<SUBMISSION>
<ACCESSION-NUMBER>0001144204-06-037244
<TYPE>SC 13D/A
<PUBLIC-DOCUMENT-COUNT>2
<FILING-DATE>20060907
<DATE-OF-FILING-DATE-CHANGE>20060906
<SUBJECT-COMPANY>
<COMPANY-DATA>
<CONFORMED-NAME>ADVANCED BIOTHERAPY INC
<CIK>0000791833
<ASSIGNED-SIC>8731
<IRS-NUMBER>510402415
<STATE-OF-INCORPORATION>DE
<FISCAL-YEAR-END>1231
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>SC 13D/A
<ACT>34
<FILE-NUMBER>005-81621
<FILM-NUMBER>061077740
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>6355 TOPANGA CANYON BLVD
<STREET2>SUITE 510
<CITY>WOODLAND HILLS
<STATE>CA
<ZIP>91367
<PHONE>818-8833956
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>6355 TOPANGA CANYON BLVD
<STREET2>SUITE 510
<CITY>WOODLAND HILLS
<STATE>CA
<ZIP>91367
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>ADVANCED BIOTHERAPY CONCEPTS INC
<DATE-CHANGED>19990524
</FORMER-COMPANY>
</SUBJECT-COMPANY>
<FILED-BY>
<COMPANY-DATA>
<CONFORMED-NAME>KIPHART RICHARD P
<CIK>0000904775
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>SC 13D/A
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>C/O WILLIAM BLAIR &COMPANY, LLC
<STREET2>222 WEST ADAMS STREET
<CITY>CHICAGO
<STATE>IL
<ZIP>60606
<PHONE>312
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>C/O WILLIAM BLAIR &COMPANY, LLC
<STREET2>222 WEST ADAMS STREET
<CITY>CHICAGO
<STATE>IL
<ZIP>60606
</MAIL-ADDRESS>
</FILED-BY>
<DOCUMENT>
<TYPE>SC 13D/A
<SEQUENCE>1
<FILENAME>v052229_sc13da.txt
<TEXT>
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                  SCHEDULE 13D
                                 (Rule 13d-102)

             INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
            TO RULE 13d-1(a) AND AMENDMENTS THERETO FILED PURSUANT TO
                                  RULE 13d-2(a)
                                (Amendment No 1)


                            ADVANCED BIOTHERAPY, INC.
                                (Name of Issuer)

                                  Common Stock
                         (Title of Class of Securities)

                                    00750J100
                                 (CUSIP Number)

                              Christopher W. Capps
              141 West Jackson Blvd., Suite 2182, Chicago, IL 60604
                                 (312) 427-1912
                  (Name, Address and Telephone Number of Person
                Authorized to Receive Notices and Communications)


                                 August 28, 2006
             (Date of Event Which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report
the acquisition that is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(e), Rule 13d-1(f) or Rule 13d-1(g), check the
following box. |_|

Note: Schedules filed in paper format shall include a signed original and five
copies of the schedule, including all exhibits. See Rule 13d-7(b) for other
parties to whom copies are to be sent.

                         (Continued on following pages)

                               (Page 1 of 6 Pages)
--------------------------------------------------------------------------------

*The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).

<PAGE>

CUSIP No. ..00750J100
--------------------------------------------------------------------------------
(1)   Names of reporting persons. Richard P. Kiphart
      I.R.S. Identification Nos. of above persons (entities only)
--------------------------------------------------------------------------------
(2)   Check the appropriate box if a member of a group (see instructions)
                                                                         (a) |_|
                                                                         (b) |_|
--------------------------------------------------------------------------------
(3)   SEC use only
--------------------------------------------------------------------------------
(4)   Source of funds (see instructions)

      PF
--------------------------------------------------------------------------------
(5)   Check if disclosure of legal proceedings is required pursuant to Items
      2(d) or 2(e)
                                                                             |_|

--------------------------------------------------------------------------------
(6)   Citizenship or place of organization

      United States
--------------------------------------------------------------------------------
Number of          (7)   Sole Voting Power
Shares Bene-             96,521,217
ficially Owned by  -------------------------------------------------------------
Each               (8)   Shared Voting Power
Reporting                None
Person With        -------------------------------------------------------------
                   (9)   Sole Dispositive Power
                         96,521,217
                   -------------------------------------------------------------
                   (10)  Shared Dispositive Power
                         None
--------------------------------------------------------------------------------

(11)  Aggregate Amount Beneficially Owned by Each Reporting Person

      96,521,217
--------------------------------------------------------------------------------

(12)  Check if the Aggregate Amount in Row (11) Excludes Certain Shares (See
      Instructions)
                                                                             |_|

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

(13)  Percent of Class Represented by Amount in Row (11)

      56.7%
--------------------------------------------------------------------------------

(14)  Type of Reporting Person (See Instructions) IN


Item 1. Security and Issuer

This statement relates to common stock of Advanced Biotherapy, Inc. (the
"Company"). The principal executive offices of the Company are located at 6355
Topanga Canyon Blvd, Suite 510, Woodland Hills, CA 91367.

Item 2. Identity and Background

      a.    This Amendment No. 1 to Schedule 13D is filed on behalf of Richard
            P. Kiphart

      b.    The business address of Mr. Kiphart is as follows:

            Richard P. Kiphart
            c/o William Blair & Company, L.L.C.
            222 West Adams Street
            Chicago, IL  60606

      c.    Mr. Kiphart is a principal of William Blair & Company, L.L.C., a
            broker dealer and investment adviser.

                               (Page 2 of 6 Pages)
<PAGE>

      d.    Mr. Kiphart has not, during the last five years, been convicted in a
            criminal proceeding (excluding traffic violations or similar
            misdemeanors).

      e.    Mr. Kiphart has not, during the last five years, been a party to any
            civil proceeding of a judicial or administrative body of competent
            jurisdiction and as a result of which he was or is subject to a
            judgment, decree, or final order enjoining future violations of, or
            prohibiting or mandating activities with respect to, federal or
            state securities laws or a finding of any violations with respect to
            such laws.

      f.    US

Item 3. Source and Amount of Funds or Other Consideration

The funds for the acquisition of common stock of the Company consisted of
personal funds of Mr. Kiphart. The total amount of the funds is $1,100,000.

      Item 4. Purpose of Transaction

      State the purpose or purposes of the acquisition of securities of the
      issuer. Describe any plans or proposals which the reporting persons may
      have which relate to or would result in:

      a.    The common stock was purchased for investment, and to generate new
            capital for the Company and to restructure the Company's long-term
            and short-term debt owing to Mr. Kiphart into equity. The cash paid
            by Mr. Kiphart is expected to be used for working capital and
            possible acquisitions.

      b.    Not applicable.

      c.    Not applicable.

      d.    Mr. Kiphart agreed with the Company, in the Share Purchase and Debt
            Restructure Agreement dated and effective August 28, 2006 (the
            "Agreement") that a Special Committee be appointed to oversee the
            performance of the Agreement and the completion of the rights
            offering required thereby (described below). The Special Committee
            consists of three directors of the Company, Thomas J. Pernice, Dr.
            Joseph Bellanti and Keith Gregg. The powers, membership, term and
            termination of the Special Committee are described in Article 7 of
            the Agreement, which is an exhibit to this Schedule 13D. Mr. Kiphart
            also agreed to elect the members of the Special Committee as
            directors of the Company until the Special Committee is terminated.

            Concurrently with approving the Agreement, the Company's board of
            directors appointed Mr. Kiphart as the new non-executive Chairman of
            the Board, Christopher W. Capps as the new President and Chief
            Executive Officer of the Company, and Thomas J. Pernice, as
            Secretary and Treasurer.

      e.    The Agreement calls for Mr. Kiphart to purchase $5,400,000 of
            additional shares of common stock (in addition to the $1,100,000
            funded on August 28, 2006 described in Item 3 above) and to convert
            the indebtedness of the Company to Mr. Kiphart of approximately
            $5,414,716 into additional shares of common stock. The price for all
            such additional shares to be purchased or to be issued upon
            conversion of debt is to be $0.015 per share. The funds to be used
            will be personal funds. These transactions cannot be consummated
            until the Company has amended its certificate of incorporation to
            increase its authorized shares of common stock, which is expected to
            occur on or about September 29, 2006. Upon consummation of such
            additional purchase of shares and conversion of debt, Mr. Kiphart
            will acquire approximately 720,981,067 additional shares of common
            stock. At that point, he will own 797,020,800, shares of Common
            Stock, equal to approximately 83% of the common stock to be then
            outstanding.

                               (Page 3 of 6 Pages)
<PAGE>

            The Agreement provides that the Company will amend its Certificate
            of Incorporation to increase the number of authorized shares of
            common stock to 2,000,000,000 from 200,000,000 shares of common
            stock. Upon filing of the amendment, the Company would have
            authorized 2,020,000,000 shares of capital stock, consisting of
            2,000,000,000 shares of common stock, $0.001 par value per share,
            and 20,000,000 shares of preferred stock, none of which preferred
            stock has been issued. Mr. Kiphart, together with another
            stockholder whose shares, when aggregated with Mr. Kiphart's,
            constitute a majority of the common stock now outstanding, have
            agreed to approve such amendment and the Company intends to obtain
            stockholder approval of such amendment by means of the written
            consent of Mr. Kiphart and such other stockholder, without
            soliciting proxies or other consents from stockholders. On August
            30, 2006 the Company filed an Information Statement on Schedule 14C
            with the Securities and Exchange Commission describing such intended
            stockholder action by written consent and expects to mail such
            Information Statement to stockholders on or about September 9, 2006.

