EXECUTION COPY

Exhibit 10.14

SECURITIES PURCHASE AGREEMENT

SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of May 25, 2006, by
and among DayStar Technologies, Inc., a Delaware corporation, with headquarters
located at 13 Corporate Drive, Halfmoon, New York 12065 (the “Company”), and
Castlerigg Master Investments Ltd., a British Virgin Islands company, with
address located at Craigmur Chambers, Road Town, Tortola, British Virgin Islands
(the “Buyer”).

RECITALS:

A. The Company and the Buyer are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by
Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”).

B. The Company has authorized a new series of senior convertible notes of the
Company, which shall be convertible into the Company’s common stock, $0.01 par
value per share (the “Common Stock”), in accordance with the terms of such
notes.

C. The Buyer wishes to purchase, and the Company wishes to sell, upon the terms
and conditions stated in this Agreement, (i) a senior convertible note in the
principal amount of $15,000,000, in substantially the form attached hereto as
Exhibit A (the “Note”), which may be converted into shares of Common Stock
pursuant to the terms of the Note (as converted, collectively, the “Conversion
Shares”) and (ii) Class A Warrants and Class B Warrants, in substantially the
forms attached hereto as Exhibit B-1 and Exhibit B-2, respectively
(collectively, the “Warrants”), to acquire that number of shares of Common Stock
(as exercised, collectively, the “Warrant Shares”) as set forth in the Warrants.

D. The Note bears interest, which at the option of the Company, subject to
certain conditions, may be paid in Common Stock (“Interest Shares”).

E. Contemporaneously with the execution and delivery of this Agreement, the
parties hereto are executing and delivering a Registration Rights Agreement,
substantially in the form attached hereto as Exhibit C (the “Registration Rights
Agreement”), pursuant to which the Company has agreed to provide certain
registration rights with respect to the Conversion Shares, Interest Shares and
Warrant Shares under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.

F. The Notes, the Conversion Shares, the Interest Shares, the Warrants and the
Warrant Shares are collectively are referred to herein as the “Securities”.

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NOW, THEREFORE, the Company and the Buyer hereby agree as follows:

1. PURCHASE AND SALE OF NOTES AND WARRANTS.

(a) Amount. Subject to the satisfaction (or waiver) of the conditions set forth
in Sections 6 and 7 below, the Company shall issue and sell to the Buyer, and
the Buyer agrees to purchase from the Company on the Closing Date (as defined
below), a Note in the principal amount of $15,000,000 and Warrants to acquire
that number of Warrant Shares as set forth in the Warrants.

(b) Closing. The closing (the “Closing”) of the purchase of the Note and the
Warrants by the Buyer shall occur at the offices of McDermott Will & Emery LLP,
340 Madison Avenue, New York, New York 10017. The date and time of the Closing
(the “Closing Date”) shall be May 25, 2006 at 10:00 a.m., New York City Time,
subject to notification of satisfaction (or waiver) of the conditions to the
Closing set forth in Sections 6 and 7 below (or such later date as is mutually
agreed to by the Company and the Buyer).

(c) Purchase Price. The purchase price for the Buyer (the “Purchase Price”) of
the Note and related Warrants to be purchased by the Buyer at the Closing shall
be equal to $15,000,000; $1.00 for each $1.00 of principal amount of the Note
being purchased by the Buyer at the Closing.

(d) Form of Payment. On the Closing Date, (A) the Buyer shall pay the Purchase
Price to the Company for the Note and the Warrants to be issued and sold to the
Buyer at the Closing, by wire transfer of immediately available funds in
accordance with the Company’s written wire instructions, and (B) the Company
shall deliver to the Buyer the Note that the Buyer is then purchasing along with
the Warrants that the Buyer is purchasing, duly executed on behalf of the
Company and registered in the name of the Buyer or its designee.

2. BUYER’S REPRESENTATIONS AND WARRANTIES.

The Buyer represents and warrants that:

(a) No Public Sale or Distribution. The Buyer (i) is acquiring the Note and the
Warrants, (ii) upon conversion of the Note will acquire the Conversion Shares,
(iii) upon receipt of any Interest Shares will acquire the Interest Shares and
(iv) upon exercise of the Warrants will acquire the Warrant Shares, in each
case, for its own account and not with a view towards, or for resale in
connection with, the public sale or distribution thereof, except pursuant to
sales registered or exempted under the 1933 Act; provided, however, that by
making such representations herein, the Buyer does not agree to hold any of the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act. The Buyer is
acquiring the Securities hereunder in the ordinary course of its business. The
Buyer does not presently have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.

(b) Accredited Investor Status. The Buyer is an “accredited investor” as that
term is defined in Rule 501(a) of Regulation D (“Regulation D”) as promulgated
by the United States Securities and Exchange Commission (the “SEC”) under the
1933 Act.

 

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(c) Reliance on Exemptions. The Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and the Buyer’s
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of the Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of the Buyer to acquire the
Securities.

(d) Information. The Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by the Buyer. The Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by the Buyer or its advisors, if
any, or its representatives shall modify, amend or affect the Buyer’s right to
rely on the Company’s representations and warranties contained herein. The Buyer
understands that its investment in the Securities involves a high degree of
risk. The Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.

(e) No Governmental Review. The Buyer understands that no United States federal
or state agency or any other government or governmental agency has passed on or
made any recommendation or endorsement of the Securities or the fairness or
suitability of the investment in the Securities nor have such authorities passed
upon or endorsed the merits of the offering of the Securities.

(f) Transfer or Resale. The Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder or (B) the Buyer shall have delivered to the Company an
opinion of counsel, in a form reasonably acceptable to the Company, to the
effect that such Securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration or
pursuant to Rule 144 or Rule 144A promulgated under the 1933 Act (or a successor
rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made
in reliance on Rule 144 may be made only in accordance with the terms of Rule
144 and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the Person (as defined in
Section 3(s)) through whom the sale is made) may be deemed to be an underwriter
(as that term is defined in the 1933 Act) may require compliance with some other
exemption under the 1933 Act or the rules and regulations of the SEC thereunder;
and (iii) neither the Company nor any other Person is under any obligation to
register the Securities under the 1933 Act or any state securities laws or to
comply with the terms and conditions of any exemption thereunder. The Securities
may be pledged in connection with a bona fide margin account or other loan or
financing arrangement secured by the Securities and such pledge of Securities
shall not be deemed to be a transfer, sale or assignment of the Securities
hereunder, provided, however, that the Buyer shall provide the Company with
written notice at least five (5) days prior to effecting a pledge of Securities.

 

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(g) Legends. The Buyer understands that the certificates or other instruments
representing the Note and the Warrants and, until such time as the resale of the
Conversion Shares, the Interest Shares and the Warrant Shares have been
registered under the 1933 Act as contemplated by the Registration Rights
Agreements, the stock certificates representing the Conversion Shares, the
Interest Shares and the Warrant Shares, except as set forth below, shall bear
any legend as required by the “blue sky” laws of any state and a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE][EXERCISABLE]
HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN]
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE
SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS OR (B) AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO
THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR THE SECURITY MAY BE SOLD PURSUANT TO RULE 144(K) UNDER
SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN
CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall cause a
certificate without such legend to issue to the holder of the Securities upon
which it is stamped, if, unless otherwise required by state securities laws
(i) such Securities are registered for resale under the 1933 Act or (ii) in
connection with a sale, assignment or other transfer, such holder provides the
Company with an opinion of counsel, in a form reasonably acceptable to the
Company, to the effect that such sale, assignment or transfer of the Securities
may be made without registration under the applicable requirements of the 1933
Act or pursuant to Rule 144(k).

(h) No Conflicts. The execution, delivery and performance by the Buyer of this
Agreement and the Registration Rights Agreement and the consummation by the
Buyer of the transactions contemplated hereby and thereby will not (i) result in
a violation of the organizational documents of the Buyer, (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture or
instrument to which the Buyer is a party or (iii) result in a violation of any
law, rule, regulation, order, judgment or decree (including federal and state
securities laws) applicable to the Buyer, except in the case of clauses (ii) and
(iii) above, for such conflicts, defaults, rights or violations which would not,
individually or in the aggregate, reasonably be expected to have a material
adverse effect on the ability of the Buyer to perform its obligations hereunder.

 

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(i) Residency. The Buyer is a resident of the British Virgin Islands and its
address is Craigmur Chambers, Road Town, Tortola, British Virgin Islands.

(j) Organization and Qualification. The Buyer is duly organized and validly
existing and in good standing under the laws of the jurisdiction in which it is
incorporated or formed, and has the requisite power and authorization to own its
properties and to carry on its business as now being conducted.

(k) Authorization; Enforcement; Validity. The Buyer has the requisite power and
authority to enter into and perform its obligations under this Agreement, the
Registration Rights Agreement and each of the other agreements entered into by
the Buyer in connection with the transactions contemplated by this Agreement.
The execution and delivery by the Buyer of this Agreement and the other
Transaction Documents to which the Buyer is a party and the consummation by the
Buyer of the transactions contemplated hereby and thereby, have been duly
authorized by the Buyer’s Board of Directors or other governing body and no
further filing, consent or authorization is required by the Buyer, its Board of
Directors or other governing body or its shareholders. This Agreement and the
other Transaction Documents of even date herewith to which the Buyer is a party
have been duly executed and delivered by the Buyer, and constitute the legal,
valid and binding obligations of the Buyer, enforceable against the Buyer in
accordance with their respective terms, except as such enforceability may be
limited by general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and
remedies.

(l) Buyer’s Purchase of Securities. The Buyer is acting solely in the capacity
of an arm’s length purchaser with respect to this Agreement and the other
Transaction Documents to which the Buyer is a party and the transactions
contemplated hereby and thereby and is not (i) an officer or director of the
Company, (ii) an “affiliate” of the Company (as defined in Rule 144) or (iii) a
“beneficial owner” of more than 10% of the shares of Common Stock (as defined
for purposes of Rule 13d-3 of the Securities Exchange Act of 1934, as amended
(the “1934 Act”)). The Buyer is not acting as a financial advisor or fiduciary
of the Company (or in any similar capacity) with respect to this Agreement or
the other Transaction Documents to which the Buyer is a party and the
transactions contemplated hereby and thereby, and any advice given by the Buyer
or any of its representatives or agents in connection with this Agreement and
the Transaction Documents to which the Buyer is a party and the transactions
contemplated hereby and thereby is merely incidental to the Buyer’s purchase of
the Securities.

