SUBSCRIPTION AND SECURITY AGREEMENT

This Subscription and Security Agreement (this “ Agreement ”) is entered into as of October 2, 2009, by and among ReGen Biologics, Inc., a Delaware corporation (together with its successors and permitted assigns, the “ Issuer ”), and the undersigned investors (together with their successors and permitted assigns, the “ Investors ” and each an “ Investor ”).  Capitalized terms used herein shall have the meanings set forth in Section 11.1.  Capitalized terms used but not otherwise defined in Section 11.1 herein   shall have the meanings set forth in the New York Uniform Commercial Code, as amended or supplemented from time to time (the “ UCC ”).

Subject to the terms and conditions of this Agreement the Issuer desires to issue and sell to the Investors an aggregate principal amount of up to $3,000,000 of the Issuer’s Secured Convertible Notes substantially in the form attached hereto as Exhibit A (the “ Notes ”) and warrants to purchase the Issuer’s Common Stock, par value $0.01 per share (“ Common Stock ”) pursuant to the terms of the warrant substantially in the form attached hereto as Exhibit B (the “ Warrant ”) and each Investor, severally and not jointly, desires to subscribe for and purchase the principal amount of Notes set forth on such Investor’s signature page hereto.

In consideration of the mutual representations and warranties, covenants and agreements contained herein, the parties hereto agree as follows:

1.1            Subscription and Issuance of the Notes .  At Closing, upon the terms and subject to the conditions set forth herein: (a) the Issuer agrees that it will issue to the Investors an aggregate principal amount of up to $3,000,000 of the Notes for an aggregate purchase price (the “ Aggregate Purchase Price ”) of up to $3,000,000 (the “ Offering ”), and each Investor, severally and not jointly, agrees that it will acquire from the Issuer Notes in the amount set forth on its signature page hereto; (b) the Issuer agrees that it will issue to each Investor, and each Investor severally and not jointly agrees that it will acquire from the Issuer, Notes, in each case, up to the aggregate principal amount set forth on the signature page for each Investor hereof (the “ Commitment Amount ”); (c) the Issuer agrees that it will issue to each Investor, and each Investor, severally and not jointly, agrees that it will acquire from the Issuer, a Warrant or Warrants; and (d) each Investor agrees to remit payment for its Commitment Amount in accordance with the provisions of Section 1.3 .

1.2            Interest .  Interest (“ Interest ”) at the rate of 8.00% per annum shall be payable on the Due Date in arrears on the sum of the principal amount of each Note then outstanding.  Interest on the principal amount outstanding shall accrue daily and shall commence accruing with respect to (i) the First Tranche, from the date of Closing, and (ii) the Second Tranche, if any, from the date of Subsequent Closing(s), and, in each case, shall be computed on the basis of a 360-day year of twelve (12) 30-day months; provided , however , if the Notes are not repaid by the Due Date, then Interest on the sum of the principal amount of each Note then outstanding shall accrue, from the day immediately after the Due Date, at the rate of 12.00% per annum computed on the basis of a 360-day year of twelve (12) 30-day months.

(a)           At Closing, upon the terms and subject to the conditions set forth herein, each Investor shall pay its first tranche commitment amount (the “ First Tranche Commitment Amount ”) set forth on the signature page for each Investor hereof (all such payments, together, the “ First Tranche ”).

(b)           At the Subsequent Closing(s), if any, upon the terms and subject to the conditions set forth herein, including the election by the Investors in accordance with Section 2.1(b) , each Investor shall pay its Subsequent Tranche Commitment Amount, up to the balance of its Commitment Amount (all such payments, together, the “ Subsequent Tranche(s) ”).

(c)           All payments by Investors shall be paid in cash, by wire transfer of immediately available funds at the Closing or the Subsequent Closing, as applicable, or in some other form deemed acceptable by the Issuer, to an account designated in a written notice delivered by the Issuer to each Investor not later than two (2) business days prior to the Closing or the Subsequent Closing(s), as applicable.  Issuer may request in writing that an Investor deliver payment hereunder directly to a third party creditor or vendor of the Issuer and to which Issuer owes an amount (the “ Third Party Payment ”); and if such Investor accepts such request and delivers the Third Party Payment as requested, such Third Party Payment shall be deemed for all purposes to have been delivered to the Issuer for the purposes this Agreement and shall constitute a payment made hereunder.

1.4            Repayment .  All outstanding principal and accrued and unpaid interest with respect to a Note shall be due and payable (a) in the form of Equity Securities of the Issuer, if elected by the Investor, in connection with a Future Private Placement and in accordance with Section 3.1 or (b) if repayment in the form of Equity Securities has not been elected by the Investor, in the form of cash on April 2, 2010 (the “ Due Date ”); provided , however , that if a Note is to be paid, at the election of the Investor, in the form of Equity Securities in connection with a Future Private Placement and such Future Private Placement shall close after the Due Date, then the number of shares of Equity Securities to be issued in repayment of such Note shall be determined in accordance with Section 3.2 .  Unless a Future Private Placement has occurred, the Issuer may not repay a Note in cash prior to the Due Date without the consent of the Investor holding such Note.  Notwithstanding the foregoing, if a Future Private Placement has not occurred by the Due Date, each Investor may elect to receive Equity Securities in lieu of cash pursuant to Section 3.3 .