            Pursuant to the Agreement, the Company has agreed to adjust the
            conversion price of all outstanding Convertible Notes, including,
            without limitation, its 2002 Convertible Notes due June 1, 2006, its
            2003 Convertible Notes due September 30, 2007, and its 2005
            Convertible Notes due September 30, 2009. Additionally, the Company
            has agreed to adjust the conversion price of all its other
            convertible notes, and authorize the holders of its other promissory
            notes, to exchange the principal and accrued interest thereon for
            shares of Company common stock at the rate of one share for each
            $0.015 of Company indebtedness. As a condition to the Mr. Kiphart's
            purchase of the $1,100,000 of common stock, most of the other
            holders ("Other Holders") of convertible notes and other promissory
            notes and indebtedness owed by the Company, including accrued unpaid
            salaries, agreed to convert the principal amount thereof, together
            with accrued interest thereon, into shares of Company common stock,
            at the price of $0.015 per share. All of the Other Holders which
            agreed to convert, other than the Michael Krasny Revocable Trust,
            converted as of August 28, 2006 and received an aggregate of
            approximately 35,000,000 shares of common stock on that date. The
            Michael Krasny Revocable Trust has agreed to convert its Convertible
            Notes on the date when Mr. Kiphart funds the additional purchase of
            shares, and will receive approximately 62,052,200 shares. The
            remaining Other Holders, if they should agree to convert, would
            receive approximately 1,550,943 shares of common stock upon
            conversion of such debt into shares of common stock. Such conversion
            by Mr. Kiphart, the Michael Krasny Revocable Trust and such
            remaining Other Holders cannot be consummated until the Company has
            amended its certificate of incorporation to increase its authorized
            shares of common stock as described above. Such amendment is
            expected to be filed on or about September 29, 2006.

            In addition, Mr. Kiphart has agreed with the Company that he will
            cause the Company to commence a stockholder rights offering for
            shares of the common stock, to be offered to the Company's
            stockholders, excluding Mr. Kiphart, his affiliates and related
            parties, at a price of $0.015 per share. Such rights offering will
            provide that each stockholder will have the right to purchase up to
            10 shares of common stock for each share then held by such
            stockholder. The rights offering cannot be consummated until after
            the Company has amended its certificate of incorporation to increase
            its authorized shares of common stock as described above. Any
            proceeds from the rights offering is expected to be used for working
            capital.

      f.    Mr. Kiphart intends to seek an acquisition for the Company, however
            no candidate has been identified at this time and it is not possible
            to state whether, if one is identified, it could be expected to
            result in a material change in the Company's business. Mr. Kiphart
            also hopes to cause the Company to license, as licensor, some of the
            Company's proprietary intellectual property rights, but no
            prospective licensees have yet been identified or contacted.

                               (Page 4 of 6 Pages)
<PAGE>

            In the Agreement, Mr. Kiphart agreed, for a period of one year from
            the closing, not to approve, or permit the Company to approve, any
            merger or consolidation of the Company unless the Company shall be
            the surviving corporation, or any transaction which enables Company
            stockholders to exercise appraisal rights under Delaware law, or any
            exchange, reclassification or cancellation of Company shares of
            common stock, including a reverse stock split, provided that the
            one-year restrictive period may be shortened upon approval by the
            holders of a majority of the outstanding shares of Company common
            stock not held by Mr. Kiphart, his affiliates and family members, or
            upon approval by the Special Committee.

      g.    As described above, it is expected that the Company will amend its
            certificate of incorporation to increase the number of authorized
            shares of Common Stock from 200,000,000 to 2,000,000,000 on or about
            September 29, 2006. As a result of the transactions contemplated by
            the Agreement when completed, Mr. Kiphart will hold a majority of
            the issued and outstanding shares of common stock of the Company and
            therefore will be able to elect its board of directors and also will
            be able to prevent, or potentially cause, the acquisition of control
            of the issuer by another person. In the Agreement, Mr. Kiphart
            agrees to elect the members of the Special Committee as directors of
            the Company until the termination of the Special Committee.

      h.    Not applicable.

      i.    Not applicable.

      j.    Mr. Kiphart intends to relocate the Company's executive offices to
            Chicago.

Item 5. Interest in Securities of the Issuer.

      a.    As of September 6, 2006, Mr. Kiphart owned 96,521,217 shares of the
            common stock of the Company, consisting of 76,039,733 outstanding,
            20,406,484 shares which are issuable upon conversion of convertible
            promissory notes held by Mr. Kiphart (before giving effect to the
            reduction in conversion price to $0.015 per share), and 75,000
            shares issuable pursuant to stock options held by Mr. Kiphart. The
            96,521,217 shares equal 56.7% of the outstanding shares of common
            stock.

      b.    Mr. Kiphart owns 96,521,217 shares of common stock of the Company
            over which he holds sole power to vote or direct the vote and sole
            power to dispose or to direct the disposition. Mr. Kiphart does not
            own any shares of common stock over which there is shared power to
            vote or direct the vote or shared power to dispose or direct the
            disposition.

      c.    None.

      d.    Not applicable.

      e.    Not applicable.

Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to
Securities of the Issuer.

                               (Page 5 of 6 Pages)
<PAGE>

As described under Item 4 above, Mr. Kiphart has entered into a Share Purchase
and Debt Restructure Agreement with the Company dated and effective August 28,
2006 (the "Agreement"). Under the Agreement, Mr. Kiphart has agreed to pay the
Company a total of $6,500,000 to purchase a total of 433,333,333 shares of
common stock at a price of $0.015 per share, of which $1,100,000 was paid on
August 28, 2006 for 73,333,333 shares. He has also agreed to convert the
indebtedness owed to him by the Company of approximately $5,414,716 into
approximately 360,981,067 additional shares of common stock at a price of $0.015
per share. Closing of the remaining $5,400,000 of the purchase and conversion of
such Company debt cannot occur until the Company files an amendment to its
certificate of incorporation to increase its authorized shares of common stock,
which amendment is expected to be filed on or about September 29, 2006.

Item 7. Material to be Filed as Exhibits.

1.    Share Purchase and Debt Restructure Agreement dated and effective August
      28, 2006 between Advanced Biotherapy, Inc. and Richard P. Kiphart

Signature.

After reasonable inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.

September 6, 2006
Date


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

Name/Title:   Richard P. Kiphart





                               (Page 6 of 6 Pages)
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>2
<FILENAME>v052229_ex99-1.txt
<TEXT>

                  SHARE PURCHASE AND DEBT RESTRUCTURE AGREEMENT

      This Share Purchase and Debt Restructure  Agreement (this  "Agreement") is
dated and  effective  as of August 28,  2006  ("Effective  Date") by and between
Advanced Biotherapy,  Inc. ("Company"),  a Delaware corporation,  and Richard P.
Kiphart ("Noteholder") and made with respect to the facts set forth below.

                                 R E C I T A L S

      A. The Company desires to restructure its long-term and short-term debt by
conversion  of such debt into equity and to raise funds for working  capital and
possible  acquisitions.  The Noteholder  desires to participate in and implement
such debt restructure and capital raise as more specifically provided herein.

      B. As of the Effective  Date, the Company had issued and  outstanding  the
following  principal  amount of  convertible  debt and notes:  (i)  subordinated
convertible debt due September 30, 2004 ("2000-2004  Convertible  Notes") in the
approximate  aggregate  principal  amount of $7,805  as of June 30,  2006,  (ii)
subordinated   convertible  pay-in-kind  notes  due  June  1,  2006  ("2002-2006
Convertible Notes") in the approximate  aggregate principal amount of $4,733,065
as of June 30,  2006,  (iii)  subordinated  convertible  pay-in-kind  notes  due
September 30, 2007 ("2003-2007  Convertible Notes") in the approximate aggregate
principal  amount  of  $1,095,413,  as  of  June  30,  2006,  (iv)  subordinated
convertible  pay-in-kind  notes due September 30, 2009  ("2005-2009  Convertible
Notes") in the approximate aggregate principal amount of $267,213 as of June 30,
2006, (v) term notes due June 30, 2006 in the  approximate  aggregate  principal
amount of $245,637,  and (vi) demand  promissory  notes ("Demand  Notes") in the
approximate  aggregate  principal  amount of  $125,746 as of June 30,  2006.  In
addition,  the Company had booked accrued salaries in the approximate  aggregate
amount of $200,000  ("Accrued  Salary"),  and  certain  other  accounts  payable
("Accounts  Payable")  as more  specifically  described  herein.  The  2002-2004
Convertible Notes, the 2002-2006  Convertible  Notes, the 2003-2007  Convertible
Notes and the 2005-2009 Convertible Notes are referred to herein collectively as
the "Convertible Notes."

      C. The Company's 2002-2004 Convertible Notes and the 2002-2006 Convertible
Notes have matured and the Company lacks funs to repay such indebtedness.

      D. The Noteholder  together with Christopher  Capps ("Capps")  submitted a
written,  non-binding  letter of intent dated May 23, 2006, to the Company ("May
23rd Proposal").  The May 23rd Proposal  provides,  among other terms,  that the
Noteholder  would  invest  new  capital  in  the  Company  and  convert  all  of
Noteholder's Convertible Notes and Demand Notes and in consideration thereof the
Company would sell to Noteholder shares of Company common stock at a share price
of One and One-Half Cents ($0.015) per share,  and the Board of Directors  would
approve  the  reduction  of the  conversion  price  of all  outstanding  Company
Convertible  Notes and Demand Notes to One and One-Half Cents ($0.015) per share
from the current  conversion price in the range of $0.25 to $0.10 per share. The
Noteholder  requires  as  a  condition  to  the  transaction  that  all  Company
Convertible  Notes,  Demand Notes,  Accrued Salary and certain  Accounts Payable
would be converted  into  Company  common  stock as more  specifically  provided
herein.  The May 23rd  Proposal  also  provides that the Company would offer its
stockholders the right to purchase shares of common stock at the same $0.015 per
share price.


Page 1 of 24
<PAGE>

      E.  The  Special  Committee  of the  Board  of  Directors  of the  Company
("Special  Committee")  was  appointed  to consider  the May 23rd  Proposal  and
negotiate  with the  Noteholder  the  terms of the May  23rd  Proposal  and this
Agreement.

      F. The  Noteholder  has  informed the Special  Committee  and the Board of
Directors that, in the absence of the Company  entering into this Agreement,  he
would  declare a default  under the  2002-2006  Convertible  Notes,  and seek to
exercise all collection and other remedies.

      G. The Board of  Directors,  on  behalf of the  Company,  has  engaged  an
independent  investment  banking  firm to render an opinion  as to  whether  the
consideration  to be received by the Company in the transaction  contemplated by
this Agreement is fair, from a financial  point of view, to the  stockholders of
the Company.

      NOW,  THEREFORE,  in consideration  of the foregoing  Recitals and for the
mutual covenants contained herein, the parties agree as follows:

      ARTICLE 1. TRANSACTION.

      The  "Transaction"  means  collectively all the transactions  described in
this Article 1. The  Transaction  and all parts  thereof shall be subject to the
terms and conditions of this Agreement.