(m) No General Solicitation; Placement Agent’s Fees. Neither the Buyer, nor any
of its affiliates, nor any Person acting on its or their behalf, has engaged in
any form of general solicitation or general advertising (within the meaning of
Regulation D) in connection with the offer or sale of the Securities. The Buyer
has not engaged any agent, financial advisor, or broker (other than Sandell
Asset Management Corp.) relating to or arising out of the transactions
contemplated hereby. The Buyer shall hold the Company harmless against any
liability, loss or expense (including, without limitation, attorney’s fees and
out-of-pocket expenses) arising in connection with any such claim (other than
claims for previously agreed to payments to Sandell Asset Management Corp. and
Ardour Capital Investments, LLC).

 

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(n) Manipulation of Price. The Buyer and its Subsidiaries have not, and to its
knowledge no one acting on its or their behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the stabilization or
manipulation of the price of any security of the Company to facilitate the
purchase or sale of any of the Securities, (ii) other than the Agent in
connection with this transactions contemplated hereby, sold, bid for, purchased,
or paid any compensation for soliciting purchases of, any of the Securities or
(iii) other than the Agent in connection with this transactions contemplated
hereby, paid or agreed to pay to any Person any compensation for soliciting
another to purchase any other securities of the Company.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to the Buyer that:

(a) Organization and Qualification. The Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly
or indirectly, owns at least 50% of the voting securities or the voting
interests of such entity or otherwise controls such entity) are entities duly
organized and validly existing in good standing under the laws of the
jurisdiction in which they are incorporated or formed, and have the requisite
power and authorization to own their properties and to carry on their business
as now being conducted. Each of the Company and its Subsidiaries is duly
qualified as a foreign entity to do business and is in good standing in every
jurisdiction in which its ownership of property or the nature of the business
conducted by it makes such qualification necessary, except to the extent that
the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any
material adverse effect on the business, properties, assets, operations, results
of operations, condition (financial or otherwise) or prospects of the Company
and its Subsidiaries, taken as whole, or on the transactions contemplated hereby
and the other Transaction Documents or by the agreements and instruments to be
entered into in connection herewith or therewith, or on the authority or ability
of the Company to perform its obligations under the Transaction Documents. The
Company has no Subsidiaries, except as set forth on Schedule 3(a).

(b) Authorization; Enforcement; Validity. The Company has the requisite power
and authority to enter into and perform its obligations under this Agreement,
the Notes, the Warrants, the Registration Rights Agreement, the Irrevocable
Transfer Agent Instructions (as defined in Section 5(b)) and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the “Transaction
Documents”) and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of this Agreement and the other Transaction
Documents by the Company and the consummation by the Company of the transactions
contemplated hereby and thereby, including, without limitation, the issuance of
the Notes, the reservation for issuance and the issuance of the Conversion
Shares issuable upon conversion of the Notes, the issuance of the Warrants and
the reservation for issuance and issuance of the Warrant Shares issuable upon
exercise of the Warrants, have been duly authorized by the Company’s Board of
Directors and (other than the filing with the SEC of one or more Registration
Statements in accordance with the requirements of the Registration Rights
Agreement, certain Blue Sky Filings, and notice to and listing of shares on the
Principal Market) no further filing, consent, or authorization is required by
the Company, its Board of Directors or its stockholders. This Agreement and the

 

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other Transaction Documents of even date herewith have been duly executed and
delivered by the Company, and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization,
moratorium, liquidation or similar laws relating to, or affecting generally, the
enforcement of applicable creditors’ rights and remedies.

(c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the
issue thereof. As of the Closing, the Company shall have reserved from its duly
authorized capital stock not less than the sum of (i) 130% of the maximum number
of shares of Common Stock issuable upon conversion of the Notes (assuming for
purposes hereof, that the Notes are convertible at the Conversion Price and
without taking into account any limitations on the conversion or redemption of
the Notes set forth in the Notes) and (ii) 130% of the maximum number of shares
of Common Stock issuable upon exercise of the Warrants (without taking into
account any limitations on the exercise of the Warrants set forth in the
Warrants). Upon issuance or conversion in accordance with the Notes or exercise
in accordance with the Warrants, as the case may be, the Interest Shares, the
Conversion Shares and the Warrant Shares, respectively, will be validly issued,
fully paid and nonassessable and free from all preemptive or similar rights,
taxes, liens and charges with respect to the issue thereof, with the holders
being entitled to all rights accorded to a holder of Common Stock. The offer and
issuance by the Company of the Securities is exempt from registration under the
1933 Act.

(d) No Conflicts. The execution, delivery and performance of this Agreement and
the other Transaction Documents by the Company and the consummation by the
Company of the transactions contemplated hereby and thereby (including, without
limitation, the issuance of the Notes, the Warrants, and the Interest Shares and
the reservation for issuance of the Conversion Shares and the Warrant Shares)
will not (i) result in a violation of the Certificate of Incorporation or Bylaws
(as defined in Section 3(r)) of the Company or the certificate of incorporation,
bylaws or other governing documents of any of its Subsidiaries or any capital
stock of the Company or (ii) conflict with, or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its Subsidiaries is a party or (iii) result in a violation of any law,
rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the NASDAQ
Capital Market (the “Principal Market”)) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries is bound or affected.

(e) Consents. Other than registration of shares with the SEC, certain Blue Sky
Filings and compliance with the notification and listing requirements of the
Principal Market, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other
Person in order for it to execute, deliver or perform any of its obligations
under or contemplated by this Agreement and the other Transaction Documents, in
each case in accordance with the terms hereof or thereof. Other than
registration of the shares with the SEC, certain Blue Sky Filings and compliance
with the notification and listing

 

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requirements of the Principal Market, all consents, authorizations, orders,
filings and registrations which the Company is required to obtain pursuant to
the preceding sentence have been obtained or effected on or prior to the Closing
Date, and the Company and its Subsidiaries are unaware of any facts or
circumstances which might prevent the Company from obtaining or effecting any of
the registration, application or filings pursuant to the preceding sentence. The
Company is not in violation of the listing requirements of the Principal Market
and other than the potential delisting if the Company’s share price falls below
$1.00 per share, has no knowledge of any facts which would reasonably lead to
delisting or suspension of the Common Stock in the foreseeable future.

(f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company
acknowledges and agrees based, in part, on the Buyer’s representations in
Section 2, that the Buyer is acting solely in the capacity of an arm’s length
purchaser with respect to this Agreement and the other Transaction Documents and
the transactions contemplated hereby and thereby and that the Buyer is not
(i) an officer or director of the Company, (ii) an “affiliate” of the Company
(as defined in Rule 144) or (iii) to the knowledge of the Company, a “beneficial
owner” of more than 10% of the shares of Common Stock (as defined for purposes
of Rule 13d-3 of the 1934 Act). The Company further acknowledges that the Buyer
is not acting as a financial advisor or fiduciary of the Company (or in any
similar capacity) with respect to this Agreement or the other Transaction
Documents and the transactions contemplated hereby and thereby, and any advice
given by the Buyer or any of its representatives or agents in connection with
this Agreement and the Transaction Documents and the transactions contemplated
hereby and thereby is merely incidental to the Buyer’s purchase of the
Securities. The Company further represents to the Buyer that the Company’s
decision to enter into the Transaction Documents has been based solely on the
independent evaluation by the Company and its representatives.

(g) No General Solicitation; Placement Agent’s Fees. Neither the Company, nor
any of its affiliates, nor any Person acting on its or their behalf, has engaged
in any form of general solicitation or general advertising (within the meaning
of Regulation D) in connection with the offer or sale of the Securities. The
Company shall be responsible for the payment of any placement agent’s fees,
financial advisory fees, or brokers’ commissions (other than for Persons engaged
by the Buyer or its investment advisor) relating to or arising out of the
transactions contemplated hereby. The Company shall pay, and hold the Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorney’s fees and out-of-pocket expenses) arising in connection with any such
claim. The Company acknowledges that it has engaged Ardour Capital Investments,
LLC as placement agent (the “Agent”) in connection with the sale of the
Securities. Other than the Agent, the Company has not engaged any placement
agent or other agent in connection with the sale of the Securities.

(h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates or 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 require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated. None of the
Company, its Subsidiaries, their

 

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affiliates or any Person acting on its or their behalf will take any action or
steps referred to in the preceding sentence that would require registration of
any of the Securities under the 1933 Act or cause the offering of the Securities
to be integrated with other offerings.

(i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares
issuable upon exercise of the Warrants, will increase in certain circumstances.
The Company further acknowledges that its obligation to issue Conversion Shares
upon conversion of the Notes in accordance with this Agreement and the Notes and
its obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants is, in each case, absolute and
unconditional, regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company.

(j) Application of Takeover Protections; Rights Agreement. The Company and its
board of directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the jurisdiction of its incorporation which is or could become applicable to the
Buyer as a result of the transactions contemplated by this Agreement, including,
without limitation, the Company’s issuance of the Securities and the Buyer’s
ownership of the Securities. The Company has not adopted a stockholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.

(k) SEC Documents; Financial Statements. The Company is a “Small Business
Issuer” and has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the 1934 Act since its initial public offering (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements, notes and schedules thereto and documents incorporated by
reference therein being hereinafter referred to herein as the “SEC Documents”).
The Company has delivered to the Buyer or its representatives true, correct and
complete copies of any SEC Documents not available on the EDGAR system. As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. As of
their respective dates, the financial statements of the Company included in the
SEC Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments).

 

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(l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since the
date of the Company’s most recent audited financial statements contained in an
Annual Report on Form 10-K, there has been no material adverse change and no
material adverse development in the business, assets, liabilities, properties,
operations, prospects, condition (financial or otherwise) or results of
operations of the Company. Except as disclosed in Schedule 3(l), since the date
of the Company’s most recent audited financial statements contained in an Annual
Report on Form 10-K, the Company has not (i) declared or paid any dividends,
(ii) sold any assets, individually or in the aggregate, in excess of $100,000
outside of the ordinary course of business or (iii) had capital expenditures,
individually or in the aggregate, in excess of $1,500,000. The Company has not
taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to
initiate involuntary bankruptcy proceedings or any knowledge of any fact which
would reasonably lead a creditor to do so. The Company is not, as of the date
hereof, and after giving effect to the transactions contemplated hereby to occur
at the Closing will not, be Insolvent (as defined below). For purposes of this
Section 3(l), “Insolvent” means (i) the Company is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and
liabilities become absolute and matured or (ii) the Company has unreasonably
small capital with which to conduct the business in which it is engaged as such
business is now conducted and is proposed to be conducted.

