EXHIBIT 10.1

 

PURCHASE AGREEMENT

 

THIS PURCHASE AGREEMENT (“Agreement”) is made as of the 24th day of September,
2008 by and among Media Sciences International, Inc., a Delaware corporation
(the “Company”), and the Investors set forth on the signature pages affixed
hereto (each an “Investor” and collectively the “Investors”).

 

Recitals

 

A. The Company and the Investors are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by the
provisions of Section 4(2) under the Securities Act of 1933, as amended, and/or
Regulation D (“Regulation D”) as promulgated by the U.S. Securities and Exchange
Commission (the “SEC”) thereunder; and

 

B. The Investors wish to purchase from the Company, and the Company wishes to
sell and issue to the Investors, upon the terms and conditions stated in this
Agreement, (i) $1,250,000 in aggregate principal amount of the Company’s 10%
Convertible Notes in the form attached hereto as Exhibit A (the “Initial
Notes”), which Initial Notes are convertible into 757,575 shares (the “Initial
Conversion Shares”) of the Company’s Common Stock, par value $0.001 per share
(together with any securities into which such shares may be reclassified the
“Common Stock”), at a conversion price of $1.65 per share (subject to adjustment
as provided therein), (ii) warrants (the “Series A Warrants”) to purchase an
aggregate of 378,787 shares (the “Initial Warrant Shares”) of Common Stock
(subject to adjustment as provided therein) at an exercise price of $1.65 per
share (subject to adjustment as provided therein) in the form attached hereto as
Exhibit B and (iii) warrants (the “Series B Warrants”) to purchase up to (A) an
aggregate of $1,250,000 in aggregate principal amount of the Company’s 10%
Convertible Notes (the “Additional Notes”), which Additional Notes are
convertible into 757,575 shares (the “Additional Conversion Shares”) of Common
Stock at a conversion price of $1.65 per share (subject to adjustment as
provided therein), and (B) warrants (the “Series C Warrants”) to purchase an
aggregate of 378,787 shares (the “Additional Warrant Shares”) of Common Stock
(subject to adjustment as provided therein) at an exercise price of $1.65 per
share (subject to adjustment as provided therein) in the form attached hereto as
Exhibit C; and

 

C. Contemporaneous with the sale of the Initial Notes and the Series A Warrants,
the parties hereto will execute and deliver a Registration Rights Agreement, in
the form attached hereto as Exhibit D (the “Registration Rights Agreement”),
pursuant to which the Company will agree to provide certain registration rights
under the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, and applicable state securities laws.

 

In consideration of the mutual promises made herein and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:

 

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1.     Definitions. In addition to those terms defined above and elsewhere in
this Agreement, for the purposes of this Agreement, the following terms shall
have the meanings set forth below:

 

“Affiliate” means, with respect to any Person, any other Person which directly
or indirectly through one or more intermediaries Controls, is controlled by, or
is under common control with, such Person.

 

“Business Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business.

 

“Common Stock Equivalents” means any securities of the Company or the
Subsidiaries which would entitle the holder thereof to acquire at any time
Common Stock, including without limitation, any debt, preferred stock, rights,
options, warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.

 

“Company’s Knowledge” means the actual knowledge of the executive officers (as
defined in Rule 405 under the 1933 Act) of the Company, after due inquiry.

 

“Confidential Information” means trade secrets, confidential information and
know-how (including but not limited to ideas, formulae, compositions, processes,
procedures and techniques, research and development information, computer
program code, performance specifications, support documentation, drawings,
specifications, designs, business and marketing plans, and customer and supplier
lists and related information).

 

“Control” (including the terms “controlling”, “controlled by” or “under common
control with”) means the possession, direct or indirect, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.

 

“Conversion Shares” means, collectively, the Initial Conversion Shares and the
Additional Conversion Shares.

 

“Effective Date” means the date on which the initial Registration Statement is
declared effective by the SEC.

 

“Effectiveness Deadline” means the date on which the initial Registration
Statement is required to be declared effective by the SEC under the terms of the
Registration Rights Agreement.

 

“Intellectual Property” means all of the following: (i) patents, patent
applications, patent disclosures and inventions (whether or not patentable and
whether or not reduced to practice); (ii) trademarks, service marks, trade
dress, trade names, corporate names, logos, slogans and Internet domain names,
together with all goodwill associated with each of the

 

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foregoing; (iii) copyrights and copyrightable works; (iv) registrations,
applications and renewals for any of the foregoing; and (v) proprietary computer
software (including but not limited to data, data bases and documentation).

 

“Material Adverse Effect” means a material adverse effect on (i) the assets,
liabilities, results of operations, condition (financial or otherwise),
business, or prospects of the Company and its Subsidiaries taken as a whole,
(ii) the validity or enforceability of the Transaction Documents, or (iii) the
ability of the Company to perform its obligations under the Transaction
Documents.

 

“Nasdaq” means the Nasdaq Capital Market.

 

“Notes” means, collectively, the Initial Notes and the Additional Notes.

 

“Person” means an individual, corporation, partnership, limited liability
company, trust, business trust, association, joint stock company, joint venture,
sole proprietorship, unincorporated organization, governmental authority or any
other form of entity not specifically listed herein.

 

“Purchase Price” means One Million Two Hundred Fifty Thousand Dollars
($1,250,000).

 

“Registration Statement” has the meaning set forth in the Registration Rights
Agreement.

 

“SEC Filings” has the meaning set forth in Section 4.6.

 

“Securities” means the Notes, the Warrants, the Conversion Shares and the
Warrant Shares.

 

“Subsidiary” of any Person means another Person, an amount of the voting
securities, other voting ownership or voting partnership interests of which is
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first Person.

 

“Transaction Documents” means this Agreement, the Notes, the Warrants and the
Registration Rights Agreement.

 

“Warrants” means, collectively, the Series A Warrants, the Series B Warrants and
the Series C Warrants.

 

“Warrant Shares” means, collectively, the Initial Warrant Shares and the
Additional Warrant Shares.

 

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“1933 Act” means the Securities Act of 1933, as amended, or any successor
statute, and the rules and regulations promulgated thereunder.

 

“1934 Act” means the Securities Exchange Act of 1934, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.

 

2.     Purchase and Sale of the Initial Notes, the Series A Warrants and the
Series B Warrants. Subject to the terms and conditions of this Agreement, on the
Closing Date, each of the Investors shall severally, and not jointly, purchase,
and the Company shall sell and issue to the Investors, the Initial Notes, the
Series A Warrants and the Series B Warrants in the respective amounts set forth
opposite the Investors’ names on the signature pages attached hereto in exchange
for the Purchase Price as specified in Section 3 below.

 

3.     Closing. Upon confirmation that the other conditions to closing specified
herein have been satisfied or duly waived by the Investors, the Company shall
deliver to Lowenstein Sandler PC, in trust, the Notes, the Series A Warrants and
the Series B Warrants, registered in such name or names as the Investors may
designate, with instructions that such securities are to be held for release to
the Investors only upon payment in full of the Purchase Price to the Company by
all the Investors. Upon such receipt by Lowenstein Sandler PC of the Initial
Notes, the Series A Warrants and the Series B Warrants, each Investor shall
promptly, but no more than one Business Day thereafter, cause a wire transfer in
same day funds to be sent to the account of the Company as instructed in writing
by the Company, in an amount representing such Investor’s pro rata portion of
the Purchase Price as set forth on the signature pages to this Agreement. On the
date (the “Closing Date”) the Company receives the Purchase Price, the Notes,
the Series A Warrants and the Series B Warrants shall be released to the
Investors (the “Closing”). The Closing of the purchase and sale of the Initial
Notes, the Series A Warrants and the Series B Warrants shall take place at the
offices of Lowenstein Sandler PC, 1251 Avenue of the Americas, 18th Floor, New
York, New York 10020, or at such other location and on such other date as the
Company and the Investors shall mutually agree.

 

4.     Representations and Warranties of the Company. The Company hereby
represents and warrants to the Investors that, except as set forth in the
schedules delivered herewith (collectively, the “Disclosure Schedules”):

 

4. 1 Organization, Good Standing and Qualification. Each of the Company and its
Subsidiaries is a corporation or other legal entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or formation and has all requisite corporate or similar power and
authority to carry on its business as now conducted and to own its properties.
Each of the Company and its Subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property makes such
qualification or leasing necessary unless the failure to so qualify has not had
and could not reasonably be expected to have a Material Adverse Effect. The
Company’s Subsidiaries are listed on Schedule 4.1 hereto.

