Exhibit 10.93

 

SECURITIES PURCHASE AGREEMENT

 

LAURUS MASTER FUND, LTD.

 

and

 

PATH 1 NETWORK TECHNOLOGIES INC.

 

Dated: December 6, 2005

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

TABLE OF CONTENTS

 

              Page

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

1.

  Agreement to Sell and Purchase    1

2.

  Fees and Warrant    1

3.

  Closing, Delivery, Payment and Closing Conditions    2    

3.1

   Closing    2    

3.2

   Delivery    2    

3.3

   Preferred Stock    2    

3.4

   Preferred Stock Letter Agreements    2

4.

  Representations and Warranties of the Company    3    

4.1

   Organization, Good Standing and Qualification    3    

4.2

   Subsidiaries    3    

4.3

   Capitalization; Voting Rights    4    

4.4

   Authorization; Binding Obligations    4    

4.5

   Liabilities    5    

4.6

   Agreements; Action    5    

4.7

   Obligations to Related Parties    6    

4.8

   Changes    7    

4.9

   Title to Properties and Assets; Liens, Etc.    8    

4.10

   Intellectual Property    9    

4.11

   Compliance with Other Instruments    9    

4.12

   Litigation    10    

4.13

   Tax Returns and Payments    10    

4.14

   Employees    10    

4.15

   Registration Rights and Voting Rights    11    

4.16

   Compliance with Laws; Permits    11    

4.17

   Environmental and Safety Laws    11    

4.18

   Valid Offering    12    

4.19

   Full Disclosure    12    

4.20

   Insurance    12    

4.21

   SEC Reports    12    

4.22

   Listing    13    

4.23

   No Integrated Offering    13    

4.24

   Stop Transfer    13    

4.25

   Dilution    13    

4.26

   Patriot Act    13    

4.27

   ERISA    14    

4.28

   Inactive Subsidiaries    14

5.

  Representations and Warranties of the Purchaser    14    

5.1

   No Shorting    14    

5.2

   Requisite Power and Authority    15    

5.3

   Investment Representations    15    

5.4

   The Purchaser Bears Economic Risk    15    

5.5

   Acquisition for Own Account    15

 

i

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

              Page(s)

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

   

5.6

   The Purchaser Can Protect Its Interest    16    

5.7

   Accredited Investor    16    

5.8

   Legends    16

6.

  Covenants of the Company    17    

6.1

   Stop-Orders    17    

6.2

   Listing    17    

6.3

   Market Regulations    17    

6.4

   Reporting Requirements    17    

6.5

   Use of Funds    19    

6.6

   Access to Facilities    19    

6.7

   Taxes    19    

6.8

   Insurance    20    

6.9

   Intellectual Property    21    

6.10

   Properties    21    

6.11

   Confidentiality    21    

6.12

   Required Approvals    21    

6.13

   Reissuance of Securities    22    

6.14

   Opinion    23    

6.15

   Margin Stock    23    

6.16

   Financing Right of First Refusal    23    

6.17

   Authorization and Reservation of Shares    24    

6.18

   Inactive Subsidiaries    24

7.

  Covenants of the Purchaser    24    

7.1

   Confidentiality    24    

7.2

   Non-Public Information    24    

7.3

   Limitation on Acquisition of Common Stock of the Company    24

8.

  Covenants of the Company and the Purchaser Regarding Indemnification    24    

8.1

   Company Indemnification    24    

8.2

   Purchaser’s Indemnification    25

9.

  Conversion of Convertible Note    25    

9.1

   Mechanics of Conversion    25

10.

  Registration Rights    26    

10.1

   Registration Rights Granted    26    

10.2

   Offering Restrictions    26

11.

  Miscellaneous.    27    

11.1

   Governing Law, Jurisdiction and Waiver of Jury Trial    27    

11.2

   Severability    28    

11.3

   Survival    28    

11.4

   Successors    28    

11.5

   Entire Agreement; Maximum Interest    28    

11.6

   Amendment and Waiver    29    

11.7

   Delays or Omissions    29    

11.8

   Notices    29

 

ii

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

              Page(s)

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

   

11.9

   Attorneys’ Fees    30    

11.10

   Titles and Subtitles    30    

11.11

   Facsimile Signatures; Counterparts    30    

11.12

   Broker’s Fees    30    

11.13

   Construction    31

 

iii

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

 

LIST OF EXHIBITS

 

Form of Convertible Term Note

   Exhibit A

Form of Warrant

   Exhibit B

Form of Opinion

   Exhibit C

Form of Escrow Agreement

   Exhibit D

 

iv

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

SECURITIES PURCHASE AGREEMENT

 

THIS SECURITIES PURCHASE AGREEMENT (this “Agreement”) is made and entered into
as of December 6, 2005, by and between PATH 1 NETWORK TECHNOLOGIES INC., a
Delaware corporation (the “Company”), and LAURUS MASTER FUND, LTD., a Cayman
Islands company (the “Purchaser”).

 

RECITALS

 

WHEREAS, the Company has authorized the sale to the Purchaser of a Secured
Convertible Term Note in the aggregate principal amount of two million one
hundred thousand dollars ($2,100,000) in the form of Exhibit A hereto (as
amended, modified and/or supplemented from time to time, the “Note”), which Note
is convertible into shares of the Company’s common stock, $0.001 par value per
share (the “Common Stock”) at an initial fixed conversion price of $2.6316 per
share of Common Stock (“Fixed Conversion Price”);

 

WHEREAS, the Company wishes to issue to the Purchaser a warrant in the form of
Exhibit B hereto (as amended, modified and/or supplemented from time to time,
the “Warrant”) to purchase up to 181,362 shares of the Company’s Common Stock
(subject to adjustment as set forth therein) in connection with the Purchaser’s
purchase of the Note;

 

WHEREAS, the Purchaser desires to purchase the Note and the Warrant on the terms
and conditions set forth herein; and

 

WHEREAS, the Company desires to issue and sell the Note and Warrant to the
Purchaser on the terms and conditions set forth herein.

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises, representations, warranties and covenants hereinafter set forth and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:

 

1. Agreement to Sell and Purchase. Pursuant to the terms and conditions set
forth in this Agreement, on the Closing Date (as defined in Section 3), the
Company shall sell to the Purchaser, and the Purchaser shall purchase from the
Company, the Note. The sale of the Note on the Closing Date shall be known as
the “Offering.” The Note will mature on the Maturity Date (as defined in the
Note). Collectively, the Note and Warrant and Common Stock issuable upon
conversion of the Note and upon exercise of the Warrant are referred to as the
“Securities.”

 

2. Fees and Warrant. On the Closing Date:

 

(a) The Company will issue and deliver to the Purchaser the Warrant to purchase
up to 181,362 shares of Common Stock (subject to adjustment as set forth
therein) in connection with the Offering, pursuant to Section 1 hereof. All the
representations, covenants, warranties, undertakings, and indemnification, and
other

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

rights made or granted to or for the benefit of the Purchaser by the Company are
hereby also made and granted for the benefit of the holder of the Warrant and
shares of the Company’s Common Stock issuable upon exercise of the Warrant (the
“Warrant Shares”).

 

(b) Subject to the terms of Section 2(d) below, the Company shall pay to Laurus
Capital Management, LLC, the manager of the Purchaser, a closing payment in an
amount equal to 3.00238% of the aggregate principal amount of the Note. The
foregoing fee is referred to herein as the “Closing Payment.”

 

(c) The Company shall reimburse the Purchaser for its reasonable expenses
(including legal fees and expenses) incurred in connection with the preparation
and negotiation of this Agreement and the Related Agreements (as hereinafter
defined), and expenses incurred in connection with the Purchaser’s due diligence
review of the Company and its Subsidiaries (as defined in Section 4.2) and all
related matters. Amounts required to be paid under this Section 2(c) will be
paid on the Closing Date and shall be $30,000 (against which a $15,000 deposit
paid by the Company to Purchaser prior to the date hereof shall be applied) for
such expenses referred to in this Section 2(c); provided however, that this
amount, does not include the cost of any required third-party appraisals,
Company approved extraordinary diligence or retention of outside counsel to the
extent deemed reasonably necessary or prudent by Purchaser, the cost for which
shall be reimbursed to Purchaser by the Company.

 

(d) The Closing Payment and the expenses referred to in the preceding clause
(c) (net of deposits previously paid by the Company) shall be paid at closing
out of funds held pursuant to the Escrow Agreement (as defined below) and a
disbursement letter (the “Disbursement Letter”).

 

3. Closing, Delivery, Payment and Closing Conditions.

 

3.1 Closing. Subject to the terms and conditions herein, the closing of the
transactions contemplated hereby (the “Closing”), shall take place on the date
hereof, at such time or place as the Company and the Purchaser may mutually
agree (such date is hereinafter referred to as the “Closing Date”).

 

3.2 Delivery. Pursuant to the Escrow Agreement, at the Closing on the Closing
Date, the Company will deliver to the Purchaser, among other things, the Note
and the Warrant and the Purchaser will deliver to the Company, among other
things, the amounts set forth in the Disbursement Letter by certified funds or
wire transfer.

 

3.3 Preferred Stock. On or prior to the date hereof, the Purchaser shall have
received from the Company evidence satisfactory to the Purchaser that the
holders of the Company’s preferred stock (the “Preferred Stock Holders”) shall
have consented to, and otherwise waived all rights to challenge on any basis,
the consummation of the transaction between the Company and the Purchaser as
described herein.