(m) No Undisclosed Events, Liabilities, Developments or Circumstances. Other
than the transactions contemplated by the Transaction Documents, no event,
liability, development or circumstance has occurred or exists, or to the best
knowledge of the Company, is contemplated to occur with respect to the Company,
its Subsidiaries or their respective business, assets, liabilities, properties,
operations, prospects, condition (financial or otherwise) or results of
operations, that would, individually or in the aggregate, be likely to have a
Material Adverse Effect.

(n) Conduct of Business; Regulatory Permits. Neither the Company nor any of its
Subsidiaries is in violation of any term of or in default under its certificate
of incorporation, bylaws or other governing documents. Neither the Company nor
any of its Subsidiaries is in violation of any judgment, decree or order or any
law, statute, ordinance, rule or regulation applicable to the Company or any of
its Subsidiaries, and neither the Company nor any of its Subsidiaries has
conducted or will conduct its business in violation of any of the foregoing,
except for possible violations which would not, individually or in the
aggregate, have a Material Adverse Effect. Without limiting the generality of
the foregoing, the Company is not in violation of any of the rules, regulations
or requirements of the Principal Market and has no knowledge of any facts or
circumstances that would reasonably lead to delisting or suspension of the
Common Stock by the Principal Market in the foreseeable future other than the
market requirements as to minimum share price. Except as disclosed on
Schedule 3(n), during the two (2) years prior to the date hereof, (i) the Common
Stock has been designated for quotation on the Principal Market, (ii) trading in
the Common Stock has not been suspended by the SEC or the Principal Market and
(iii) the Company has received no communication, written or oral, from the SEC
or the Principal Market regarding the suspension or delisting of the Common
Stock from the Principal Market. Except as disclosed on Schedule 3(n), the
Company and its Subsidiaries possess all certificates, authorizations and
permits issued by the appropriate regulatory authorities necessary to conduct
their respective businesses, except where the failure to possess

 

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such certificates, authorizations or permits would not have, individually or in
the aggregate, a Material Adverse Effect, and neither the Company nor any such
Subsidiary has received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization or permit, except where the
revocation or modification would not have, individually or in the aggregate, a
Material Adverse Effect.

(o) Foreign Corrupt Practices. Neither the Company nor any of its Subsidiaries
nor, to the best of the Company’s knowledge, any director, officer, agent,
employee or other Person acting on behalf of the Company or any of its
Subsidiaries has, in the course of its actions for, or on behalf of, the Company
or any such Subsidiary (i) used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; (ii) made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
(iii) violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate,
payoff, influence payment, kickback or other unlawful payment to any foreign or
domestic government official or employee.

(p) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date
hereof that are mandated for compliance by the Company, and any and all
applicable rules and regulations promulgated by the SEC thereunder that are
effective as of the date hereof, except where such noncompliance would not have,
individually or in the aggregate, a Material Adverse Effect.

(q) Transactions With Affiliates. Except as set forth in the SEC Documents and
other than the grant of stock options disclosed on Schedule 3(q), none of the
officers, directors or employees of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for ordinary
course services as employees, officers or directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any such officer, director or employee or, to the
knowledge of the Company, any corporation, partnership, trust or other entity in
which any such officer, director or employee has a substantial interest or is an
officer, director, trustee or partner.

(r) Equity Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of 19,850,000 shares of Common Stock, 150,000 shares of
Class B Common Stock, $0.01 par value per share (the “Class B Common Stock”),
and 3,000,000 shares of Preferred Stock, $0.01 par value per share, of which as
of the date hereof, 6,560,723 shares of Common Stock, no shares of Class B
Common Stock and no shares of Preferred Stock are issued and outstanding,
323,986 shares are reserved for issuance pursuant to the Company’s stock option
and purchase plans and 5,219,371 shares are reserved for issuance pursuant to
securities (other than the Notes and Warrants) exercisable or exchangeable for,
or convertible into, shares of Common Stock. All of such outstanding shares have
been, or upon issuance will be, duly authorized and validly issued and are fully
paid and nonassessable. Except as disclosed in the SEC Documents or on Schedule
3(r): (i) none of the capital stock of the Company or any of its Subsidiaries is
subject to preemptive rights or any other similar rights or any liens or
encumbrances suffered or permitted by the Company or any of its Subsidiaries;
(ii) there are no

 

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outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries, or contracts, commitments, understandings or
arrangements by which the Company or any of its Subsidiaries is or may become
bound to issue additional capital stock of the Company or any of its
Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, or exercisable or exchangeable for, any capital stock of the
Company or any of its Subsidiaries; (iii) there are no outstanding debt
securities, notes, credit or loan agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness of the Company or
any of its Subsidiaries or by which the Company or any of its Subsidiaries is or
may become bound; (iv) there are no financing statements securing obligations in
any material amounts, either singly or in the aggregate, filed in connection
with the Company or any of its Subsidiaries; (v) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement); (vi) there are no outstanding securities or
instruments of the Company or any of its Subsidiaries which contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is or may become bound to purchase, repurchase, retire, redeem or otherwise
acquire for value a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar
provisions that will be triggered by the issuance of the Securities; (viii) the
Company and its Subsidiaries do not have any stock appreciation rights or
“phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations
required to be disclosed in the SEC Documents but not so disclosed in the SEC
Documents, other than those incurred in the ordinary course of the Company’s or
its Subsidiaries’ respective businesses and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect. The Company has
furnished to the Buyer true, correct and complete copies of the Company’s
Certificate of Incorporation, as amended and as in effect on the date hereof or
as proposed for amendment, but subject to shareholder approval (the “Certificate
of Incorporation”), and the Company’s Bylaws, as amended and as in effect on the
date hereof (the “Bylaws”), and the terms of all securities convertible into, or
exercisable or exchangeable for, shares of Common Stock and the material rights
of the holders thereof in respect thereto.

(s) Indebtedness and Other Contracts. Except as disclosed in the SEC Documents
or on Schedule 3(s), neither the Company nor any of its Subsidiaries (i) has any
outstanding Indebtedness (as defined below), (ii) is a party to any contract,
agreement or instrument, the violation of which, or default under which, by the
other party(ies) to such contract, agreement or instrument would result in a
Material Adverse Effect, (iii) is in violation of any term of or in default (and
to the best of the knowledge of the Company, no event has occurred which, with
notice or lapse of time or both would, become a default) under any contract with
any New York State government agency (or other governmental body) or any
contract, agreement or instrument relating to any Indebtedness, except where
such violations and defaults would not result, individually or in the aggregate,
in a Material Adverse Effect or (iv) is a party to contract with any New York
State government agency (or other governmental body) or any contract, agreement
or instrument relating to any Indebtedness, the performance of which, in the
reasonable judgment of the Company’s officers, has or is expected to have a
Material Adverse

 

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Effect. Except as disclosed on Schedule 3(s), no party to any contract with any
New York State government agency (or other governmental body) or any contract,
agreement or instrument relating to any Indebtedness, has given notice to the
Company or any of its Subsidiaries of, or made a claim with respect to, any
breach or default thereunder, or of a desire or intention to exercise any
optional termination right thereunder and there is no notice of or claim with
respect to any such breach, default, desire or intention. For purposes of this
Agreement: (x) ”Indebtedness” of any Person means, without duplication (A) all
indebtedness for borrowed money, (B) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (including,
without limitation, “capital leases” in accordance with generally accepted
accounting principals) (other than trade payables entered into in the ordinary
course of business), (C) all reimbursement or payment obligations with respect
to letters of credit, surety bonds and other similar instruments, (D) all
obligations evidenced by notes, bonds, debentures or similar instruments,
including obligations so evidenced incurred in connection with the acquisition
of property, assets or businesses, (E) all monetary obligations under any
leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is
classified as a capital lease, (F) all indebtedness referred to in clauses
(A) through (E) above secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any mortgage,
lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person,
even though the Person which owns such assets or property has not assumed or
become liable for the payment of such indebtedness and (G) all Contingent
Obligations in respect of indebtedness or obligations of others of the kinds
referred to in clauses (A) through (F) above; (y) “Contingent Obligation” means,
as to any Person, any direct or indirect liability, contingent or otherwise, of
that Person with respect to any indebtedness, lease, dividend or other
obligation of another Person if the primary purpose or intent of the Person
incurring such liability, or the primary effect thereof, is to provide assurance
to the obligee of such liability that such liability will be paid or discharged,
or that any agreements relating thereto will be complied with, or that the
holders of such liability will be protected (in whole or in part) against loss
with respect thereto; and (z) “Person” means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization or other entity and a government or any department
or agency thereof.

(t) Absence of Litigation. Except as set forth in Schedule 3(t), there is no
action, suit, proceeding, inquiry or investigation before or by the Principal
Market, any court, public board, government agency, arbitrator, mediator,
self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company, the Common Stock or any of
the Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers
or directors.

(u) Insurance. The Company and each of its Subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as management of the Company believes to be prudent and customary in the
businesses in which the Company and its Subsidiaries are engaged. Neither the
Company nor any such Subsidiary has been refused any insurance coverage sought
or applied for and neither the Company nor any such Subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers

 

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as may be necessary to continue its business at a cost that would not have a
Material Adverse Effect.

(v) Employee Relations. (i) Neither Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union.
The Company and its Subsidiaries believe that their relations with their
employees are good. No executive officer (as defined in Rule 501(f) of the 1933
Act) of the Company or any of its Subsidiaries has notified the Company or any
such Subsidiary that such officer intends to leave the Company or any such
Subsidiary or otherwise terminate such officer’s employment with the Company or
any such Subsidiary. To the best knowledge of the Company, no executive officer
of the Company or any of its Subsidiaries, to the knowledge of the Company or
any such Subsidiary, is, or is now expected to be, in violation of any material
term of any employment contract, confidentiality, disclosure or proprietary
information agreement, non-competition agreement, or any other contract or
agreement or any restrictive covenant, and the continued employment of each such
executive officer does not subject the Company or any such Subsidiary to any
liability with respect to any of the foregoing matters.

(ii) The Company and its Subsidiaries are in compliance with all federal, state,
local and foreign laws and regulations respecting labor, employment and
employment practices and benefits, terms and conditions of employment and wages
and hours, except where failure to be in compliance would not, either
individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.