      1.1 Sale and Purchase of Shares of Company common stock. Noteholder hereby
subscribes for and  contributes,  and, may, in  Noteholder's  discretion,  cause
Capps,  certain  family  members of  Noteholder  and  prospective  board members
(collectively  "related persons"),  if any, to subscribe for and contribute,  to
the Company the aggregate sum of $6,500,000.00 (collectively, "New Capital") for
shares  of  Company  common  stock at a share  price of One and  One-Half  Cents
($0.015) per share of Company common stock ("New Shares"). The New Capital shall
be paid by wire transfer to the Company in accordance with the following payment
terms:  (i) on or before the First  Closing  Date,  Noteholder  shall pay to the
Company  an  amount   equal  to  One  Million  One  Hundred   Thousand   Dollars
($1,100,000.00)  ("First Payment") to acquire 73,333,333 New Shares. The balance
of the New Capital shall be paid to the Company  concurrently with (but no later
than one (1) business  day after) the filing with the  Secretary of State of the
State  of  Delaware  ("Delaware   Secretary  of  State")  of  the  Amendment  to
Certificate  as provided in Section 1.6 below.  Upon receipt of the New Capital,
the Company  promptly  shall  arrange to deliver to  Noteholder  by  appropriate
certificates  or other  instruments  satisfactory  to Noteholder the appropriate
amount of New Shares purchased pursuant to this Section 1.1. Upon payment of the
entire New Capital, the Noteholder  immediately  thereafter will hold a majority
of the issued and outstanding shares of Company common stock.


Page 2 of 24
<PAGE>

      1.2  Adjustment  of Conversion  Price of  Convertible  Notes.  The Company
hereby  agrees to adjust the  conversion  price of all  outstanding  Convertible
Notes (including the outstanding  2000-2004 Convertible Notes that have matured)
and the Demand  Notes to One and  One-Half  Cents  ($0.015) per share of Company
common stock,  and such adjustment to the conversion  price shall be recorded on
the books and records of the  Company as well as  pursuant  to a written  notice
promptly  delivered by the Company to all such holders of Convertible  Notes and
Demand Notes.

      1.3 Conversion of Noteholder's Convertible Notes and Demand Notes. Section
1.3 of the Company  Disclosure  Schedule contains a correct and complete list of
the  Convertible  Notes,  Demand  Notes  and  other  loans  held  by or  made by
Noteholder as of July 31, 2006.  Subject to the Company  filing the Amendment to
Certificate  with the Delaware  Secretary of State, the Noteholder shall convert
all of his Convertible  Notes,  owned of record or beneficially,  into shares of
Company common stock at the adjusted  conversion price of One and One-Half Cents
($0.015) per share.

      1.4 Conversion by Other  Debtholders.  As a condition to the First Closing
described in Section  5.2(d) below,  the holders of  Convertible  Notes,  Demand
Notes,  Accrued  Salary and  Accounts  Payable  (other than  Noteholder  and his
affiliates)  identified in the Company Disclosure  Schedule,  shall exchange the
entire principal amount,  together with accrued interest thereon, into shares of
Company  common stock at the exchange  price of One and One-Half  Cents ($0.015)
per share of Company common stock,  all as of the First Closing Date. The shares
of Company  common  stock to be issued by the Company  upon  conversion  of such
Convertible Notes,  Accrued Salary and Accounts Payable listed in Section 2.2 of
the Company Disclosure  Schedule are referred to herein as the "Other Debtholder
Shares."

      1.5 Stockholder  Rights  Offering.  Promptly after the First Closing,  the
Company  shall  commence  to  prepare a  registration  statement  ("Registration
Statement")  for shares of Company  common stock to be offered to the  Company's
stockholders  pursuant to a stockholder  rights  offering  ("Rights  Offering"),
excluding  the  Noteholder,  Capps and  related  persons,  at a price of One and
One-Half  Cents ($0.015) per share.  The Rights  Offering will provide that each
stockholder  shall have the right to  purchase  up to ten (10) shares of Company
common stock for each one (1) share then held by such  stockholder at $0.015 per
share.  Subject to the filing of the Amendment to Certificate in accordance with
this  Agreement,  the  Company  will  file  with  the  Securities  and  Exchange
Commission  ("SEC")  the  Registration  Statement,   all  as  more  specifically
described  in Section  4.2  hereof.  The Company  will use its  commercial  best
efforts to register the Other  Debtholder  Shares  (except such shares as may be
transferred  pursuant  to  Rule  144 of  the  Securities  Act)  as  part  of the
Registration Statement.


Page 3 of 24
<PAGE>

      As an inducement to the Company to issue the New Shares to Noteholder, for
a  period  of one  (1)  year  from  the  Closing  Date  ("Restrictive  Period"),
Noteholder  shall not  approve or agree to, and shall not permit the  Company or
any  affiliate  to  approve or agree to,  (i) a merger or  consolidation  of the
Company  unless the  Company  shall be the  surviving  corporation,  or (ii) any
transaction  which gives rise to  appraisal  rights  under  Delaware  law to any
stockholders of the Company,  and (iii) effect an exchange,  reclassification or
cancellation  of all or part of the shares of Company  common stock  including a
reverse  stock  split;   provided,  the  Special  Committee  may,  in  its  sole
discretion,  approve the  shortening  of the  Restrictive  Period so long as the
Registration  Statement  Effective Date (as defined herein) shall have occurred,
the  Rights  Offering  shall have  expired,  and all  shares  purchased  in that
offering  shall  have been  registered  by the  Company;  provided,  further,  a
majority of the  disinterested  stockholders  may approve the  shortening of the
Restrictive Period, whether or not the Special Committee has so approved.

      1.6 Post-Closing Transactions. Following the First Closing, the Noteholder
agrees to take the following actions:

      (i)  Promptly  approve  by  written  consent  ("written  consent"),  as  a
controlling stockholder of the Company along with one or more other stockholders
who together  with the  Noteholder  hold in the aggregate a majority of the then
issued and  outstanding  shares of Company  common  stock,  an  amendment to the
Company's Certificate of Incorporation that would increase the authorized shares
of common  stock of the Company  from  200,000,000  to  2,000,000,000  shares of
Company  common stock  ("Amendment to  Certificate");

      (ii) Cause the  Company to  prepare  and file with the SEC an  Information
Statement  pursuant to Section 14 of the  Securities  Exchange  Act of 1934,  as
amended  ("Exchange Act") regarding the written consent to approve the Amendment
to  Certificate,  and  cause  the  Information  Statement  to be  mailed  to the
Company's stockholders in accordance with the rules and regulations of the SEC;

      (iii)  Subject to expiration of the 20-day  Information  Statement  notice
period to  stockholders,  cause the Company to file the Amendment to Certificate
with the Delaware Secretary of State;

      (iv)  Approximately one (1) month following the Closing and so long as the
Company shall have received the entire amount of New Capital payable pursuant to
Section 1.1, vote as the majority stockholder of the Company to reconstitute the
Board of  Directors  of the  Company  so that the  Board  of  Directors  will be
comprised  of at least  seven  (7)  directors,  of which  the  Noteholder  shall
nominate  and appoint at least four (4)  directors  and  nominate  and elect the
three (3) members of the Special Committee (as described in Section 7 hereof) to
the Board of  Directors;  and

      (v) Cause the Company to secure directors and officers liability insurance
in a policy  amount agreed upon by the  Noteholder  upon  consultation  with the
Special Committee, subject to commercially reasonable premiums and other terms.

      1.7 Grant of Stock  Options/Amendment  to  Termination  Period  for Option
Exercise.  Concurrently  herewith,  the Board of Directors has approved, and the
Company  hereby  approves:  (i) the grant  ("new  grant")  of stock  options  to
directors,  advisory board members and certain consultants for services rendered
during 2006 and other future services for the benefit of the Company as mutually
approved by the Special  Committee and the  Noteholder,  and (ii) for each stock
option and warrant  held by a director  serving on the Board of  Directors as of
the  Effective  Date that  provides by its terms for an exercise  period of less
than one (1) year from the date of  termination  of such person's  services as a
director,  consultant or employee of the Company,  such option and warrant shall
be amended to provide for the exercise thereof for a period of one (1) year from
the date of termination of such person's  services as a director,  consultant or
employee.  The new grant  will be  subject  to the  filing of the  Amendment  to
Certificate in accordance with this Agreement.


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<PAGE>

      1.8 Closing.  The term "First Closing" means the date the Company receives
the First Payment  pursuant to Section 1.1. The term "Second  Closing" means the
date on which the  Amendment  to  Certificate  shall be filed with the  Delaware
Secretary of State in accordance with this  Agreement.  The term "Closing" means
the  consummation of the  transactions  described in Sections 1.1, 1.2, 1.3, and
1.4 that  are by their  terms to  occur  at the  First  Closing  and the  Second
Closing,  respectively. The terms "First Closing Date" and "Second Closing Date"
means  the date upon  which the First  Closing  and the  Second  Closing  occur,
respectively, and the "Closing Date" means the date on which the Closing occurs.
All  transactions and deliveries at the Closing shall be deemed to have occurred
simultaneously.

      ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

      Except in each case as  publicly  disclosed  by the Company in the Company
SEC Reports (as defined below) filed prior to the date hereof or as set forth on
the Disclosure  Schedule  delivered by the Company to Noteholder and made a part
of this  Agreement  (the  "Company  Disclosure  Schedule"),  the Company  hereby
represents and warrants to Noteholder as follows:

      2.1.  Organization and  Qualification;  Subsidiaries.  The Company is duly
organized,  validly existing and in good standing under the laws of the State of
Delaware and has all requisite  corporate  power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.  The
Company has heretofore  delivered to Noteholder  accurate and complete copies of
the  Certificate of  Incorporation  and Bylaws,  as currently in effect,  of the
Company.  The Company is not in violation of its Certificate of Incorporation or
Bylaws.  The Company has no  subsidiaries.  The Company is duly qualified and in
good standing in Delaware and California.