 

2

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

4. Representations and Warranties of the Company. The Company hereby represents
and warrants and covenants to the Purchaser as follows

 

4.1 Organization, Good Standing and Qualification. Each of the Company and each
of its Subsidiaries (other than any Inactive Subsidiary) is a corporation,
partnership or limited liability company, as the case may be, duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Each of the Company and each of its Subsidiaries has the
corporate, limited liability company or partnership, as the case may be, power
and authority to own and operate its properties and assets and, insofar as it is
or shall be a party thereto, to (1) execute and deliver (i) this Agreement,
(ii) the Note and the Warrant to be issued in connection with this Agreement,
(iii) the Master Security Agreement dated as of the date hereof between the
Company, certain Subsidiaries of the Company and the Purchaser (as amended,
modified and/or supplemented from time to time, the “Master Security
Agreement”), (iv) the Registration Rights Agreement relating to the Securities
dated as of the date hereof between the Company and the Purchaser (as amended,
modified and/or supplemented from time to time, the “Registration Rights
Agreement”), (v) the Funds Escrow Agreement dated as of the date hereof among
the Company, the Purchaser and the escrow agent referred to therein,
substantially in the form of Exhibit D hereto (as amended, modified and/or
supplemented from time to time, the “Escrow Agreement”) and (vi) all other
documents, instruments and agreements entered into in connection with the
transactions contemplated hereby and thereby (the preceding clauses (ii) through
(vi), collectively, the “Related Agreements”); (2) issue and sell the Note and
the shares of Common Stock issuable upon conversion of the Note (the “Note
Shares”); (3) issue and sell the Warrant and the Warrant Shares; and (4) carry
out the provisions of this Agreement and the Related Agreements and to carry on
its business as presently conducted. Each of the Company and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation, partnership or limited liability company, as
the case may be, in all jurisdictions in which the nature or location of its
activities and of its properties (both owned and leased) makes such
qualification necessary, except for those jurisdictions in which failure to do
so has not, or could not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the business, assets, liabilities,
condition (financial or otherwise), properties, operations or prospects of the
Company and its Subsidiaries, taken individually and as a whole (a “Material
Adverse Effect”).

 

4.2 Subsidiaries. Each direct and indirect Subsidiary of the Company, the direct
owner of such Subsidiary and its percentage ownership thereof, is set forth on
Schedule 4.2. For the purpose of this Agreement, (x) a “Subsidiary” of any
person or entity means (i) a corporation or other entity whose shares of stock
or other ownership interests having ordinary voting power (other than stock or
other ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors of such corporation, or other
persons or entities performing similar functions for such person or entity, are
owned, directly or indirectly, by such person or entity or (ii) a corporation or
other entity in which such person or entity owns, directly or indirectly, more
than 50% of the equity interests at such time and (y) the “Inactive
Subsidiaries” shall mean, Path 1 Holdings Inc., a Delaware corporation, Path 1
Network Technologies Europe B.V., a company organized under the laws of the
Netherlands and PNWK Europe C.V., a company organized under the laws of the
Romania.

 

3

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

4.3 Capitalization; Voting Rights.

 

(a) The authorized capital stock of the Company, as of the date hereof consists
of 40,000,000 shares of Common Stock, par value $0.001 per share, 7,276,604
shares of which are issued and outstanding. The authorized, issued and
outstanding capital stock of each Subsidiary of the Company is set forth on
Schedule 4.3.

 

(b) Except as disclosed on Schedule 4.3, other than: (i) the shares reserved for
issuance under the Company’s stock option plans; and (ii) shares which may be
granted pursuant to this Agreement and the Related Agreements, there are no
outstanding options, warrants, rights (including conversion or preemptive rights
and rights of first refusal), proxy or stockholder agreements, or arrangements
or agreements of any kind for the purchase or acquisition from the Company of
any of its securities. Except as disclosed on Schedule 4.3, neither the offer,
issuance or sale of any of the Note or the Warrant, or the issuance of any of
the Note Shares or Warrant Shares, nor the consummation of any transaction
contemplated hereby will result in a change in the price or number of any
securities of the Company outstanding, under anti-dilution or other similar
provisions contained in or affecting any such securities.

 

(c) All issued and outstanding shares of the Company’s Common Stock: (i) have
been duly authorized and validly issued and are fully paid and nonassessable;
and (ii) were issued in compliance with all applicable state and federal laws
concerning the issuance of securities.

 

(d) The rights, preferences, privileges and restrictions of the shares of the
Common Stock are as stated in the Company’s Certificate of Incorporation (the
“Charter”). The Note Shares and Warrant Shares have been duly and validly
reserved for issuance. When issued in compliance with the provisions of this
Agreement and the Company’s Charter, the Securities will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Securities may be subject to restrictions on
transfer under state and/or federal securities laws as set forth herein or as
otherwise required by such laws at the time a transfer is proposed.

 

4.4 Authorization; Binding Obligations. All corporate, partnership or limited
liability company, as the case may be, action on the part of the Company and
each of its Subsidiaries (including their respective officers and directors)
necessary for the authorization of this Agreement and the Related Agreements,
the performance of all obligations of the Company and its Subsidiaries hereunder
and under the other Related Agreements at the Closing and, the authorization,
sale, issuance and delivery of the Note and Warrant has been taken or will be
taken prior to the Closing. This Agreement and the Related Agreements, when
executed and delivered and to the extent it is a party thereto, will be valid
and binding obligations of each of the Company and each of its Subsidiaries,
enforceable against each such person or entity in accordance with their terms,
except:

 

(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditors’ rights;
and

 

4

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

(b) general principles of equity that restrict the availability of equitable or
legal remedies.

 

The sale of the Note and the subsequent conversion of the Note into Note Shares
are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the
Warrant and the subsequent exercise of the Warrant for Warrant Shares are not
and will not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.

 

4.5 Liabilities. Neither the Company nor any of its Subsidiaries has any
liabilities, except current liabilities incurred in the ordinary course of
business and liabilities disclosed in any of the Company’s filings under the
Securities Exchange Act of 1934 (“Exchange Act”) made prior to the date of this
Agreement (collectively, the “Exchange Act Filings”), copies of which have been
provided to the Purchaser.

 

4.6 Agreements; Action. Except as set forth on Schedule 4.6 or as disclosed in
any Exchange Act Filings:

 

(a) there are no agreements, understandings, instruments, contracts, proposed
transactions, judgments, orders, writs or decrees to which the Company or any of
its Subsidiaries is a party or by which it is bound which may involve:
(i) obligations (contingent or otherwise) of, or payments to, the Company or any
of its Subsidiaries in excess of $50,000 (other than obligations of, or payments
to, the Company or any of its Subsidiaries arising from purchase or sale
agreements entered into in the ordinary course of business); or (ii) the
transfer or license of any patent, copyright, trade secret or other proprietary
right to or from the Company or any of its Subsidiaries (other than licenses
arising from the purchase of “off the shelf” or other standard products); or
(iii) provisions restricting the development, manufacture or distribution of the
Company’s or any of its Subsidiaries products or services; or
(iv) indemnification by the Company or any of its Subsidiaries with respect to
infringements of proprietary rights.

 

(b) Since December 31, 2004 (the “Balance Sheet Date”), neither the Company nor
any of its Subsidiaries has: (i) declared or paid any dividends, or authorized
or made any distribution upon or with respect to any class or series of its
capital stock; (ii) incurred any indebtedness for money borrowed or any other
liabilities (other than ordinary course obligations) individually in excess of
$50,000 or, in the case of indebtedness and/or liabilities individually less
than $50,000, in excess of $100,000 in the aggregate; (iii) made any loans or
advances to any person or entity not in excess, individually or in the
aggregate, of $100,000, other than ordinary course advances for travel expenses;
or (iv) sold, exchanged or otherwise disposed of any of its assets or rights,
other than the sale of its inventory in the ordinary course of business.

 

(c) For the purposes of subsections (a) and (b) above, all indebtedness,
liabilities, agreements, understandings, instruments, contracts and proposed
transactions involving the same person or entity (including persons or entities
the Company or any Subsidiary of the Company has reason to believe are
affiliated therewith) shall be aggregated for the purpose of meeting the
individual minimum dollar amounts of such subsections.

 

5

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

(d) The Company maintains disclosure controls and procedures (“Disclosure
Controls”) designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized, and reported, within the time periods specified
in the rules and forms of the Securities and Exchange Commission (“SEC”).

 

(e) The Company makes and keep books, records, and accounts, that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
Company’s assets. The Company maintains internal control over financial
reporting (“Financial Reporting Controls”) designed by, or under the supervision
of, the Company’s principal executive and principal financial officers, and
effected by the Company’s board of directors, management, and other personnel,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles (“GAAP”), including that:

 

(i) transactions are executed in accordance with management’s general or
specific authorization;

 

(ii) unauthorized acquisition, use, or disposition of the Company’s assets that
could have a material effect on the financial statements are prevented or timely
detected;

 

(iii) transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that the Company’s receipts and
expenditures are being made only in accordance with authorizations of the
Company’s management and board of directors;

 

(iv) transactions are recorded as necessary to maintain accountability for
assets; and

 

(v) the recorded accountability for assets is compared with the existing assets
at reasonable intervals, and appropriate action is taken with respect to any
differences.

 

(f) There is no weakness in any of the Company’s Disclosure Controls or
Financial Reporting Controls that is required to be disclosed in any of the
Exchange Act Filings, except as so disclosed.

 

4.7 Obligations to Related Parties. Except as set forth on Schedule 4.7, there
are no obligations of the Company or any of its Subsidiaries to officers,
directors, stockholders or employees of the Company or any of its Subsidiaries
other than:

 

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

 

6

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

(b) reimbursement for reasonable expenses incurred on behalf of the Company and
its Subsidiaries;

 

(c) for other standard employee benefits made generally available to all
employees (including stock option agreements outstanding under any stock option
plan approved by the Board of Directors of the Company and each Subsidiary of
the Company, as applicable); and

 

(d) obligations listed in the Company’s and each of its Subsidiary’s financial
statements or disclosed in any of the Company’s Exchange Act Filings.

 

Except as described above or set forth on Schedule 4.7, none of the officers,
directors or, to the best of the Company’s knowledge, key employees or
stockholders of the Company or any of its Subsidiaries or any members of their
immediate families, are indebted to the Company or any of its Subsidiaries,
individually or in the aggregate, in excess of $50,000 or have any direct or
indirect ownership interest in any firm or corporation with which the Company or
any of its Subsidiaries is affiliated or with which the Company or any of its
Subsidiaries has a business relationship, or any firm or corporation which
competes with the Company or any of its Subsidiaries, other than passive
investments in publicly traded companies (representing less than one percent
(1%) of such company) which may compete with the Company or any of its
Subsidiaries. Except as described above, no officer, director or stockholder of
the Company or any of its Subsidiaries, or any member of their immediate
families, is, directly or indirectly, interested in any material contract with
the Company or any of its Subsidiaries and no agreements, understandings or
proposed transactions are contemplated between the Company or any of its
Subsidiaries and any such person. Except as set forth on Schedule 4.7, neither
the Company nor any of its Subsidiaries is a guarantor or indemnitor of any
indebtedness of any other person or entity.