(w) Title. The Company and its Subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
Subsidiaries, in each case free and clear of all liens, encumbrances and
defects, except such as do not materially affect the value of such property and
do not interfere with the use made and proposed to be made of such property by
the Company and any of its Subsidiaries. Any real property and facilities held
under lease by the Company and any of its Subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of such
property and facilities by the Company and its Subsidiaries.

(x) Intellectual Property Rights. The Company and its Subsidiaries own or
possess adequate rights or licenses to use all trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets and other intellectual property rights (“Intellectual Property Rights”)
necessary to conduct their respective businesses as now conducted. None of the
Company’s Intellectual Property Rights have expired or terminated, or are
expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the
Company or its Subsidiaries of Intellectual Property Rights of others. There is
no claim, action or proceeding pending, or to the knowledge of the Company,
being threatened, against the Company or its Subsidiaries regarding its
Intellectual Property Rights. The Company is unaware of any facts or
circumstances which might give rise to any of the foregoing infringements or
claims, actions or proceedings. The Company and its Subsidiaries have taken
reasonable measures to protect the secrecy, confidentiality and value of all of
their Intellectual Property Rights.

 

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(y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance
with any and all Environmental Laws (as hereinafter defined), (ii) have received
all permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or approval
where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so
comply could be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect. The term “Environmental Laws” means all federal, state,
local or foreign laws relating to pollution or protection of human health or the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata), including, without limitation,
laws relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes
(collectively, “Hazardous Materials”) into the environment, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions,
judgments, licenses, notices or notice letters, orders, permits, plans or
regulations issued, entered, promulgated or approved thereunder.

(z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or one
of its Subsidiaries has the unrestricted right to vote, and (subject to
limitations imposed by applicable law) to receive dividends and distributions
on, all capital securities of its Subsidiaries as owned by the Company or such
Subsidiary.

(aa) Investment Company. The Company is not, and is not an affiliate of, an
“investment company” within the meaning of the Investment Company Act of 1940,
as amended.

(bb) Tax Status. The Company and each of its Subsidiaries (i) has made or filed
all foreign, federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject when due,
(ii) has paid all taxes and other governmental assessments and charges that are
material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside
on its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or declarations
apply. There are no unpaid taxes in any material amount claimed to be due by the
taxing authority of any jurisdiction, and the officers of the Company know of no
basis for any such claim.

(cc) Internal Accounting and Disclosure Controls. The Company maintains a system
of internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management’s general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset and liability accountability,
(iii) access to assets or incurrence of liabilities is permitted only in
accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets and liabilities is compared with the existing
assets and liabilities at reasonable intervals and appropriate action is taken
with respect to any difference. The Company maintains disclosure controls and
procedures (as such term is defined in Rule 13a-14 under the 1934 Act) that are
effective in ensuring that information required to be disclosed by the Company
in the

 

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reports that it files or submits under the 1934 Act is recorded, processed,
summarized and reported, within the time periods specified in the rules and
forms of the SEC, including, without limitation, controls and procedures
designed in to ensure that information required to be disclosed by the Company
in the reports that it files or submits under the 1934 Act is accumulated and
communicated to the Company’s management, including its principal executive
officer or officers and its principal financial officer or officers, as
appropriate, to allow timely decisions regarding required disclosure. During the
twelve months prior to the date hereof neither the Company nor any of its
Subsidiaries has received any notice or correspondence from any accountant
relating to any potential material weakness in any part of the system of
internal accounting controls of the Company or any of its Subsidiaries.

(dd) Off Balance Sheet Arrangements. There is no transaction, arrangement or
other relationship between the Company or any of its Subsidiaries and an
unconsolidated or other off balance sheet entity that is required to be
disclosed by the Company in its 1934 Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.

(ee) Ranking of Note. Except as set forth on Schedule (ee), no Indebtedness of
the Company is senior to or ranks pari passu with the Note in right of payment,
whether with respect of payment of redemptions, interest, damages or upon
liquidation or dissolution or otherwise.

(ff) Form S-3 Eligibility. The Company is eligible to register the Conversion
Shares, the Warrant Shares and the Interest Shares for resale by the Buyer using
Form S-3 promulgated under the 1933 Act.

(gg) Transfer Taxes. On the Closing Date, all stock transfer or other taxes
(other than income or similar taxes) which are required to be paid in connection
with the sale and transfer of the Securities to be sold to the Buyer hereunder
will be, or will have been, fully paid or provided for by the Company, and all
laws imposing such taxes will be or will have been complied with.

(hh) Manipulation of Price. The Company and its Subsidiaries have not, and to
its knowledge no one acting on its or their behalf has, (i) taken, directly or
indirectly, any action designed to cause or to result in the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of any of the Securities, (ii) other than the Agent, sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the
Securities or (iii) other than the Agent, paid or agreed to pay to any Person
any compensation for soliciting another to purchase any other securities of the
Company.

(ii) U.S. Real Property Holding Corporation. The Company is not, nor has it ever
been, a U.S. real property holding corporation within the meaning of Section 897
of the Internal Revenue Code of 1986, as amended, and the Company shall so
certify upon the Buyer’s request.

(jj) Disclosure. The Company confirms that as of two (2) Business Days after the
Closing Date, any information that constitutes or could reasonably be expected
to constitute

 

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material, nonpublic information previously disclosed to the Buyer, its agent or
counsel, will have been publicly disclosed. The Company understands and confirms
that the Buyer will rely on the foregoing representation in effecting
transactions in securities of the Company. All disclosure provided to the Buyer
regarding the Company, its business and the transactions contemplated by this
Agreement and the other Transaction Documents, including the Schedules and
Exhibits hereto and thereto, furnished by or on behalf of the Company is true
and correct and does not contain any untrue statement of a material fact or omit
to state any material fact necessary in order to make the statements made herein
or therein, in the light of the circumstances under which they were made, not
misleading. Each press release issued by the Company during the twelve
(12) months preceding the date of this Agreement did not at the time of release
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they are made, not
misleading. No event or circumstance has occurred or information exists with
respect to the Company or any of its Subsidiaries or its or their business,
assets, liabilities, properties, prospects, operations or condition (financial
or otherwise) or results of operations, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company, but which
has not been so publicly announced or disclosed.

4. COVENANTS.

(a) Blue Sky. The Company shall, on or before the Closing Date, take such action
as the Company shall reasonably determine is necessary in order to obtain an
exemption for or to qualify the Securities for sale to the Buyer at the Closing
pursuant to this Agreement under applicable securities or “Blue Sky” laws of the
states of the United States (or to obtain an exemption from such qualification),
and shall provide evidence of any such action so taken to the Buyer on or prior
to the Closing Date. The Company shall make all filings and reports relating to
the offer and sale of the Securities required under applicable securities or
“Blue Sky” laws of the states of the United States following the Closing Date
(“Blue Sky Filings”).

(b) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares,
Interest Shares and Warrant Shares and none of the Notes or Warrants is
outstanding (the “Reporting Period”), the Company shall file all reports
required to be filed by it with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports
under the 1934 Act, even if the 1934 Act or the rules and regulations thereunder
would otherwise permit such termination.

(c) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for working capital purposes, and not for (A) repayment of any
outstanding Indebtedness of the Company or any of its Subsidiaries or
(B) redemption, purchase, repurchase, retirement or other acquisition for value
of any of its or its Subsidiaries’ equity securities.

(d) Financial Information. The Company agrees to send the following to each
Investor (as defined in the Registration Rights Agreement) during the Reporting
Period (i) unless the following are filed with the SEC through EDGAR and are
available to the public through the EDGAR system, within one (1) Business Day
after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K
or 10-KSB, any interim reports and any consolidated balance

 

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sheets, income statements, stockholders’ equity statements and/or cash flow
statements for any period other than annual, any Current Reports on Form 8-K and
any registration statements (other than on Form S-8) or amendments filed
pursuant to the 1933 Act, (ii) on the same day as the release thereof, facsimile
or e-mailed copies of all press releases issued by the Company or any of its
Subsidiaries and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.

(e) Listing. The Company shall promptly secure the listing of all of the
Registrable Securities (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which the Common Stock is then listed (subject to official notice of issuance)
and shall maintain such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
maintain the Common Stock’s authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which
would be reasonably expected to result in the delisting or suspension of the
Common Stock on the Principal Market. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this Section 4(e).

(f) Fees. The Company shall reimburse the Buyer or its designee(s) for all
reasonable costs and expenses incurred in connection with documenting the
transactions contemplated by the Transaction Documents (including all reasonable
legal fees and disbursements in connection therewith, documentation and
implementation of the transactions contemplated by the Transaction Documents and
due diligence in connection therewith), which amount shall be offset against the
$50,000 already paid to Sandell Asset Management, and any amount in excess of
such $50,000 shall be withheld by the Buyer from its Purchase Price at the
Closing. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees and broker’s commissions (other than for
Persons engaged by the Buyer) relating to or arising out of the transactions
contemplated by the Transaction Documents, including, without limitation, any
fees payable to the Agent. The Company shall pay, and hold the Buyer harmless
against, any liability, loss or expense (including, without limitation,
reasonable attorney’s fees and out-of-pocket expenses) arising in connection
with any claim relating to any such payment. The Buyer shall pay, and hold the
Company harmless against, any liability, loss or expense (including, without
limitation, reasonable attorney fees and out-of-pocket expenses) arising in
connection with any payment due by Buyer to Sandell Asset Management Corp. or
any other Person acting solely on the Buyer’s behalf.

(g) Pledge of Securities. The Company acknowledges and agrees that the
Securities may be pledged by an Investor (as defined in the Registration Rights
Agreement) in connection with a bona fide margin agreement or other loan or
financing arrangement that is secured by the Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the
Securities hereunder, provided, however, that an Investor shall provide the
Company with written notice at least five (5) days prior to effecting a pledge
of Securities. An Investor and its pledgee shall be required to comply with the
provisions of Section 2(f) hereof, in order to effect a sale, transfer or
assignment of Securities to such pledgee. The Company hereby agrees to execute
and deliver such documentation as a pledgee of the Securities may reasonably
request in connection with a pledge of the Securities to such pledgee by an
Investor.