1.5            Fundamental Transaction Premium . Upon the consummation of a Fundamental Transaction prior to repayment, conversion or retirement of the Notes, a premium shall be applied to the principal amount of each Note then outstanding equal to 300% of the outstanding principal amount of such Note (the “ Fundamental Transaction Premium ” the day immediately preceding the consummation of such Fundamental Transaction and thereafter interest shall accrue in accordance with Section 1.2 on the principal amount of such Note the day immediately preceding the consummation of such Fundamental Transaction plus the premium applied pursuant to this Section 1.5 (such sum totaling four times the amount of outstanding principal the day immediately preceding the consummation of such Fundamental Transaction).

THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IN COMPLIANCE WITH APPLICABLE SECURITIES LAWS OF ANY STATE WITH RESPECT THERETO OR IN ACCORDANCE WITH AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND ALSO MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN COMPLIANCE WITH ANY APPLICABLE RULES OF THE SECURITIES AND EXCHANGE COMMISSION.

(a)            Closing .  The initial closing of the transactions contemplated herein in connection with the First Tranche (the “ Closing ”) shall take place on a date designated by the Issuer, which date shall be October 2, 2009.  The Closing shall take place at the offices of Pillsbury Winthrop Shaw Pittman LLP, counsel for the Issuer, 2300 N Street, NW, Washington, DC 20037 or such other location as determined by the Issuer.  At the Closing (i) each Investor shall remit payment in accordance with Section 1.3(a) and   in the manner specified in Section 1.3(c) ; (ii) the Issuer shall issue to each Investor a Note representing the amount of such Investor’s First Tranche Commitment Amount; (iii) the Issuer shall issue to each Investor a Warrant or Warrants, each exercisable for five (5) years from the date of Closing at the applicable Warrant Price, to purchase a number of shares of Common Stock equal to the amount of Conversion Shares into which such Investor’s First Tranche Commitment Amount would be repaid; and (iv) all other actions referred to in this Agreement which are required to be taken for the Closing shall be taken and all other agreements and other documents referred to in this Agreement which are required for the Closing shall be executed and delivered.  Notwithstanding the foregoing, if no Future Private Placement is consummated prior to the Due Date, the Warrant(s) issued to an Investor pursuant to Section 2.1(a)(iii) above will be immediately exercisable for a number of shares of Common Stock of the Issuer equal to the Investor’s First Tranche Commitment Amount divided by $0.03.

(b)            Subsequent Closing(s) .  The subsequent closing or closings of the transactions contemplated herein in connection with a Susbsequent Tranche (the “ Subsequent Closing(s) ”) shall take place, upon the affirmative election of the holders of two-thirds (2/3) of the aggregate principal amount of the Notes then outstanding, in such aggregate principal amount(s) of such Subsequent Tranche(s) and on such day(s) as are determined by the affirmative election of the holders of two-thirds (2/3) of the aggregate principal amount of the Notes then outstanding at the offices of Pillsbury Winthrop Shaw Pittman LLP, counsel for the Issuer, 2300 N Street, NW, Washington, DC 20037 or such other location as determined by the Issuer.  At the Subsequent Closing(s) (i) each Investor shall remit payment in accordance with Section 1.3(b) and in the manner specified in Section 1.3(c) ; (ii) the Issuer shall issue to each Investor a Note representing the amount paid by the Investor to the Issuer at such Subsequent Closing; (iii) the Issuer shall issue to each Investor a Warrant or Warrants, each exercisable for five (5) years from the date of Closing at the applicable Warrant Price, to purchase a number of shares of Common Stock equal to the amount of Conversion Shares into which the amount paid by such Investor to the Issuer at such Subsequent Closing would be repaid; and (iv) all other actions referred to in this Agreement which are required to be taken for the Subsequent Closing(s) shall be taken and all other agreements and other documents referred to in this Agreement which are required for the Subsequent Closing(s) shall be executed and delivered; provided , however , if any Investor shall fail to remit payment in a duly elected Subsequent Closing, such Investor shall be deemed to have forfeited all Warrants issued to such Investor at Closing or issuable to it at the Subsequent Closing(s) and all such Warrants shall be deemed null and void without any further action by the Issuer or such Investor.  Notwithstanding the foregoing, if no Future Private Placement is consummated prior to the Due Date, each Warrant issued to an Investor pursuant to Section 2.1(b)(iii) above will be immediately exercisable for a number of shares of Common Stock of the Issuer equal to the amount paid by such Investor to the Issuer at such Subsequent Closing divided by $0.03.