 

4.8 Changes. Since the Balance Sheet Date, except as disclosed in any Exchange
Act Filing or in any Schedule to this Agreement or to any of the Related
Agreements, there has not been:

 

(a) any change in the business, assets, liabilities, condition (financial or
otherwise), properties, operations or prospects of the Company or any of its
Subsidiaries, which individually or in the aggregate has had, or could
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect;

 

(b) any resignation or termination of any officer, key employee or group of
employees of the Company or any of its Subsidiaries;

 

(c) any material change, except in the ordinary course of business, in the
contingent obligations of the Company or any of its Subsidiaries by way of
guaranty, endorsement, indemnity, warranty or otherwise;

 

(d) any damage, destruction or loss, whether or not covered by insurance, which
has had, or could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect;

 

7

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

(e) any waiver by the Company or any of its Subsidiaries of a valuable right or
of a material debt owed to it;

 

(f) any direct or indirect loans made by the Company or any of its Subsidiaries
to any stockholder, employee, officer or director of the Company or any of its
Subsidiaries, other than advances made in the ordinary course of business;

 

(g) any material change in any compensation arrangement or agreement with any
employee, officer, director or stockholder of the Company or any of its
Subsidiaries;

 

(h) any declaration or payment of any dividend or other distribution of the
assets of the Company or any of its Subsidiaries;

 

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

 

(j) any debt, obligation or liability incurred, assumed or guaranteed by the
Company or any of its Subsidiaries, except those for immaterial amounts and for
current liabilities incurred in the ordinary course of business;

 

(k) any sale, assignment or transfer of any patents, trademarks, copyrights,
trade secrets or other intangible assets owned by the Company or any of its
Subsidiaries;

 

(l) any change in any material agreement to which the Company or any of its
Subsidiaries is a party or by which either the Company or any of its
Subsidiaries is bound which either individually or in the aggregate has had, or
could reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect;

 

(m) any other event or condition of any character that, either individually or
in the aggregate, has had, or could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect; or

 

(n) any arrangement or commitment by the Company or any of its Subsidiaries to
do any of the acts described in subsection (a) through (m) above.

 

4.9 Title to Properties and Assets; Liens, Etc. Except as set forth on
Schedule 4.9, each of the Company and each of its Subsidiaries has good and
marketable title to its properties and assets, and good title to its leasehold
interests, in each case subject to no mortgage, pledge, lien, lease, encumbrance
or charge, other than:

 

(a) Those in favor of the Purchaser;

 

(b) those resulting from taxes which have not yet become delinquent;

 

(c) minor liens and encumbrances which do not materially detract from the value
of the property subject thereto or materially impair the operations of the
Company or any of its Subsidiaries, so long as in each such case, such liens and
encumbrances have no effect on the lien priority of the Purchaser in such
property; and

 

8

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

(d) those that have otherwise arisen in the ordinary course of business, so long
as they have no effect on the lien priority of the Purchaser therein.

 

All facilities, machinery, equipment, fixtures, vehicles and other properties
owned, leased or used by the Company and its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used. Except as set forth on Schedule 4.9, the Company and
its Subsidiaries are in compliance with all material terms of each lease to
which it is a party or is otherwise bound.

 

4.10 Intellectual Property.

 

(a) Each of the Company and each of its Subsidiaries owns or possesses
sufficient legal rights to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, licenses, information and other proprietary rights
and processes necessary for its business as now conducted and, to the Company’s
knowledge, as presently proposed to be conducted (the “Intellectual Property”),
without any known infringement of the rights of others. There are no outstanding
options, licenses or agreements of any kind relating to the foregoing
proprietary rights, nor is the Company or any of its Subsidiaries bound by or a
party to any options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses, information and other proprietary rights and processes of any other
person or entity other than such licenses or agreements arising from the
purchase of “off the shelf” or standard products.

 

(b) Neither the Company nor any of its Subsidiaries has received any
communications alleging that the Company or any of its Subsidiaries has violated
any of the patents, trademarks, service marks, trade names, copyrights or trade
secrets or other proprietary rights of any other person or entity, nor is the
Company or any of its Subsidiaries aware of any basis therefor.

 

(c) The Company does not believe it is or will be necessary to utilize any
inventions, trade secrets or proprietary information of any of its employees
made prior to their employment by the Company or any of its Subsidiaries, except
for inventions, trade secrets or proprietary information that have been
rightfully assigned to the Company or any of its Subsidiaries.

 

4.11 Compliance with Other Instruments. Neither the Company nor any of its
Subsidiaries is in violation or default of (x) any term of its Charter or
Bylaws, or (y) any provision of any indebtedness, mortgage, indenture, contract,
agreement or instrument to which it is party or by which it is bound or of any
judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. The execution,
delivery and performance of and compliance with this Agreement and the Related
Agreements to which it is a party, and the issuance and sale of the Note by the
Company and the other Securities by the Company each pursuant hereto and
thereto, will not, with or without the passage of time or giving of notice,
result in any such material violation, or be in conflict with or constitute a
default under any such term or provision, or result in the creation of any
mortgage, pledge, lien,

 

9

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

encumbrance or charge upon any of the properties or assets of the Company or any
of its Subsidiaries or the suspension, revocation, impairment, forfeiture or
nonrenewal of any permit, license, authorization or approval applicable to the
Company, its business or operations or any of its assets or properties.

 

4.12 Litigation. Except as set forth on Schedule 4.12 hereto, there is no
action, suit, proceeding or investigation pending or, to the Company’s
knowledge, currently threatened against the Company or any of its Subsidiaries
that prevents the Company or any of its Subsidiaries from entering into this
Agreement or the other Related Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could reasonably be
expected to have, either individually or in the aggregate, a Material Adverse
Effect or any change in the current equity ownership of the Company or any of
its Subsidiaries, nor is the Company aware that there is any basis to assert any
of the foregoing. Neither the Company nor any of its Subsidiaries is a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or government agency or instrumentality. There is no material
action, suit, proceeding or investigation by the Company or any of its
Subsidiaries currently pending or which the Company or any of its Subsidiaries
intends to initiate.

 

4.13 Tax Returns and Payments. Each of the Company and each of its Subsidiaries
has timely filed all tax returns (federal, state and local) required to be filed
by it. All taxes shown to be due and payable on such returns, any assessments
imposed, and all other taxes due and payable by the Company or any of its
Subsidiaries on or before the Closing, have been paid or will be paid prior to
the time they become delinquent. Except as set forth on Schedule 4.13, neither
the Company nor any of its Subsidiaries has been advised:

 

(a) that any of its returns, federal, state or other, have been or are being
audited as of the date hereof; or

 

(b) of any adjustment, deficiency, assessment or court decision in respect of
its federal, state or other taxes.

 

The Company has no knowledge of any liability for any tax to be imposed upon its
properties or assets as of the date of this Agreement that is not adequately
provided for.

 

4.14 Employees. Except as set forth on Schedule 4.14, neither the Company nor
any of its Subsidiaries has any collective bargaining agreements with any of its
employees. There is no labor union organizing activity pending or, to the
Company’s knowledge, threatened with respect to the Company or any of its
Subsidiaries. Except as disclosed in the Exchange Act Filings or on Schedule
4.14, neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation arrangement,
bonus plan, incentive plan, profit sharing plan, retirement agreement or other
employee compensation plan or agreement. To the Company’s knowledge, no employee
of the Company or any of its Subsidiaries, nor any consultant with whom the
Company or any of its Subsidiaries has contracted, is in violation of any term
of any employment contract, proprietary information agreement or any other
agreement relating to the right of any such individual to be employed by, or to
contract with, the Company or any of its Subsidiaries because of the nature of
the business to be conducted by the Company or any of its Subsidiaries; and to
the Company’s knowledge the

 

10

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

continued employment by the Company and its Subsidiaries of their present
employees, and the performance of the Company’s and its Subsidiaries’ contracts
with its independent contractors, will not result in any such violation. Neither
the Company nor any of its Subsidiaries is aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency that would interfere with their duties to the
Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has received any notice alleging that any such violation has
occurred. Except for employees who have a current effective employment agreement
with the Company or any of its Subsidiaries, no employee of the Company or any
of its Subsidiaries has been granted the right to continued employment by the
Company or any of its Subsidiaries or to any material compensation following
termination of employment with the Company or any of its Subsidiaries. Except as
set forth on Schedule 4.14, the Company is not aware that any officer, key
employee or group of employees intends to terminate his, her or their employment
with the Company or any of its Subsidiaries, nor does the Company or any of its
Subsidiaries have a present intention to terminate the employment of any
officer, key employee or group of employees.

 

4.15 Registration Rights and Voting Rights. Except as set forth on Schedule 4.15
or as disclosed in Exchange Act Filings, neither the Company nor any of its
Subsidiaries is presently under any obligation, and neither the Company nor any
of its Subsidiaries has granted any rights, to register any of the Company’s or
its Subsidiaries’ presently outstanding securities or any of its securities that
may hereafter be issued. Except as set forth on Schedule 4.15 or as disclosed in
Exchange Act Filings, to the Company’s knowledge, no stockholder of the Company
or any of its Subsidiaries has entered into any agreement with respect to the
voting of equity securities of the Company or any of its Subsidiaries.

 

4.16 Compliance with Laws; Permits. Neither the Company nor any of its
Subsidiaries is in violation of any provision of the Sarbanes-Oxley Act of 2002
applicable to it or any SEC related regulation or rule or any rule of the
Principal Market (as hereafter defined) promulgated thereunder or any other
applicable statute, rule, regulation, order or restriction of any domestic or
foreign government or any instrumentality or agency thereof in respect of the
conduct of its business or the ownership of its properties which has had, or
could reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect. No governmental orders, permissions, consents,
approvals or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this Agreement or any other Related Agreement and the issuance of
any of the Securities, except such as have been duly and validly obtained or
filed, or with respect to any filings that must be made after the Closing, as
will be filed in a timely manner. Each of the Company and its Subsidiaries has
all material franchises, permits, licenses and any similar authority necessary
for the conduct of its business as now being conducted by it, the lack of which
could, either individually or in the aggregate, reasonably be expected to have a
Material Adverse Effect.