 

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(h) Disclosure of Transactions and Other Material Information. On or before
8:30 a.m., New York Time, on the first Business Day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the
terms of the transactions contemplated by the Transaction Documents in the form
required by the 1934 Act and attaching the material Transaction Documents
(including, without limitation, this Agreement (and all Schedules to this
Agreement), the form of Notes, the forms of Warrants and the Registration Rights
Agreement) (including all attachments, the “8-K Filing”). From and after the
filing of the 8-K Filing with the SEC, the Company represents and acknowledges
that the Buyer shall not be in possession of any material, nonpublic information
received from the Company or any of its Subsidiaries, or any of its or their
respective officers, directors, employees, stockholders, representatives or
agents, that is not disclosed in the 8-K Filing. The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective
officers, directors, employees, stockholders, representatives and agents, not
to, provide the Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the filing of the 8-K Filing
with the SEC without the express prior written consent of the Buyer. In the
event of a breach of the foregoing covenant by the Company or any of its
Subsidiaries, or any of its or their respective officers, directors, employees,
stockholders, representatives and agents, in addition to any other remedy
provided herein or in the other Transaction Documents, the Buyer, upon five
(5) business days’ notice to the Company, shall have the right to make a public
disclosure, in the form of a press release, public advertisement or otherwise,
of such material, nonpublic information without the prior approval by the
Company or its Subsidiaries or any of its or their respective officers,
directors, employees, stockholders, representatives or agents. The Buyer shall
not have any liability to the Company or its Subsidiaries or any of its or their
respective officers, directors, employees, stockholders, representatives or
agents, for any such disclosure. Subject to the foregoing, none of the Company,
any of its Subsidiaries or the Buyer shall issue any press releases or any other
public statements with respect to the transactions contemplated hereby;
provided, however, that the Company shall be entitled, without the prior
approval of the Buyer, to make any press release or other public disclosure with
respect to such transactions (i) in substantial conformity with the 8-K Filings
and contemporaneously therewith and (ii) as is required by applicable law and
regulations (provided, that in the case of clause (i) the Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release). Without the prior written consent of
the Buyer, the Company shall not disclose the name of the Buyer in any filing,
announcement, release or otherwise.

(i) Restriction on Redemption and Cash Dividends. Except in connection with any
Soft Call of Warrants (as defined below) by the Company, and in connection with
the transactions contemplated hereby, so long as any Notes are outstanding, the
Company shall not, directly or indirectly, redeem, purchase, repurchase, retire
or otherwise acquire for value, or declare or pay any cash dividend or
distribution on, the Common Stock without the prior express written consent of
the holders of Notes representing not less than a majority of the aggregate
principal amount of the then outstanding Notes. For purposes of this Agreement,
a “Soft Call of Warrants” means any offer or exchange of additional securities
or warrants to the holders of the Company’s publicly traded, registered Class Z
warrants (DSTIZ), to induce such holders to redeem or exchange the Class Z
warrants.

 

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(j) Additional Notes; Variable Securities; Dilutive Issuances. So long as the
Note is outstanding, the Company will not issue any Notes (other than to the
Buyer as contemplated hereby) and the Company shall not issue any other
securities that would cause a breach or default under the Note. For the period
of one year after the Closing Date, the Company shall not, in any manner, enter
into or effect any Dilutive Issuance (as defined in the Notes) if the effect of
such Dilutive Issuance is to cause the Company to be required to issue upon
conversion of any Note or exercise of any Warrant any shares of Common Stock in
excess of that number of shares of Common Stock which the Company may issue upon
conversion of the Notes and exercise of the Warrants without breaching the
Company’s obligations under the rules or regulations of the Principal Market.

(k) Reservation of Shares. The Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than
130% of the sum of the number of Interest Shares issuable pursuant to the terms
of the Notes, shares of Common Stock issuable upon conversion of the Note and
shares of Common Stock issuable upon exercise of the Warrants.

(l) Conduct of Business. The business of the Company and its Subsidiaries shall
not be conducted in violation of any law, ordinance or regulation of any
government or any department or agency thereof or other governmental entity,
except where such violations would not result, either individually or in the
aggregate, in a Material Adverse Effect.

(m) Other Registration Statements; Additional Issuances of Securities.

(i) From the date hereof until at least three (3) months after the Effective
Date (as defined in the Registration Rights Agreement), the Company will not,
directly or indirectly, file any registration statement with the SEC or draw
down on any existing Form S-3 shelf registration statement, other than the
Registration Statement (as defined in the Registration Rights Agreement).

(ii) The Company shall notify the Buyer, at least thirty (30) days in advance of
its intention to raise additional capital (other than (i) through a Soft Call of
Warrants, (ii) a secondary offering that is an underwritten offering of shares
by the Company in which the gross proceeds are not less than $25,000,000 or
(iii) through issuance of options, shares, warrants, phantom stock, stock
appreciation rights, restricted stock or other securities (A) pursuant to the
Company Employee Incentive Plan or (B) to Consultants in compensation for
services in an amount of up to 50,000 shares of Common Stock). Until the second
anniversary of the Closing Date, the Company shall allow Buyer to purchase up to
100% of any debt or equity to be raised in a capital transaction, in an
aggregate amount up to $15,000,000. Regardless of whether the Buyer participates
in the transaction, subject to the following sentence, the Company shall use its
best efforts to keep the Buyer informed of progress of the transaction. Prior to
disclosing to the Buyer the existence of any such transaction or any of the
terms thereof, the Company agrees to request the Buyer to waive the covenant
concerning disclosure of non-public information to Buyer to permit the Company
to make disclosures to the Buyer pursuant to this Section 4(m).

 

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(n) Stockholder Approval. The Company shall provide each stockholder entitled to
vote at a special or annual meeting of stockholders of the Company (the
“Stockholder Meeting”), which shall be promptly called and held not later than
November 30, 2006 (the “Stockholder Meeting Deadline”), a proxy statement,
substantially in the form which has been previously reviewed by the Buyer and
McDermott Will & Emery LLP, soliciting each such stockholder’s affirmative vote
at the Stockholder Meeting for approval of resolutions providing for the
Company’s issuance of all of the Securities as described in the Transaction
Documents in accordance with applicable law and the rules and regulations of the
Principal Market (such affirmative approval being referred to herein as the
“Stockholder Approval”), and the Company shall use its best efforts to solicit
its stockholders’ approval of such resolutions and to cause the Board of
Directors of the Company to recommend to the stockholders that they approve such
resolutions. The Company shall be obligated to use its best efforts to obtain
the Stockholder Approval by the Stockholder Meeting Deadline. If, despite the
Company’s best efforts, the Stockholder Approval is not obtained on or prior to
the Stockholder Meeting Deadline, the Company shall cause an additional
Stockholder Meeting to be held every three (3) months thereafter until such
Stockholder Approval is obtained, the Notes are no longer outstanding, or
August 30, 2007, whichever occurs first.

5. REGISTER; TRANSFER AGENT INSTRUCTIONS.

(a) Register. The Company shall maintain at its principal executive office (or
such other office or agency of the Company as it may designate by notice to each
holder of Securities), a register for the Note (and any Notes issued in
exchange, transfer or replacement of the Note, which shall collectively be
referred to as the “Notes”) and the Warrants in which the Company shall record
the name and address of the Person in whose name the Notes and the Warrants have
been issued (including the name and address of each transferee), the principal
amount of Notes held by such Person, the number of Conversion Shares issuable
upon conversion of the Notes and the number of Warrant Shares issuable upon
exercise of the Warrants held by such Person. The Company shall keep the
register open and available at all times during business hours for inspection of
the Buyer or its legal representatives.

(b) Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue
certificates or credit shares to the applicable balance accounts at The
Depository Trust Company (“DTC”), registered in the name of the Buyer or its
nominee, for the Conversion Shares, the Interest Shares, if any, and the Warrant
Shares in such amounts as specified from time to time by the Buyer to the
Company upon conversion of the Notes or exercise of the Warrants in the form of
Exhibit D attached hereto (the “Irrevocable Transfer Agent Instructions”). The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this Section 5(b), and stop transfer instructions to
give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent with respect to the Securities, and that the Securities shall otherwise be
freely transferable on the books and records of the Company, as applicable, and
to the extent provided in this Agreement and the other Transaction Documents. If
the Buyer effects a sale, assignment or transfer of the Securities in accordance
with Section 2(g), the Company shall permit the transfer and shall promptly
instruct its transfer agent to issue one or more certificates or credit shares
to the applicable balance accounts at DTC in such name and in such denominations
as specified by the Buyer to effect such sale, transfer or assignment. In the
event

 

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that such sale, assignment or transfer involves Conversion Shares, Interest
Shares or Warrant Shares sold, assigned or transferred pursuant to an effective
registration statement or pursuant to Rule 144, the transfer agent shall issue
such Securities to the Buyer, assignee or transferee, as the case may be,
without any restrictive legend upon receipt of reasonably requested
documentation and an opinion of counsel in a form reasonably satisfactory to the
Company. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyer. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5(b) will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions of this Section 5(b), that
the Buyer shall be entitled, in addition to all other available remedies, to an
order and/or injunction restraining any breach and requiring immediate issuance
and transfer, without the necessity of showing economic loss and without any
bond or other security being required.

6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.

(a) The obligation of the Company hereunder to issue and sell the Note and the
related Warrants to the Buyer at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions; provided, that
these conditions are for the Company’s sole benefit and may be waived by the
Company at any time in its sole discretion by providing the Buyer with prior
written notice thereof:

(i) The Buyer shall have executed each of the Transaction Documents to which it
is a party and delivered the same to the Company.

(ii) The Buyer shall have delivered to the Company the Purchase Price (less the
amounts withheld pursuant to Section 4(f)) for the Note and the Warrants being
purchased by the Buyer at the Closing by wire transfer of immediately available
funds pursuant to the wire instructions provided in advance by the Company.

(iii) The representations and warranties of the Buyer shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a specific date), and the Buyer shall have performed, satisfied and
complied in all material respects with the covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by the
Buyer at or prior to the Closing Date.

7. CONDITIONS TO THE BUYER’S OBLIGATION TO PURCHASE.

(a) The obligation of the Buyer hereunder to purchase the Note and the related
Warrants at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions; provided, that these conditions are
for the Buyer’s sole benefit and may be waived by the Buyer at any time in its
sole discretion by providing the Company with prior written notice thereof:

(i) The Company shall have executed and delivered to the Buyer (A) each of the
Transaction Documents and (B) the Note and the related Warrants being purchased
by the Buyer at the Closing pursuant to this Agreement.