 

4.2 Authorization. The Company has full power and authority and has taken all
requisite action on the part of the Company, its officers, directors and
stockholders necessary

 

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for (i) the authorization, execution and delivery of the Transaction Documents,
(ii) the authorization of the performance of all obligations of the Company
hereunder or thereunder, and (iii) the authorization, issuance (or reservation
for issuance) and delivery of the Securities. When delivered in accordance with
the terms hereof, the Transaction Documents will constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of general applicability,
relating to or affecting creditors’ rights generally.

 

4.3 Capitalization. The issued and outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, were not issued
in violation of or subject to any preemptive rights or other rights to subscribe
for or purchase securities, and conform in all material respects to the
description thereof contained in the Company’s filings with the SEC. Except as
set forth in the Company’s SEC Filings and except for options and other awards
that may be granted under the Company’s equity awards plans, the Company does
not have outstanding any options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. Except as contemplated by this Agreement, neither the Company nor
any of its Subsidiaries is currently in negotiations for the issuance and sale
of any equity securities of any kind. Except as described on Schedule 4.3 and
except for the Registration Rights Agreement, there are no voting agreements,
buy-sell agreements, option or right of first purchase agreements or other
agreements of any kind among the Company and any of the securityholders of the
Company relating to the securities of the Company held by them. Except as
described on Schedule 4.3 and except as provided in the Registration Rights
Agreement, no Person has the right to require the Company to register any
securities of the Company under the 1933 Act, whether on a demand basis or in
connection with the registration of securities of the Company for its own
account or for the account of any other Person.

 

Except as described on Schedule 4.3, the issuance and sale of the Securities
hereunder will not obligate the Company to issue shares of Common Stock or other
securities to any other Person (other than the Investors) and will not result in
the adjustment of the exercise, conversion, exchange or reset price of any
outstanding security.

 

Except as described on Schedule 4.3, the Company does not have outstanding
stockholder purchase rights or “poison pill” or any similar arrangement in
effect giving any Person the right to purchase any equity interest in the
Company upon the occurrence of certain events.

 

4.4 Valid Issuance. The Conversion Shares have been duly and validly authorized
and, when issued upon the due conversion of the Notes, will be validly issued,
fully paid and nonassessable, and shall be free and clear of all encumbrances
and restrictions (other than those created by the Investors), except for
restrictions on transfer set forth in the Transaction Documents or imposed by
applicable securities laws. The Warrants have been duly and validly authorized.
Upon the due exercise of the Warrants, the Warrant Shares will be validly
issued,

 

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fully paid and non-assessable free and clear of all encumbrances and
restrictions, except for restrictions on transfer set forth in the Transaction
Documents or imposed by applicable securities laws and except for those created
by the Investors. The Company has reserved a sufficient number of shares of
Common Stock for issuance upon the conversion of the Notes and upon exercise of
the Warrants, free and clear of all encumbrances and restrictions, except for
restrictions on transfer set forth in the Transaction Documents or imposed by
applicable securities laws and except for those created by the Investors.

 

4.5 Consents. The execution, delivery and performance by the Company of the
Transaction Documents and the offer, issuance and sale of the Securities require
no consent of, action by or in respect of, or filing with, any Person,
governmental body, agency, or official other than filings that have been made
pursuant to applicable state securities laws and post-sale filings pursuant to
applicable state and federal securities laws which the Company undertakes to
file within the applicable time periods. Subject to the accuracy of the
representations and warranties of each Investor set forth in Section 5 hereof,
the Company has taken all action necessary to exempt (i) the issuance and sale
of the Securities, (ii) the issuance of the Additional Notes and the Series C
Warrants upon the due exercise of the Series B Warrants, (iii) the issuance of
the Conversion Shares upon the due conversion of the Notes and the issuance of
the Warrant Shares upon due exercise of the Warrants, and (iv) the other
transactions contemplated by the Transaction Documents from the provisions of
any stockholder rights plan or other “poison pill” arrangement, any
anti-takeover, business combination or control share law or statute binding on
the Company or to which the Company or any of its assets and properties may be
subject and any provision of the Company’s Certificate of Incorporation or
Bylaws that is or could reasonably be expected to become applicable to the
Investors as a result of the transactions contemplated hereby, including without
limitation, the issuance of the Securities and the ownership, disposition or
voting of the Securities by the Investors or the exercise of any right granted
to the Investors pursuant to this Agreement or the other Transaction Documents.

 

4.6 Delivery of SEC Filings; Business. The Company has made available to the
Investors through the EDGAR system, true and complete copies of the Company’s
most recent Annual Report on Form 10-KSB for the fiscal year ended June 30, 2007
(the “10-KSB”), and all other reports filed by the Company pursuant to the 1934
Act since the filing of the 10-KSB and prior to the date hereof (collectively,
the “SEC Filings”). The SEC Filings are the only filings required of the Company
pursuant to the 1934 Act for such period. The Company and its Subsidiaries are
engaged in all material respects only in the business described in the SEC
Filings and the SEC Filings contain a complete and accurate description in all
material respects of the business of the Company and its Subsidiaries, taken as
a whole.

 

4.7 Use of Proceeds. The net proceeds of the sale of the Securities hereunder
shall be used by the Company for working capital and general corporate purposes.

 

4.8 No Material Adverse Change. Since June 30, 2007, except as identified and
described in the SEC Filings or as described on Schedule 4.8, there has not
been:

 

(i) any change in the consolidated assets, liabilities, financial condition or
operating results of the Company from that reflected in the financial statements

 

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included in the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2008, except for changes in the ordinary course of business which have
not had and could not reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate;

 

(ii) any declaration or payment of any dividend, or any authorization or payment
of any distribution, on any of the capital stock of the Company, or any
redemption or repurchase of any securities of the Company;

 

(iii) any material damage, destruction or loss, whether or not covered by
insurance to any assets or properties of the Company or its Subsidiaries;

 

(iv) any waiver, not in the ordinary course of business, by the Company or any
Subsidiary of a material right or of a material debt owed to it;

 

(v) any satisfaction or discharge of any lien, claim or encumbrance or payment
of any obligation by the Company or a Subsidiary, except in the ordinary course
of business and which is not material to the assets, properties, financial
condition, operating results or business of the Company and its Subsidiaries
taken as a whole (as such business is presently conducted and as it is proposed
to be conducted);

 

(vi) any change or amendment to the Company's Certificate of Incorporation or
Bylaws, or material change to any material contract or arrangement by which the
Company or any Subsidiary is bound or to which any of their respective assets or
properties is subject;

 

(vii) any material labor difficulties or labor union organizing activities with
respect to employees of the Company or any Subsidiary;

 

(viii) any material transaction entered into by the Company or a Subsidiary
other than in the ordinary course of business;

 

(ix) the loss of the services of any key employee, or material change in the
composition or duties of the senior management of the Company or any Subsidiary;

 

(x) the loss or threatened loss of any customer which has had or could
reasonably be expected to have a Material Adverse Effect; or

 

(xi) any other event or condition of any character that has had or could
reasonably be expected to have a Material Adverse Effect.

 

4.9

SEC Filings; S-3 Eligibility.

 

(a) At the time of filing thereof, the SEC Filings complied as to form in all
material respects with the requirements of the 1934 Act and did not contain any
untrue statement of a material fact or omit to state any material fact necessary
in order to make the

 

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statements made therein, in the light of the circumstances under which they were
made, not misleading.

 

(b) Each registration statement and any amendment thereto filed by the Company
since January 1, 2005 pursuant to the 1933 Act and the rules and regulations
thereunder, as of the date such statement or amendment became effective,
complied as to form in all material respects with the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein not misleading; and each prospectus filed pursuant to Rule 424(b)
under the 1933 Act, as of its issue date and as of the closing of any sale of
securities pursuant thereto did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading.

 

(c) Upon the filing of the Company’s Annual Report on Form 10-K for the fiscal
year ended June 30, 2008 (the “2008 10-K”), the Company will be eligible to use
Form S-3 to register the Registrable Securities (as such term is defined in the
Registration Rights Agreement) for sale by the Investors as contemplated by the
Registration Rights Agreement.

