement, provided that the rights of
first refusal established by this Article IV applied with respect to the initial
sale or grant by the Company of such rights, options or warrants;

(c) any Equity Securities issued for consideration other
than cash pursuant to a merger, consolidation, acquisition or similar business
combination;

(d) any Equity Securities that are issued by the Company
as part of the Initial Offering referred to in Section 4.4 hereof;

(e) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization by the Company;

(f) shares of Common Stock issued upon conversion of the
Company's Preferred Stock; and

(g) shares of Series D Preferred Stock or Common Stock
issued upon conversion of the Convertible Debentures; and

(h) any Equity Securities issued pursuant to any
equipment leasing arrangement or commercial bank financing approved by the
Company's Board of Directors.

V. MISCELLANEOUS.

5.1 Governing Law. This Agreement shall be governed by and
construed under the laws of the State of California as applied to agreements
among California residents entered into and to be performed entirely within
California.

5.2 Survival. The representations, warranties, covenants, and
agreements made herein shall survive any investigation made by any Holder and
the closing of the transactions contemplated hereby. 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.

5.3 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors, and administrators of
the parties hereto and shall inure to the benefit of and be enforceable by each
person who shall be a holder of Registrable Securities from time to time;
provided, however, that prior to the receipt by the Company of adequate written
notice of the transfer of any Registrable Securities specifying the full name
and address of the transferee, the Company may deem and treat the person listed
as the holder of such shares in its records as the absolute owner and holder of
such shares for all purposes, including the payment of dividends or any
redemption price.

5.4 Separability. In case any provision of the Agreement shall be
invalid, illegal, or unenforceable, the validity, legality, and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.

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5.5 Amendment and Waiver.

(a) Except as otherwise expressly provided, this
Agreement may be amended or modified only upon the written consent of the
Company and the holders of more than fifty percent (50%) of the Registrable
Securities.

(b) Except as otherwise expressly provided, the
obligations of the Company and the rights of the Holders under this Agreement
may be waived only with the written consent of the holders of more than fifty
percent (50%) of the Registrable Securities.

5.6 Delays or Omissions. It is agreed that no delay or omission
to exercise any right, power, or remedy accruing to any Holder, upon any
breach, default or noncompliance of the Company under this Agreement 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 any similar breach, default or noncompliance thereafter
occurring. It is further agreed that any waiver, permit, consent, or approval
of any kind or character on any Holder's part of any breach, default or
noncompliance under this Agreement or any waiver on such Holder's part of any
provisions or conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement, by law, or otherwise afforded to
Holders, shall be cumulative and not alternative.

5.7 Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (i) upon personal delivery to
the party to be notified; (ii) upon receipt at the address on the signature page
hereto after having been sent by registered or certified mail, return receipt
requested, postage prepaid; or (iii) 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 to the party
to be notified at the address as set forth on the signature page hereof or at
such other address as such party may designate by ten (10) days advance written
notice to the other party hereto.

5.8 Attorneys' Fees. If legal action is brought to enforce or
interpret this Agreement, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and legal costs in connection therewith.

5.9 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.

5.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.

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IN WITNESS WHEREOF, the parties hereto have executed this Investor's
Rights Agreement as of the date set forth in the first paragraph hereof.

AIR SOUTH AIRLINES, INC. H&Q AIR SOUTH INVESTORS, L.P.

By: /s/ By: /s/
--------------------------------- -----------------------------
Its: Chairman Its: Attorney-in-fact
-------------------------------- ----------------------------

Address: Address:

0000 Xxxxxxx Xxxx. Xxx Xxxx Xxxxxx
Xxxx Xxxxxxxx, XX 00000 Xxx Xxxxxxxxx, XX 00000

74
EXHIBIT E
75

EXHIBIT E

FORM OF OPINION

1. The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of Delaware.

2. The Company has the requisite corporate power to own its
property and assets and to conduct its business as it is currently being
conducted and is qualified as a foreign corporation to do business and is in
good standing in each jurisdiction in the United States in which the ownership
of its property or the conduct of its business requires such qualification and
where the failure to so qualify would have a material adverse effect on the
Company, its assets, financial condition or operations.