 

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(ii) The Buyer shall have received the opinion of Whiteman Osterman & Hanna LLP,
the Company’s outside counsel, dated as of the Closing Date, in substantially
the form of Exhibit E attached hereto.

(iii) The Company shall have delivered to the Buyer a copy of the Irrevocable
Transfer Agent Instructions, in the form of Exhibit D attached hereto, which
instructions shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.

(iv) The Company shall have delivered to the Buyer a certificate evidencing the
due incorporation or formation and good standing of the Company and each of its
Subsidiaries in each such entity’s jurisdiction of incorporation or formation,
issued by the Secretary of State (or comparable office) of such jurisdiction, as
of a date within ten (10) days of the Closing Date.

(v) The Company shall have delivered to the Buyer a certificate evidencing the
Company’s qualification as a foreign corporation and good standing issued by the
Secretary of State (or comparable office) of each jurisdiction in which the
Company conducts business, as of a date within ten (10) days of the Closing
Date.

(vi) The Company shall have delivered to the Buyer a certified copy of the
Certificate of Incorporation, as certified by the Secretary of State of the
State of Delaware, within ten (10) days of the Closing Date.

(vii) The Company shall have delivered to the Buyer a certificate, executed by
the Secretary of the Company and dated as of the Closing Date, as to (i) the
resolutions consistent with Section 3(b) as adopted by the Company’s Board of
Directors in a form reasonably acceptable to the Buyer, (ii) the Certificate of
Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit F.

(viii) The representations and warranties of the Company shall be true and
correct as of the date when made and as of the Closing Date as though made at
that time (except for representations and warranties that speak as of a specific
date, which shall be true as of such specific date) and the Company shall have
performed, satisfied and complied in all respects with the covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Company at or prior to the Closing Date. The Buyer shall
have received a certificate, executed by the Chief Executive Officer of the
Company, dated as of the Closing Date, to the foregoing effect and as to such
other matters as may be reasonably requested by the Buyer in the form attached
hereto as Exhibit G.

(ix) The Company shall have delivered to the Buyer a letter from the Company’s
transfer agent certifying the number of shares of Common Stock outstanding as of
a date within five (5) days of the Closing Date.

(x) The Common Stock (I) shall be designated for quotation or listed on the
Principal Market and (II) shall not have been suspended, as of the Closing Date,
by the SEC or the Principal Market from trading on the Principal Market nor
shall suspension by the SEC or the Principal Market have been threatened, as of
the Closing Date, either (A) in writing

 

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by the SEC or the Principal Market or (B) by falling below the minimum listing
maintenance requirements of the Principal Market.

(xi) The Company shall have obtained all governmental, regulatory or third party
consents and approvals, if any, necessary for the sale of the Securities (other
than the Stockholder Approval).

(xii) The Company shall have delivered to the Buyer such other documents
relating to the transactions contemplated by this Agreement as the Buyer or its
counsel may reasonably request.

8. MISCELLANEOUS.

(a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall
be governed by the internal laws of the State of New York, without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of New York or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of New York. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in The City of New York, Borough of Manhattan for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY
WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE
ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR ARISING OUT OF
THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

(b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to each other party; provided, that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.

(c) Headings. The headings of this Agreement are for convenience of reference
only and shall not form part of, or affect the interpretation of, this
Agreement.

(d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity

 

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or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.

(e) Entire Agreement; Amendments. This Agreement and the other Transaction
Documents supersede all other prior oral or written agreements between the
Buyer, the Company, their Affiliates and Persons acting on their behalf with
respect to the matters discussed herein, and this Agreement, the other
Transaction Documents and the instruments referenced herein and therein contain
the entire understanding of the parties with respect to the matters covered
herein and therein and, except as specifically set forth herein or therein,
neither the Company nor the Buyer makes any representation, warranty, covenant
or undertaking with respect to such matters. No provision of this Agreement may
be amended other than by an instrument in writing signed by the Company and the
holders of at least a majority of the aggregate number of Registrable Securities
issued and issuable hereunder, and any amendment to this Agreement made in
conformity with the provisions of this Section 8(e) shall be binding on the
Buyer and holders of Securities, as applicable. No provision hereof may be
waived other than by an instrument in writing signed by the party against whom
enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the applicable Securities then
outstanding. No consideration shall be offered or paid to any Person to amend or
consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration also is offered to all of the parties to
the Transaction Documents, holders of Notes or holders of the Warrants, as the
case may be. The Company has not, directly or indirectly, made any agreements
with the Buyer relating to the terms or conditions of the transactions
contemplated by the Transaction Documents except as set forth in the Transaction
Documents. Without limiting the foregoing, the Company confirms that, except as
set forth in this Agreement, the Buyer has not made any commitment or promise or
has any other obligation to provide any financing to the Company or otherwise.

(f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and
will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided, confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the
same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

 

DayStar Technologies, Inc.

13 Corporate Drive

Halfmoon, New York 12065

Telephone:

   (518) 383-4600

Facsimile:

   (518) 383-7900

Attention:

   Thomas A. Polich, Esq.    General Counsel/Assistant Secretary

 

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With a copy (for informational purposes only) to:

 

Whiteman Osterman & Hanna LLP

One Commerce Plaza

Albany, New York 12260

Telephone:

   (518) 487-7600

Facsimile:

   (518) 487-7777

Attention:

   Leslie M. Apple, Esq.

If to the Transfer Agent:

 

U.S. Stock Transfer Corporation

1745 Gardena Avenue

Glendale, California 91204

Telephone:

   (818) 502-1404

Facsimile:

   (818) 502-0674

Attention:

   Syed Hussaini

If to the Buyer:

 

Castlerigg Master Investments Ltd.

c/o Sandell Asset Management Corp.

40 West 57th Street, 26th Floor

New York, New York 10019

Telephone:

   (212) 603-5775

Facsimile:

   (212) 603-5710

Attention:

   Cem Hacioglu

with a copy (for informational purposes only) to:

 

McDermott Will & Emery LLP

340 Madison Avenue

New York, New York 10017

Telephone:

   (212) 547-5400

Facsimile:

   (212) 547-5444

Attention:

   Stephen E. Older, Esq.

or to such other address and/or facsimile number and/or to the attention of such
other Person as the recipient party has specified by written notice given to
each other party five (5) days prior to the effectiveness of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender’s facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or
(C) provided by an overnight courier service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from an overnight courier
service in accordance with clause (i), (ii) or (iii) above, respectively.

 

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(g) Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their respective successors and assigns,
including any purchasers of the Note or the Warrants. The Company shall not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the holders of at least a majority of the aggregate number of
Registrable Securities issued and issuable hereunder, including by way of a
Fundamental Transaction (unless the Company is in compliance with the applicable
provisions governing Fundamental Transactions set forth in the Note and the
Warrants). The Buyer may assign some or all of its rights hereunder in
connection with transfer of any of its Securities without the consent of the
Company, in which event such assignee shall be deemed to be a Buyer hereunder
with respect to such assigned rights.

(h) No Third Party Beneficiaries. This Agreement is intended for the benefit of
the parties hereto and their respective permitted successors and assigns, and is
not for the benefit of, nor may any provision hereof be enforced by, any other
Person.

(i) Survival. The representations and warranties of the Company and the Buyer
contained in Sections 2 and 3 and the agreements and covenants set forth in
Sections 4, 5 and 8 shall survive the Closing.

(j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as any other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.

(k) Indemnification. In consideration of the Buyer’s execution and delivery of
the Transaction Documents and acquiring the Securities thereunder and in
addition to all of the Company’s other obligations under the Transaction
Documents, the Company shall defend, protect, indemnify and hold harmless the
Buyer and each other holder of the Securities and all of their partners,
members, managers, officers, directors, employees and direct or indirect
investors and any of the foregoing Persons’ agents or other representatives
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in this Agreement or the other Transaction Documents or any other
certificate, instrument or document contemplated hereby or thereby, (b) any
breach of any covenant, agreement or obligation of the Company contained in this
Agreement or the other Transaction Documents or any other certificate,
instrument or document contemplated hereby or thereby or (c) any cause of
action, suit or claim brought or made against such Indemnitee by a third party
(including for these purposes a derivative action brought on behalf of the
Company) and arising out of or resulting from (i) the execution, delivery,
performance or enforcement of this Agreement or the other Transaction Documents
or any other certificate, instrument or document contemplated hereby or thereby,
(ii) any transaction financed or to be financed in whole or in part, directly or
indirectly,

 

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with the proceeds of the issuance of the Securities, (iii) any disclosure made
by the Buyer pursuant to Section 4(h), or (iv) the status of the Buyer or holder
of the Securities as an investor in the Company pursuant to the transactions
contemplated by the Transaction Documents. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law. Except as
otherwise set forth herein, the mechanics and procedures with respect to the
rights and obligations under this Section 8(k) shall be the same as those set
forth in Section 6 of the Registration Rights Agreement.

(l) Remedies. The Buyer and each holder of the Securities and the Company shall
have all rights and remedies set forth in the Transaction Documents and all
rights and remedies which such holders have been granted at any time under any
other agreement or contract and all of the rights which such holders have under
any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or
other security), to recover damages by reason of any breach of any provision of
this Agreement and to exercise all other rights granted by law. Furthermore, the
Company recognizes that in the event that it fails to perform, observe or
discharge any or all of its obligations under the Transaction Documents, any
remedy at law may prove to be inadequate relief to the Buyer. The Company
therefore agrees that the Buyer shall be entitled to seek temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages and without posting a bond or other security.

(m) Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyer hereunder or pursuant to any of the other Transaction
Documents or the Buyer enforces or exercises its rights hereunder or thereunder,
and such payment or payments or the proceeds of such enforcement or exercise or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside, recovered from, disgorged by or are required to be
refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy
law, foreign, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.

[Signature Pages Follow]

 

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IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above

 

COMPANY:

 

DAYSTAR TECHNOLOGIES, INC.

By:   /s/ John R. Tuttle   Name: John R. Tuttle   Title: Chief Executive Officer

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

IN WITNESS WHEREOF, the Buyer and the Company have caused their respective
signature page to this Securities Purchase Agreement to be duly executed as of
the date first written above.

 

BUYER:

 

CASTLERIGG MASTER INVESTMENTS LTD.