 

4.10 No Conflict, Breach, Violation or Default. The execution, delivery and
performance of the Transaction Documents by the Company and the issuance and
sale of the Securities will not conflict with or result in a breach or violation
of any of the terms and provisions of, or constitute a default under (i) the
Company’s Certificate of Incorporation or the Company’s Bylaws, both as in
effect on the date hereof (true and complete copies of which have been made
available to the Investors through the EDGAR system), or (ii)(a) any statute,
rule, regulation or order of any governmental agency or body or any court,
domestic or foreign, having jurisdiction over the Company, any Subsidiary or any
of their respective assets or properties, or (b) any agreement or instrument to
which the Company or any Subsidiary is a party or by which the Company or a
Subsidiary is bound or to which any of their respective assets or properties is
subject, except, in the case of clause (ii) only, such breaches, violations or
defaults that individually or in the aggregate would not cause a Material
Adverse Effect.

 

4.11 Tax Matters. The Company and each Subsidiary has timely prepared and filed
all tax returns required to have been filed by the Company or such Subsidiary
with all appropriate governmental agencies and timely paid all taxes shown
thereon or otherwise owed by it. The charges, accruals and reserves on the books
of the Company in respect of taxes for all fiscal periods are adequate in all
material respects, and there are no material unpaid assessments against the
Company or any Subsidiary nor, to the Company’s Knowledge, any basis for the
assessment of any additional taxes, penalties or interest for any fiscal period
or audits by any federal, state or local taxing authority except for any
assessment which is not material to the Company and its Subsidiaries, taken as a
whole. All taxes and other assessments and levies that the Company or any
Subsidiary is required to withhold or to collect for payment have been duly
withheld and collected and paid to the proper governmental entity or third party
when due. There are no tax liens or claims pending or, to the Company’s
Knowledge, threatened against the Company or any Subsidiary or any of their
respective assets or property. There are no

 

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outstanding tax sharing agreements or other such arrangements between the
Company and any Subsidiary or other corporation or entity.

 

4.12 Title to Properties. Except as disclosed in the SEC Filings, the Company
and each Subsidiary has good and marketable title to all real properties and all
other properties and assets owned by it, in each case free from liens,
encumbrances and defects that would materially affect the value thereof or
materially interfere with the use made or currently planned to be made thereof
by them; and except as disclosed in the SEC Filings, the Company and each
Subsidiary holds any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere with the
use made or currently planned to be made thereof by them.

 

4.13 Certificates, Authorizations and Permits. The Company and each Subsidiary
possess adequate certificates, authorizations or permits issued by appropriate
governmental agencies or bodies necessary to conduct the business now operated
by it, except where the failure to possess such certificates, authorizations or
permits has not had and could not reasonably be expected to have a Material
Adverse Effect, and neither the Company nor any Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authority or permit that, if determined adversely to the Company or
such Subsidiary, could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate.

 

4.14

Labor Matters.

 

(a) Except as set forth on Schedule 4.14, the Company is not a party to or bound
by any collective bargaining agreements or other agreements with labor
organizations. The Company has not violated in any material respect any laws,
regulations, orders or contract terms, affecting the collective bargaining
rights of employees, labor organizations or any laws, regulations or orders
affecting employment discrimination, equal opportunity employment, or employees’
health, safety, welfare, wages and hours.

 

(b) (i) There are no labor disputes existing, or to the Company's Knowledge,
threatened, involving strikes, slow-downs, work stoppages, job actions,
disputes, lockouts or any other disruptions of or by the Company's employees,
(ii) there are no unfair labor practices or petitions for election pending or,
to the Company's Knowledge, threatened before the National Labor Relations Board
or any other federal, state or local labor commission relating to the Company's
employees, (iii) no demand for recognition or certification heretofore made by
any labor organization or group of employees is pending with respect to the
Company and (iv) to the Company's Knowledge, the Company enjoys good labor and
employee relations with its employees and labor organizations.

 

(c) The Company is, and at all times has been, in compliance in all material
respects with all applicable laws respecting employment (including laws relating
to classification of employees and independent contractors) and employment
practices, terms and conditions of employment, wages and hours, and immigration
and naturalization. There are no claims pending against the Company before the
Equal Employment Opportunity Commission or any other

 

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administrative body or in any court asserting any violation of Title VII of the
Civil Rights Act of 1964, the Age Discrimination Act of 1967, 42 U.S.C. §§ 1981
or 1983 or any other federal, state or local Law, statute or ordinance barring
discrimination in employment.

 

(d) Except as disclosed in the SEC Filings or as described on Schedule 4.14, the
Company is not a party to, or bound by, any employment or other contract or
agreement that contains any severance, termination pay or change of control
liability or obligation, including, without limitation, any “excess parachute
payment,” as defined in Section 280G(b) of the Internal Revenue Code.

 

(e) Each of the Company's employees is a Person who is either (i) a United
States citizen, (ii) a permanent resident entitled to work in the United States
or (iii) holds a valid H-1 visa. To the Company's Knowledge, the Company has no
liability for the improper classification by the Company of such employees as
independent contractors or leased employees prior to the Closing.

 

4.15

Intellectual Property. Except as described in the SEC Filings:

 

(a) All Intellectual Property of the Company and its Subsidiaries is currently
in compliance with all legal requirements (including timely filings, proofs and
payments of fees) and is valid and enforceable. No Intellectual Property of the
Company or its Subsidiaries which is necessary for the conduct of Company’s and
each of its Subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted has been or is now involved in any
cancellation, dispute or litigation, and, to the Company’s Knowledge, no such
action is threatened. No patent of the Company or its Subsidiaries has been or
is now involved in any interference, reissue, re-examination or opposition
proceeding.

 

(b) All of the licenses and sublicenses and consent, royalty or other agreements
concerning Intellectual Property which are necessary for the conduct of the
Company’s and each of its Subsidiaries’ respective businesses as currently
conducted or as currently proposed to be conducted to which the Company or any
Subsidiary is a party or by which any of their assets are bound (other than
 generally commercially available, non-custom, off-the-shelf software
application programs having a retail acquisition price of less than $10,000 per
license) (collectively, “License Agreements”) are valid and binding obligations
of the Company or its Subsidiaries that are parties thereto and, to the
Company’s Knowledge, the other parties thereto, enforceable in accordance with
their terms, except to the extent that enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
other similar laws affecting the enforcement of creditors’ rights generally, and
there exists no event or condition which will result in a material violation or
breach of or constitute (with or without due notice or lapse of time or both) a
default by the Company or any of its Subsidiaries under any such License
Agreement.

 

(c) The Company and its Subsidiaries own or have the valid right to use all of
the Intellectual Property that is necessary for the conduct of the Company’s and
each of its Subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted and for the ownership, maintenance and
operation of the Company’s and its

 

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Subsidiaries’ properties and assets, free and clear of all liens, encumbrances,
adverse claims or obligations to license all such owned Intellectual Property
and Confidential Information, other than licenses entered into in the ordinary
course of the Company’s and its Subsidiaries’ businesses. The Company and its
Subsidiaries have a valid and enforceable right to use all third party
Intellectual Property and Confidential Information used or held for use in the
respective businesses of the Company and its Subsidiaries.

 

(d) To the Company’s Knowledge, the conduct of the Company’s and its
Subsidiaries’ businesses as currently conducted does not infringe or otherwise
impair or conflict with (collectively, “Infringe”) any Intellectual Property
rights of any third party or any confidentiality obligation owed to a third
party, and, to the Company’s Knowledge, the Intellectual Property and
Confidential Information of the Company and its Subsidiaries which are necessary
for the conduct of Company’s and each of its Subsidiaries’ respective businesses
as currently conducted or as currently proposed to be conducted are not being
Infringed by any third party. There is no litigation or order pending or
outstanding or, to the Company’s Knowledge, threatened or imminent, that seeks
to limit or challenge or that concerns the ownership, use, validity or
enforceability of any Intellectual Property or Confidential Information of the
Company and its Subsidiaries and the Company’s and its Subsidiaries’ use of any
Intellectual Property or Confidential Information owned by a third party, and,
to the Company’s Knowledge, there is no valid basis for the same.

 

(e) The consummation of the transactions contemplated hereby and by the other
Transaction Documents will not result in the alteration, loss, impairment of or
restriction on the Company’s or any of its Subsidiaries’ ownership or right to
use any of the Intellectual Property or Confidential Information which is
necessary for the conduct of Company’s and each of its Subsidiaries’ respective
businesses as currently conducted or as currently proposed to be conducted.