3. The Company's authorized capital stock consists of (a)
___________ (__________) shares of Common Stock, $.001 par value, of which
___________ (___________) shares are issued and outstanding, and (b) Two
Million (2,000,000) shares of Preferred Stock, $.001 par value, of which (i)
One Million Two Hundred Fifty Thousand (1,250,000) shares have been designated
Series A Preferred Stock having a liquidation preference of Two Dollars ($2.00)
per share all of which shares are issued and outstanding; (ii) Six Hundred
Twenty-Five Thousand (625,000) shares have been designated Series B Preferred
Stock having a liquidation preference of Four Dollars ($4.00) per share all of
which shares are issued and outstanding; (iii) One Hundred Twenty Thousand
(120,000) shares have been designated Series C Preferred Stock having a
liquidation preference of Twelve Dollars and Fifty Cents ($12.50) per share all
of which shares are issued and outstanding; and (iv) Sixteen Million
(16,000,000) shares have been designated Series D Preferred Stock having a
liquidation preference of Twenty-Five Cents ($0.25) per share _________ of
which shares are issued and outstanding. The outstanding shares of Common
Stock and Preferred Stock have been duly authorized and validly issued and are
fully paid and nonassessable. The rights, preferences and privileges of the
Series A Preferred Stock are as stated in the Certificate of Incorporation.
The rights, preferences and privileges of the Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock are each set forth in their
respective Certificate of Designation filed by the Company with the Secretary
of State of Delaware. The shares of Common Stock issuable upon conversion of
the Preferred Stock have been duly authorized and reserved. To our knowledge,
there are no preemptive rights, rights of first refusal or rights of co-sale
which exist with respect to the issuance and sale of the Debentures that have
not been waived.

The Company has reserved _________ shares of Common Stock for issuance
upon the exercise of: (i) options to purchase shares of Common Stock pursuant
to its various stock option plans for directors, officers and employees; (ii)
and warrants to purchase shares of Common Stock which have been issued to a
supplier, former employees, consultants to the Company, a bank lender to the
Company and the guarantor of certain bank debt of the Company. Other than as
set forth above and except as may be granted pursuant to (i) that certain
Investor's Rights Agreement entered into as of December 29, 1995 between the
Company and purchasers of the Company's Series B Preferred Stock; (ii) that
certain Investor's Rights Agreement entered into as of May 24, 1996 between the
Company and purchasers of the Company's Series B Preferred Stock; (iii) that
certain Investor's Rights Agreement entered into as of June __, 1996 between

E-1
76

the Company and purchasers of the Company's Series C Preferred Stock and (iv)
that certain Investor's Rights Agreement entered into as of July __, 1996
between the Company and purchasers of the Company's Convertible Debentures,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights), proxy or stockholder agreements, or agreements of any kind
for the purchase or acquisition from the Company of any of it securities.

4. To the best of such counsel's knowledge, there is no action,
proceeding or investigation pending or overtly threatened against the Company
before any court or administrative agency that questions the validity of the
shares of Series D Preferred Stock issuable upon conversion of the Convertible
Debentures (the "Shares") or that might result, either individually or in the
aggregate, in any material adverse change in the business, condition (financial
or otherwise), properties or results of operations of the Company.

5. All consents, approvals, authorizations, or orders of, and
filings, registrations, and qualifications with any regulatory authority or
governmental body in the United States required for the issuance of the Shares
have been made or obtained.

6. The issuance of the Shares is exempt from the registration
requirements of the Securities Act of 1933, as amended.

X-0
00
XXXXXXX X
78

EXHIBIT F

FORM OF OPINION

1. The Company has been duly incorporated and is a validly
existing corporation in good standing under the laws of the State of Delaware.