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<PAGE>

      2.2. Capitalization of the Company.

      (a) The authorized capital stock of the Company consists of (i) 20,000,000
shares of  preferred  stock,  $0.001 par value per share,  which are blank check
preferred stock without  designation,  none of which are issued and outstanding;
and (ii)  200,000,000  shares  of common  stock,  $0.001  par  value per  share,
54,348,346 of which are issued and  outstanding as of August 1, 2006. All of the
outstanding  shares of Company  common  stock have been  validly  issued and are
fully paid,  nonassessable  and free of preemptive  rights.  Section 2.2A of the
Company Disclosure  Schedule contains a correct and complete list of all holders
(excluding  Noteholder and his affiliates) of Convertible Notes,  Accrued Salary
and Accounts Payable as of June 30, 2006, along with the current balance thereon
as of June 30, 2006. The Company will notify  Noteholder  promptly upon becoming
aware  that any  Company  account  payable  has been  omitted  from the  Company
Disclosure Schedule. Section 2.2B of the Company Disclosure Schedule identifies,
as of July 31,  2006,  the  holders of  outstanding  Company  stock  options and
warrants,  and the number of shares of Company  common stock  issuable  upon the
exercise of such stock options and warrants. As of the date hereof, there are no
outstanding  obligations  of the  Company  to  repurchase,  redeem or  otherwise
acquire any Company  securities.  There are no  stockholder  agreements,  voting
trusts or other agreements or  understandings to which the Company is a party or
by which it is bound  relating  to the voting of any shares of capital  stock of
the Company.  Section 2.2C of the Company Disclosure Schedule contains a list of
agreements to which the Company is a party relating to the  registration  of any
shares of capital stock of the Company.

      2.3. Authority  Relative to this Agreement.  The Company has all necessary
corporate  power and  authority  to execute and deliver  this  Agreement  and to
consummate the transactions  contemplated  hereby. The execution and delivery of
this  Agreement  by the  Company  and the  consummation  by the  Company  of the
transactions  contemplated hereby have been recommended by the Special Committee
and duly and validly authorized and recommended by the Board of Directors of the
Company.  This Agreement has been duly and validly executed and delivered by the
Company and, assuming due  authorization,  execution and delivery by Noteholder,
constitutes  a valid,  legal and binding  agreement  of the Company  enforceable
against  the  Company  in  accordance  with  its  terms,  except  that  (i) such
enforcement may be subject to applicable bankruptcy, insolvency, reorganization,
moratorium  or  other  similar  laws,  now or  hereafter  in  effect,  affecting
creditors'  rights  generally,  and (ii) the remedy of specific  performance and
injunctive  and other  forms of  equitable  relief may be  subject to  equitable
defenses and to the discretion of the court before which any proceeding therefor
may be brought.

      2.4. SEC Reports; Financial Statements. The Company has filed all required
forms, reports and documents with the SEC for the periods on or after January 1,
2004 (such filings, along with any other filings made by the Company pursuant to
the Exchange Act (as defined below) are hereinafter  referred to as "Company SEC
Reports"),  each of  which  has  complied  in all  material  respects  with  all
applicable requirements of the Exchange Act, each as in effect on the dates such
forms,  reports  and  documents  were  filed.  None of such  Company SEC Reports
contained when filed any untrue statement of a material fact or omitted to state
a material fact required to be stated or  incorporated  by reference  therein or
necessary in order to make the statements  therein in light of the circumstances
under  which they were made not  misleading.  The  financial  statements  of the
Company  included in the Company SEC Reports  have been  prepared in  accordance
with generally  accepted  accounting  principles  applied on a consistent  basis
(except as may be indicated  in the notes  thereto),  and fairly  present in all
material  respects the  consolidated  financial  position of the Company and its
consolidated subsidiaries as of the dates thereof and their consolidated results
of  operations  and changes in  financial  position  for the periods then ended,
except,  in the case of  unaudited  interim  financial  statements,  for  normal
year-end audit adjustments and the fact that certain  information and notes have
been condensed or omitted in accordance with the applicable rules of the SEC.


Page 6 of 24
<PAGE>

      2.5. Consents and Approvals; No Violations.

      (a) Except as set forth in Section 2.5 of the Company Disclosure Schedule,
and except for filings, permits,  authorizations,  consents and approvals as may
be required under, and other  applicable  requirements of, the Securities Act of
1933, as amended  ("Securities Act"), the Exchange Act, state securities or blue
sky laws, no filing with or notice to and no permit,  authorization,  consent or
approval of any court, arbitrator or tribunal, or administrative governmental or
regulatory body, agency or authority (a "Governmental  Entity") is necessary for
the execution and delivery by the Company of this Agreement or the  consummation
by the Company of the transactions contemplated hereby, except where the failure
to obtain such  permits,  authorizations,  consents or approvals or to make such
filings or give such notice would not  reasonably  be expected to have a Company
Material Adverse Effect.  The term "Company  Material Adverse Effect" shall mean
any change or effect that, individually or in the aggregate, is or is reasonably
likely to be materially adverse to the business, assets, operations,  results of
operations,  or financial condition of the Company,  taken as a whole other than
any changes or effects arising out of (i) general economic conditions,  (ii) the
financial  markets and (iii) the entering into or the public  disclosure of this
Agreement or the transactions contemplated hereby.

      (b) Except as set forth in Section 2.5 of the Company Disclosure Schedule,
neither the execution, delivery and performance of this Agreement by the Company
nor the consummation by the Company of the transactions contemplated hereby will
(i) conflict with or result in any breach of any provision of its Certificate of
Incorporation or Bylaws of the Company,  (ii) result in a violation or breach of
or  constitute  (with or without  due notice or lapse of time or both) a default
under any material note, bond, mortgage,  indenture,  lease, license,  contract,
agreement or other  instrument  or obligation to which the Company is a party or
by which it or any of its  respective  properties or assets may be bound (each a
"Material  Contract")  or (iii) to the Company's  knowledge,  violate any order,
writ,  injunction,  decree, law, statute,  rule or regulation  applicable to the
Company,  except,  in the case of (ii) or (iii),  for  violations,  breaches  or
defaults  which would not  reasonably  be  expected  to have a Company  Material
Adverse Effect.

      2.6.  No  Default.  Except  as set  forth in  Section  2.6 of the  Company
Disclosure Schedule,  to the Company's knowledge,  the Company is not in breach,
default or  violation  of any term,  condition  or provision of (a) any Material
Contract or (b) any order,  writ,  injunction,  decree,  law,  statute,  rule or
regulation  applicable to the Company,  except,  in the case of (a) and (b), for
violations, breaches or defaults that would not reasonably be expected to have a
Company Material Adverse Effect.

      2.7. Absence of Changes. Except as set forth in Section 2.7 of the Company
Disclosure   Schedule  and  except  for  this  Agreement  and  the  transactions
contemplated hereby, since June 30, 2006, there have not been: (i) any events or
changes with respect to the Company that would  reasonably be expected to have a
Company  Material  Adverse  Effect or that are  outside the  ordinary  course of
business;  (ii) any amendment to the Certificate of  Incorporation  or Bylaws of
the Company; (iii) any sale or transfer of any material portion of its assets or
of any material asset;  (iv) pledge of any of its assets or otherwise  permitted
any of its  assets  to  become  subject  to any lien;  (v) any  commencement  or
settlement  of  material  legal   proceedings;   (vi)  any  action  taken  by  a
Governmental Entity which affects, in any material respect,  the business of the
Company,  except, in the case of each of the foregoing clauses (i) through (vi),
as expressly contemplated by this Agreement.


Page 7 of 24
<PAGE>

      2.8.  Litigation.  Except  as set  forth  in  Section  2.8 of the  Company
Disclosure  Schedule,  to the  Company's  knowledge,  there is no  suit,  claim,
action, proceeding or investigation pending or, to the knowledge of the Company,
threatened  against the Company or any of its  respective  properties  or assets
before any  Governmental  Entity  which could  reasonably  be expected to have a
Company  Material  Adverse Effect or would  reasonably be expected to prevent or
materially  delay the  consummation  of the  transactions  contemplated  by this
Agreement. The Company is not subject to any outstanding order, writ, injunction
or decree of any Governmental Entity that could reasonably be expected to have a
Company  Material  Adverse Effect or would  reasonably be expected to prevent or
materially delay the consummation of the transactions contemplated hereby.

      2.9. Employee Benefit Plans; Labor Matters. Section 2.9 (a) of the Company
Disclosure Schedule lists all employee benefit plans (as defined in Section 3(3)
of the Employee  Retirement  Income Security Act of 1974, as amended  ("ERISA"))
and all bonus, stock option, stock purchase,  incentive,  deferred compensation,
supplemental retirement, savings, profit-sharing, retention, severance and other
material fringe or employee benefit plans,  programs or arrangements  maintained
or  contributed to by the Company for the benefit of or relating to any employee
of the Company,

      2.10. Intellectual Property.

      (a)  Section  2.10(a)  of the  Company  Disclosure  Schedule  sets forth a
complete list of: (i) the Company's  patents,  trademarks,  service marks, trade
names,  trade  secrets,   copyrights  and  other  intellectual  property  rights
(generally "IP Rights") and all  registrations and applications for registration
of IP Rights, and all material  unregistered IP Rights; (ii) within one (1) year
prior to the Effective Date any patent applications or rights to submit any such
patent  application,  for  IP  Rights  assigned  by  the  Company  or  otherwise
abandoned;  and (iii) licenses and other contracts relating to IP rights granted
by or to the Company.

      (b)  Except as set forth on  Section  2.10(b)  of the  Company  Disclosure
Schedule:  (i) no  litigation  is pending and no claim has been made against the
Company:  (A) alleging  that any IP Right  infringes or  misappropriates  any IP
Rights owned by others;  or (B) challenging the title,  inventorship,  validity,
enforceability,  or alleging misuse, of any IP Right owned by Company;  and (ii)
the Company has not  asserted  any claim of  infringement,  misappropriation  or
misuse by any Person of any IP Rights owned by the Company.


Page 8 of 24
<PAGE>

      2.11. Brokers.  No broker,  finder or investment banker (other than Gemini
Partners) is entitled to any  brokerage,  finder's or other fee or commission in
connection  with the  transactions  contemplated  by this  Agreement  based upon
arrangements made by or on behalf of the Company.

      ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF NOTEHOLDER.