 

(f) The Company and its Subsidiaries have taken reasonable steps to protect the
Company’s and its Subsidiaries’ rights in their Intellectual Property and
Confidential Information. Except under confidentiality obligations, there has
been no material disclosure of any of the Company’s or its Subsidiaries’
Confidential Information to any third party.

 

4.16 Environmental Matters. Neither the Company nor any Subsidiary is in
violation of any statute, rule, regulation, decision or order of any
governmental agency or body or any court, domestic or foreign, relating to the
use, disposal or release of hazardous or toxic substances or relating to the
protection or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, “Environmental Laws”), owns or operates any real
property contaminated with any substance that is subject to any Environmental
Laws, is liable for any off-site disposal or contamination pursuant to any
Environmental Laws, or is subject to any claim relating to any Environmental
Laws, which violation, contamination, liability or claim has had or could
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate; and there is no pending or, to the Company’s Knowledge, threatened
investigation that might lead to such a claim.

 

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4.17 Litigation. Except as described on Schedule 4.17, there are no pending
actions, suits or proceedings against or affecting the Company, its Subsidiaries
or any of its or their properties; and to the Company’s Knowledge, no such
actions, suits or proceedings are threatened or contemplated. Neither the
Company nor any Subsidiary, nor any director or officer thereof, is or since
January 1, 2003 has been the subject of any action involving a claim of
violation of or liability under federal or state securities laws or a claim of
breach of fiduciary duty. There has not been, and to the Company’s Knowledge,
there is not pending or contemplated, any investigation by the SEC involving the
Company or any current or former director or officer of the Company. The SEC has
not issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the 1933 Act
or the 1934 Act.

 

4.18 Financial Statements. The financial statements included in each SEC Filing
present fairly, in all material respects, the consolidated financial position of
the Company as of the dates shown and its consolidated results of operations and
cash flows for the periods shown, and such financial statements have been
prepared in conformity with United States generally accepted accounting
principles applied on a consistent basis (“GAAP”) (except as may be disclosed
therein or in the notes thereto, and, in the case of quarterly financial
statements, as permitted by Form 10-Q under the 1934 Act). As of their
respective dates, such financial statements complied as to form in all material
respects with the published rules and regulations of the Commission with respect
thereto. Except as set forth in the financial statements of the Company included
in the SEC Filings filed prior to the date hereof or as described on Schedule
4.18, neither the Company nor any of its Subsidiaries has incurred any
liabilities, contingent or otherwise, except those incurred in the ordinary
course of business, consistent (as to amount and nature) with past practices
since the date of such financial statements, none of which, individually or in
the aggregate, have had or could reasonably be expected to have a Material
Adverse Effect.

 

4.19 Insurance Coverage. The Company and each Subsidiary maintains in full force
and effect insurance coverage that is customary for comparably situated
companies for the business being conducted and properties owned or leased by the
Company and each Subsidiary, and the Company reasonably believes such insurance
coverage to be adequate against all liabilities, claims and risks against which
it is customary for comparably situated companies to insure.

 

4.20 Compliance with Nasdaq Continued Listing Requirements. The Company is in
compliance with applicable Nasdaq continued listing requirements. There are no
proceedings pending or, to the Company’s Knowledge, threatened against the
Company relating to the continued listing of the Common Stock on Nasdaq and the
Company has not received any notice of, nor to the Company’s Knowledge is there
any basis for, the delisting of the Common Stock from Nasdaq.

 

4.21 Brokers and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company, any Subsidiary or an Investor for any commission,
fee or other compensation

 

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pursuant to any agreement, arrangement or understanding entered into by or on
behalf of the Company, other than as described in Schedule 4.21.

 

4.22 No Directed Selling Efforts or General Solicitation. Neither the Company
nor any Person acting on its behalf has conducted any general solicitation or
general advertising (as those terms are used in Regulation D) in connection with
the offer or sale of any of the Securities.

 

4.23 No Integrated Offering. Neither the Company nor any of its Affiliates, nor
any Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any Company security or solicited any offers to buy any
security, under circumstances that would adversely affect reliance by the
Company on Section 4(2) for the exemption from registration for the transactions
contemplated hereby or would require registration of the Securities under the
1933 Act.

 

4.24 Private Placement. Assuming the truth and accuracy of the Investors’
representations and warranties in this Agreement, the offer and sale of the
Securities to the Investors as contemplated hereby is exempt from the
registration requirements of the 1933 Act.

 

4.25 Questionable Payments. Neither the Company nor any of its Subsidiaries nor,
to the Company’s Knowledge, any of their respective current or former directors,
officers, employees, agents or other Persons acting on behalf of the Company or
any Subsidiary, has on behalf of the Company or any Subsidiary or in connection
with their respective businesses: (a) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (b) made any direct or indirect unlawful payments to any
governmental officials or employees from corporate funds; (c) established or
maintained any unlawful or unrecorded fund of corporate monies or other assets;
(d) made any false or fictitious entries on the books and records of the Company
or any Subsidiary; or (e) made any unlawful bribe, rebate, payoff, influence
payment, kickback or other unlawful payment of any nature.

 

4.26 Transactions with Affiliates. Except as disclosed in the SEC Filings, none
of the officers or directors of the Company and, to the Company’s Knowledge,
none of the employees of the Company is presently a party to any transaction
with the Company or any Subsidiary (other than as holders of stock options
and/or warrants, and for services as employees, officers and 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 officer,
director or such employee or, to the Company’s Knowledge, any entity in which
any officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.

 

4.27 Internal Controls. The Company is in material compliance with the
provisions of the Sarbanes-Oxley Act of 2002 currently applicable to the
Company. The Company and the Subsidiaries maintain 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 GAAP and to maintain
asset

 

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accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The
Company has established disclosure controls and procedures (as defined in 1934
Act Rules 13a-15(e) and 15d-15(e)) for the Company and designed such disclosure
controls and procedures to ensure that material information relating to the
Company, including the Subsidiaries, is made known to the certifying officers by
others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the 1934 Act, as the case
may be, is being prepared. The Company's certifying officers have evaluated the
effectiveness of the Company's controls and procedures as of the end of the
period covered by the most recently filed periodic report under the 1934 Act
(such date, the "Evaluation Date"). The Company presented in its most recently
filed periodic report under the 1934 Act the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based
on their evaluations as of the Evaluation Date. Since the Evaluation Date, there
have been no significant changes in the Company's internal controls (as such
term is defined in Item 308 of Regulation S-K) or, to the Company's Knowledge,
in other factors that could significantly affect the Company's internal
controls. The Company maintains and will continue to maintain a standard system
of accounting established and administered in accordance with GAAP and the
applicable requirements of the 1934 Act.

 

4.28 Disclosures. Neither the Company nor any Person acting on its behalf has
provided the Investors or their agents or counsel with any information that
constitutes or might constitute material non-public information, other than the
terms of the transactions contemplated hereby and except for certain information
to be contained in the 2008 10-K and to be disclosed to the public in accordance
with Section 7.11. The written materials delivered to the Investors in
connection with the transactions contemplated by the Transaction Documents do
not contain any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which they were made, not misleading.

 

5.     Representations and Warranties of the Investors. Each of the Investors
hereby severally, and not jointly, represents and warrants to the Company that:

 

5.1 Organization and Existence. Such Investor is a validly existing corporation,
limited partnership or limited liability company and has all requisite
corporate, partnership or limited liability company power and authority to
invest in the Securities pursuant to this Agreement.

 

5.2 Authorization. The execution, delivery and performance by such Investor of
the Transaction Documents to which such Investor is a party have been duly
authorized and will each constitute the valid and legally binding obligation of
such Investor, enforceable against such Investor in accordance with their
respective terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability, relating
to or affecting creditors’ rights generally.

 

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5.3 Purchase Entirely for Own Account. The Securities to be received by such
Investor hereunder will be acquired for such Investor’s own account, not as
nominee or agent, and not with a view to the resale or distribution of any part
thereof in violation of the 1933 Act, and such Investor has no present intention
of selling, granting any participation in, or otherwise distributing the same in
violation of the 1933 Act without prejudice, however, to such Investor’s right
at all times to sell or otherwise dispose of all or any part of such Securities
in compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such Investor
to hold the Securities for any period of time. Such Investor is not a
broker-dealer registered with the SEC under the 1934 Act or an entity engaged in
a business that would require it to be so registered.