3. The Convertible Debenture Purchase Agreement (the "Purchase
Agreement") and the Investor's Rights Agreement (the "Rights Agreement") have
been duly and validly authorized, executed and delivered by the Company and
constitute valid and binding agreements of the Company enforceable against the
Company in accordance with their terms, except as rights to indemnity under
Section 2.8 of the Rights Agreement may be limited by applicable laws and
except as enforcement of such agreements may be limited by applicable
bankruptcy, insolvency, reorganization, arrangement, moratorium or other
similar laws affecting creditor's rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance.

4. The Convertible Debentures have been duly and validly
authorized, executed and delivered by the Company and constitute valid and
binding agreements of the Company enforceable against the Company in accordance
with their terms, except as enforcement of the Debentures may be limited by
applicable bankruptcy, insolvency, reorganization, arrangement, moratorium or
other similar laws affecting creditor's rights, and subject to general equity
principles and to limitations on availability of equitable relief, including
specific performance.

5. The Company's authorized capital stock consists of (a)
Eighteen Million (18,000,000) shares of Common Stock, $.001 par value, of
which _________ (_________) shares are issued and outstanding, and (b) Two
Million (2,000,000) shares of Preferred Stock, $.001 par value, of which (i)
One Million Two Hundred Fifty Thousand (1,250,000) shares have been designated
Series A Preferred Stock having a liquidation preference of Two Dollars ($2.00)
per share all of which shares are issued and outstanding; (ii) Six Hundred
Twenty-Five Thousand (625,000) shares have been designated Series B Preferred
Stock having a liquidation preference of Four Dollars ($4.00) per share all of
which shares are issued and outstanding; and (iii) One Hundred Twenty Thousand
(120,000) shares have been designated Series C Preferred Stock having a
liquidation preference of Twelve Dollars and Fifty Cents ($12.50) per share all
of which shares are issued and outstanding. The outstanding shares of Common
Stock and Preferred Stock have been duly authorized and validly issued and are
fully paid and nonassessable. The rights, preferences and privileges of the
Series A Preferred Stock are as stated in the Certificate of Incorporation.
The rights, preferences and privileges of the Series B Preferred Stock are as
set forth in a Certificate of Designation filed by the Company with the
Secretary of State of Delaware. The rights, preferences and privileges of the
Series C Preferred

F-1
79

Stock are as set forth in a Certificate of Designation filed by the Company
with the Secretary of State of Delaware. The shares of Common Stock issuable
upon conversion of the Preferred Stock have been duly authorized and reserved.
To our knowledge, there are no preemptive rights, rights of first refusal or
rights of co-sale which exist with respect to the issuance and sale of the
Debentures that have not been waived.

The Company has reserved _________ shares of Common Stock (the
"Reserved Shares") for issuance upon the exercise of: (i) options to purchase
shares of Common Stock pursuant to its various stock option plans for
directors, officers and employees; and (ii) warrants and options to purchase
shares of Common Stock which have been issued to a supplier, former employees,
consultants to the Company and the guarantor of certain bank debt of the
Company. To the best of such counsel's knowledge, after inquiry, other than
(a) rights to convert issued and outstanding shares of Preferred Stock, (b) the
options and warrants related to the Reserved Shares and (c) as may be granted
that certain Investor's Rights Agreement entered into as of December 29, 1995
between the Company and purchasers of the Company's Series B Preferred Stock;
(ii) that certain Investor's Rights Agreement entered into as of May 24, 1996
between the Company and purchasers of the Company's Series B Preferred Stock
and (iii) those certain Investor's Rights Agreement entered into as of June 14,
1996 and June 28, 1996 between the Company and purchasers of the Company's
Series C Preferred Stock, there are no outstanding options, warrants, rights
(including conversion or preemptive rights), proxy or stockholder agreements,
or agreements of any kind for the purchase or acquisition from the Company of
any of it securities.

6. The execution and delivery of the Purchase Agreement and the
Rights Agreement by the Company and the consummation of the transactions
contemplated thereby do not violate any provisions of the Company's Certificate
of Incorporation or By-Laws, and do not constitute a material default under the
provisions of any material agreement known to such counsel to which the Company
is a party or by which it is bound, and do not violate or contravene (a) any
governmental statute, rule or regulation applicable to the Company or (b) any
order, writ, judgment, injunction, decree, determination or award which has
been entered against the Company and of which such counsel is aware, the
violation or contravention of which would have a Material Adverse Effect (as
defined in the Purchase Agreement).