By:   /s/ Patrick T. Burke   Name: Patrick T. Burke   Title: Senior Managing
Director

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EXHIBITS

 

Exhibit A

   Form of Note

Exhibit B-1

   Form of Class A Warrant

Exhibit B-2

   Form of Class B Warrant

Exhibit C

   Registration Rights Agreement

Exhibit D

   Irrevocable Transfer Agent Instructions

Exhibit E

   Form of Outside Company Counsel Opinion

Exhibit F

   Form of Secretary’s Certificate

Exhibit G

   Form of Officer’s Certificate

SCHEDULES

 

Schedule 3(a)

   Subsidiaries

Schedule 3(l)

   Absence of Certain Changes

Schedule 3(q)

   Transactions with Affiliates

Schedule 3(n)

   Conduct of Business; Regulatory Permits

Schedule 3(r)

   Equity Capitalization

Schedule 3(s)

   Indebtedness and Other Contracts

Schedule 3(t)

   Litigation

Schedule 3(z)

   Subsidiary Rights

Schedule 3(ee)

   Ranking of the Note

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SECURITIES PURCHASE AGREEMENT

Schedule 3(a) Subsidiaries

DayStar Solar, LLC, a Colorado limited liability company

FEIN # 52-2309159

DayStar Solar, LLC discontinued operations during the second quarter of 2005.

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SECURITIES PURCHASE AGREEMENT

Schedule 3(l) Absence of Certain Changes

Item (iii) Since the date of the Company’s most recent audited financial
statements (December 31, 2005), the Company has had capital expenditures in
excess of $1,500,000. Expenditures that, in the aggregate, exceeded the
$1,500,000 threshold since December 31, 2005 are as follows:

 

Date   

Vendor

  

Description

   Amount 01/04/2006    Metrology Equipment Services    see attached quote #
3208    5,000.00 01/06/2006    Newark in One    Calibrated Fluke    4,570.00
01/07/2006    Custom Fabrications    Materials for Chamber    723.00 01/10/2006
   Dell Commercial Credit    Optiplex w/ micro Tower    862.41 01/10/2006   
Dell Commercial Credit    Latitude laptop    1,887.39 01/10/2006    Dell
Commercial Credit    Lattitude laptops    4,128.98 01/10/2006    Dell Commercial
Credit    Latitude laptop    1,813.64 01/10/2006    PVI    Inline Thermal System
projected labor and materials cost    128,300.00 01/10/2006    Dell Commercial
Credit    Project 2003 English 6.0, Visio Studio    3,435.93 01/10/2006    Dell
Commercial Credit    Office Professional    911.54 01/12/2006    Myers Vacuum   
Automatic valve sensor    7,646.00 01/13/2006    Coy Laboratory Products, inc.
   3 ft. glove box    2,154.00 01/13/2006    Inficon Inc.    Crystal retainer
and holder    1,780.00 01/13/2006    KeyBank - Corporate Card    LabTek - High
Res Video Camera with Zoom Lense    882.00 01/13/2006    Coy Laboratory
Products, inc.    freight    87.94 01/16/2006    The Walters Company    Mix Hood
   5,355.00 01/18/2006    CVD Equipment    20% Downpayment on 3 tube furnace   
171,767.00 01/18/2006    David Franco    Three bollards installed at bld 21   
2,440.00 01/19/2006    GBI Installations    50% down payment, 3 bookcases, 2
credenza    1,211.71 01/19/2006    McMaster- Carr Supply    All SS Assembled
Mobile workbench 72"x3"x34", w/lower shelf, 5" H back stop & drawer    683.33
01/19/2006    Duniway Stockroom Corp    6" air operated SS 6" conflat gate valve
   1,500.00 01/19/2006    The Walters Company    Chemical Evaporator stack
install    2,490.59 01/19/2006    WaveMetrics    IGRO Pro 5 for PC’s software   
550.00 01/19/2006    WaveMetrics    IGRO manual    49.00 01/20/2006    VWR
International    Dry-Keeper Desiccator Cabinet    824.87 01/21/2006    Venzon   
Target Delrin Insulator, Target aluminum blankoff plate, nickel plated   
16,260.00 01/21/2006    Venzon    3-Target Aluminum Door (nickel plated)   
20,681.00 01/30/2006    Duniway Stockroom Corp    6" air operated SS 6" conflate
gate valve    1,450.00 01/31/2006    The Walters Company    fabrication and
installation of sheetmetal B vent stack for the Belt furnace    2,850.00
01/31/2006    Quartzfab    6" tray Liner    3,724.00 01/31/2006    Deborah
Dzingle    Intuit QuickBooks purchase    4,239.00 02/01/2006    W.B. Mason   
Cherry Cabinet, white boards, projection screen    3,937.57 02/01/2006   
McMaster- Carr Supply    Thermoplastic Heater    966.20 02/01/2006    Aries
Chemical    Evaporation system, final payment    11,479.61 02/01/2006    SMRT
Architects and Engineers    Jan ‘06 Professional Services    44,655.63
02/01/2006    Hawk Ridge Systems    CA Office - SolidWorks, COSMOS Works,
PDMWorks    33,020.74 02/02/2006    GBI Installations    50% down payment,
Engineering workstations    6,800.00 02/03/2006    MKS Instruments Inc.    Power
supply    1,282.50 02/03/2006    MKS Instruments Inc.    Controller to power
supply cable    49.50 02/03/2006    MKS Instruments Inc.    Chapman to
controller cable    49.50 02/03/2006    MKS Instruments Inc.    Power supply to
FMC cable    148.50 02/03/2006    Phoenix Vacuum Technologies    Edwards
Mechanical Vacuum pump Edwards E2M80 Fomblin Prep    6,900.00 02/06/2006   
McMaster- Carr Supply    Flammable Cabinet    783.57 02/06/2006    Kurt J.
Lesker Company    Custom Box Chamber    24,153.57 02/06/2006    Kurt J. Lesker
Company    Custom Blank flange package    914.00 02/06/2006    Kurt J. Lesker
Company    10 % down - Custom Thin film dep system    64,530.00 02/06/2006   
Kurt J. Lesker Company    10 % down - Custom Thin film dep system    19,000.00
02/07/2006    Azco Corp    Moveable blade, staty blade    1,319.00 02/08/2006   
Dell Commercial Credit    Dell Precision tower    3,709.66 02/08/2006    Dell
Commercial Credit    Latitude laptop    2,026.57 02/08/2006    Dell Commercial
Credit    Latitude laptop    1,835.07 02/08/2006    Dell Commercial Credit   
latitude laptop    2,416.05 02/08/2006    Dell Commercial Credit    precision
tower    3,009.98 02/08/2006    Dell Commercial Credit    Creative Suite 2 for
Windows    884.89 02/10/2006    CVD Equipment    30 % Downpayment - Research
Deposition System    71,130.00 02/10/2006    Eastern Applied Research    X-Ray
Fluorescent Element Analyzer for Characterization lab    63,000.00

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(l) Absence of Certain Changes

Item (iii) (Continued)

 

Date   

Vendor

  

Description

   Amount 02/13/2006    KeyBank - Corporate Card    Apple 23" HD Display Flat
panel    1,426.31 02/14/2006    GBI Installations    workstations    3,400.00
02/14/2006    GBI Installations    stage receiving area    115.00 02/14/2006   
GBI Installations    tax    246.05 02/14/2006    CHA Industries    Credit for
Drive plate assembly and drive latch assy    -891.00 02/14/2006    Eastern
Applied Research    Online UPS power supply    895.00 02/15/2006    Northeast
Gas Technologies, Ltd    773216    19.99 02/16/2006    Kurt J. Lesker Company   
ASA 90 Degree both Flange grooved    679.50 02/16/2006    Northeast Gas
Technologies, Ltd    773374    12.80 02/20/2006    Unishippers    Pick up @
Phoenix Vacuum Technology delivery to DayStar-Halfmoon    539.34 02/21/2006   
GBI Installations    Remainder on Bookcases and credenzas    715.22 02/23/2006
   Kurt J. Lesker Company    Custom Box Chamber w/ multiple ports    23,979.13
02/24/2006    Kurt J. Lesker Company    Custom Blank Flange package    914.00
02/24/2006    LR Enviromental Equipment Co. Inc.    shipping    708.00
02/24/2006    LR Enviromental Equipment Co. Inc.    Baxter Scientific Vacuum
Oven (Refurbish)    6,200.00 02/28/2006    SMRT Architects and Engineers    Feb
‘06 Professional Services    25,217.69 02/28/2006    CADimensions, Inc.   
assembly and 2 D...    7,191.00 02/28/2006    CADimensions, Inc.    tax   
684.67 03/01/2006    W.B. Mason    mailroom table for bldg 21    829.19
03/04/2006    Jon A. Sharp    Module Coaters from SPI supplies    835.14
03/06/2006    Semicore Equipment, Inc.    30% deposit on high vacuum evaporation
system    84,210.00 03/06/2006    Eastern Applied Research    Vacuum Pump for
Seiko 2210A XRF System    4,000.00 03/06/2006    Green Mountain Engineering, LLC
   Solar Simulator Additional Costs    9,050.05 03/06/2006    Eastern Applied
Research    shipping    110.00 03/06/2006    MSC Industrial Supply Co.   
Digital Readout package for 3-axis knee milling machine    1,667.60 03/09/2006
   GBI Installations    Redeliver and install (7) used workstations    3,921.55
03/09/2006    Instron Corporation    Bluehill 2 reports and graph pack. See
attached Quote #DKDMQ2348Details    1,500.00 03/10/2006    Dell Commercial
Credit    Latitude laptop for NY office    1,835.07 03/10/2006    Dell
Commercial Credit    computer for Charlene G.    1,347.12 03/10/2006    Dell
Commercial Credit    computer for Walter O’brien    3,651.71 03/10/2006    Dell
Commercial Credit    Prec Workstation for CA office    2,845.14 03/10/2006   
Dell Commercial Credit    Latitude laptop for CA office    2,026.57 03/10/2006
   Dell Commercial Credit    CA office flat panel    662.33 03/11/2006    Dell
Business Credit    hard drives and monitors    3,651.71 03/11/2006    Dell
Business Credit    CA office - dell computer    662.33 03/11/2006    Dell
Business Credit    2 computers for CA office    5,819.63 03/11/2006    Dell
Business Credit    software for Anglea and Lemanski    2,389.31 03/13/2006   
Unishippers    was heavier than originally thought    244.99 03/13/2006   
Unishippers    Pick-up from Halfmoon deliver to Pentagon Technologies sheet
metal part to be cleaned    123.92 03/14/2006    PV Measurments, Inc.    solar
simulator    1,014.86 03/14/2006    GraceCom    additional phones    3,865.16
03/15/2006    KeyBank - Corporate Card    staples    1,497.99 03/16/2006   
Stanley Supply and Services    Pace Model 888-0110 Filtration Unit    1,200.00
03/17/2006    Kurt J. Lesker Company    Thin Film Dep system (25 % due upon
drawing issuance)    161,325.00 03/17/2006    Quartzfab    Isolation tube Q/L
dual perf    4,148.00 03/17/2006    EMA Design Automation    OrCAD    3,768.29
03/18/2006    GBI Installations    used work stations (engineering)    1,038.15
03/20/2006    Jon A. Sharp    COO Temporary laptop    1,922.35 03/20/2006    GBI
Installations    Chairs (bld 21) and table for bldg 13    1,524.75 03/20/2006   
MSC Industrial Supply Co.    7x12 Horizontal Cut-off Band Saw    899.00
03/20/2006    MSC Industrial Supply Co.    shipping charge    124.99 03/21/2006
   Duniway Stockroom Corp    4.5" CF gate valve, pneumatic, 115v    1,100.00
03/21/2006    Duniway Stockroom Corp    6" CF gate Valve pneumatic, 115   
1,300.00 03/22/2006    GBI Installations    Remainder on bookcases for Bldg 21
   666.13 03/23/2006    Sigma Instruments    EIES -IV Guardian Controller   
5,915.00 03/23/2006    Sigma Instruments    EISE - IV Detector Module   
12,615.00 03/24/2006    Unishippers    Livermore Ca    147.49 03/24/2006   
Newport Corporation    1000 W Xenon of lamp for Oriel Solar Simulator   
1,540.00 03/24/2006    Newport Corporation    shipping    4.10