 

5.4 Investment Experience. Such Investor acknowledges that it can bear the
economic risk and complete loss of its investment in the Securities and has such
knowledge and experience in financial or business matters that it is capable of
evaluating the merits and risks of the investment contemplated hereby.

 

5.5 Disclosure of Information. Such Investor has had an opportunity to receive
all information related to the Company requested by it and to ask questions of
and receive answers from the Company regarding the Company, its business and the
terms and conditions of the offering of the Securities. Such Investor
acknowledges receipt of copies of the SEC Filings. Neither such inquiries nor
any other due diligence investigation conducted by such Investor shall modify,
limit or otherwise affect such Investor’s right to rely on the Company’s
representations and warranties contained in this Agreement.

 

5.6 Restricted Securities. Such Investor understands that the Securities are
characterized as “restricted securities” under the U.S. federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act only in
certain limited circumstances.

 

5.7 Legends. It is understood that, except as provided below, certificates
evidencing the Securities may bear the following or any similar legend:

 

(a) “The securities represented hereby have not been registered under the
Securities Act of 1933, as amended (the ‘Act’) and may not be transferred unless
(i) such securities have been registered for sale pursuant to the Act, (ii) such
securities may be sold without volume restriction pursuant to Rule 144, or (iii)
the Company has received an opinion of counsel reasonably satisfactory to it
that such transfer may lawfully be made without registration under the
Securities Act of 1933 or qualification under applicable state securities laws.”

 

(b) If required by the authorities of any state in connection with the issuance
of sale of the Securities, the legend required by such state authority.

 

5.8 Accredited Investor. Such Investor is an accredited investor as defined in
Rule 501(a) of Regulation D, as amended, under the 1933 Act.

 

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5.9 No General Solicitation. Such Investor did not learn of the investment in
the Securities as a result of any general solicitation or general advertising.

 

5.10 Brokers and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company, any Subsidiary or an Investor for any commission,
fee or other compensation pursuant to any agreement, arrangement or
understanding entered into by or on behalf of such Investor.

 

5.11 Prohibited Transactions. Since the earlier of (a) such time as such
Investor was first contacted by the Company or any other Person acting on behalf
of the Company regarding the transactions contemplated hereby or (b) thirty (30)
days prior to the date hereof, neither such Investor nor any Affiliate of such
Investor which (x) had knowledge of the transactions contemplated hereby, (y)
has or shares discretion relating to such Investor’s investments or trading or
information concerning such Investor’s investments, including in respect of the
Securities, or (z) is subject to such Investor’s review or input concerning such
Affiliate’s investments or trading (collectively, “Trading Affiliates”) has,
directly or indirectly, effected or agreed to effect any short sale, whether or
not against the box, established any “put equivalent position” (as defined in
Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, granted any
other right (including, without limitation, any put or call option) with respect
to the Common Stock or with respect to any security that includes, relates to or
derived any significant part of its value from the Common Stock or otherwise
sought to hedge its position in the Securities (each, a “Prohibited
Transaction”). Prior to the earliest to occur of (i) the termination of this
Agreement, (ii) the Effective Date or (iii) the Effectiveness Deadline, such
Investor shall not, and shall cause its Trading Affiliates not to, engage,
directly or indirectly, in a Prohibited Transaction. Such Investor acknowledges
that the representations, warranties and covenants contained in this Section
5.11 are being made for the benefit of the Investors as well as the Company and
that each of the other Investors shall have an independent right to assert any
claims against such Investor arising out of any breach or violation of the
provisions of this Section 5.11.

 

6. Conditions to Closing.

 

6.1 Conditions to the Investors’ Obligations. The obligation of each Investor to
purchase the Initial Notes, the Series A Warrants and the Series B Warrants at
the Closing is subject to the fulfillment to such Investor’s satisfaction, on or
prior to the Closing Date, of the following conditions, any of which may be
waived by such Investor (as to itself only):

 

(a) The representations and warranties made by the Company in Section 4 hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 4 hereof not
qualified as to materiality shall be true and correct in all material respects
at all times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and

 

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correct in all material respects as of such earlier date. The Company shall have
performed in all material respects all obligations and covenants herein required
to be performed by it on or prior to the Closing Date.

 

(b) The Company shall have obtained any and all consents, permits, approvals,
registrations and waivers necessary or appropriate for consummation of the
purchase and sale of the Securities and the consummation of the other
transactions contemplated by the Transaction Documents, all of which shall be in
full force and effect.

 

(c) The Company shall have executed and delivered the Registration Rights
Agreement.

 

(d) No judgment, writ, order, injunction, award or decree of or by any court, or
judge, justice or magistrate, including any bankruptcy court or judge, or any
order of or by any governmental authority, shall have been issued, and no action
or proceeding shall have been instituted by any governmental authority,
enjoining or preventing the consummation of the transactions contemplated hereby
or in the other Transaction Documents.

 

(e) The Company shall have delivered to the Investors a Certificate, executed on
behalf of the Company by its Chief Executive Officer or its Chief Financial
Officer, dated as of the Closing Date, certifying to the fulfillment of the
conditions specified in subsections (a), (b), (d) and (h) of this Section 6.1.

 

(f) The Company shall have delivered to the Investors a Certificate, executed on
behalf of the Company by its Secretary, dated as of the Closing Date, certifying
the resolutions adopted by the Board of Directors of the Company approving the
transactions contemplated by this Agreement and the other Transaction Documents
and the issuance of the Securities, certifying the current versions of the
Certificate of Incorporation and Bylaws of the Company and certifying as to the
signatures and authority of persons signing the Transaction Documents and
related documents on behalf of the Company.

 

(g) The Investors shall have received an opinion from the Law Offices of Dan
Brecher, the Company's counsel, dated as of the Closing Date, in form and
substance reasonably acceptable to the Investors and addressing such legal
matters as the Investors may reasonably request.

 

(h) No stop order or suspension of trading shall have been imposed by Nasdaq,
the SEC or any other governmental or regulatory body with respect to public
trading in the Common Stock.

 

6.2 Conditions to Obligations of the Company. The Company's obligation to sell
and issue the Initial Notes, the Series A Warrants and the Series B Warrants at
the Closing is subject to the fulfillment to the satisfaction of the Company on
or prior to the Closing Date of the following conditions, any of which may be
waived by the Company:

 

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(a) The representations and warranties made by the Investors in Section 5
hereof, other than the representations and warranties contained in Sections 5.3,
5.4, 5.5, 5.6, 5.7, 5.8 and 5.9 (the “Investment Representations”), shall be
true and correct in all material respects when made, and shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investment
Representations shall be true and correct in all respects when made, and shall
be true and correct in all respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investors shall have
performed in all material respects all obligations and covenants herein required
to be performed by them on or prior to the Closing Date.

 

(b) The Investors shall have executed and delivered the Registration Rights
Agreement.

 

(c)

The Investors shall have delivered the Purchase Price to the Company.

 

6.3

Termination of Obligations to Effect Closing; Effects.

 

(a) The obligations of the Company, on the one hand, and the Investors, on the
other hand, to effect the Closing shall terminate as follows:

 

(i)

Upon the mutual written consent of the Company and the Investors;

 

(ii) By the Company if any of the conditions set forth in Section 6.2 shall have
become incapable of fulfillment, and shall not have been waived by the Company;

 

(iii) By an Investor (with respect to itself only) if any of the conditions set
forth in Section 6.1 shall have become incapable of fulfillment, and shall not
have been waived by the Investor; or

 

(iv) By either the Company or any Investor (with respect to itself only) if the
Closing has not occurred on or prior to September 30, 2008;

 

provided, however, that, except in the case of clause (i) above, the party
seeking to terminate its obligation to effect the Closing shall not then be in
breach of any of its representations, warranties, covenants or agreements
contained in this Agreement or the other Transaction Documents if such breach
has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect the Closing.

 

(b) In the event of termination by the Company or any Investor of its
obligations to effect the Closing pursuant to this Section 6.3, written notice
thereof shall forthwith be given to the other Investors by the Company and the
other Investors shall have the right to terminate their obligations to effect
the Closing upon written notice to the Company and

 

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the other Investors. Nothing in this Section 6.3 shall be deemed to release any
party from any liability for any breach by such party of the terms and
provisions of this Agreement or the other Transaction Documents or to impair the
right of any party to compel specific performance by any other party of its
obligations under this Agreement or the other Transaction Documents.

 

7.

Covenants and Agreements of the Company.