7. To the best of such counsel's knowledge, there is no action,
proceeding or investigation pending or overtly threatened against the Company
before any court or administrative agency that questions the validity of the
Convertible Debentures, the Purchase Agreement or the Rights Agreement or that
might result, either individually or in the aggregate, in any Material Adverse
Effect.

8. All consents, approvals, authorizations, or orders of, and
filings, registrations, and qualifications with any regulatory authority or
governmental body in the United States required for the consummation by the
Company of the transactions contemplated by the Purchase Agreement, have been
made or obtained, except for the filing of a Notice of Transaction pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968.

F-2
80

9. The offer and sale of the Convertible Debentures is exempt
from the registration requirements of the Securities Act of 1933, as amended.
The qualification of an indenture in respect of the Convertible Debentures
under the Trust Indenture Act of 1939, as amended, is not required in
connection with the offer, issue, sale and delivery of the Convertible
Debentures.

10. The issue and sale of the Convertible Debentures and the
carrying out of any of the other transactions contemplated in the Purchase
Agreement will not violate Regulation G of the Board of Governors of the
Federal Reserve System (12 C.F.R. 207, as amended) or Regulation U (12 C.F.R.
221, as amended), Regulation T (12 C.F.R. 220, as amended) or Regulation X (12
C.F.R. 224, as amended) or any other regulation of such Board.

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81

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.04

(1) The Company's Series A, Series B and Series C Preferred Stock
have: (a) rights to convert their shares to shares of Common Stock par value
$0.001 per share ("Common Stock") of the Company; (b) a right of first refusal
as to any additional issues of equity securities of the Company; and (c)
anti-dilution rights in the event of certain issuances of equity securities.

(2) The Company has reserved 10,384,833 shares of Common Stock
pursuant to (i) its various stock option plans for directors, officers and
employees; (ii) warrants to purchase shares of Common Stock which have been
issued to a supplier, certain former employees, consultants to the Company,
and the guarantor of certain bank debt of the Company; and (iii) conversion
rights of the Company's Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock.

(3) The Company believes that certain of its shareholders may hold
proxies from family members and others to whom they have transferred shares of
Common Stock; however, the Company does not believe that such proxies cover
more than an insubstantial number of shares.

(4) The Company believes that substantially all of its outstanding
securities were issued in compliance with all applicable federal and state
securities laws; however, as to an insubstantial number of shares of Common
Stock, the Company does not have sufficient knowledge of the circumstances of
their issuance to make an informed judgment as to their having been issued in
compliance with such laws.
82

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.06

(i) Issuances of Stocks, Bonds or Other Corporate Securities

(a) On May 24, 1996 the Company issued 625,000 shares of its
Series B Preferred Stock

(b) On June 14, 1996 the Company issued 40,000 shares of its
Series C Preferred Stock.

(d) On July 17, 1996 the Company issued 100,000 shares of Common
Stock par value $0.001 per share to its Chief Executive
Officer in fulfillment of an incentive to his employment.

(e) On April 26, 1996 the Company issued to H&Q Group a warrant
exercisable for 400,000 shares of Series A Preferred Stock.

(ii) Incurrence of Liabilities

(a) On March 29, 1996 the Company entered into a $1 Million
Revolving Line of Credit (the "NationsBank Line") with
NationsBank, N.A. $500,000 has been drawn against such line
of credit.

(b) On April 26, 1996 the Company closed a $2 Million loan with
National Bank of South Carolina guaranteed by Xxxxxxxxx &
Xxxxx Group.

(c) On May 17, 1996, the Company entered into a $1 Million demand
loan with H&Q. This loan was repaid with proceeds from the
Series B Preferred Stock financing.

(d) On July 17 and July 18, 1996, the Company entered into demand
loans with H&Q for $250,000 and $800,000, respectively.