      Except as set forth on the Disclosure Schedule delivered by the Noteholder
to  the  Company  (the  "Noteholder  Disclosure  Schedule"),  Noteholder  hereby
represents and warrants to the Company as follows:

      3.1.  Authority  Relative to this Agreement.  Noteholder has all necessary
power and  authority  to execute and deliver this  Agreement  and to perform his
obligations  hereunder.  Noteholder has taken all necessary  action required for
the execution,  delivery and performance of this Agreement by Noteholder and the
consummation  by  Noteholder  of  the  transactions  contemplated  hereby.  This
Agreement has been duly and validly  executed and  delivered by Noteholder  and,
assuming due authorization, execution and delivery by the Company, constitutes a
valid, legal and binding agreement of Noteholder  enforceable against Noteholder
in accordance with its terms, except that (i) such enforcement may be subject to
applicable bankruptcy, insolvency,  reorganization,  moratorium or other similar
laws, now or hereafter in effect,  affecting  creditors' rights  generally,  and
(ii) the  remedy of  specific  performance  and  injunctive  and other  forms of
equitable  relief may be subject to equitable  defenses and to the discretion of
the court before which any proceeding therefor may be brought.

      3.2. Information Supplied.  None of the information supplied by Noteholder
for inclusion in the Registration  Statement for the Stockholder Rights Offering
will,  at the time  that the  related  prospectus  is  mailed  to the  Company's
stockholders,  contain any untrue  statement of a material fact or omit to state
any material  fact  required to be stated  therein or necessary in order to make
the  statements  therein,  in light of the  circumstances  under which they were
made,  not  misleading,  except  that no  representation  or warranty is made by
Noteholder with respect to statements made or incorporated by reference  therein
based on information  supplied by the Company for inclusion or  incorporation by
reference therein.

      3.3.  Consents and Approvals;  No Violations.  Except for the Schedule 13D
(as  defined in Section  4.2(b)  hereof),  no filing by the  Noteholder  with or
notice to, and no permit authorization, consent or approval of, any Governmental
Entity is  necessary  for the  execution  and  delivery  by  Noteholder  of this
Agreement or the  consummation  by Noteholder of the  transactions  contemplated
hereby.  Neither the  execution,  delivery and  performance of this Agreement by
Noteholder nor the consummation by Noteholder of the  transactions  contemplated
hereby  will (a)  result in a  violation  or breach  of or  constitute  (with or
without  due notice or lapse of time or both) a default  under any of the terms,
conditions  or  provisions  of any  material  note,  lease,  license,  contract,
agreement or other  instrument or  obligation to which  Noteholder s a party and
which contemplates a payment from Noteholder,  or (b) to Noteholder's knowledge,
violate any order, writ,  injunction,  decree, law, statute,  rule or regulation
applicable to Noteholder.


Page 9 of 24
<PAGE>

      3.4. Ownership of Securities. As of the date hereof, Noteholder (including
his affiliates and associates as such terms are defined under the Exchange Act),
beneficially  owns,  directly  or  indirectly,  or is  party  to  an  agreement,
arrangement  or  understanding  (other than this  Agreement)  for the purpose of
acquiring,  holding or disposing of, in each case,  the shares of Company common
stock,  as set  forth in  Section  3.4 of the  Noteholder  Disclosure  Schedule.
Noteholder  has not  assigned  or granted any other  person any  interest in the
Convertible Notes,  Demand Notes or other Company  securities  registered in his
name or otherwise held beneficially by him.

      3.5.  Brokers.  No broker,  finder or investment banker is entitled to any
brokerage,   finder's  or  other  fee  or  commission  in  connection  with  the
transactions  contemplated by this Agreement based upon  arrangements made by or
on behalf of Noteholder.

      3.6. No Additional Representations; Investigation by Noteholder.

      (a) In entering into this  Agreement,  Noteholder has not been induced by,
or relied upon, any representations, warranties or statements by the Company not
set forth or referred to in this Agreement or the Company  Disclosure  Schedule,
whether or not such representations, warranties or statements have actually been
made, in writing or orally.

      (b) Noteholder has conducted his own independent review and analysis of
the businesses,  assets, condition,  operations and prospects of the Company and
has  reviewed  the  Company  SEC  Reports.  In  entering  into  this  Agreement,
Noteholder  has  relied  solely  upon the items set forth in clause (a) above of
this Section 3.6 and his own investigation and analysis, and Noteholder:

            (i) acknowledges that, other than as set forth in this Agreement, or
the Company  Disclosure  Schedule,  none of the Company or any of its directors,
officers,   employees,   affiliates,   agents  or   representatives   makes  any
representation  or warranty,  either  express or implied,  as to the accuracy or
completeness of any of the information  provided or made available to Noteholder
or his agents or representatives;

            (ii)  agrees,  to the fullest  extent  permitted by law (except with
respect to fraud), that none of the Company, or any of its respective directors,
officers, employees,  stockholders,  affiliates, agents or representatives shall
have any  liability or  responsibility  whatsoever  to  Noteholder  on any basis
(including  without  limitation in contract,  tort or otherwise)  based upon any
information  provided or made  available,  or statements  made, to Noteholder in
connection with this Agreement; and

      (c) acknowledges  that, as of the date hereof,  he has no knowledge of any
representation  or warranty of the Company  being  untrue or  inaccurate  in any
Material Respect.


Page 10 of 24
<PAGE>

      3.7. Investment Representations.

      (a)  Noteholder  is  acquiring  the New Shares and the  Conversion  Shares
(collectively  "Securities") solely for his own account as an investment and not
with a view to any distribution or resale thereof in violation of the Securities
Act.  Noteholder has been advised that the Securities  have not been  registered
under the  Securities  Act or under the  provisions  of any state  securities or
"blue sky" law. Noteholder, by accepting the Securities, agrees and acknowledges
that he will not directly or indirectly offer,  transfer,  sell, assign, pledge,
encumber,  hypothecate  or dispose of any of such  Securities (or to solicit any
offers  to  purchase  or  otherwise  acquire  or  take  a  pledge  of any of the
Securities) unless such offer, transfer, sale, assignment,  pledge, encumbrance,
hypothecation  or  other  disposition  is  made  (i)  pursuant  to an  effective
registration  statement  under the  Securities  Act and in  compliance  with all
applicable  state securities or "blue sky" laws or (ii) pursuant to an available
exemption  from  registration  under,  or  otherwise  in  compliance  with,  the
Securities  Act  and  all  applicable  state  securities  or  "blue  sky"  laws.
Noteholder  understands  and  agrees  that in the  case of a  transfer  or other
disposition  made  pursuant to clause (ii) above,  each  purchaser of Securities
shall be  required  to provide to the  Company an opinion of counsel  reasonably
satisfactory to the Company to the effect that registration under the Securities
Act is not required and that  qualification or registration under any such state
securities  laws and  regulations is not required (or that any applicable  state
qualification or registration requirements have been satisfied in full).

      (b) Noteholder is a director of the Company and an  "accredited  investor"
(as such term is defined in Rule 501 of Regulation D of the Securities Act). The
financial  situation  of  Noteholder  is such  that he can  afford  to bear  the
economic risk of holding the unregistered Securities for an indefinite period of
time. Noteholder can afford to suffer the complete loss of his investment in the
Securities. The knowledge and experience of Noteholder in financial and business
matters is such that he is capable of evaluating  the risk of the  investment in
the Securities. Noteholder acknowledges that he has had access to such financial
and  other  information,  and has  been  afforded  the  opportunity  to ask such
questions of  representatives  of the Company,  and receive answers thereto,  as
Noteholder has deemed  necessary in connection with his decision to purchase the
Securities,  and that no representation or warranties,  express or implied,  are
being made by the Company with respect to the Company or the  Securities,  other
than those expressly set forth herein.

      (c) Noteholder  has been further  advised and  understands  that a limited
trading market and illiquid  public market now exists for the Securities  issued
by the  Company  and  that a  viable  public  market  may  never  exist  for the
Securities.

      3.8.  Permitted  Securities  Legends.  The  certificates  representing the
Securities  shall  bear  a  legend   evidencing  such  restriction  on  transfer
substantially in the following form:

      "The  shares  represented  by this  certificate  have  been  acquired  for
      investment and have not been  registered  under the Securities Act of 1933
      (the  "Act") or the  securities  laws of any state.  The shares may not be
      transferred  by  sale,  assignment,  pledge  or  otherwise  unless  (i)  a
      registration  statement  for the shares under the Act is in effect or (ii)
      the  corporation  has  received  an opinion of counsel,  which  opinion is
      reasonably  satisfactory  to the  corporation,  to the  effect  that  such
      registration  is not required under the Act or the securities  laws of any
      state."


Page 11 of 24
<PAGE>

The certificates representing the Securities also shall bear legends required or
necessitated by law.

                  ARTICLE 4. COVENANTS.

      4.1. Conduct of Business.  The parties  acknowledge that because of a lack
of capital during 2006, the Company has  substantially  curtailed its operations
and research and development. Except as expressly set forth in this Agreement or
as consented to in writing by  Noteholder,  during the period from the Effective
Date to the Closing or termination of this Agreement if applicable,  the Company
shall not undertake any actions  inconsistent with its business practices during
2006.

      4.2. Preparation of the Registration Statement; Schedule 13D Filing.

      (a) As promptly as  reasonably  practicable  after the  execution  of this
Agreement,  the Company  shall  prepare  and file with the SEC the  Registration
Statement on Form SB-1 (or comparable form) to effect the registration under the
Securities Act of the Other  Debtholder  Shares and the shares of Company common
stock to be offered to stockholders  pursuant to the Stockholder Rights Offering
(excluding  shares held by Noteholder and his affiliates) in accordance with the
terms  and  provisions  set  forth  in  Addendum  A  affixed  hereto   captioned
"Registration  Provisions"  and made a part  hereof.  Company  shall  obtain and
furnish the information  required to be included in the  Registration  Statement
and shall  respond  promptly to any comments made by the SEC with respect to the
Registration  Statement and cause the prospectus  contained in the  Registration
Statement  to be  disseminated  to the  Company's  stockholders  at the earliest
practicable  date.   Noteholder  shall  cooperate  in  the  preparation  of  the
Registration  Statement  and shall as soon as reasonably  practicable  after the
date hereof  furnish the  Company  with all  information  for  inclusion  in the
Registration  Statement  as the  Company  may  reasonably  request.  The Company
agrees, as to information with respect to the Company, its officers,  directors,
stockholders  and  subsidiaries  contained in the  Registration  Statement,  and
Noteholder  agrees,  as to  information  with  respect  to  Noteholder  and  his
affiliates contained in the Registration Statement that such information, at the
date the prospectus contained in the Registration  Statement is disseminated (as
amended or supplemented) to the Company  stockholders,  and will not be false or
misleading with respect to any material fact, or omit to state any material fact
required to be stated  therein or necessary to make the statements  therein,  in
light of the  circumstances  in which they are made, not misleading.  Noteholder
and his  counsel  shall be given  the  opportunity  to review  the  Registration
Statement and all amendments or  supplements  thereof prior to their being filed
with the SEC. The Company  will advise  Noteholder,  promptly  after it receives
notice thereof,  of the time when the  Registration  Statement has been declared
effective  by  the  SEC or  any  request  by the  SEC  for an  amendment  of the
Registration  Statement or comments from the SEC thereon and proposed  responses
thereto or  requests by the SEC for  additional  information  and Company  shall
furnish copies to Noteholder.  The Company, on the one hand, and Noteholder,  on
the other hand, agree to promptly correct any information  provided by either of
them for use in the Registration  Statement,  if and to the extent that it shall
have become  materially  false or misleading,  and the Company further agrees to
take all steps reasonably  necessary to cause the  Registration  Statement as so
corrected  to be filed with the SEC and to use all  reasonable  efforts to cause
the prospectus contained in the Registration Statement to be disseminated to the
Company's  stockholders,  in  each  case,  as  and  to the  extent  required  by
applicable laws.