 

7.1 Reservation of Common Stock. The Company shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock, solely for
the purpose of providing for the conversion of the Notes and the exercise of the
Warrants, such number of shares of Common Stock as shall from time to time equal
the Conversion Shares, the Interest Shares (assuming all interest on the Notes
is paid in Interest Shares) and the Warrant Shares.

 

7.2 Reports. The Company will furnish to the Investors such information relating
to the Company and its Subsidiaries as from time to time may reasonably be
requested by the Investors; provided, however, that the Company shall not
disclose material nonpublic information to the Investors, or to advisors to or
representatives of the Investors, unless prior to disclosure of such information
the Company identifies such information as being material nonpublic information
and provides the Investors, such advisors and representatives with the
opportunity to accept or refuse to accept such material nonpublic information
for review and any Investor wishing to obtain such information enters into an
appropriate confidentiality agreement with the Company with respect thereto.

 

7.3 No Conflicting Agreements. The Company will not take any action, enter into
any agreement or make any commitment that would conflict or interfere in any
material respect with the Company’s obligations to the Investors under the
Transaction Documents.

 

7.4 Insurance. The Company shall not materially reduce the insurance coverages
described in Section 4.19.

 

7.5 Compliance with Laws. The Company will comply in all material respects with
all applicable laws, rules, regulations, orders and decrees of all governmental
authorities.

 

7.6 Listing of Underlying Shares and Related Matters. Promptly following the
date hereof, the Company shall take all necessary action to cause the Conversion
Shares and the Warrant Shares to be listed on Nasdaq no later than the Closing
Date. Further, if the Company applies to have its Common Stock or other
securities traded on any stock exchange or market, it shall include in such
application the Conversion Shares and the Warrant Shares and will take such
other action as is necessary to cause such Common Stock to be so listed. The
Company will use commercially reasonable efforts to continue the listing and
trading of its Common Stock on Nasdaq and, in accordance, therewith, will use
commercially reasonable efforts to comply in all respects with the Company’s
reporting, filing and other obligations under the bylaws or rules thereof.

 

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7.7 Termination of Covenants. The provisions of Sections 7.2 through 7.5 shall
terminate and be of no further force and effect on the date on which the
Company’s obligations under the Registration Rights Agreement to register or
maintain the effectiveness of any registration covering the Registrable
Securities (as such term is defined in the Registration Rights Agreement) shall
terminate.

 

7.8 Removal of Legends. In connection with any sale or disposition of the
Securities by an Investor pursuant to Rule 144 or pursuant to any other
exemption under the 1933 Act such that the purchaser acquires freely tradable
shares and upon compliance by the Investor with the requirements of this
Agreement, the Company shall or, in the case of Common Stock, shall cause the
transfer agent for the Common Stock (the “Transfer Agent”) to issue replacement
certificates representing the Securities sold or disposed of without restrictive
legends. Upon the earlier of (i) registration for resale pursuant to the
Registration Rights Agreement or (ii) the Conversion Shares or the Warrant
Shares, as applicable, becoming freely tradable by a non-affiliate pursuant to
Rule 144 the Company shall (A) deliver to the Transfer Agent irrevocable
instructions that the Transfer Agent shall issue a certificate representing
shares of Common Stock without legends upon receipt by such Transfer Agent of
(X) either (1) a customary representation by the Investor that Rule 144 applies
to the shares of Common Stock represented thereby or (2) a statement by the
Investor that such Investor has sold the shares of Common Stock represented
thereby in accordance with the Plan of Distribution contained in the
Registration Statement, and (Y) if applicable, the legended certificates for
such shares, and (B) cause its counsel to deliver to the Transfer Agent one or
more blanket opinions to the effect that the removal of such legends in such
circumstances may be effected under the 1933 Act. At any time when one or more
of the Securities may be freely sold or is covered by an effective Registration
Statement, the Company shall, or shall cause the Transfer Agent to, promptly
cause the Investor’s Securities to be replaced with Securities which do not bear
restrictive legends, and Conversion Shares subsequently issued upon the due
conversion of the Notes and Warrant Shares subsequently issued upon due exercise
of the Warrants shall not bear such restrictive legends provided such Securities
may be freely sold or are covered by an effective Registration Statement. When
the Company is required to cause an unlegended Security to be issued as provided
herein, if: (1) the unlegended Security is not delivered to an Investor within
three (3) Business Days of submission by that Investor of a request for
unlegended Securities and, if applicable, the documentation specified above to
the Transfer Agent or the Company, as applicable, and (2) prior to the time such
unlegended Security is received by the Investor, the Investor, or any third
party on behalf of such Investor or for the Investor’s account, purchases (in an
open market transaction or otherwise) another Security to deliver in
satisfaction of a sale by the Investor of such Security (a “Buy-In”), then the
Company shall pay in cash to the Investor (for costs incurred either directly by
such Purchaser or on behalf of a third party) the amount by which the total
purchase price paid for the replacement Security as a result of the Buy-In
(including brokerage commissions, if any) exceeds the proceeds received by such
Investor as a result of the sale to which such Buy-In relates. The Investor
shall provide the Company written notice indicating the amounts payable to the
Investor in respect of the Buy-In.

 

7.9

Subsequent Equity Sales.

 

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(a) From the date hereof until ninety (90) days after the Effective Date,
without the consent of the Investors, neither the Company nor any Subsidiary
shall issue shares of Common Stock or Common Stock Equivalents; provided,
however, the ninety (90) day period set forth in this Section shall be extended
for the number of days during such period in which (i) trading in the Common
Stock is suspended by any exchange or market on which the Common Stock is listed
or quoted, or (ii) following the Effective Date, the Registration Statement is
not effective or the prospectus included in the Registration Statement may not
be used by the Investors for the resale of the Initial Conversion Shares or the
Initial Warrant Shares. Notwithstanding the foregoing, the provisions of this
Section 7.9(a) shall not apply to (i) the issuance of Common Stock or Common
Stock Equivalents upon the conversion or exercise of any securities of the
Company or a Subsidiary outstanding on the date hereof, provided that the terms
of such security are not amended after the date hereof to decrease the exercise
price or increase the Common Stock or Common Stock Equivalents receivable upon
the exercise, conversion or exchange thereof or (ii) the issuance of any Common
Stock or Common Stock Equivalents pursuant to any Company equity incentive plan
approved by the Company’s stockholders and in place as of the date hereof.

 

(b) From the date hereof until such time as no Investor holds more than $50,000
of Securities (based on the purchase price paid hereunder), the Company shall be
prohibited from effecting or entering into an agreement to effect any Subsequent
Financing involving a “Variable Rate Transaction”. The term “Variable Rate
Transaction” shall mean a transaction in which the Company issues or sells (i)
any debt or equity securities that are convertible into, exchangeable or
exercisable for, or include the right to receive additional shares of Common
Stock either (A) at a conversion, exercise or exchange rate or other price that
is based upon and/or varies with the trading prices of or quotations for the
shares of Common Stock at any time after the initial issuance of such debt or
equity securities, or (B) with a conversion, exercise or exchange price that is
subject to being reset at some future date after the initial issuance of such
debt or equity security or upon the occurrence of specified or contingent events
directly or indirectly related to the business of the Company or the market for
the Common Stock or (ii) enters into any agreement, including, but not limited
to, an equity line of credit, whereby the Company may sell securities at a
future determined price.

 

7.10 Equal Treatment of Investors. 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 is also offered
to all of the parties to the Transaction Documents. For clarification purposes,
this provision constitutes a separate right granted to each Investor by the
Company and negotiated separately by each Investor, and is intended for the
Company to treat the Investors as a class and shall not in any way be construed
as the Investors acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.

 

7.11 Filing of 2008 10-K. The Company shall file the 2008 10-K with the SEC no
later than 5:30 p.m., New York time, on September 30, 2008, without giving
effect to Rule 12b-25 under the 1934 Act (the “Filing Deadline”). From and after
the earlier of (i) the filing of 2008 10-K with the SEC and (ii) the Filing
Deadline, the Investors shall be deemed to no longer be in possession of
material non-public information and shall be free to trade the Common Stock

 

-21-

 

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

 

 

in the open market. If the Company is unable to file the 2008 10-K on or prior
to the Filing Deadline, the Company shall take all actions required to disclose
publicly any material non-public information previously provided to the
Investors and to otherwise comply with the requirements of Regulation FD and
such other requirements as may be necessary or advisable (in the reasonable
judgment of counsel to the Investors) to permit the Investors to trade the
Common Stock in the open market from and after the Filing Deadline.