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(l) Absence of Certain Changes

Item (iii) (Continued)

 

Date   

Vendor

  

Description

   Amount 04/18/2006    Grainger    Black Drafting Stool    507.28 04/19/2006   
American Rigging    CA 95035. ap...    3,960.00 04/19/2006    KOM Lamb Inc   
shipping    40.92 04/20/2006    Furniture Associates    Office Furniture
(cubicles, chairs, workstations) for CA office    15,000.00 04/20/2006   
ALLWIN21 Corp    AW-900 new software and controller with one pentium PC control
board for AG610 RTA    12,000.00 04/20/2006    SVT Associates, Inc.    Reference
quote attached # 2005163C Dated 3/10/06    43,656.70 04/20/2006    SVT
Associates, Inc.    source shutter    2,100.00 04/20/2006    SVT Associates,
Inc.    8 - source shutter manifold    200.00 04/20/2006    Phoenix Vacuum
Technologies    Lebold TMP vacuum pump    13,000.00 04/24/2006    G & D Clarke
Machinery Movers, Inc.    off a truck...    1,600.00 04/24/2006    OCR Services
   112185 SH06040506    5,720.00 04/25/2006    Grainger    CUTTER,PLASMA,27 A   
1,470.00 04/25/2006    Grainger    WELDER,MIG    1,435.00 04/25/2006    ALLWIN21
Corp    Isolation Tube for heat Pulse 610    2,500.00 04/27/2006    Venzon    10
% progressive payment    64,461.20 04/27/2006    Venzon    Balance (70%) CPA4
upgrade    80,500.00 04/27/2006    Venzon    Balance (70%) CPA 4 Chamber upgrade
- group 1    80,500.00 04/28/2006    Trinco Trinity Tool Company    Split Level
Deluxe Cabinet    4,222.83 04/30/2006    SMRT Architects and Engineers    April
Consulting Fees    25,577.83 05/01/2006    Landry Drywall    Installation of
raised floor and ramps for CPA4    1,932.00 05/01/2006    Keystone Architectural
Services    Building Code Review    500.00 05/03/2006    FASCIA FLOOR COVERING,
INC    Carpet and Flooring for Building 5    1,906.25 05/05/2006    Allegheny
Technologies    Packing estimate    20.00 05/05/2006    Cortron Business Systems
   Xerox Work Center, Muratec Fax, Finisher    8,901.40 05/10/2006    Grizzly
Industrial, Inc.    Small downdraft table    119.95 05/10/2006    Office
Furniture Express    50% downpayment on workstations, bookcases, Office Desk   
7,083.00 05/10/2006    Phoenix Technology, Inc.    30% Down on Dryer Furnace and
CW Price Screen Printer    7,275.00 05/10/2006    C.P. Construction    Exhaust
Hood    4,500.00 05/10/2006    C.P. Construction    Acid Bench    3,500.00
05/10/2006    C.P. Construction    delivery charge    250.00 05/10/2006    C.P.
Construction    CA sales tax    831.25 05/11/2006    Besco Metals, Inc.    tax
   784.00 05/12/2006    All Guard Systems, Inc.    Downpayment on Security
System (50%)    11,910.00 05/15/2006    Master Sonics       17.50 05/16/2006   
Advance Energy Industries    power supply ...    30,000.00 05/16/2006    PVI   
Payment upon completion of basic vacuum chamber assy    75,000.00 05/16/2006   
Scott Alarm Systems, Inc.    50% Bldg 5 Alarm System    2,967.45 05/19/2006   
Novellus Systems    Conference Table for CA office    500.00 05/19/2006   
Facilities Logistics    Used forklift    1,500.00 05/22/2006    Dell Business
Credit    Laptop Latitude D820 Quote#292845706    1,732.86 05/22/2006   
Northeast Gas Technologies, Ltd    2 Cylinder wall mounted N2 auto changer   
2,465.00 05/22/2006    Inficon Inc.    Transpector XPR 3 Gas Analysts System   
24,385.00                     2,063,147.45

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SECURITIES PURCHASE AGREEMENT

Schedule 3(n) Conduct of Business; Regulatory Permits

On June 21, 2005, the Company announced that it would redeem its outstanding
Class A public warrants (NASDAQ: DSTIW). As a result, NASDAQ suspended trading
on such date for two hours to allow for the information to be disseminated.

On April 26, 2006, The NASDAQ Stock Market (“NASDAQ”) verbally communicated that
Dr. Tuttle’s appointment to the various committees of the Board of Directors, as
reflected in the Company’s recently filed 10K was in violation of the NASD Rule
4350(c). As a remedy to the infraction, on May 12, 2006, Dr. Tuttle resigned his
positions on such committees. Based on conversations, NASDAQ expects to issue a
letter noting that the violation was inadvertent and has been corrected. No
penalties will be assessed. NASDAQ verbally indicated they would not be taking
further action.

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(q) Transactions with Affiliates

The Company has granted options to purchase 321,217 shares of Common Stock to
its officers, directors and employees pursuant to its currently effective 2003
Equity Incentive Plan.

On April 10, 2006, upon commencement of his service as Chief Operating Officer
of the Company, the Company granted 50,000 shares of restricted common stock to
Steven DeLuca pursuant to its currently effective 2003 Equity Incentive Plan.
The grant has a four year vesting schedule.

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(r) Equity Capitalization

(i) None.

(ii) Outstanding Options and Warrants

 

      Shares Required

Class B Public Warrant

   5,115,153

Representative Warrants

   32,768

Consultant Warrants

   71,450

2003 EIP Plan

  

Stock Option Grants Outstanding

   321,217

Available for Grant

   2,769

(iii) Debt and capital leases in schedule 3(s) below

(iv) Debt and capital leases in schedule 3(s) below

(v) In addition to the registration rights set forth in the Transaction
Documents, the Company has granted registration rights with respect to certain
of the consultant warrants listed above.

(vi) None

(vii) As set forth in the Company’s currently effective Certificate of
Incorporation, the Company’s Class B Common Stock has antidilution protection.
There are, however, no shares of Class B Common Stock presently outstanding.

(viii) None.

(ix) None

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(s) Indebtedness and Other Contracts

Letter of Credit

The Company secured a $110,000 letter of credit on May 22, 2006 from a bank, in
order to facilitate the acquisition of a Laminator from a Japanese Company. This
required a borrowing / collateral agreement be executed and a restricted
depository account for the letter of credit amount be established.

Capital Leases as Disclosed in SEC Documents:

Sterling National Bank - $50,000 capital lease dated October 7, 2002; 60 monthly
payments of $1,348.25; secured by CPA Sputtering Equipment acquired under the
lease.

Key Equipment Finance - $53,687 capital lease dated December 4, 2002; 60 monthly
payments of $1,240.18; secured by CPA Sputtering Equipment acquired under the
lease.

GE Colonial Pacific - $26,844 capital lease dated September 26, 2002; 60 monthly
payments of $665.56; secured by CPA Sputtering Equipment acquired under the
lease.

Toshiba American Info Services - $49,000 capital lease dated February 2, 2003;
60 monthly payments of $1,179.95; secured by Comptech 2440 Alumina RF Sputtering
System acquired under the lease.

GE Capital Corporation - $25,000 capital lease dated April 14, 2003; 60 monthly
payments of $577.42; secured by 3K Advanced Energy Power Supplies acquired under
the lease.

GE Capital Corporation - $35,000 capital lease dated May 9, 2003; 60 monthly
payments of $1,087.72; secured by 5K Advanced Energy Power Supplies acquired
under the lease.

GE Capital Corporation - $38,595 capital lease dated February 18, 2005; 49
monthly payments of $994.32; secured by Perkin Elmer Optima Spectrometer
acquired under the lease.

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(s) Indebtedness and Other Contracts (Continued)

Notes Payable as Disclosed in SEC Documents:

LMDC – $500,000 note payable finalized in January 2005, to complete the
acquisition of several pieces of equipment from the vendor. The Company paid
$120,000 in 2004 as a down payment and took possession of the equipment. Under
the agreement, the Company will have 30 monthly payments of $5,323 followed by
another 30 monthly payments of $16,339. The note is secured by the following
equipment acquired under the note: (a) Alcatel; (b) Semitool Spin Dryer (2);
(c) Branson Washer w/ DI Heater; (d) Diffusion Pumps; (e) Screen Printer; and
(f) V2000 – CPA 3.

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(t) Litigation

None

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

SECURITIES PURCHASE AGREEMENT

Schedule 3(z) Subsidiary Rights

None

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SECURITIES PURCHASE AGREEMENT

Schedule 3(ee) Ranking of the Note

All Indebtedness of the Company is listed on Schedule 3(s).