Page 12 of 24
<PAGE>

      (b) Concurrently  with the Closing,  Noteholder and his affiliates (to the
extent  required by law) shall prepare and file with the SEC,  together with the
Company,  a Rule 13d-1  Statement on Schedule 13D (together with all supplements
and amendments  thereto,  the "Schedule  13D") with respect to the  transactions
contemplated by this Agreement. The Company shall promptly furnish to Noteholder
all  information  concerning  the  Company as may  reasonably  be  requested  in
connection  with  the  preparation  of the  Schedule  13D.  In any  such  event,
Noteholder  shall take all reasonable  steps necessary to cause the Schedule 13D
as so  supplemented,  updated or  corrected to be filed  promptly  with the SEC.
Noteholder  agrees to provide the  Company  and its  counsel  with copies of any
comments  that  Noteholder  or its counsel may receive from the staff of the SEC
promptly after receipt thereof.

      4.3.  Access to  Information;  Confidentiality.  The Company  shall afford
Noteholder  and his  representatives  reasonable  access during normal  business
hours  during the  period  prior to the  Closing  to all its  books,  contracts,
agreements, commitments, returns, personnel and records and, during such period,
the Company shall  furnish  promptly to  Noteholder,  (a) a copy of each report,
schedule,  registration  statement  and other  document  filed by it during such
period pursuant to the  requirements of federal or state securities laws and (b)
all other  information  concerning  its  business,  properties  and personnel as
Noteholder may reasonably request.

      4.4. Reasonable Efforts;  Notification.  Upon the terms and subject to the
conditions set forth in this Agreement, each of the Company and Noteholder agree
to use reasonable best efforts to take, or cause to be taken,  all actions,  and
to do, or cause to be done,  and to assist and cooperate  with the other parties
in  doing,  all  things  necessary,   proper  or  advisable  to  consummate  the
transactions  contemplated by this Agreement,  including without  limitation (i)
the making of all necessary  applications,  registrations and filings (including
filings with Governmental Entities, if any), (ii) the obtaining of all necessary
consents,  approvals  or waivers  from  Governmental  Entities  and other  third
parties,  (iii)  the  execution  and  delivery  of  any  additional  instruments
necessary to consummate the transactions contemplated by, and to fully carry out
the purposes of, this  Agreement and (iv) the defending of any lawsuits or other
legal proceedings, judicial or administrative, challenging this Agreement or the
consummation of the transactions  contemplated hereby or thereby,  including the
using of all reasonable best efforts necessary to lift,  rescind or mitigate the
effect of any injunction or restraining order or other order adversely affecting
the ability of any party  hereto to  consummate  the  transactions  contemplated
hereby.


Page 13 of 24
<PAGE>

      4.5. Indemnification, Exculpation and Insurance.

      (a) The Company's  Certificate of Incorporation and the Bylaws on the date
of this  Agreement  contain  provisions  with  respect  to  indemnification  and
exculpation from liability.  Such provisions  shall not be amended,  repealed or
otherwise  modified  in any  manner  that  would  adversely  affect  the  rights
thereunder  of  individuals  who on or  prior  to the  Closing  were  directors,
officers,  employees  or agents of the  Company,  unless  such  modification  is
required by law.

      (b) After the Closing,  the Company shall indemnify and hold harmless (and
shall also advance  expenses as incurred to the fullest extent  permitted  under
applicable  law to) each  person who is or has been prior to the date  hereof or
who becomes prior to the Closing an officer, director,  employee or agent of the
Company (the  "Indemnified  Persons") against (a) all losses,  claims,  damages,
costs,  expenses  (including,  without  limitation,  counsel fees and expenses),
settlement  payments or  liabilities  arising out of or in  connection  with any
claim, demand,  action,  suit,  proceeding or investigation based in whole or in
part on or  arising  in whole or in part out of the fact that such  person is or
was an  officer,  director,  employee  or agent of the  Company  whether  or not
pertaining  to any matter  existing or  occurring at or prior to the Closing and
whether  or  not  asserted  or  claimed  prior  to or at or  after  the  Closing
("Indemnified  Liabilities") and (b) all Indemnified  Liabilities based in whole
or in part on or  arising  in  whole  or in part  out of or  pertaining  to this
Agreement or the transactions  contemplated  hereby, in each case to the fullest
extent  required  or  permitted  under  applicable  law or under  the  Company's
Certificate of Incorporation or Bylaws,  or any agreement with the Company.  The
parties hereto intend,  to the extent not prohibited by applicable law, that the
indemnification  provided  for  in  this  Section  4.5(b)  shall  apply  without
limitation  to  negligent  acts or  omissions  by an  Indemnified  Person.  Each
Indemnified  Person is intended to be a third party  beneficiary of this Section
4.5(b) and may  specifically  enforce its terms.  This Section  4.5(b) shall not
limit or otherwise  adversely effect any rights any Indemnified  Person may have
under any  agreement  with the  Company or under the  Company's  Certificate  of
Incorporation or Bylaws.

      (c) For six years from the Closing,  Noteholder shall cause the Company to
maintain in effect directors' and officers'  liability insurance for current and
former  officers and directors of the Company who were covered by the directors'
and officers'  liability  insurance policy referred to in Section 1.6(iii) above
("Company's  Insurance  Policy") on terms no less favorable to such  indemnified
parties than the terms of such Company  Insurance Policy and providing  coverage
with respect to matters occurring on or prior to the Closing, to the extent that
such  coverage  can be  maintained  at an annual net cost to the  Company of not
greater than 175% of the annual premium for the Company's  Insurance Policy and,
if such coverage cannot be so maintained at such cost, providing as much of such
insurance  as can be so  maintained  at a net cost  equal to 175% of the  annual
premium for the Company's Insurance Policy.


Page 14 of 24
<PAGE>

      (d) The  obligations  of the  Company  and  Noteholder  contained  in this
Section 4.5 shall be binding on the successors and assigns of Noteholder and the
Company.  If the Company or any of its  successors  or assigns (i)  consolidates
with or  merges  into any  other  person  and  shall  not be the  continuing  or
surviving  corporation  or  entity  of  such  consolidation  or  merger  or (ii)
transfers all or  substantially  all of its properties and assets to any person,
then  and in each  such  case,  proper  provisions  shall  be  made so that  the
successors  and  assigns  of the  Company as the case may be,  shall  assume the
obligations set forth in this Section 4.5.

      4.6. Fees and  Expenses.  If the  Transaction  is not  consummated  or the
Closing  does not occur,  all  reasonable  costs and  expenses  incurred  by the
Company and by Noteholder in connection with this Agreement and the transactions
contemplated hereby shall be paid by the Noteholder. Otherwise the Company shall
pay all such reasonable costs and expenses.

      4.7. Public Announcements.  Noteholder,  on the one hand, and the Company,
on the other hand,  will not issue any press release or other public  statements
with respect to the transactions  contemplated by this Agreement,  without first
obtaining the prior consent of the other party; provided,  however, in the event
of any press release that may be required by applicable law or court process, or
the NASDAQ,  the parties will use  reasonable  best efforts to consult with each
other before  issuing,  and to provide each other the  opportunity to review and
comment upon, any such press release or other public statement.

      ARTICLE 5. CONDITIONS PRECEDENT.

      5.1. Conditions to Each Party's Obligations to Effect the Transaction. The
respective  obligation of each party to effect the Transaction is subject to the
satisfaction  or  waiver on or prior to the First  Closing  Date and the  Second
Closing Date, respectively, of the following conditions:

      (a) No Injunctions or Restraints.  No litigation brought by a Governmental
Entity  shall  be  pending,  and  no  litigation  shall  be  threatened  by  any
Governmental  Entity,  which seeks to enjoin or prohibit the consummation of the
Transaction,  and no  temporary  restraining  order,  preliminary  or  permanent
injunction or other order issued by any court of competent jurisdiction or other
legal  restraint or prohibition  preventing the  consummation of the Transaction
shall be in effect.

      5.2. Additional  Conditions to Obligations of Noteholder.  The obligations
of Noteholder to effect the Transaction are also subject to the  satisfaction or
waiver  on or prior to the  First  Closing  Date and the  Second  Closing  Date,
respectively, of the following conditions:

      (a) Representations and Warranties.  The representations and warranties of
the  Company  set  forth in this  Agreement  shall be true  and  correct  in all
Material Respects as of the date of this Agreement and shall be true and correct
in all Material  Respects as of the First Closing Date and Second  Closing Date,
respectively,  as though made on and as of the First Closing Date and the Second
Closing Date (provided that those  representations  and warranties which address
matters  only as of a  particular  date  shall  remain  true and  correct in all
Material Respects as of such date).


Page 15 of 24
<PAGE>

      (b) Agreements and Covenants. The Company shall have performed or complied
in all Material  Respects with all  agreements  and  covenants  required by this
Agreement  to be  performed  or  complied  with by it on or prior  to the  First
Closing Date and the Second Closing Date, respectively.

      (c) Certificates and Other  Deliveries.  The Company shall have delivered,
or caused to be delivered, to Noteholder (i) a certificate of good standing from
the  Delaware   Secretary  of  State  and  of  comparable   authority  in  other
jurisdictions in which the Company is qualified to do business stating that each
is a validly  existing  corporation  in good  standing;  and (ii)  duly  adopted
resolutions  of the Board of Directors of the Company  approving the  execution,
delivery and  performance  of this  Agreement and the  instruments  contemplated
hereby, certified by the Secretary of the Company.