 

8.

Survival and Indemnification.

 

8.1 Survival. The representations, warranties, covenants and agreements
contained in this Agreement shall survive the Closing of the transactions
contemplated by this Agreement.

 

8.2 Indemnification. The Company agrees to indemnify and hold harmless each
Investor and its Affiliates and their respective directors, officers, employees
and agents from and against any and all losses, claims, damages, liabilities and
expenses (including without limitation reasonable attorney fees and
disbursements and other expenses incurred in connection with investigating,
preparing or defending any action, claim or proceeding, pending or threatened
and the costs of enforcement thereof) (collectively, “Losses”) to which such
Person may become subject as a result of any breach of representation, warranty,
covenant or agreement made by or to be performed on the part of the Company
under the Transaction Documents, and will reimburse any such Person for all such
amounts as they are incurred by such Person.

 

8.3 Conduct of Indemnification Proceedings. Promptly after receipt by any Person
(the “Indemnified Person”) of notice of any demand, claim or circumstances which
would or might give rise to a claim or the commencement of any action,
proceeding or investigation in respect of which indemnity may be sought pursuant
to Section 8.2, such Indemnified Person shall promptly notify the Company in
writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person, and
shall assume the payment of all fees and expenses; provided, however, that the
failure of any Indemnified Person so to notify the Company shall not relieve the
Company of its obligations hereunder except to the extent that the Company is
materially prejudiced by such failure to notify. In any such proceeding, any
Indemnified Person shall have the right to retain its own counsel, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Person
unless: (i) the Company and the Indemnified Person shall have mutually agreed to
the retention of such counsel; or (ii) in the reasonable judgment of counsel to
such Indemnified Person representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
The Company shall not be liable for any settlement of any proceeding effected
without its written consent, which consent shall not be unreasonably withheld,
but if settled with such consent, or if there be a final judgment for the
plaintiff, the Company shall indemnify and hold harmless such Indemnified Person
from and against any loss or liability (to the extent stated above) by reason of
such settlement or judgment. Without the prior written consent of the
Indemnified Person, which consent shall not be unreasonably withheld, the
Company shall not effect any settlement of any pending or threatened proceeding
in respect of which any Indemnified Person is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless

 

-22-

 

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such settlement includes an unconditional release of such Indemnified Person
from all liability arising out of such proceeding.

 

9.

Miscellaneous.

 

9.1 Successors and Assigns. This Agreement may not be assigned by a party hereto
without the prior written consent of the Company or the Investors, as
applicable, which shall not be unreasonably withheld; provided, however, that an
Investor may assign its rights and delegate its duties hereunder in whole or in
part to an Affiliate or to a third party acquiring some or all of its Securities
in a transaction complying with applicable securities laws without the prior
written consent of the Company or the other Investors. The provisions of this
Agreement shall inure to the benefit of and be binding upon the respective
permitted successors and assigns of the parties. Nothing in this Agreement,
express or implied, is intended to confer upon any party other than the parties
hereto or their respective successors and assigns any rights, remedies,
obligations, or liabilities under or by reason of this Agreement, except as
expressly provided in this Agreement.

 

9.2 Counterparts; Faxes. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement may also
be executed and transmitted via facsimile, or by portable document format via
electronic mail, each of which shall be deemed an original.

 

9.3 Titles and Subtitles. The titles and subtitles used in this Agreement are
used for convenience only and are not to be considered in construing or
interpreting this Agreement.

 

9.4 Notices. Unless otherwise provided, any notice required or permitted under
this Agreement shall be given in writing and shall be deemed effectively given
as hereinafter described (i) if given by personal delivery, then such notice
shall be deemed given upon such delivery, (ii) if given by telex or telecopier,
then such notice shall be deemed given upon receipt of confirmation of complete
transmittal, (iii) if given by mail, then such notice shall be deemed given upon
the earlier of (A) receipt of such notice by the recipient or (B) three days
after such notice is deposited in first class mail, postage prepaid, and (iv) if
given by an internationally recognized overnight air courier, then such notice
shall be deemed given one Business Day after delivery to such carrier. All
notices shall be addressed to the party to be notified at the address as
follows, or at such other address as such party may designate by ten days’
advance written notice to the other party:

 

If to the Company:

 

Media Sciences International, Inc.

8 Allerman Road

Oakland, New Jersey 07436

Attention: Michael W. Levin,

Chief Executive Officer and President

 

-23-

 

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

 

 

Fax: (201) 677-0311

 

With a copy to:

 

Law Offices of Dan Brecher

99 Park Avenue, 16th Floor

New York, New York 10016

Attention: Dan Brecher

Fax: (212) 808-4155

 

If to the Investors:

 

to the addresses set forth on the signature pages hereto.

 

9.5 Expenses. The parties hereto shall pay their own costs and expenses in
connection herewith, except that the Company shall pay the reasonable fees and
expenses of Lowenstein Sandler PC in an amount not to exceed $20,000 at Closing;
it being understood that Lowenstein Sandler PC has only rendered legal advice to
the MicroCapital Funds participating in this transaction and not to the Company
or any other Investor in connection with the transactions contemplated hereby,
and that each of the Company and each Investor has relied for such matters on
the advice of its own respective counsel. The Company shall reimburse the
Investors upon demand for all reasonable out-of-pocket expenses incurred by the
Investors, including without limitation reimbursement of attorneys’ fees and
disbursements, in connection with any amendment, modification or waiver of this
Agreement or the other Transaction Documents requested by the Company. In the
event that legal proceedings are commenced by any party to this Agreement
against another party to this Agreement in connection with this Agreement or the
other Transaction Documents, the party or parties which do not prevail in such
proceedings shall severally, but not jointly, pay their pro rata share of the
reasonable attorneys’ fees and other reasonable out-of-pocket costs and expenses
incurred by the prevailing party in such proceedings.

 

9.6 Amendments and Waivers. Any term of this Agreement may be amended and the
observance of any term of this Agreement may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Investors. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each holder of
any Securities purchased under this Agreement at the time outstanding, each
future holder of all such Securities, and the Company.

 

9.7 Publicity. Except as set forth below, no public release or announcement
concerning the transactions contemplated hereby shall be issued by the Company
or the Investors without the prior consent of the Company (in the case of a
release or announcement by the Investors) or the Investors (in the case of a
release or announcement by the Company) (which consents shall not be
unreasonably withheld), except as such release or announcement may be required
by law or the applicable rules or regulations of any securities exchange or
securities market, in which case the Company or the Investors, as the case may
be, shall allow the Investors or the Company, as applicable, to the extent
reasonably practicable in the circumstances,

 

-24-

 

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

 

 

reasonable time to comment on such release or announcement in advance of such
issuance. By 8:30 a.m. (New York City time) on the trading day immediately
following the Closing Date, the Company shall issue a press release disclosing
the consummation of the transactions contemplated by this Agreement. No later
than the fourth Business Day following the Closing Date, the Company will file a
Current Report on Form 8-K attaching the press release described in the
foregoing sentence as well as copies of the Transaction Documents. In addition,
the Company will make such other filings and notices in the time and manner
required by the SEC or Nasdaq.

 

9.8 Severability. Any provision of this Agreement that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof but shall be interpreted as if it were written so as
to be enforceable to the maximum extent permitted by applicable law, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. To the extent
permitted by applicable law, the parties hereby waive any provision of law which
renders any provision hereof prohibited or unenforceable in any respect.

 

9.9 Entire Agreement. This Agreement, including the Exhibits and the Disclosure
Schedules, together with the other Transaction Documents, constitute the entire
agreement among the parties hereof with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, both oral and
written, between the parties with respect to the subject matter hereof and
thereof.

 

9.10 Further Assurances. The parties shall execute and deliver all such further
instruments and documents and take all such other actions as may reasonably be
required to carry out the transactions contemplated hereby and to evidence the
fulfillment of the agreements herein contained.