 

4.17 Environmental and Safety Laws. Neither the Company nor any of its
Subsidiaries is in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to its
knowledge, no material expenditures

 

11

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

are or will be required in order to comply with any such existing statute, law
or regulation. Except as set forth on Schedule 4.17, no Hazardous Materials (as
defined below) are used or have been used, stored, or disposed of by the Company
or any of its Subsidiaries or, to the Company’s knowledge, by any other person
or entity on any property owned, leased or used by the Company or any of its
Subsidiaries. For the purposes of the preceding sentence, “Hazardous Materials”
shall mean:

 

(a) materials which are listed or otherwise defined as “hazardous” or “toxic”
under any applicable local, state, federal and/or foreign laws and regulations
that govern the existence and/or remedy of contamination on property, the
protection of the environment from contamination, the control of hazardous
wastes, or other activities involving hazardous substances, including building
materials; or

 

(b) any petroleum products or nuclear materials.

 

4.18 Valid Offering. Assuming the accuracy of the representations and warranties
of the Purchaser contained in this Agreement, the offer, sale and issuance of
the Securities will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the “Securities Act”), and will have been
registered or qualified (or are exempt from registration and qualification)
under the registration, permit or qualification requirements of all applicable
state securities laws.

 

4.19 Full Disclosure. Each of the Company and each of its Subsidiaries has
provided the Purchaser with all information requested by the Purchaser in
connection with its decision to purchase the Note and Warrant, including all
information the Company and its Subsidiaries believe is reasonably necessary to
make such investment decision. Neither this Agreement, the Related Agreements,
the exhibits and schedules hereto and thereto nor any other document delivered
by the Company or any of its Subsidiaries to Purchaser or its attorneys or
agents in connection herewith or therewith or with the transactions contemplated
hereby or thereby, contain any untrue statement of a material fact nor omit to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances in which they are made, not
misleading. Any financial projections and other estimates provided to the
Purchaser by the Company or any of its Subsidiaries were based on the Company’s
and its Subsidiaries’ experience in the industry and on assumptions of fact and
opinion as to future events which the Company or any of its Subsidiaries, at the
date of the issuance of such projections or estimates, believed to be
reasonable.

 

4.20 Insurance. Each of the Company and each of its Subsidiaries has general
commercial, product liability, fire and casualty insurance policies with
coverages which the Company believes are customary for companies similarly
situated to the Company and its Subsidiaries in the same or similar business.

 

4.21 SEC Reports. Except as set forth on Schedule 4.21, the Company has filed
all proxy statements, reports and other documents required to be filed by it
under the Exchange Act. The Company has furnished the Purchaser copies of:
(i) its Annual Reports on Form 10-K for its fiscal years ended December 31,
2004; and (ii) its Quarterly Reports on Form 10-Q for its fiscal quarters ended
March 31, 2005, June 30, 2005 and September 30, 2005, and

 

12

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

the Form 8-K filings which it has made during the fiscal year 2005 to date
(collectively, the “SEC Reports”). Except as set forth on Schedule 4.21, each
SEC Report was, at the time of its filing, in substantial compliance with the
requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of
their respective filing dates, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.

 

4.22 Listing. The Company’s Common Stock is listed or quoted, as applicable, on
a Principal Market (as hereafter defined) and satisfies and at all times
hereafter will satisfy, all requirements for the continuation of such listing or
quotation, as applicable. The Company has not received any notice that its
Common Stock will be delisted from, or no longer quoted on, as applicable, the
Principal Market or that its Common Stock does not meet all requirements for
such listing or quotation, as applicable. For purposes hereof, the term
“Principal Market” means the NASD Over The Counter Bulletin Board, NASDAQ
Capital Market, NASDAQ National Market System, American Stock Exchange or New
York Stock Exchange (whichever of the foregoing is at the time the principal
trading exchange or market for the Common Stock).

 

4.23 No Integrated Offering. Neither the Company, nor any of its Subsidiaries or
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would cause the offering of the
Securities pursuant to this Agreement or any of the Related Agreements to be
integrated with prior offerings by the Company for purposes of the Securities
Act which would prevent the Company from selling the Securities pursuant to Rule
506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or
Subsidiaries take any action or steps that would cause the offering of the
Securities to be integrated with other offerings.

 

4.24 Stop Transfer. The Securities are restricted securities as of the date of
this Agreement. Neither the Company nor any of its Subsidiaries will issue any
stop transfer order or other order impeding the sale and delivery of any of the
Securities at such time as the Securities are registered for public sale or an
exemption from registration is available, except as required by state and
federal securities laws.

 

4.25 Dilution. The Company specifically acknowledges that its obligation to
issue the shares of Common Stock upon conversion of the Note and exercise of the
Warrant is binding upon the Company and enforceable regardless of the dilution
such issuance may have on the ownership interests of other shareholders of the
Company.

 

4.26 Patriot Act. The Company certifies that, to the best of Company’s
knowledge, neither the Company nor any of its Subsidiaries has been designated,
nor is or shall be owned or controlled, by a “suspected terrorist” as defined in
Executive Order 13224. The Company hereby acknowledges that the Purchaser seeks
to comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, the Company hereby represents,
warrants and covenants that: (i) none of the cash or property that the Company
or any of its Subsidiaries will pay or will contribute to the Purchaser has been
or shall be derived from, or related to, any activity that is deemed criminal
under United States law;

 

13

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

and (ii) no contribution or payment by the Company or any of its Subsidiaries to
the Purchaser, to the extent that they are within the Company’s and/or its
Subsidiaries’ control shall cause the Purchaser to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering
Control Act of 1986 or the United States International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001. The Company shall promptly
notify the Purchaser if any of these representations, warranties or covenants
ceases to be true and accurate regarding the Company or any of its Subsidiaries.
The Company shall provide the Purchaser all additional information regarding the
Company or any of its Subsidiaries that the Purchaser deems necessary or
convenient to ensure compliance with all applicable laws concerning money
laundering and similar activities. The Company understands and agrees that if at
any time it is discovered that any of the foregoing representations, warranties
or covenants are incorrect, or if otherwise required by applicable law or
regulation related to money laundering or similar activities, the Purchaser may
undertake appropriate actions to ensure compliance with applicable law or
regulation, including but not limited to segregation and/or redemption of the
Purchaser’s investment in the Company. The Company further understands that the
Purchaser may release confidential information about the Company and its
Subsidiaries and, if applicable, any underlying beneficial owners, to proper
authorities if the Purchaser, in its sole discretion, determines that it is in
the best interests of the Purchaser in light of relevant rules and regulations
under the laws set forth in subsection (ii) above.

 

4.27 ERISA. Based upon the Employee Retirement Income Security Act of 1974
(“ERISA”), and the regulations and published interpretations thereunder:
(i) neither the Company nor any of its Subsidiaries has engaged in any
Prohibited Transactions (as defined in Section 406 of ERISA and Section 4975 of
the Internal Revenue Code of 1986, as amended (the “Code”)); (ii) each of the
Company and each of its Subsidiaries has met all applicable minimum funding
requirements under Section 302 of ERISA in respect of its plans; (iii) neither
the Company nor any of its Subsidiaries has any knowledge of any event or
occurrence which would cause the Pension Benefit Guaranty Corporation to
institute proceedings under Title IV of ERISA to terminate any employee benefit
plan(s); (iv) neither the Company nor any of its Subsidiaries has any fiduciary
responsibility for investments with respect to any plan existing for the benefit
of persons other than the Company’s or such Subsidiary’s employees; and
(v) neither the Company nor any of its Subsidiaries has withdrawn, completely or
partially, from any multi-employer pension plan so as to incur liability under
the Multiemployer Pension Plan Amendments Act of 1980.

 

4.28 Inactive Subsidiaries. No Inactive Subsidiary owns or holds any assets or
liabilities (other than a cash balance not to exceed in the aggregate $12,000)
or engages in any business operations.

 

5. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants and covenants to the Company as follows (such
representations and warranties do not lessen or obviate the representations and
warranties of the Company set forth in this Agreement):

 

5.1 No Shorting. The Purchaser (including each of its affiliates and investment
partners) has not, will not and will not cause or encourage any person or
entity, to directly engage in “short sales” of the Company’s Common Stock as
long as the Note shall be outstanding.

 

14

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

5.2 Requisite Power and Authority. The Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver this
Agreement and the Related Agreements and to carry out their provisions. All
company action on the Purchaser’s part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be
effectively taken prior to the Closing. Upon their execution and delivery, this
Agreement and the Related Agreements will be valid and binding obligations of
the Purchaser, enforceable in accordance with their terms, except:

 

(a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws of general application affecting enforcement of creditors’ rights;
and

 

(b) as limited by general principles of equity that restrict the availability of
equitable and legal remedies.

 

5.3 Investment Representations. The Purchaser understands that the Securities
are being offered and sold pursuant to an exemption from registration contained
in the Securities Act based in part upon the Purchaser’s representations
contained in this Agreement, including, without limitation, that the Purchaser
is an “accredited investor” within the meaning of Regulation D under the
Securities Act of 1933, as amended (the “Securities Act”). The Purchaser
confirms that it has received or has had full access to all the information it
considers necessary or appropriate to make an informed investment decision with
respect to the Note and the Warrant to be purchased by it under this Agreement
and the Note Shares and the Warrant Shares acquired by it upon the conversion of
the Note and the exercise of the Warrant, respectively. The Purchaser further
confirms that it has had an opportunity to ask questions and receive answers
from the Company regarding the Company’s and its Subsidiaries’ business,
management and financial affairs and the terms and conditions of the Offering,
the Note, the Warrant and the Securities and to obtain additional information
(to the extent the Company possessed such information or could acquire it
without unreasonable effort or expense) necessary to verify any information
furnished to the Purchaser or to which the Purchaser had access.

 

5.4 The Purchaser Bears Economic Risk. The Purchaser has substantial experience
in evaluating and investing in private placement transactions of securities in
companies similar to the Company so that it is capable of evaluating the merits
and risks of its investment in the Company and has the capacity to protect its
own interests. The Purchaser must bear the economic risk of this investment
until the Securities are sold pursuant to: (i) an effective registration
statement under the Securities Act; or (ii) an exemption from registration is
available with respect to such sale.

 

5.5 Acquisition for Own Account. The Purchaser is acquiring the Note and Warrant
and the Note Shares and the Warrant Shares for the Purchaser’s own account for
investment only, and not as a nominee or agent and not with a view towards or
for resale in connection with their distribution.