(e) On August 1 and August 8, 1996, the Company entered into
demand loans with H&Q for $1,000,000 and $250,000,
respectively.

(f) On August 13, 1996, the Company entered into a demand loan
with H&Q for $250,000.
83

(g) On August 15, 1996, the Company entered into a demand loan
with H&Q for $250,000.

(iii) Mortgages, Pledges and Creation of Liens

In connection with the NationsBank Line the Company granted a first
lien on substantially all its assets.

(iv) Sale of Assets

On April 26, 1996 the Company sold $441,400 of its aircraft parts
inventory under an agreement by which it would repurchase certain of
such parts from time-to-time on an as needed basis.

(v) Change in Business Operations

Beginning on March 14, 1996 the Company changed its business plan from
being a Southeastern regional airline to one providing service from
underserved cities in the Southeast to high population density areas
of the Northeast and Midwest.

(vi) Redemptions

On January 2, 1996, the Company redeemed 250,000 shares of its Common
Stock, par value $0.001 per share held by Xxxxxxx X. X'Xxxx, the
former President of the Company, and certain other persons designated
by him for $2.00 per share.
84

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.07

The Company is in violation of the following instruments or contracts as to
which it is a party.

(a) Air South, Inc. (now Air South Airlines, Inc.) HUD Section 108
Loan Program.

(b) Revolving Credit Facility with NationsBank, N.A.

(d) Aircraft leases on five Boeing 737 aircraft leased through GE
Capital Aviation Services, Inc.
85

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.08

The Company is the subject of an inquiry from the United States Department of
Transportation (the "DOT") with regard to its fitness to be a certificated air
carrier. The inquiry stated that it arose as a result of publicity concerning
a dispute between the Company and the Hillsborough County Aviation Authority
over the Company's cessation of operations at and non payment of rent for Tampa
International Airport, Florida. The Company has responded to the inquiry.
Through its counsel, Bageles, Xxxxxxxxxx & Xxxxxxx of Washington, D.C., the
Company has received additional inquiries from the DOT. A copy of the
Memorandum dated August 7, 1996 from such counsel to the Company describing
such inquiries has been delivered to Xxxxxx Godward Xxxxxx Xxxxxxxxx & Xxxxx,
counsel to the Purchaser.
86

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.10

All of the properties and assets of the Company are subject to security
interests created by:

(a) the HUD Loan; and

(b) that certain loan from NationsBank, N.A. to the Company made
March 29, 1996.
87

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.11

The Company is in default in one or more respects, including the making of
lease payments thereon as to the following leases of property, real or
personal:

(a) Aircraft Lease Agreement for five Boeing 737 aircraft arranged
through GE Capital Aviation Services, Inc.

(b) Terminated lease and other agreements with Hillsborough County
Aviation Authority relating to the Company's operations
(discontinued since April 5, 1996) at Tampa International
Airport, Florida.
88

CONVERTIBLE DEBENTURE PURCHASE AGREEMENT
SCHEDULE 4.14

The outstanding Debt of the Company consists of:

(a) debt incurred pursuant to the HUD Loan of which $12 million is
outstanding on the date hereof;

(b) debt incurred pursuant to a loan from NationsBank N.A. to the
Company, of which $500,000 is outstanding on the date hereof;

(c) debt incurred pursuant to a loan from the National Bank of
South Carolina to the Company of which $2 million is
outstanding on the date hereof; and

(d) debt incurred on July 17 and July 18, 1996 pursuant to demand
notes from H&Q for $250,000 and $800,000, respectively.

(e) debt incurred on August 1 and August 8, 1996 pursuant to
demand notes from H&Q for $1,000,000 and $250,000,
respectively.

(f) debt incurred on August 13, 1996 pursuant to a demand note
from H&Q for $250,000.

(g) debt incurred on August 15, 1996 pursuant to a demand note
from H&Q for $250,000.

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1 EXHIBIT 4.12 CONVERTIBLE DEBENTURE PURCHASE AGREEMENT

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