2.2            Termination .  This Agreement may be terminated at any time prior to the Closing or, upon conversion of the Notes in accordance with the terms of this Agreement or payment in full by Issuer of any Notes issued in connection with the Closing or the Subsequent Closing(s):

(a)           by mutual written consent of the Issuer and the Investors;

(b)           with respect to any Investor’s obligations hereunder, by such Investor, upon a materially inaccurate representation or breach of any material warranty, covenant or agreement on the part of the Issuer set forth in this Agreement, in either case such that the conditions in Section 10.1 would be reasonably incapable of being satisfied on or prior to the date of the Closing or the Subsequent Closing(s); or

(c)           by the Issuer, upon a materially inaccurate representation or breach of any material warranty, covenant or agreement on the part of the Investors set forth in this Agreement, in either case such that the conditions in Section 10.2 would be reasonably incapable of being satisfied on or prior to the date of the Closing or the Subsequent Closing(s).

2.3            Effect of Termination .  In the event of termination of this Agreement pursuant to Section 2.2 , this Agreement shall forthwith become void, there shall be no liability on the part of the Issuer or the Investors to each other and all rights and obligations of any party hereto shall cease; provided , however , that nothing herein shall relieve any party from liability for the willful breach of any of its representations and warranties, covenants or agreements set forth in this Agreement. For the avoidance of doubt, for so long as the Issuer has any outstanding indebtedness under any of the Notes, the Lien on the Collateral and the security interest granted hereunder shall remain in effect for the benefit of the Investors or holders of the Notes then outstanding.

3.1            Conversion Prior to Due Date .  If repayment of a Note is to be made in the form of Equity Securities pursuant to a Future Private Placement prior to or on the Due Date, then the number of shares of Equity Securities to be issued in repayment of such Note will be determined by dividing (a) the principal amount, the Fundamental Transaction Premium (if applicable) and any accrued and unpaid interest on that Note by (b) the purchase price per share of the Equity Securities offered in the Future Private Placement; provided , that any fractional shares shall be rounded up to the nearest whole share (the shares of Equity Securities to be issued pursuant to such conversion, the “ 3.1 Conversion Shares ”).

3.2            Conversion Subsequent to Due Date .  If repayment of a Note is to be made in the form of Equity Securities pursuant to a Future Private Placement subsequent to the Due Date, then the number of shares of Equity Securities to be issued in repayment of such Note will be determined by dividing (a) the principal amount, the Fundamental Transaction Premium (if applicable) and any accrued and unpaid interest on that Note by (b) the product of multiplying the purchase price per share of the Equity Securities offered in the Future Private Placement by 0.75; provided , that any fractional shares shall be rounded up to the nearest whole share (the shares of Equity Securities to be issued pursuant to such conversion, the “ 3.2 Conversion Shares ”).

3.3            Conversion without a Future Private Placement .  Prior to any repayment of the Notes in cash pursuant to Section 1.4 , and in the absence of a completed Future Private Placement, each Investor shall have the option to elect to receive payment therefor in the form of Common Stock of the Issuer, with the number of shares of Common Stock to be issued in repayment of such Note to be determined by dividing (a) the principal amount, the Fundamental Transaction Premium (if applicable) and any accrued and unpaid interest on that Note by (b) the product of multiplying  the twenty (20) trading day volume weighted average price per share of the Common Stock immediately preceding any conversion pursuant to this Section 3.3 by 0.90; provided , that any fractional shares shall be rounded up to the nearest whole share (the shares of Equity Securities to be issued pursuant to such conversion, the “ 3.3 Conversion Shares ”).

3.4            Terms of Conversion Shares .  The Conversion Shares issued in connection with a Future Private Placement shall be subject to and limited by the same terms of and granted the same rights of the participants in such Future Private Placement, including, but not limited to, the issuance of any warrants, options or other securities in addition to the Equity Securities offered in connection with such Future Private Placement, as shall be determined in connection with such transaction.

3.5            Increase of Authorized Capital Stock .  To the extent conversion of the Notes in accordance with this Article 3 would result in the issuance of more than the amount of shares of capital stock authorized under the Certificate of Incorporation, the Issuer shall, at such time, use its commercially reasonable efforts, subject to the approval of the Issuer’s shareholders, to increase the authorized capital stock of the Issuer such that all of the Conversion Shares are authorized under the Certificate of Incorporation; provided , however , that, to the extent that the Investors are shareholders of the Issuer entitled to vote shares of Common Stock at an annual or special meeting of the shareholders of the Company, the Investors shall not unreasonably withhold their votes in favor of any such proposal to increase the authorized capital stock of the Issuer.