 

15

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

5.6 The Purchaser Can Protect Its Interest. The Purchaser represents that by
reason of its, or of its management’s, business and financial experience, the
Purchaser has the capacity to evaluate the merits and risks of its investment in
the Note, the Warrant and the Securities and to protect its own interests in
connection with the transactions contemplated in this Agreement and the Related
Agreements. Further, the Purchaser is aware of no publication of any
advertisement in connection with the transactions contemplated in the Agreement
or the Related Agreements.

 

5.7 Accredited Investor. The Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act.

 

5.8 Legends.

 

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

 

“THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION
OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS NOTE OR SUCH SHARES
UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
REASONABLY SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC. THAT SUCH
REGISTRATION IS NOT REQUIRED.”

 

(b) The Note Shares and the Warrant Shares, if not issued by DWAC system (as
hereinafter defined), shall bear a legend which shall be in substantially the
following form until such shares are covered by an effective registration
statement filed with the SEC:

 

“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS.
THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND
APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO PATH 1
NETWORK TECHNOLOGIES INC. THAT SUCH REGISTRATION IS NOT REQUIRED.”

 

(c) The Warrant shall bear substantially the following legend:

 

“THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON

 

16

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

SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO PATH 1 NETWORK TECHNOLOGIES INC. THAT SUCH REGISTRATION IS NOT
REQUIRED.”

 

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

 

6.1 Stop-Orders. The Company will advise the Purchaser, promptly after it
receives notice of issuance by the SEC, any state securities commission or any
other regulatory authority of any stop order or of any order preventing or
suspending any offering of any securities of the Company, or of the suspension
of the qualification of the Common Stock of the Company for offering or sale in
any jurisdiction, or the initiation of any proceeding for any such purpose.

 

6.2 Listing. The Company shall promptly secure the listing or quotation, as
applicable, of the shares of Common Stock issuable upon conversion of the Note
and upon the exercise of the Warrant on the Principal Market upon which shares
of Common Stock are listed or quoted for trading, as applicable (subject to
official notice of issuance) and shall maintain such listing or quotation, as
applicable, so long as any other shares of Common Stock shall be so listed or
quoted, as applicable. The Company will maintain the listing or quotation, as
applicable, of its Common Stock on the Principal Market, and will comply in all
material respects with the Company’s reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers
(“NASD”) and such exchanges, as applicable.

 

6.3 Market Regulations. The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the transactions
contemplated by this Agreement, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Securities to the Purchaser
and promptly provide copies thereof to the Purchaser.

 

6.4 Reporting Requirements. The Company will deliver, or cause to be delivered,
to the Purchaser each of the following, which shall be in form and detail
acceptable to the Purchaser:

 

(a) As soon as available, and in any event within ninety (90) days after the end
of each fiscal year of the Company, each of the Company’s and each of its
Subsidiaries’ audited financial statements with a report of independent
certified public accountants of recognized standing selected by the Company and
acceptable to the Purchaser (the “Accountants”), which annual financial
statements shall be without qualification (other than in respect of the annual
financial statements in respect of the Company’s fiscal years ended December 31,
2005 and December 31, 2006 which may have a going concern qualification) and
shall include each of the Company’s and each of

 

17

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

its Subsidiaries’ balance sheet as at the end of such fiscal year and the
related statements of each of the Company’s and each of its Subsidiaries’
income, retained earnings and cash flows for the fiscal year then ended,
prepared on a consolidating and consolidated basis to include the Company, each
Subsidiary of the Company and each of their respective affiliates, all in
reasonable detail and prepared in accordance with GAAP, together with (i) if and
when available, copies of any management letters prepared by the Accountants;
and (ii) a certificate of the Company’s President, Chief Executive Officer or
Chief Financial Officer stating that such financial statements have been
prepared in accordance with GAAP and whether or not such officer has knowledge
of the occurrence of any Event of Default (as defined in the Note) and, if so,
stating in reasonable detail the facts with respect thereto;

 

(b) As soon as available and in any event within forty five (45) days after the
end of each fiscal quarter of the Company, an unaudited/internal balance sheet
and statements of income, retained earnings and cash flows of the Company and
each of its Subsidiaries as at the end of and for such quarter and for the year
to date period then ended, prepared on a consolidating and consolidated basis to
include all the Company, each Subsidiary of the Company and each of their
respective affiliates, in reasonable detail and stating in comparative form the
figures for the corresponding date and periods in the previous year, all
prepared in accordance with GAAP, but without all footnotes and subject to
year-end adjustments and accompanied by a certificate of the Company’s
President, Chief Executive Officer or Chief Financial Officer, stating (i) that
such financial statements have been prepared in accordance with GAAP, but
without all footnotes and subject to year-end audit adjustments, and
(ii) whether or not such officer has knowledge of the occurrence of any Event of
Default (as defined in the Note) not theretofore reported and remedied and, if
so, stating in reasonable detail the facts with respect thereto;

 

(c) As soon as available and in any event within fifteen (15) days after the end
of each calendar month, an unaudited/internal balance sheet and statements of
income, retained earnings and cash flows of each of the Company and its
Subsidiaries as at the end of and for such month and for the year to date period
then ended, prepared on a consolidating and consolidated basis to include the
Company, each Subsidiary of the Company and each of their respective affiliates,
in reasonable detail and stating in comparative form the figures for the
corresponding date and periods in the previous year, all prepared in accordance
with GAAP, subject to year-end adjustments and accompanied by a certificate of
the Company’s President, Chief Executive Officer or Chief Financial Officer,
stating (i) that such financial statements have been prepared in accordance with
GAAP, subject to year-end audit adjustments, and (ii) whether or not such
officer has knowledge of the occurrence of any Event of Default (as defined in
the Note) not theretofore reported and remedied and, if so, stating in
reasonable detail the facts with respect thereto;

 

(d) The Company shall timely file with the SEC all reports required to be filed
pursuant to the Exchange Act and refrain from terminating its status as an
issuer required by the Exchange Act to file reports thereunder even if the
Exchange Act or the rules or regulations thereunder would permit such
termination. Promptly after (i) the filing

 

18

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

thereof, copies of the Company’s most recent registration statements and annual,
quarterly, monthly or other regular reports which the Company files with the
Securities and Exchange Commission (the “SEC”), and (ii) the issuance thereof,
copies of such financial statements, reports and proxy statements as the Company
shall send to its stockholders; and

 

(e) The Company shall deliver, or cause the applicable Subsidiary of the Company
to deliver, such other information as the Purchaser shall reasonably request.

 

6.5 Use of Funds. The Company shall use the proceeds of the sale of the Note and
the Warrant for general working capital purposes only.

 

6.6 Access to Facilities. Each of the Company and each of its Subsidiaries will
permit any representatives designated by the Purchaser (or any successor of the
Purchaser), upon reasonable notice and during normal business hours, at such
person’s expense and accompanied by a representative of the Company or any
Subsidiary (provided that no such prior notice shall be required to be given and
no such representative of the Company or any Subsidiary shall be required to
accompany the Purchaser in the event the Purchaser believes such access is
necessary to preserve or protect the Collateral (as defined in the Master
Security Agreement) or following the occurrence and during the continuance of an
Event of Default (as defined in the Note)), to:

 

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

 

(b) examine the corporate and financial records of the Company or any of its
Subsidiaries (unless such examination is not permitted by federal, state or
local law or by contract) and make copies thereof or extracts therefrom; and

 

(c) discuss the affairs, finances and accounts of the Company or any of its
Subsidiaries with the directors, officers and independent accountants of the
Company or any of its Subsidiaries.

 

Notwithstanding the foregoing, neither the Company nor any of its Subsidiaries
will provide any material, non-public information to the Purchaser unless the
Purchaser signs a confidentiality agreement and otherwise complies with
Regulation FD, under the federal securities laws.

 

6.7 Taxes. Each of the Company and each of its Subsidiaries will promptly pay
and discharge, or cause to be paid and discharged, when due and payable, all
taxes, assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company and its Subsidiaries; provided,
however, that any such tax, assessment, charge or levy need not be paid
currently if (i) the validity thereof shall currently and diligently be
contested in good faith by appropriate proceedings, (ii) such tax, assessment,
charge or levy shall have no effect on the lien priority of the Purchaser in any
property of the Company or any of its Subsidiaries and (iii) if the Company
and/or such Subsidiary shall have set aside on its books adequate reserves with
respect thereto in accordance with GAAP; and provided, further, that the Company
and its Subsidiaries will pay all such taxes, assessments, charges or levies
forthwith upon the commencement of proceedings to foreclose any lien which may
have attached as security therefor.

 

19

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

6.8 Insurance. Each of the Company and its Subsidiaries will keep its assets
which are of an insurable character insured by financially sound and reputable
insurers against loss or damage by fire, explosion and other risks customarily
insured against by companies in similar business similarly situated as the
Company and its Subsidiaries; and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and property to the extent and in the
manner which the Company reasonably believes is customary for companies in
similar business similarly situated as the Company and its Subsidiaries and to
the extent available on commercially reasonable terms. The Company, and each of
its Subsidiaries, will jointly and severally bear the full risk of loss from any
loss of any nature whatsoever with respect to the assets pledged to the
Purchaser as security for their respective obligations hereunder and under the
Related Agreements. At the Company’s and each of its Subsidiaries’ joint and
several cost and expense in amounts and with carriers reasonably acceptable to
the Purchaser, each of the Company and each of its Subsidiaries shall (i) keep
all its insurable properties and properties in which it has an interest insured
against the hazards of fire, flood, sprinkler leakage, those hazards covered by
extended coverage insurance and such other hazards, and for such amounts, as is
customary in the case of companies engaged in businesses similar to the
Company’s or the respective Subsidiary’s including business interruption
insurance; (ii) maintain a bond in such amounts, if any, as is customary in the
case of similarly-sized companies engaged in businesses similar to the Company’s
or the respective Subsidiary’s insuring against larceny, embezzlement or other
criminal misappropriation of insured’s officers and employees who may either
singly or jointly with others at any time have access to the assets or funds of
the Company or any of its Subsidiaries either directly or through governmental
authority to draw upon such funds or to direct generally the disposition of such
assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all
such worker’s compensation or similar insurance as may be required under the
laws of any state or jurisdiction in which the Company or the respective
Subsidiary is engaged in business; and (v) furnish the Purchaser with (x) copies
of all policies and evidence of the maintenance of such policies at least thirty
(30) days before any expiration date, (y) excepting the Company’s workers’
compensation policy, endorsements to such policies naming the Purchaser as
“co-insured” or “additional insured” and appropriate loss payable endorsements
in form and substance satisfactory to the Purchaser, naming the Purchaser as
loss payee, and (z) evidence that as to the Purchaser the insurance coverage
shall not be impaired or invalidated by any act or neglect of the Company or any
Subsidiary and the insurer will provide the Purchaser with at least thirty
(30) days notice prior to cancellation. The Company and each Subsidiary shall
instruct the insurance carriers that in the event of any loss thereunder, the
carriers shall make payment for such loss to the Company and/or the Subsidiary
and the Purchaser jointly. In the event that as of the date of receipt of each
loss recovery upon any such insurance, the Purchaser has not declared an event
of default with respect to this Agreement or any of the Related Agreements, then
the Company and/or such Subsidiary shall be permitted to direct the application
of such loss recovery proceeds toward investment in property, plant and
equipment that would comprise “Collateral” secured by the Purchaser’s security
interest pursuant to the Master Security Agreement or such other security
agreement as shall be required by the Purchaser, with any surplus funds to be
applied toward payment of the obligations of the