      (d) Consent by Debt Holders to Conversion.  In accordance with Section 1.4
hereof, the Company shall have delivered or caused to be delivered to Noteholder
the  consents  to convert all  Company  debt held by the holders of  Convertible
Notes,  Demand Notes,  Accrued Salary and Accounts Payable as more  specifically
listed  on  Schedule  2.2A  of  the  Company  Disclosure  Schedule  (except  for
Noteholder and his  affiliates,  and except for the sole holder of the Company's
2000-2004 Convertible Notes).

      (e) Resignation of Directors.  In accordance with Section 1.6 hereof,  the
Company will request that the  directors,  as designated by  Noteholder,  submit
written  resignations  to become  effective  upon  nomination  and  election  by
Noteholder as the majority  stockholder of the new directors pursuant to Section
1.6.

      5.3. Additional  Conditions to Obligations of the Company. The obligations
of the Company to effect the Transaction are also subject to the satisfaction or
waivers on or prior to the Closing Date of the following conditions:

      (a) Representations and Warranties.  The representations and warranties of
the  Noteholder  set forth in this  Agreement  shall be true and  correct in all
Material Respects as of the date of this Agreement and shall be true and correct
in all Material  Respects as of the Closing Date as though made on and as of the
Closing Date.

      (b) Agreements and Covenants.  Noteholder shall have performed or complied
in all Material  Respects with all  agreements  and  covenants  required by this
Agreement  to be  performed  or complied  with by him on or prior to the Closing
Date.

      (c) Financing of Noteholder in Place. As of the Effective Date, Noteholder
shall have,  and shall have provided the Company with  satisfactory  evidence of
the  availability  of, funds  sufficient  for the payment of the New Capital and
performance  of  Noteholder's  obligations  with  respect  to  the  transactions
contemplated by this Agreement.


Page 16 of 24
<PAGE>

      (d) Fairness  Opinion.  The Board of  Directors of the Company  shall have
received an opinion  satisfactory to it from Gemini Partners as to the fairness,
from a financial point of view, of the total consideration to be received by the
Company as contemplated by this Agreement, to the Company's stockholders.

      ARTICLE 6. TERMINATION, AMENDMENT AND WAIVER.

      6.1.  Termination.  This  Agreement may be terminated at any time prior to
the Closing:

      (a) by mutual written consent of Noteholder and Company,  if (with respect
to the  Company)  the  Board  of  Directors  of  Company  so  determines  by the
affirmative vote of a majority of the members of its Board of Directors;

      (b) by  Noteholder  (provided  that  Noteholder  is not  then in  Material
Breach,  as  defined  in this  Section  7.1,  of any  representation,  warranty,
covenant or other  agreement  contained  herein),  upon a Material Breach of any
representation,  warranty,  covenant or agreement on the part of the Company set
forth in this  Agreement,  or if any  representation  or warranty of the Company
shall have become untrue,  continuing  thirty (30) days following  notice to the
Company of such breach or untruth;

      (c) by the  Company  (provided  that the  Company is not then in  Material
Breach of any  representation,  warranty,  covenant or other agreement contained
herein),  upon a Material Breach of any  representation,  warranty,  covenant or
agreement  on the part of  Noteholder  set  forth in this  Agreement,  or if any
representation  or warranty of Noteholder  shall have become  untrue,  in either
case continuing  thirty (30) days following  notice to Noteholder of such breach
or untruth;

      (d) by either  Noteholder or the Company if any Governmental  Entity shall
have  issued an order,  decree or ruling or taken any other  action  permanently
enjoining,   restraining  or  otherwise  prohibiting  the  consummation  of  the
Transaction  and such order,  decree or ruling or other action shall have become
final and nonappealable;

      For purposes of Sections 6.1(b) and (c),  "Material Breach" shall mean (i)
when used in connection with a representation,  warranty,  covenant or agreement
made by the  Company  or  Noteholder,  as the  case  may be,  set  forth in this
Agreement  which is  qualified by  materiality  or by Company  Material  Adverse
Effect), any breach of such representation, warranty, covenant or agreement; and
(ii)  when used in  connection  with a  representation,  warranty,  covenant  or
agreement  made by the Company or  Noteholder,  as the case may be, set forth in
this Agreement  that is not so qualified by  materiality or by Company  Material
Adverse Effect, as the case may be, a breach of such  representation,  warranty,
covenant or agreement in any Material Respect.

      6.2. Effect of Termination.  In the event of termination of this Agreement
by either the Company or Noteholder  as provided in Section 6.1, this  Agreement
shall  forthwith  become  void and have no  effect,  without  any  liability  or
obligation on the part of Noteholder or the Company or their respective officers
or  directors,  except as set forth in Section 4.6 and Articles 7, 8 and 9 which
shall survive termination and except to the extent that such termination results
from the willful  breach by a party of any of its  representations,  warranties,
covenants or agreements set forth in this Agreement.


Page 17 of 24
<PAGE>

      ARTICLE 7. SPECIAL COMMITTEE.

      The Board of  Directors  of the Company has  determined  that it is in the
best interest of the Company to form the Special  Committee and has  constituted
and appointed the Special Committee.

      7.1.  Purpose.   The  purpose  of  the  Special  Committee  (the  "Special
Committee") is to oversee,  monitor, and enforce compliance of this Agreement by
Noteholder and the Company.  Noteholder  acknowledges that upon his becoming the
holder of a  majority  of the issued and  outstanding  shares of Company  common
stock and so long as he  controls a majority of such  shares,  he would have the
power to  nominate  and elect a majority  of the  directors  of the  Company and
thereby influence and affect the compliance of this Agreement by the Company and
himself.

      In discharging its  responsibilities  hereunder,  the Special Committee is
empowered  (i) to review and  discuss  with  management  the  compliance  by the
Company  and  Noteholder  of  their  respective  obligations  set  forth in this
Agreement,  (ii) to  investigate  review and analyze  any matter  brought to its
attention  with full access to all books,  records,  facilities and personnel of
the  Company,  (iii) to engage  such  advisers  including,  but not  limited to,
attorneys,  accountants or other consultants (collectively,  "professionals") as
the Special  Committee  shall deem  necessary  or  desirable to assist it in the
discharge of its responsibilities including, without limitation,  enforcement of
this  Agreement  as well  exercise  of all legal and  equitable  remedies of the
Company  as to the  Noteholder,  (iv) to modify or amend any  provision  of this
Agreement as the Special  Committee  deems  reasonable or appropriate and in the
interest of the Company's stockholders,  in the Committee's sole discretion, (v)
to  execute  in the  name  of and  on  behalf  of  the  Company  any  agreement,
certificate, instrument or document to be delivered by the Company in connection
with this  Agreement,  and (vi) to take such other actions as it deems necessary
or  appropriate  to assure  compliance  by the  Company and  Noteholder  of this
Agreement.  The Company shall be responsible for, and the Noteholder shall cause
the Company to pay, the fees and expenses of any such attorneys, accountants and
other  consultants that may be retained by the Special  Committee.  No member of
the Special Committee shall have any responsibility or obligation for payment of
the  fees  and  expenses  of  such  professionals  so  retained  by the  Special
Committee.

      In  carrying  out  its  responsibilities,  the  Special  Committee  is not
providing any expert or special  assurance as to the Company or any professional
certification as to any outside  professional's work. The determinations made by
the Special  Committee and dealings with the Noteholder and the Company shall be
final, shall not be subject to review by the Board of Directors and shall in all
respects be binding upon the Company. The officers, agents, and employees of the
Company are  authorized  to assist the Special  Committee and to provide it with
all  information  and  documents  that it requests  with  respect to the subject
matter of this Agreement.


Page 18 of 24
<PAGE>

      Upon request of the Special Committee, the Noteholder agrees to provide to
the Special  Committee  reasonable  evidence of the compliance by the Noteholder
and/or the Company of his/its obligations set forth in this Agreement.

      7.2.  Membership.  The Special  Committee  shall be comprised of three (3)
members of the Board,  except as otherwise  provided herein. The initial members
of Special  Committee shall be Thomas J. Pernice,  Dr. Joseph Bellanti and Keith
Gregg,  each of whom shall serve until his  successor  is  appointed as provided
hereunder,  he  resigns  or ceases  to be a member  of the  Board of  Directors.
Noteholder  hereby  agrees to take all actions  necessary to call,  or cause the
Company and the  appropriate  officers and  directors of the Company to call, an
annual or special  meeting of  stockholders of the Company to vote all shares of
Company  common  stock  owned or held of  record,  directly  or  indirectly,  by
Noteholder  at any such  annual  or  special  meeting  in favor  of, or take all
actions by written consent in lieu of any such meeting necessary, to ensure that
the individuals  designated  above as comprising the Special  Committee shall be
and are elected as members of the Company's  Board of Directors and to otherwise
effect the intent of this Article 7. In addition  Noteholder  agrees to vote all
shares of Company common stock owned or held of record,  directly or indirectly,
by Noteholder upon any other matter arising under this Agreement  submitted to a
vote of the stockholders of the Company in a manner so as to implement the terms
of this Agreement.

      In the event of a vacancy created on the Special  Committee at any time by
the death,  disability or resignation  or otherwise a vacancy shall occur,  then
the remaining  members of the Special  Committee may (but without any obligation
to do so)  appoint  a then  existing  director  of the  Company  to serve on the
Special Committee so that the Committee shall be comprised of three (3) members.
Notwithstanding  the foregoing  sentence,  the remaining  members of the Special
Committee  may  continue to take all actions on behalf of the Special  Committee
regardless of any such vacancy.

      7.3. Termination of Special Committee. The Special Committee is authorized
to  continue  in  existence  until the  earlier of such time as (i) the  Special
Committee shall recommend its dissolution to the Board of Directors, or (ii) the
Company's and Noteholder's  satisfaction of all of their respective  obligations
hereunder,  which with respect to the stockholder's Rights Offering contemplated
by this Agreement  means that the Company's  Registration  Statement  shall have
been declared  effective by the SEC ("Registration  Statement  Effective Date"),
and either (A) such  offering  shall have expired by reason of no  subscriptions
received by the Company in accordance with the terms of the Rights Offering,  or
(B) the Company shall have accepted all  subscriptions  made in accordance  with
the terms of the Rights  Offering and issued all shares of Company  common stock
required in connection with such exercise and subscriptions.