As a material inducement to the Investors entering into this Agreement, subscribing for the Notes and Warrants, except as set forth in the Disclosure Schedules delivered to the Investors concurrently herewith, the Issuer represents and warrants to the Investors as follows:

4.1            Corporate Status .  The Issuer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. Each of the Issuer and its Subsidiaries has full corporate power and authority to own and hold its properties and to conduct its business as described in the Issuer’s SEC Reports. Each of the Issuer and its Subsidiaries is duly qualified to do business and is in good standing in each jurisdiction in which the nature of its business requires qualification or good standing, except for any failure to be so qualified or be in good standing that would not have a Material Adverse Effect.

4.2            Corporate Power and Authority .  The Issuer has the corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby.  At or prior to the Closing, the Issuer will have taken all necessary corporate action to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby.  No further approval or authorization of any stockholder or the board of directors of the Issuer is required for the issuance and sale of the Notes and Warrants, the conversion or exercise thereof or, except as provided in Section 7.2 , the filing of the Registration Statement.

4.4            No Violation .  Except as set forth on Schedule 4.4 , the execution and delivery by the Issuer of this Agreement, the consummation of the transactions contemplated hereby, and the compliance by the Issuer with the terms and provisions hereof (including, without limitation, the Issuer’s issuance to the Investors of the Notes as contemplated by and in accordance with this Agreement), will not result in a default under (or give any other party the right, with the giving of notice or the passage of time (or both), to declare a default or accelerate any obligation under) or violate the Certificate of Incorporation or Bylaws of the Issuer or any material Contract to which the Issuer is a party (except to the extent such a default, acceleration, or violation would not, in the case of a Contract, have a Material Adverse Effect on the Issuer), or materially violate any Requirement of Law applicable to the Issuer, or result in the creation or imposition of any material Lien upon any of the capital stock, properties or assets of the Issuer or any of its Subsidiaries (except where such violations of any Requirement of Law or creations or impositions of any Liens would not have a Material Adverse Effect on the Issuer or are specifically contemplated hereby).  Neither the Issuer nor any of its Subsidiaries is (a) in default under or in violation of any material Contract to which it is a party or by which it or any of its properties is bound or (b) to its knowledge, in violation of any order of any Governmental Authority, which, in the case of clauses (a) and (b) , could reasonably be expected to have a Material Adverse Effect.

4.5            Consents/Approvals .  Except for the filing of a registration statement in accordance with Article 7 hereof and filings with the SEC and the securities commissions of the states in which the Notes are to be issued, no consents, filings, authorizations or other actions of any Governmental Authority are required to be obtained or made by the Issuer for the Issuer’s execution, delivery and performance of this Agreement which have not already been obtained or made.  No consent, approval, waiver or other action by any Person under any Contract to which the Issuer is a party or by which the Issuer or any of its properties or assets are bound is required or necessary for the execution, delivery or performance by the Issuer of this Agreement and the consummation of the transactions contemplated hereby, except where the failure to obtain such consents would not have a Material Adverse Effect on the Issuer.

4.6            Valid Issuance .  Upon payment of the applicable purchase price by the Investor with respect to each Note purchased hereunder and delivery to the Investors of such Notes and the accompanying Warrants, such Notes and Warrants will be validly issued, fully paid and nonassessable and will be free and clear of all Liens imposed by the Issuer.  The Conversion Shares and the shares issuable upon exercise of the Warrants (the “ Warrant Shares ”), when issued, will be validly issued, fully paid and nonassessable and will be free and clear of all Liens imposed by the Issuer and will not be subject to any preemptive rights or other similar rights of stockholders of the Issuer.

4.8            Commissions .  Except for those fees set forth on Schedule 4.8 , the Issuer has not incurred any other obligation for any finder’s or broker’s or agent’s fees or commissions in connection with the transactions contemplated hereby.

4.9            Capitalization .  As of August 31, 2009, the authorized capital stock of the Issuer consists of 165,000,000 shares of Common Stock and 60,000,000 shares of Preferred Stock.  Except as set forth on Schedule 4.9 , all issued and outstanding shares of capital stock of the Issuer have been, and as of Closing will be, duly authorized and validly issued and are fully paid and non-assessable, have been issued in compliance with all applicable state and federal securities laws in all material respects and were not issued in violation of, or subject to, any preemptive, subscription or other similar rights of any stockholder of the Issuer imposed by law.  As of August 31, 2009, the Issuer has issued and outstanding 9,778,940 shares of Common Stock, and 3,372,212 shares of Preferred Stock, of which 1,990,331 shares have been designated as Series A Convertible Preferred Stock and of which 1,381,881 shares have been designated as Series C Convertible Preferred Stock, which in the aggregate are convertible into 168,612 shares of Common Stock, not accounting for any fractional shares.  Except for outstanding options to purchase 4,233,500 shares of Common Stock and outstanding warrants to purchase 1,422,627 shares of Common Stock, as of August 31, 2009, there were no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal and similar rights) or agreements, orally or in writing, for the purchase or acquisition from the Issuer of any shares of capital stock, and, except as set forth on Schedule 4.9 , the Issuer is not a party to or subject to any agreement or understanding and, to the Issuer’s knowledge, there is no agreement or understanding between any Persons, which affects or relates to the voting or giving of written consents with respect to any security or by a director of the Issuer. The Issuer owns, directly or indirectly, all of the capital stock of its Subsidiaries, free and clear of any Liens or equitable interests other than as reflected in the SEC Reports.  Except as set forth in the SEC Reports, the Issuer has no obligation, contingent or otherwise, to redeem or repurchase any Equity Security or any security that is a combination of debt and equity.