 

20

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

Company to the Purchaser. In the event that the Purchaser has properly declared
an event of default with respect to this Agreement or any of the Related
Agreements, then all loss recoveries received by the Purchaser upon any such
insurance thereafter may be applied to the obligations of the Company hereunder
and under the Related Agreements, in such order as the Purchaser may determine.
Any surplus (following satisfaction of all Company obligations to the Purchaser)
shall be paid by the Purchaser to the Company or applied as may be otherwise
required by law. Any deficiency thereon shall be paid by the Company or the
Subsidiary, as applicable, to the Purchaser, on demand.

 

6.9 Intellectual Property. Each of the Company and each of its Subsidiaries
shall maintain in full force and effect its existence, rights and franchises and
all licenses and other rights to use Intellectual Property owned or possessed by
it and reasonably deemed to be necessary to the conduct of its business.

 

6.10 Properties. Each of the Company and each of its Subsidiaries will keep its
properties in good repair, working order and condition, reasonable wear and tear
excepted, and from time to time make all needful and proper repairs, renewals,
replacements, additions and improvements thereto; and each of the Company and
each of its Subsidiaries will at all times comply with each provision of all
leases to which it is a party or under which it occupies property if the breach
of such provision could, either individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.

 

6.11 Confidentiality. The Company will not, and will not permit any of its
Subsidiaries to, disclose, and will not include in any public announcement, the
name of the Purchaser, unless expressly agreed to by the Purchaser or unless and
until such disclosure is required by law or applicable regulation, and then only
to the extent of such requirement. Notwithstanding the foregoing, the Company
may disclose the Purchaser’s identity and the terms of this Agreement to its
current and prospective debt and equity financing sources.

 

6.12 Required Approvals. (I) For so long as twenty-five percent (25%) of the
principal amount of the Note is outstanding, the Company, without the prior
written consent of the Purchaser, shall not, and shall not permit any of its
Subsidiaries to:

 

(a) (i) directly or indirectly declare or pay any dividends, other than
dividends paid to the Company, any of its wholly-owned Subsidiaries or to
holders of its two currently outstanding series of Preferred Stock; provided
that any cash dividends paid to the holders of the Company’s two currently
outstanding series of Preferred Stock shall not be in excess of $378,000 (plus
any dividends accumulated from prior fiscal years) during any fiscal year of the
Company; it being understood and agreed that as of the date hereof, the Company
has no more than $270,000 of accrued and unpaid dividends from earlier in 2005,
(ii) issue any preferred stock that is mandatorily redeemable prior to the one
year anniversary of the Maturity Date (as defined in the Note) or (iii) redeem
any of its preferred stock or other equity interests;

 

(b) liquidate, dissolve or effect a material reorganization (it being understood
that in no event shall the Company or any of its Subsidiaries dissolve,
liquidate or merge with any other person or entity (unless, in the case of such
a merger, the Company or, in the case of merger not involving the Company, such
Subsidiary, as applicable, is the surviving entity);

 

21

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

(c) become subject to (including, without limitation, by way of amendment to or
modification of) any agreement or instrument which by its terms would (under any
circumstances) restrict the Company’s or any of its Subsidiaries, right to
perform the provisions of this Agreement, any Related Agreement or any of the
agreements contemplated hereby or thereby;

 

(d) materially alter or change the scope of the business of the Company and its
Subsidiaries taken as a whole; or

 

(e) (i) create, incur, assume or suffer to exist any indebtedness (exclusive of
trade debt and debt incurred to finance the purchase of equipment (not in excess
of five percent (5%) of the fair market value of the Company’s and its
Subsidiaries’ assets)) whether secured or unsecured other than (x) the Company’s
obligations owed to the Purchaser, (y) indebtedness set forth on Schedule
6.12(e) attached hereto and made a part hereof and any refinancings or
replacements thereof on terms no less favorable to the Purchaser than the
indebtedness being refinanced or replaced, and (z) any indebtedness incurred in
connection with the purchase of assets (other than equipment) in the ordinary
course of business, or any refinancings or replacements thereof on terms no less
favorable to the Purchaser than the indebtedness being refinanced or replaced,
so long as any lien relating thereto shall only encumber the fixed assets so
purchased and no other assets of the Company or any of its Subsidiaries;
(ii) cancel any indebtedness owing to it in excess of $50,000 in the aggregate
during any 12 month period; (iii) assume, guarantee, endorse or otherwise become
directly or contingently liable in connection with any obligations of any other
person or entity, except the endorsement of negotiable instruments by the
Company or any Subsidiary thereof for deposit or collection or similar
transactions in the ordinary course of business or guarantees of indebtedness
otherwise permitted to be outstanding pursuant to this clause (e); and

 

(II) The Company, without the prior written consent of the Purchaser, shall not,
and shall not permit any of its Subsidiaries to, create or acquire any
Subsidiary after the date hereof unless (i) such Subsidiary is a wholly-owned
Subsidiary of the Company and (ii) such Subsidiary becomes a party to the Master
Security Agreement, the Stock Pledge Agreement and the Subsidiary Guaranty
(either by executing a counterpart thereof or an assumption or joinder agreement
in respect thereof) and, to the extent required by the Purchaser, satisfies each
condition of this Agreement and the Related Agreements as if such Subsidiary
were a Subsidiary on the Closing Date.

 

6.13 Reissuance of Securities. The Company agrees to reissue certificates
representing the Securities without the legends set forth in Section 5.8 above
at such time as:

 

(a) the holder thereof is permitted to dispose of such Securities pursuant to
Rule 144(k) under the Securities Act; or

 

22

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

(b) upon resale subject to an effective registration statement after such
Securities are registered under the Securities Act.

 

The Company agrees to cooperate with the Purchaser in connection with all
resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions
necessary to allow such resales provided the Company and its counsel receive
reasonably requested representations from the Purchaser and broker, if any.

 

6.14 Opinion. On the Closing Date, the Company will deliver to the Purchaser an
opinion acceptable to the Purchaser from the Company’s external legal counsel.
The Company will provide, at the Company’s expense, such other legal opinions in
the future as are deemed reasonably necessary by the Purchaser (and acceptable
to the Purchaser) in connection with the conversion of the Note and exercise of
the Warrant.

 

6.15 Margin Stock. The Company will not permit any of the proceeds of the Note
or the Warrant to be used directly or indirectly to “purchase” or “carry”
“margin stock” or to repay indebtedness incurred to “purchase” or “carry”
“margin stock” within the respective meanings of each of the quoted terms under
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect.

 

6.16 Financing Right of First Offer.

 

(a) The Company hereby grants to the Purchaser a right of first offer to provide
any Additional Financing (as defined below) to be issued by the Company and/or
any of its Subsidiaries, subject to the following terms and conditions. From and
after the date hereof, prior to the incurrence of any additional convertible
indebtedness (an “Additional Financing”), the Company and/or any Subsidiary of
the Company, as the case may be, shall notify the Purchaser of its intention to
seek to enter into such Additional Financing. In connection therewith, the
Company and/or the applicable Subsidiary thereof shall submit a term sheet (a
“Proposed Term Sheet”) to the Purchaser setting forth the terms, conditions and
pricing of any such Additional Financing proposed to be entered into by the
Company and/or such Subsidiary. The Purchaser shall have the right, but not the
obligation, to deliver within ten (10) business days thereafter a written
acceptance of the Proposed Term Sheet, in which case the Purchaser and the
Company and/or such Subsidiary shall be obligated to forthwith enter into and
consummate the Additional Financing transaction outlined in the Proposed Term
Sheet. If the Purchaser does not deliver such a timely written acceptance, the
Company and/or such Subsidiary shall be entitled to, at any time within ninety
(90) days thereafter, enter into an Additional Financing with any party, so long
as such Additional Financing is on conditions at least as favorable overall to
the lender as the terms and conditions stated in the Proposed Term Sheet.

 

(b) The Company will not, and will not permit its Subsidiaries to, agree,
directly or indirectly, to any restriction with any person or entity which
limits the ability of the Purchaser to consummate an Additional Financing with
the Company or any of its Subsidiaries.

 

23

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

6.17 Authorization and Reservation of Shares. The Company shall at all times
have authorized and reserved a sufficient number of shares of Common Stock to
provide for the conversion of the Note and exercise of the Warrants.

 

6.18 Inactive Subsidiaries. The Company shall prevent each Inactive Subsidiary
from owning or holding any assets or liabilities (other than in respect of a
cash balance not to exceed $12,000 in the aggregate for all Inactive
Subsidiaries) or engaging in any business operations.

 

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

 

7.1 Confidentiality. The Purchaser will not disclose, and will not include in
any public announcement, the name of the Company, unless expressly agreed to by
the Company or unless and until such disclosure is required by law or applicable
regulation, and then only to the extent of such requirement.

 

7.2 Non-Public Information. The Purchaser will not effect any sales in the
shares of the Company’s Common Stock while in possession of material, non-public
information regarding the Company if such sales would violate applicable
securities law.