      7.4. Indemnity.  The Company shall indemnify and hold harmless each member
of the  Special  Committee  against  any  loss,  liability,  claim  or  expense,
including, without limitation,  attorneys' fees, arising out of or in connection
with such member's  participation or service on the Special  Committee or action
or inaction with respect thereto,  including,  without limitation, the costs and
expenses of defending himself against any such loss, liability, claim or expense
relating to or arising from any claims,  demands or lawsuits by a stockholder of
the Company or by the Noteholder against such member or the Special Committee.


Page 19 of 24
<PAGE>

      ARTICLE 8. RELEASE.

      8.1. Release.  Effective upon Closing hereunder,  Noteholder, for himself,
his heirs,  successors  and assigns and for others who may claim  through  them,
hereby  releases and forever  discharges the Company,  its officers,  directors,
agents  and   representatives  of  and  from  all  claims,   demands,   damages,
liabilities,  actions, causes of actions, suits,  obligations,  costs, expenses,
agreements,  contracts  and  promises  (in law and in  equity)  or the  like and
whether known or unknown (collectively the "Claims"),  of any description,  kind
or nature and whether by act or omission  relating directly or indirectly to (i)
the conduct and  management of the Company and its business,  (ii) the discharge
of statutory and common law fiduciary duties with respect to the Company and its
stockholders  prior  to  Closing,  and  (iii)  the  negotiation,  execution  and
performance of this Agreement.  The Claims shall exclude (the  "Exclusions") (i)
claims or causes of action made or brought prior to the Closing  relating to any
material breach by the Company of this Agreement between the date hereof and the
Closing;  (ii) claims or causes relating to this Agreement and the  negotiation,
execution and performance thereof; and (iii) claims and causes of action arising
directly  from actual  fraud,  intentional  misconduct,  or a knowing,  material
violation  of law by the person  against whom such claim is made or against whom
such cause of action is alleged.

      8.2. General Release. In furtherance of the intention that this Release be
a full and final accord and satisfaction and release of the Claims, subject only
to the  Exclusions  and  the  obligations  of the  Company  set  forth  in  this
Agreement,  Noteholder  acknowledges  that he has been informed by his attorneys
of,  and he is  familiar  with,  Section  1542 of the Civil Code of the State of
California which provides as follows:

      "A  GENERAL  RELEASE  DOES NOT EXTEND TO  CLAIMS WHICH THE CREDITOR
      DOES NOT KNOW OR  SUSPECT  TO EXIST  IN HIS  FAVOR  AT THE  TIME OF
      EXECUTING THE RELEASE, WHICH IF  KNOWN BY HIM MUST HAVE  MATERIALLY
      AFFECTED  HIS SETTLEMENT WITH THE DEBTOR."

Noteholder,  for himself,  his heirs,  successors and assigns and for others who
may claim through them,  expressly  waives any and all rights and benefits which
he has or may  have  under  Section  1542  of the  Civil  Code of the  State  of
California  to the full  extent that he may  lawfully  waive all such rights and
benefits.  Noteholder hereby acknowledges that he is aware that he may hereafter
discover  facts in  addition  to or  different  from those which he now knows or
believes to be true with respect to the subject  matter of this  Agreement,  but
that it is his  intention  hereby,  finally and forever and subject  only to the
Exclusions to settle and release any and all Claims,  disputes and  differences,
known or unknown,  suspected and unsuspected,  which do now exist, may hereafter
exist or heretofore have existed between him, on the one hand, and those persons
or entities  released by him on the other hand,  and that in furtherance of such
intention, the releases are binding and effective  notwithstanding the discovery
or existence of any such additional or different facts.

      ARTICLE 9. ADDITIONAL PROVISIONS.


Page 20 of 24
<PAGE>

      9.1. Survival of Representations  and Warranties.  The representations and
warranties  in  this   Agreement   shall   survive  until   December  31,  2007.
Notwithstanding the foregoing,  this Section 9.1 shall not limit any covenant or
agreement of the parties, which by its terms contemplates  performance after the
Closing.

      9.2.  Notices.   All  notices,   requests,   claims,   demands  and  other
communications  under this  Agreement  shall be in  writing  and shall be deemed
given if delivered  personally or sent by reputable overnight courier (providing
proof of delivery) to the parties at the  following  addresses (or at such other
address for a party as shall be specified by like notice):

                  If to Noteholder:         Richard P. Kiphart
                                            William Blair & Co. LLC
                                            222 West Adams Street
                                            Chicago, IL 60606


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<PAGE>

                  If to Company:            Special Committee
                                            Board of Directors
                                            c/o Thomas J. Pernice
                                            Advanced Biotherapy, Inc.
                                            141 West Jackson Blvd.
                                            Chicago, ILL 60604

                  With a copy to:           Joseph A. Bellanti M.D.
                                            6007 Corewood Lane
                                            Bethesda, MD 20816

      9.3. Definitions. For purposes of this Agreement:

      (a) an "affiliate"  of any person means another  person that,  directly or
indirectly,  through one or more intermediaries,  controls, is controlled by, or
is under common control with, such first person;

      (b) "Governmental Entity" means any federal, state, local or foreign court
or governmental agency, authority, instrumentality or regulatory body.

      (c) "knowledge" means a fact, event,  circumstance or occurrence  actually
known,  or that reasonably  should have been known by an executive  officer of a
comparable   company  with  comparable   responsibilities   by  virtue  of  such
responsibilities, by any of the executive officers of the Company or Noteholder,
as the case may be;

      (d)  "Material   Respect"  means  (i)  when  used  in  connection  with  a
representation,  warranty,  covenant, condition or agreement to be complied with
or satisfied by the Company or Noteholder, as the case may be, that is qualified
by materiality or by Company Material  Adverse Effect,  any respect (taking into
account  such  qualifications  as to  materiality  or Company  Material  Adverse
Effect,  as  the  case  may  be);  and  (ii)  when  used  in  connection  with a
representation,  warranty,  covenant, condition or agreement to be complied with
or satisfied by the Company or  Noteholder,  as the case may be, which is not so
qualified by materiality or by Company Material Adverse Effect,  as the case may
be, any material respect. and

      (e) "Person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity.

      9.4.  Interpretation.  When a  reference  is made in this  Agreement  to a
Section,  exhibit or schedule,  such  reference  shall be to a Section of, or an
exhibit or schedule to, this Agreement unless otherwise indicated.  The table of
contents and headings  contained in this  Agreement are for  reference  purposes
only and  shall not  affect in any way the  meaning  or  interpretation  of this
Agreement.  Whenever the words "include," "includes" and "including" are used in
this  Agreement,  they  shall be deemed  to be  followed  by the words  "without
limitation."


Page 22 of 24
<PAGE>

      9.5.  Counterparts;  Facsimile.  This  Agreement may be executed in one or
more  counterparts  and via facsimile,  all of which shall be considered one and
the same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered to the other parties.

      9.6.  Entire  Agreement;  No Third-Party  Beneficiaries.  This  Agreement,
including  the  Company  Disclosure  Schedule  and  the  Noteholder   Disclosure
Schedule,  contains  the entire  agreement,  both  written  and oral,  among the
parties with respect to the subject  matter of this Agreement and except for the
provisions of Sections 1.5,  1.6(iii),  4.2, 4.5,  Article VII, Article VIII and
this  Section  9.6,  are not  intended to confer upon any person  other than the
parties hereto any rights or remedies hereunder.

      9.7. Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the laws of the State of California,  regardless of
the laws that might otherwise govern under applicable  principles of conflict of
laws thereof.

      9.8. Assignment.  Neither this Agreement nor any of the rights,  interests
or obligations  under this Agreement shall be assigned,  in whole or in part, by
operation of law or otherwise  by any of the parties  without the prior  written
consent of the other party.  Subject to the preceding  sentence,  this Agreement
will be  binding  upon,  inure to the  benefit  of, and be  enforceable  by, the
parties and their respective successors and assigns.

      9.9. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the  provisions  of this  Agreement  were not performed in
accordance  with  their  specific  terms  or  were  otherwise  breached.  It  is
accordingly  agreed that the parties  shall be entitled to seek an injunction or
injunctions to prevent  breaches of this  Agreement and to enforce  specifically
the  terms  and   provisions  of  this  Agreement  in  any  court  of  competent
jurisdiction,  this  being in  addition  to any other  remedy to which  they are
entitled at law or in equity.

      9.10. Amendment. This Agreement may be amended by the parties at any time;
provided,  however,  that  this  Agreement  may  not  be  amended  except  by an
instrument in writing  signed on behalf of each of the parties,  and approved in
writing by the Special  Committee  prior to execution  of such  amendment by the
Company.

      9.11. Extension; Waiver. At any time prior to the Closing, the parties may
(a) extend the time for the  performance of any of the obligations or other acts
of the other parties,  (b) waive any  inaccuracies  in the  representations  and
warranties  contained in this Agreement or in any document delivered pursuant to
this Agreement or (c) waive  compliance with any of the agreements or conditions
contained in this  Agreement.  Any  agreement on the part of a party to any such
extension  or  waiver  shall be valid  only if set  forth  in an  instrument  in
writing,  signed on behalf of such party and  approved in writing by the Special
Committee prior to the execution of any such instrument by the Company.


Page 23 of 24
<PAGE>

The  failure of any party to this  Agreement  to assert any of its rights  under
this Agreement or otherwise shall not constitute a waiver of those rights.

COMPANY:                                                     NOTEHOLDER:

ADVANCED BIOTHERAPY, INC.


By:/s/ Thomas J. Pernice                               /s/ Richard P. Kiphart
   ---------------------------                         -------------------------
   Thomas J. Pernice,                                  Richard P. Kiphart
   Member of Special Committe
   and Board of Directors


By:/s/ Joseph Bellanti M.D.
   ---------------------------
   Joseph Bellanti, M.D.,
   Member of Special Committee
   and Board of Directors

SPECIAL COMMITTEE:

Read and Approved as to Section 7 only:

/s/ Joseph Bellanti M.D.
-------------------------------------------------
Joseph Bellanti, M.D.

/s/ Keith Gregg
-------------------------------------------------
Keith Gregg

/s/ Thomas J. Pernice
-------------------------------------------------
Thomas J. Pernice


Page 24 of 24
</TEXT>
</DOCUMENT>
</SUBMISSION>