4.10          Material Changes .  Except as set forth on Schedule 4.10 and in the SEC Reports (excluding any “risk factors” or “forward-looking statements” sections thereof) or as otherwise contemplated herein, since December 31, 2008, there has been no Material Adverse Effect in respect of the Issuer and its Subsidiaries taken as a whole.  Except as set forth in the SEC Reports (excluding any “risk factors” or “forward-looking statements” sections thereof) or as otherwise contemplated herein, since December 31, 2008, there has not been: (i) any direct or indirect redemption, purchase or other acquisition by the Issuer of any shares of the Common Stock; (ii) any declaration, setting aside or payment of any dividend or other distribution by the Issuer with respect to the Common Stock; (iii) any borrowings incurred or any material liabilities (absolute, accrued or contingent) assumed, other than current liabilities incurred in the ordinary course of business, liabilities under Contracts entered into in the ordinary course of business, or liabilities not required to be reflected on the Issuer’s financial statements pursuant to GAAP or required to disclosed in the SEC Reports; (iv) any Lien or adverse claim on any of the Issuer’s material properties or assets, except for Liens for taxes not yet due and payable or otherwise in the ordinary course of business; (v) any sale, assignment or transfer of any of the Issuer’s material assets, tangible or intangible, except in the ordinary course of business; (vi) any extraordinary losses or waiver of any rights of material value; (vii) any material capital expenditures or commitments therefor other than in the ordinary course of business; (viii) any other material transaction other than in the ordinary course of business; (ix) any material change in the nature or operations of the business of the Issuer and its Subsidiaries; (x) any default in the payment of principal or interest in any material amount, or violation of any material covenant, with respect to any outstanding debt obligations that are material to the Issuer and its Subsidiaries as a whole; (xi) any material changes to the Issuer’s critical accounting policies or material deviations from historical accounting and other practices in connection with the maintenance of the Issuer’s books and records; or (xii) any agreement or commitment to do any of the foregoing.

4.11          Litigation; Investigations .  Except as set forth on Schedule 4.11 and in the SEC Reports, there is no action, suit, proceeding or investigation pending or, to the Issuer’s knowledge, currently threatened against the Issuer or any of its Subsidiaries that questions the validity of this Agreement or the right of the Issuer to enter into it, or to consummate the transactions contemplated hereby, or that could reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect on the Issuer or any material change in the current equity ownership of the Issuer. The foregoing includes, without limitation, actions pending or, to the Issuer’s knowledge, threatened involving the prior employment of any of the Issuer’s employees or their use in connection with the Issuer’s business of any information or techniques allegedly proprietary to any of their former employers.  Neither the Issuer nor any of its Subsidiaries is a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or Governmental Authority.  Except as set forth in the SEC Reports, there is no action, suit, proceeding or investigation by the Issuer or any of its Subsidiaries currently pending or which the Issuer or any of its Subsidiaries currently intends to initiate, which could reasonably be expected to have a Material Adverse Effect.

4.13          Offerings .  Subject in part to the truth and accuracy of the Investors’ representations and warranties set forth in this Agreement, the offer, sale and issuance of the Notes, Warrants and Conversion Shares (together, the “ Securities ”) as contemplated by this Agreement are exempt from the registration requirements of the Securities Act and any applicable state securities laws, and neither the Issuer nor any authorized agent acting on its behalf will take any action hereafter that would cause the loss of such exemption.