 

7.3 Limitation on Acquisition of Common Stock of the Company. Notwithstanding
anything to the contrary contained in this Agreement, any Related Agreement or
any document, instrument or agreement entered into in connection with any other
transactions between the Purchaser and the Company, the Purchaser may not
acquire stock in the Company (including, without limitation, pursuant to a
contract to purchase, by exercising an option or warrant, by converting any
other security or instrument, by acquiring or exercising any other right to
acquire, shares of stock or other security convertible into shares of stock in
the Company, or otherwise, and such contracts, options, warrants, conversion or
other rights shall not be enforceable or exercisable) to the extent such stock
acquisition would cause any interest (including any original issue discount)
payable by the Company to the Purchaser not to qualify as “portfolio interest”
within the meaning of Section 881(c)(2) of the Code, by reason of
Section 881(c)(3) of the Code, taking into account the constructive ownership
rules under Section 871(h)(3)(C) of the Code (the “Stock Acquisition
Limitation”). The Stock Acquisition Limitation shall automatically become null
and void without any notice to the Company upon the earlier to occur of either
(a) the Company’s delivery to the Purchaser of a Notice of Redemption (as
defined in the Note) or (b) the existence of an Event of Default (as defined in
the Note) at a time when the average closing price of the Company’s common stock
as reported by Bloomberg, L.P. on the Principal Market for the immediately
preceding five trading days is greater than or equal to 150% of the Fixed
Conversion Price (as defined in the Note).

 

8. Covenants of the Company and the Purchaser Regarding Indemnification.

 

8.1 Company Indemnification. The Company agrees to indemnify, hold harmless,
reimburse and defend the Purchaser, each of the Purchaser’s officers, directors,
agents, affiliates, control persons, and principal shareholders, against all
claims, costs, expenses, liabilities, obligations, losses or damages (including
reasonable legal fees) of any nature,

 

24

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

incurred by or imposed upon the Purchaser which result, arise out of or are
based upon: (i) any misrepresentation by the Company or any of its Subsidiaries
or breach of any warranty by the Company or any of its Subsidiaries in this
Agreement, any other Related Agreement or in any exhibits or schedules attached
hereto or thereto; or (ii) any breach or default in performance by Company or
any of its Subsidiaries of any covenant or undertaking to be performed by
Company or any of its Subsidiaries hereunder, under any other Related Agreement
or any other agreement entered into by the Company and/or any of its
Subsidiaries and the Purchaser relating hereto or thereto.

 

8.2 Purchaser’s Indemnification. The Purchaser agrees to indemnify, hold
harmless, reimburse and defend the Company and each of the Company’s officers,
directors, agents, affiliates, control persons and principal shareholders, at
all times against any claims, costs, expenses, liabilities, obligations, losses
or damages (including reasonable legal fees) of any nature, incurred by or
imposed upon the Company which result, arise out of or are based upon: (i) any
misrepresentation by the Purchaser or breach of any warranty by the Purchaser in
this Agreement or in any exhibits or schedules attached hereto or any Related
Agreement; or (ii) any breach or default in performance by the Purchaser of any
covenant or undertaking to be performed by the Purchaser hereunder, or any other
agreement entered into by the Company and the Purchaser relating hereto.

 

9. Conversion of Convertible Note.

 

9.1 Mechanics of Conversion.

 

(a) Provided the Purchaser has notified the Company of the Purchaser’s intention
to sell the Note Shares and the Note Shares are included in an effective
registration statement or are otherwise exempt from registration when sold:
(i) upon the conversion of the Note or part thereof, the Company shall, at its
own cost and expense, take all necessary action (including the issuance of an
opinion of counsel reasonably acceptable to the Purchaser following a request by
the Purchaser) to assure that the Company’s transfer agent shall issue shares of
the Company’s Common Stock in the name of the Purchaser (or its nominee) or such
other persons as designated by the Purchaser in accordance with Section 9.1(b)
hereof and in such denominations to be specified representing the number of Note
Shares issuable upon such conversion; and (ii) the Company warrants that no
instructions other than these instructions have been or will be given to the
transfer agent of the Company’s Common Stock and that after the Effectiveness
Date (as defined in the Registration Rights Agreement) the Note Shares issued
will be freely transferable subject to the prospectus delivery requirements of
the Securities Act and the provisions of this Agreement, and will not contain a
legend restricting the resale or transferability of the Note Shares.

 

(b) The Purchaser will give notice of its decision to exercise its right to
convert the Note or part thereof by telecopying or otherwise delivering an
executed and completed notice of the number of shares to be converted to the
Company (the “Notice of Conversion”). The Purchaser will not be required to
surrender the Note until the Purchaser receives a credit to the account of the
Purchaser’s prime broker through the DWAC system (as defined below),
representing the Note Shares or until the Note has

 

25

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

been fully satisfied. Each date on which a Notice of Conversion is telecopied or
delivered to the Company in accordance with the provisions hereof shall be
deemed a “Conversion Date.” Pursuant to the terms of the Notice of Conversion,
the Company will issue instructions to the transfer agent accompanied by an
opinion of counsel within one (1) business day of the date of the delivery to
the Company of the Notice of Conversion and shall cause the transfer agent to
transmit the certificates representing the Conversion Shares to the Holder by
crediting the account of the Purchaser’s prime broker with the Depository Trust
Company (“DTC”) through its Deposit Withdrawal Agent Commission (“DWAC”) system
within three (3) business days after receipt by the Company of the Notice of
Conversion (the “Delivery Date”).

 

(c) The Company understands that a delay in the delivery of the Note Shares in
the form required pursuant to Section 9 hereof beyond the Delivery Date could
result in economic loss to the Purchaser. In the event that the Company fails to
direct its transfer agent to deliver the Note Shares to the Purchaser via the
DWAC system within the time frame set forth in Section 9.1(b) above and the Note
Shares are not delivered to the Purchaser by the Delivery Date, as compensation
to the Purchaser for such loss, the Company agrees to pay late payments to the
Purchaser for late issuance of the Note Shares in the form required pursuant to
Section 9 hereof upon conversion of the Note in the amount equal to the greater
of: (i) $500 per business day after the Delivery Date; or (ii) the Purchaser’s
actual damages from such delayed delivery. The Company shall pay any payments
incurred under this Section in immediately available funds upon demand and, in
the case of actual damages, accompanied by reasonable documentation of the
amount of such damages. Such documentation shall show the number of shares of
Common Stock the Purchaser is forced to purchase (in an open market transaction)
which the Purchaser anticipated receiving upon such conversion, and shall be
calculated as the amount by which (A) the Purchaser’s total purchase price
(including customary brokerage commissions, if any) for the shares of Common
Stock so purchased exceeds (B) the aggregate principal and/or interest amount of
the Note, for which such Conversion Notice was not timely honored.

 

10. Registration Rights.

 

10.1 Registration Rights Granted. The Company hereby grants registration rights
to the Purchaser pursuant to the Registration Rights Agreement.

 

10.2 Offering Restrictions. Except as previously disclosed in the SEC Reports or
in the Exchange Act Filings, or stock or stock options granted to employees or
directors of the Company (these exceptions hereinafter referred to as the
“Excepted Issuances”), neither the Company nor any of its Subsidiaries will,
prior to the full repayment or conversion of the Note (together with all accrued
and unpaid interest and fees related thereto), (x) enter into any equity line of
credit agreement or similar agreement or (y) issue, or enter into any agreement
to issue, any securities with a variable/floating conversion and/or pricing
feature which are or could be (by conversion or registration) free-trading
securities (i.e. common stock subject to a registration statement).

 

26

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

11. Miscellaneous.

 

11.1 Governing Law, Jurisdiction and Waiver of Jury Trial.

 

(a) THIS AGREEMENT AND THE OTHER RELATED AGREEMENTS SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN SUCH STATE, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.

 

(b) THE COMPANY HEREBY CONSENTS AND AGREES THAT THE STATE OR FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK SHALL HAVE EXCLUSIVE
JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE COMPANY,
ON THE ONE HAND, AND THE PURCHASER, ON THE OTHER HAND, PERTAINING TO THIS
AGREEMENT OR ANY OF THE RELATED AGREEMENTS OR TO ANY MATTER ARISING OUT OF OR
RELATED TO THIS AGREEMENT OR ANY OF THE OTHER RELATED AGREEMENTS; PROVIDED, THAT
THE PURCHASER AND THE COMPANY ACKNOWLEDGE THAT ANY APPEALS FROM THOSE COURTS MAY
HAVE TO BE HEARD BY A COURT LOCATED OUTSIDE OF THE COUNTY OF NEW YORK, STATE OF
NEW YORK; AND FURTHER PROVIDED, THAT NOTHING IN THIS AGREEMENT SHALL BE DEEMED
OR OPERATE TO PRECLUDE THE PURCHASER FROM BRINGING SUIT OR TAKING OTHER LEGAL
ACTION IN ANY OTHER JURISDICTION TO COLLECT THE OBLIGATIONS, TO REALIZE ON THE
COLLATERAL (AS DEFINED IN THE MASTER SECURITY AGREEMENT) OR ANY OTHER SECURITY
FOR THE OBLIGATIONS (AS DEFINED IN THE MASTER SECURITY AGREEMENT), OR TO ENFORCE
A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE PURCHASER. THE COMPANY EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH (COUNTY OF NEW YORK) COURT, AND THE COMPANY HEREBY WAIVES
ANY OBJECTION WHICH IT MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION,
IMPROPER VENUE OR FORUM NON CONVENIENS. THE COMPANY HEREBY WAIVES PERSONAL
SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH ACTION OR
SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER PROCESS MAY BE
MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO THE COMPANY AT THE ADDRESS SET
FORTH IN SECTION 11.9 AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON
THE EARLIER OF THE COMPANY’S ACTUAL RECEIPT THEREOF OR FIVE (5) DAYS AFTER
DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.

 

(c) THE PARTIES DESIRE THAT THEIR DISPUTES BE RESOLVED BY A JUDGE APPLYING SUCH
APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF
THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHTS TO
TRIAL BY

 

27

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

JURY IN ANY ACTION, SUIT, OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER
ARISING IN CONTRACT, TORT, OR OTHERWISE BETWEEN THE PURCHASER AND/OR THE COMPANY
ARISING OUT OF, CONNECTED WITH, RELATED OR INCIDENTAL TO THE RELATIONSHIP
ESTABLISHED BETWEEN THEM IN CONNECTION WITH THIS AGREEMENT, ANY OTHER RELATED
AGREEMENT OR THE TRANSACTIONS RELATED HERETO OR THERETO.