4.14          Licenses and Permits .  Except as disclosed in the SEC Reports or on Schedule 4.14 , each of the Issuer and its Subsidiaries has all Permits under applicable Requirements of Law from all applicable Governmental Authorities that are necessary to operate its businesses as presently conducted and all such Permits are in full force and effect, except where the failure to have any such Permits in full force and effect would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.  Neither the Issuer nor any of its Subsidiaries is in default under, or in violation of or noncompliance with, any of such Permits, except for any such default, violation, or noncompliance which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. To the Issuer’s knowledge, other than as disclosed in the SEC Reports, there is no proposed change in any Requirements of Law which would require the Issuer and its Subsidiaries to obtain any Permits in order to conduct its business as presently conducted that the Issuer and its Subsidiaries do not currently possess and the lack of which could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

4.15          Patents and Trademarks.   The Issuer and each of its Subsidiaries has, or has rights to use, all intellectual property, including, without limitation, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and know-how (including trade secrets or other unpatented and/or unpatentable proprietary or confidential information, systems or procedures) (collectively, the “ Intellectual Property Rights ”) that are necessary for use in connection with its business as presently conducted, except where the failure to have such Intellectual Property Rights would not reasonably be expected to have a Material Adverse Effect.  To the Issuer’s knowledge, there is no existing infringement by another person or entity of any of the Intellectual Property Rights that are necessary for use in connection with the Issuer’s business as presently conducted.  The Issuer is not infringing on any intellectual property rights of any other person, nor is there any claim of infringement made or, to the Issuer’s knowledge, threatened by a third party against or involving the Issuer.

4.17          Material Contracts . All material Contracts to which the Issuer or any Subsidiary is a party and which are required to have been filed by the Issuer on Exhibit 10 to the SEC Reports have been filed by the Issuer with the SEC pursuant to the requirements of the Exchange Act.  Except as disclosed in the SEC Reports, each such material Contract is in full force and effect, except as otherwise required pursuant to its respective terms, and is binding on the Issuer or its Subsidiaries, as the case may be, in each case, in accordance with its respective terms, and neither the Issuer or any of its Subsidiaries nor, to the Issuer’s knowledge, any other party thereto is in breach of, or in default under, any such material Contract, which breach or default would reasonably be expected to have a Material Adverse Effect.  Except as set forth in the SEC Reports, there exists no actual or, to the knowledge of the Issuer, threatened termination, cancellation or limitation of, or any material adverse modification or change in, the business relationship of the Issuer or any of its Subsidiaries, or the business of the Issuer or any of its Subsidiaries, with any customer or supplier or any group of customers or suppliers whose purchases or inventories provided to the business of the Issuer or any of its Subsidiaries would, individually or in the aggregate, have a Material Adverse Effect.

4.18          Taxes .  The Issuer has filed all material federal, state and foreign income and franchise tax returns which are due, unless validly extended, and has paid or accrued all taxes shown as due thereon, unless validly extended, and the Issuer has no knowledge of a tax deficiency which has been or might be asserted or threatened against it which is reasonably likely to have a Material Adverse Effect.

4.19          Private Placement .  Neither the Issuer nor any of its Subsidiaries or Affiliates, nor any Person acting on its or their behalf, (i) has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Securities Act) in connection with the offer or sale of the Securities, (ii) has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under any circumstances that would require registration of the Securities under the Securities Act or (iii) has issued any shares of Common Stock or shares of any series of preferred stock or other securities or instruments convertible into, exchangeable for or otherwise entitling the holder thereof to acquire shares of Common Stock which, to our knowledge, would be integrated with the sale of the Securities hereunder for purposes of the Securities Act or of any applicable stockholder approval provisions, nor will the Issuer or any of its Subsidiaries or Affiliates take any action or steps that would, to our knowledge, require registration of any of the Securities under the Securities Act or cause the offering of the Securities to be integrated with other offerings; provided , however , that if any integration shall have occurred prior to repayment or conversion of the Notes, then the indemnification provisions under Section 9.1 shall apply notwithstanding anything stated therein.  Assuming the accuracy of the representations and warranties of the Investors, the offer and sale of the Securities by the Issuer to the Investors pursuant to this Agreement will be exempt from the registration requirements of the Securities Act.

4.20          Reservation of Warrant Shares .  The Issuer has validly reserved sufficient Warrant Shares to provide for conversion of the Warrants issued or issuable pursuant to this Agreement.

As a material inducement to the Issuer entering into this Agreement and issuing the Notes and Warrants, and in reliance upon the representations and warranties of the Issuer in Section 4 hereof, each of the Investors severally and not jointly represents, warrants, and covenants to the Issuer as follows:

5.1            Power and Authority .  The Investor, if other than a natural person, is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation.  The Investor has the corporate, partnership or other power (or capacity) and authority under applicable law to execute and deliver this Agreement and consummate the transactions contemplated hereby, and has all necessary authority to execute, deliver and perform its obligations under this Agreement and to consummate the transactions contemplated hereby.  The Investor has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby.

5.2            Enforceability .  This Agreement has been duly executed and delivered by the Investor and (assuming it has been duly authorized, executed and delivered by the Issuer) constitutes a legal, valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms, except (a) as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor’s rights generally, and (b) the indemnity provisions of Section 9 of this Agreement, to the extent they may not be enforceable based upon public policy considerations, and general equitable principles, regardless of whether enforceability is considered in a proceeding at law or in equity.

5.3            Investment Intent .  The Investor is acquiring the Notes and Warrants hereunder for its own account and with no present intention of distributing or selling any of the Securities and further agrees not to transfer such Securities in violation of the Securities Act or any applicable state securities law, and no one other than the Investor has any beneficial interest in the Notes (except to the extent that the Investor may have delegated voting authority to its investment advisor), the Warrants, the Conversion Shares and the Warrant Shares.  The Investor agrees that it will not sell or otherwise dispose of any of the Securities unless such sale or other disposition has been registered under the Securities Act or, in the opinion of counsel acceptable to the Issuer, is exempt from registration under the Securities Act and has been registered or qualified or, in the opinion of such counsel acceptable to the Issuer, is exempt from registration or qualification under applicable state securities laws.  The Investor understands that the offer and sale by the Issuer of the Notes and Warrants being acquired by the Investor hereunder has not been registered under the Securities Act by reason of their contemplated issuance in transactions exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) thereof, and that the reliance of the Issuer on such exemption from registration is predicated in part on these representations and warranties of the Investor.  The Investor acknowledges that pursuant to Section 1.6 of this Agreement a restrictive legend consistent with the foregoing has been or will be placed on the certificates for the Securities.

5.5            Adequate Information .  The Investor has received from the Issuer, and has had the opportunity to review, such information which the Investor considers necessary or appropriate to evaluate the risks and merits of an investment in the Notes and Warrants.  The Investor also acknowledges that the risk factors set forth on Exhibit C and contained in the SEC Reports have been delivered to the Investor and the Investor has had the opportunity to review such risk factors; provided, however, that delivery of such risk factors in no way alters or amends the representations, warranties and covenants made in this Agreement.

5.6            Opportunity to Question .  The Investor has had the opportunity to question, and has questioned, to the extent deemed necessary or appropriate, representatives of the Issuer so as to receive answers and verify information obtained in the Investor’s examination of the Issuer, including the information that the Investor has received and reviewed as referenced in Section 5.6 hereof in relation to its investment in the Notes and Warrants.

5.7            No Other Representations .  No oral or written material representations have been made to the Investor in connection with the Investor’s acquisition of the Notes and Warrants which were in any way inconsistent with the information reviewed by the Investor.  The Investor acknowledges that in deciding whether to enter into this Agreement and to purchase the Notes and Warrants hereunder, it has not relied on any representations or warranties of any type or description made by the Issuer or any of its representatives with regard to the Issuer, any of its Subsidiaries, any of their respective businesses or properties, or the prospects of the investment contemplated herein, other than the representations and warranties set forth in Section 4 hereof.

5.8            Knowledge and Experience .  The Investor has such knowledge and experience in financial, tax and business matters, including substantial experience in evaluating and investing in common stock and other securities (including the common stock and other securities of speculative companies), so as to enable the Investor to utilize the information referred to in Section 5.5 hereof and any other information made available by the Issuer to the Investor in order to evaluate the merits and risks of an investment in the Notes and Warrants and to make an informed investment decision with respect thereto.

5.10          Commissions .  The Investor has not incurred any obligation for any finder’s or broker’s or agent’s fees or commissions in connection with the transactions contemplated hereby.

6.1            Public Announcements .  The Issuer shall file within four (4) business days after the Closing a Current Report on Form 8-K with the SEC in respect of the transactions contemplated by this Agreement.  Prior to the earlier of the filing of such Current Report on Form 8-K or the fifth business day after the Closing, each Investor agrees not to make any public announcement or issue any press release or otherwise publicly disseminate any information about the subject matter of this Agreement.  Except as provided herein, the Issuer shall have the right to make such public announcements and shall control, in its sole and absolute discretion, the timing, form and content of all press releases or other public communications of any sort relating to the subject matter of this Agreement, and the method of their release, or publication thereof.  The Issuer may issue press releases relating to the transactions contemplated by this Agreement, but shall not identify any Investor in any such press release without the consent of such Investor, except as may be required by any Requirement of Law or rule of any exchange on which the Issuer’s securities are listed.  Notwithstanding the foregoing, each Investor may make such filings with and public disclosures to any Governmental Authority as are required, including but not limited to filings on Form 4 and Schedule 13D/G with the SEC.

6.2            Further Assurances .  Each party shall execute and deliver such additional instruments and other documents and shall take such further actions as may be reasonably necessary or appropriate to effectuate, carry out and comply with all of the terms of this Agreement and the transactions contemplated hereby.  Each of the Investors and the Issuer shall make on a prompt and timely basis all governmental or regulatory notifications and filings required to be made by it with or to any Governmental Authority in connection with the consummation of the transactions contemplated hereby.  The Issuer and the Investors each agree to cooperate with the other in the preparation and filing of all forms, notifications, reports and information, if any, required or reasonably deemed advisable pursuant to any Requirement of Law in connection with the transactions contemplated by this Agreement and to use their respective commercially reasonable efforts to agree jointly on a method to overcome any objections by any Governmental Authority to any such transactions.  Except as may be specifically required hereunder, neither of the parties hereto nor their respective Affiliates shall be required to agree to take any action that in the reasonable opinion of such party would result in or produce a Material Adverse Effect on such party.