 

11.2 Severability. Wherever possible each provision of this Agreement and the
Related Agreements shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement or any
Related Agreement shall be prohibited by or invalid or illegal under applicable
law such provision shall be ineffective to the extent of such prohibition or
invalidity or illegality, without invalidating the remainder of such provision
or the remaining provisions thereof which shall not in any way be affected or
impaired thereby.

 

11.3 Survival. The representations, warranties, covenants and agreements made
herein shall survive any investigation made by the Purchaser and the closing of
the transactions contemplated hereby to the extent provided therein. All
statements as to factual matters contained in any certificate or other
instrument delivered by or on behalf of the Company pursuant hereto in
connection with the transactions contemplated hereby shall be deemed to be
representations and warranties by the Company hereunder solely as of the date of
such certificate or instrument. All indemnities set forth herein shall survive
the execution, delivery and termination of this Agreement and the Note and the
making and repayment of the obligations arising hereunder, under the Note and
under the other Related Agreements.

 

11.4 Successors. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
heirs, executors and administrators of the parties hereto and shall inure to the
benefit of and be enforceable by each person or entity which shall be a holder
of the Securities from time to time, other than the holders of Common Stock
which has been sold by the Purchaser pursuant to Rule 144 or an effective
registration statement. The Purchaser shall not be permitted to assign its
rights hereunder or under any Related Agreement to a competitor of the Company
unless an Event of Default (as defined in the Note) has occurred and is
continuing.

 

11.5 Entire Agreement; Maximum Interest. This Agreement, the Related Agreements,
the exhibits and schedules hereto and thereto and the other documents delivered
pursuant hereto constitute the full and entire understanding and agreement
between the parties with regard to the subjects hereof and no party shall be
liable or bound to any other in any manner by any representations, warranties,
covenants and agreements except as specifically set forth herein and therein.
Nothing contained in this Agreement, any Related Agreement or in any document
referred to herein or delivered in connection herewith shall be deemed to
establish or require the payment of a rate of interest or other charges in
excess of the maximum rate permitted by applicable law. In the event that the
rate of interest or dividends required to be paid or other charges hereunder
exceed the maximum rate permitted by such law, any payments in excess of such
maximum shall be credited against amounts owed by the Company to the Purchaser
and thus refunded to the Company.

 

28

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

11.6 Amendment and Waiver.

 

(a) This Agreement may be amended or modified only upon the written consent of
the Company and the Purchaser.

 

(b) The obligations of the Company and the rights of the Purchaser under this
Agreement may be waived only with the written consent of the Purchaser.

 

(c) The obligations of the Purchaser and the rights of the Company under this
Agreement may be waived only with the written consent of the Company.

 

11.7 Delays or Omissions. It is agreed that no delay or omission to exercise any
right, power or remedy accruing to any party, upon any breach, default or
noncompliance by another party under this Agreement or the Related Agreements,
shall impair any such right, power or remedy, nor shall it be construed to be a
waiver of any such breach, default or noncompliance, or any acquiescence
therein, or of or in any similar breach, default or noncompliance thereafter
occurring. All remedies, either under this Agreement or the Related Agreements,
by law or otherwise afforded to any party, shall be cumulative and not
alternative.

 

11.8 Notices. All notices required or permitted hereunder shall be in writing
and shall be deemed effectively given:

 

(a) upon personal delivery to the party to be notified;

 

(b) when sent by confirmed facsimile if sent during normal business hours of the
recipient, if not, then on the next business day;

 

(c) five (5) business days after having been sent by registered or certified
mail, return receipt requested, postage prepaid; or

 

(d) one (1) day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt.

 

All communications shall be sent as follows:

 

If to the Company, to:   

Path 1 Network Technologies Inc.

6215 Ferris Square, Suite 140

San Diego, California 92121

 

Attention:        Chief Financial Officer

Facsimile:        858-450-4203

 

29

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

     with a copy to:     

Heller Ehrman LLP

4350 La Jolla Village Drive, 7th Floor

San Diego, CA 92122

Attention:        Hayden Trubitt, Esq.

Facsimile:        858-587-5903

If to the Purchaser, to:   

Laurus Master Fund, Ltd.

c/o M&C Corporate Services Limited

P.O. Box 309 GT

Ugland House

George Town

South Church Street

Grand Cayman, Cayman Islands

Facsimile:        345-949-8080

     with a copy to:     

John E. Tucker, Esq.

825 Third Avenue 14th Floor

New York, NY 10022

Facsimile:        212-541-4434

 

or at such other address as the Company or the Purchaser may designate by
written notice to the other parties hereto given in accordance herewith.

 

11.9 Attorneys’ Fees. In the event that any suit or action is instituted to
enforce any provision in this Agreement or any Related Agreement, the prevailing
party in such dispute shall be entitled to recover from the losing party all
fees, costs and expenses of enforcing any right of such prevailing party under
or with respect to this Agreement and/or such Related Agreement, including,
without limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees, costs and
expenses of appeals.

 

11.10 Titles and Subtitles. The titles of the sections and subsections of this
Agreement are for convenience of reference only and are not to be considered in
construing this Agreement.

 

11.11 Facsimile Signatures; Counterparts. This Agreement may be executed by
facsimile signatures and in any number of counterparts, each of which shall be
an original, but all of which together shall constitute one agreement.

 

11.12 Broker’s Fees. Except as set forth on Schedule 11.12 hereof, each party
hereto represents and warrants that no agent, broker, investment banker, person
or firm acting on behalf of or under the authority of such party hereto is or
will be entitled to any broker’s or finder’s fee or any other commission
directly or indirectly in connection with the transactions contemplated herein.
Each party hereto further agrees to indemnify each other party for any claims,
losses or expenses incurred by such other party as a result of the
representation in this Section 11.13 being untrue.

 

30

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

11.13 Construction. Each party acknowledges that its legal counsel participated
in the preparation of this Agreement and the Related Agreements and, therefore,
stipulates that the rule of construction that ambiguities are to be resolved
against the drafting party shall not be applied in the interpretation of this
Agreement or any Related Agreement to favor any party against the other.

 

[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

 

31

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

IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.

 

COMPANY:       PURCHASER: PATH 1 NETWORK TECHNOLOGIES INC.       LAURUS MASTER
FUND, LTD. By:  

/s/ Jeremy Ferrell

      By:   /s/ Eugene Grin Name:    Jeremy Ferrell       Name:    Eugene Grin
Title:   Interim CFO       Title:   Fund Manager                  

 

32

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

EXHIBIT A

 

FORM OF CONVERTIBLE NOTE

 

A-1

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

 

EXHIBIT B

 

FORM OF WARRANT

 

B-1

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

 

EXHIBIT C

 

FORM OF OPINION

 

1. The Company is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its formation and has all
requisite corporate power and authority to own, operate and lease its properties
and to carry on its business as it is now being conducted.

 

2. The Company has the requisite corporate power and authority to execute,
deliver and perform its obligations under the Agreement and the Related
Agreements. All corporate action on the part of the Company and each of its
Subsidiaries and its officers, directors and stockholders necessary has been
taken for: (i) the authorization of the Agreement and the Related Agreements and
the performance of all obligations of the Company thereunder; and (ii) the
authorization, sale, issuance and delivery of the Securities pursuant to the
Agreement and the Related Agreements. The Note Shares and the Warrant Shares,
when issued pursuant to and in accordance with the terms of the Agreement and
the Related Agreements and upon delivery shall be validly issued and
outstanding, fully paid and non assessable.

 

3. The execution, delivery and performance by the Company of the Agreement and
the Related Agreements (to which it is a party) and the consummation of the
transactions on its part contemplated by any thereof, will not, with or without
the giving of notice or the passage of time or both:

 

(a) Violate the provisions its Charter or bylaws; or

 

(b) To such counsels knowledge, violate any judgment, decree, order or award of
any court binding upon the Company or any of its Subsidiaries; or

 

(c) Violate any California, Delaware corporate or federal law.

 

4. The Agreement and the Related Agreements will constitute, valid and legally
binding obligations of the Company (to the extent the Company is a party
thereto), and are enforceable against the Company in accordance with their
respective terms.

 

(a)     

 

5. To such counsel’s knowledge, the sale of the Note and the subsequent
conversion of the Note into Note Shares are not subject to any preemptive rights
or rights of first refusal that have not been properly waived or complied with.
To such counsel’s knowledge, the sale of the Warrant and the subsequent exercise
of the Warrant for Warrant Shares are not subject to any preemptive rights or,
to such counsel’s knowledge, rights of first refusal that have not been properly
waived or complied with.

 

6. Assuming the accuracy of the representations and warranties of the Purchaser
contained in the Agreement, the offer, sale and issuance of the Securities on
the Closing Date will be exempt from the registration requirements of the
Securities Act. To such counsel’s

 

C-1

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

knowledge, neither the Company, nor any of its affiliates, nor any person acting
on its or their behalf, has directly or indirectly made any offers or sales of
any security or solicited any offers to buy and security under circumstances
that would cause the offering of the Securities pursuant to the Agreement or any
Related Agreement to be integrated with prior offerings by the Company for
purposes of the Securities Act which would prevent the Company from selling the
Securities pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions.

 

7. To such counsel’s knowledge, there is no action, suit, proceeding or
investigation pending or currently threatened against the Company or any of its
Subsidiaries that prevents the right of the Company to enter into this Agreement
or any Related Agreement, or to consummate the transactions contemplated
thereby. To such counsel’s knowledge, except as set forth on Exhibit A hereto,
(a) the Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality; and (b), there is no any action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to
initiate.

 

8. The terms and provisions of the Master Security Agreement creates a valid
security interest in favor of the Purchaser, in the respective rights, title and
interests of the Company in and to the Collateral (as defined in the Master
Security Agreement). Assuming that California law (applicable as near as may be)
governed such matters, the UCC-1 Financing Statement naming the Company as
debtor and the Purchaser as secured party, a copy of which is set forth on
Exhibit B hereto, is in proper form for filing and assuming that such UCC-1
Financing Statement has been filed with the Secretary of State of Delaware, the
security interest created under the Master Security Agreement will constitute a
perfected security interest under the applicable Delaware Uniform Commercial
Code in favor of the Purchaser in respect of the Collateral that can be
perfected by filing a financing statement.

 

C-2

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

 

EXHIBIT D

 

FORM OF ESCROW AGREEMENT

 

D-1