6.3            Notification of Certain Matters .  Prior to the Closing, each party hereto shall give prompt notice to the other party of the occurrence, or non-occurrence, of any event which would be likely to cause any representation and warranty herein to be untrue or inaccurate, or any covenant, condition or agreement herein not to be complied with or satisfied.

6.4            Confidential Information .

(a)           Except as contemplated by Sections 6.1 and 6.2 above, each of the Investors agrees that no portion of the Confidential Information (as defined below) shall be disclosed to third parties, except as may be required by law, without the prior express written consent of the Issuer; provided , that an Investor may share such information with such of its officers and professional advisors as may need to know such information to assist such Investor in its evaluation thereof on the condition that such parties agree to be bound by the terms hereof.  “ Confidential Information ” means the existence and terms of this Agreement, the transactions contemplated hereby, and the disclosures and other information contained herein, excluding any disclosures or other information that is or becomes publicly available without breach by the Investor of this Section 6.4.  Each of the Investors further agrees that it will not transfer the Notes acquired through this Offering or any Common Stock owned by such Investor until the earlier of the time the Issuer has publicly announced the completion of the Offering or the fifth business day after the Closing.

6.5            Disposition or Encumbrance of Collateral .  The Issuer will not without the prior written consent of the Collateral Agent (A) surrender or lose possession of (other than to the Investors), sell, lease, rent or otherwise dispose of or transfer (collectively, a “Transfer”) any of its property including without limitation its intellectual property or any right or interest therein, other than: (i) Transfers of inventory in the ordinary course of business, (ii) Transfers of non-exclusive licenses and similar arrangements for the use of the property of Issuer in the ordinary course of business, or (iii) Transfers of worn-out or obsolete equipment; (B) create, incur, assume or allow any Lien with respect to any of the Collateral, outside the ordinary course of business; or (C) remove any material portion of the Collateral from its present location within the State of California.

6.6            Covenants Regarding Intellectual Property .

(a)           The Issuer shall register or cause to be registered on an expedited basis (to the extent not already registered) with the United States Patent and Trademark Office or the United States Copyright Office, as the case may be, those registrable Intellectual Property Rights now owned or hereafter developed or acquired by the Issuer, to the extent that the Issuer, in its reasonable business judgment, deems it appropriate to so protect such Intellectual Property Rights.

(b)           The Issuer shall promptly give Collateral Agent written notice of any applications or registrations of Intellectual Property Rights filed with the United States Patent and Trademark Office, including the date of such filing and the registration or application numbers, if any.

(c)           The Issuer shall (i) give Collateral Agent not less than 30 days prior written notice of the filing of any applications or registrations with the United States Copyright Office, including the title of such Intellectual Property Rights to be registered, as such title will appear on such applications or registrations, and the date such applications or registrations will be filed; (ii) prior to the filing of any such applications or registrations, execute such documents as Collateral Agent may reasonably request for Collateral Agent to maintain its perfection in such Intellectual Property Rights to be registered by Issuer; (iii) upon the request of Collateral Agent, either deliver to Collateral Agent or file such documents simultaneously with the filing of any such applications or registrations; or (iv) upon filing any such applications or registrations, promptly provide Collateral Agent with a copy of such applications or registrations together with any exhibits, evidence of the filing of any documents requested by Collateral Agent to be filed for Collateral Agent to maintain the perfection and priority of its security interest in such Intellectual Property Rights, and the date of such filing.

(d)           The Issuer shall execute and deliver such additional instruments and documents from time to time as Collateral Agent shall reasonably request to perfect and maintain the perfection and priority of Collateral Agent’s security interest in Issuer’s Intellectual Property.

(e)           The Issuer shall (i) protect, defend and maintain the validity and enforceability of the Intellectual Property including all trade secrets, trademarks, patents and copyrights, (ii) use commercially reasonable efforts to detect infringements of the Intellectual Property and promptly advise Collateral Agent in writing of material infringements detected and (iii) not allow any material Intellectual Property to be abandoned, forfeited or dedicated to the public without the written consent of Collateral Agent, which shall not be unreasonably withheld.

6.7            Amendments of Notes .  So long as the Notes are outstanding, the Issuer shall be allowed to alter or change the terms of the Notes or the Warrants (including any applicable provisions of this Agreement notwithstanding anything to the contrary provided in Section 11.6 ) upon first obtaining the written consent of the Investors whose investment constitutes two-thirds (2/3) of the aggregate principal amount of the Notes then outstanding or any such subsequent holder (“ Required Consent ”), unless such alteration or change shall