 

9.11 Governing Law; Consent to Jurisdiction; Waiver of Jury Trial. This
Agreement shall be governed by, and construed in accordance with, the internal
laws of the State of New York without regard to the choice of law principles
thereof. Each of the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts of the State of New York located in New York County
and the United States District Court for the Southern District of New York for
the purpose of any suit, action, proceeding or judgment relating to or arising
out of this Agreement and the transactions contemplated hereby. Service of
process in connection with any such suit, action or proceeding may be served on
each party hereto anywhere in the world by the same methods as are specified for
the giving of notices under this Agreement. Each of the parties hereto
irrevocably consents to the jurisdiction of any such court in any such suit,
action or proceeding and to the laying of venue in such court. Each party hereto
irrevocably waives any objection to the laying of venue of any such suit, action
or proceeding brought in such courts and irrevocably waives any claim that any
such suit, action or proceeding brought in any such court has been brought in an
inconvenient forum. EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A
TRIAL BY JURY IN ANY LITIGATION WITH RESPECT TO THIS AGREEMENT AND REPRESENTS
THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY AS TO THIS WAIVER.

 

-25-

 

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9.12 Independent Nature of Investors' Obligations and Rights. The obligations of
each Investor under any Transaction Document are several and not joint with the
obligations of any other Investor, and no Investor shall be responsible in any
way for the performance of the obligations of any other Investor under any
Transaction Document. The decision of each Investor to purchase Securities
pursuant to the Transaction Documents has been made by such Investor
independently of any other Investor. Nothing contained herein or in any
Transaction Document, and no action taken by any Investor pursuant thereto,
shall be deemed to constitute the Investors as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Investors are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Documents. Each
Investor acknowledges that no other Investor has acted as agent for such
Investor in connection with making its investment hereunder and that no Investor
will be acting as agent of such Investor in connection with monitoring its
investment in the Securities or enforcing its rights under the Transaction
Documents. Each Investor shall be entitled to independently protect and enforce
its rights, including, without limitation, the rights arising out of this
Agreement or out of the other Transaction Documents, and it shall not be
necessary for any other Investor to be joined as an additional party in any
proceeding for such purpose. The Company acknowledges that each of the Investors
has been provided with the same Transaction Documents for the purpose of closing
a transaction with multiple Investors and not because it was required or
requested to do so by any Investor.

[signature page follows]

 

-26-

 

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

 

 

IN WITNESS WHEREOF, the parties have executed this Agreement or caused their
duly authorized officers to execute this Agreement as of the date first above
written.

 

The Company:

MEDIA SCIENCES INTERNATIONAL, INC.

 

 

 

By: /s/ Michael W. Levin

 

Name: Michael W. Levin

 

Title: Chief Executive Officer and President

 

 

 

-27-

 

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

 

 

The Investors:

MICROCAPITAL FUND, L.P.

 

 

 

By: /s/ Ian P. Ellis

 

Name: Ian P. Ellis

 

Title: General Partner

 

Aggregate Purchase Price: $950,000

Principal Amount of Notes: $950,000

Number of Series A Warrants: 287,878

Series B Warrants: 575,757

 

Address for Notice:

529 Fifth Avenue

8th Floor

New York, NY 10017

 

with a copy to:

 

Lowenstein Sandler PC

65 Livingston Avenue

Roseland, NJ 07068

Attn: John D. Hogoboom, Esq.

Telephone:

973.597.2500

Facsimile:

973.597.2400

 

 

MICROCAPITAL FUND, LTD

 

 

 

By: /s/ Ian P. Ellis

 

Name: Ian P. Ellis

 

Title: General Partner

 

Aggregate Purchase Price: $300,000

Principal Amount of Notes: $300,000

Number of Series A Warrants: 90,909

Series B Warrants: 181,818

 

Address for Notice:

529 Fifth Avenue

8th Floor

 

-28-

 

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

 

 

New York, NY 10017

 

with a copy to:

 

Lowenstein Sandler PC

65 Livingston Avenue

Roseland, NJ 07068

Attn: John D. Hogoboom, Esq.

Telephone:

973.597.2500

Facsimile:

973.597.2400

 

 

 

-29-

 

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DISCLOSURE SCHEDULES

TO

PURCHASE AGREEMENT

DATED AS OF SEPTEMBER 24, 2008

 

 

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SCHEDULE 4.1

 

Subsidiaries

 

The following is as of September 23, 2008:

 

Name of Subsidiary

 

Jurisdiction

Cadapult Graphic Systems, Inc.

 

New Jersey

wholly owned

 

 

Media Sciences, Inc.

 

New Jersey

wholly owned

 

 

Media Sciences UK Limited

 

England & Wales

wholly owned by Media Sciences, Inc.

 

 

MSIA, LLC

 

Delaware

wholly owned by Media Sciences, Inc.

 

 

Media Sciences Trading, Ltd.

 

Bermuda

wholly owned by Media Sciences, Inc.

 

 

Media Sciences (Dongguan) Company Limited

 

China

wholly owned by Media Sciences Trading, Ltd.

 

 

 

 

 

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

 

 

SCHEDULE 4.3

 

The Company has various agreements for awards of stock option and restricted
stock units issued pursuant to the Company’s 1998 Incentive Plan and 2006 Stock
Incentive Plan.

 

The Company has a Registration Rights Agreement, dated as of June 30, 2004, with
GFX INVESTMENTS, LLC. The agreement was filed as Exhibit 10.21 of Registration
Statement on Form SB-2, filed on July 30, 2004.

 

 

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

 

 

SCHEDULE 4.8

 

Prior to February 12, 2008, we had a revolving line of credit facility which
provided for maximum borrowings of $3,000,000. This line was replaced on
February 12, 2008, when we entered into an agreement with Sovereign Bank for a
three year revolving line of credit for up to $8,000,000. As amended, the
advance limit under the line of credit is the lesser of: (a) $8,000,000; or (b)
up to 80% of eligible accounts receivable plus up to the lesser of: (i)
$3,000,000; or (ii) 50% of eligible inventory; or (iii) 60% of the maximum
amount available to be advanced under the line. The line of credit is
collateralized by a first priority security interest in substantially all of our
U.S. based assets. Proceeds were drawn down under this line to repay all
revolving and term debt extended by our former bank. On May 14, 2008, we entered
into an amendment to the loan agreement that amended the range of interest rates
applicable to our borrowings. As amended, under a prime rate option, the
interest rate can vary from the bank’s prime rate to its prime rate plus 1%,
and, under a LIBOR rate option, the interest rate can vary from LIBOR plus 225
basis points to LIBOR plus 275 basis points. Both the term note and the line of
credit bear interest at the bank’s Prime Rate plus 1% (6.0% at June 30, 2008)
and require payments of interest only through the facilities three year term.

 

The revolving loan may be converted into one or more term notes upon mutual
agreement of the parties. On February 12, 2008, we entered into a non-amortizing
term note with the bank in the amount of $1,500,000, due February 12, 2011. At
June 30, 2008, this note had a principal balance of $1,500,000. As of June 30,
2008, we had an outstanding balance of $1,094,209 under the revolving line. The
applicable interest rate on the revolving and term loans extended under the
agreement varies based upon certain financial criteria.

 

In the year ago period and at June 30, 2007, we had a revolving line of credit
facility which provided for maximum borrowings of $3,000,000. At June 30, 2007,
we had no outstanding balance under this line. At June 30, 2007, we had
$471,083, respectively, outstanding to our former bank under two term notes.
These notes bore interest at rates greater than our present lending facility.
These term notes were repaid in full on February 12, 2008.

 

We have been subject to financial covenants in our current and former credit
facilities. Our current financial covenants include monitoring a ratio of debt
to tangible net worth and a fixed charge coverage ratio, as defined in the loan
agreements. At June 30, 2007, we were in compliance with our financial
covenants. At June 30, 2008, we were not in compliance with our financial
covenants, which were waived by the bank via an amendment dated September 22,
2008. As a result of a cross default and collateralization provision associated
with our former debt facility, we agreed to refinance certain operating leases
held by an affiliate of our former bank. Under terms of a separate waiver and
amendment with this leasing affiliate, we received an extension of time to
refinance or payoff the lease obligation until March 31, 2009. At June 30, 2008,
the remaining obligation under the agreement was approximately $567,000. Under
the terms of this amendment, we agreed to make six lease payments of $50,000 per
month between October 2008 and March 2009 and refinance or otherwise payoff any
remaining balance on or before March 31, 2009. Upon full satisfaction of this
obligation we will obtain title to the leased equipment. Based on the amended
lease terms, which include an agreed upon interest charge of prime plus 2.5% per
annum, the remaining balance at March 31, 2009 would be approximately

 

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

 

 

$245,000. This obligation may be refinanced or otherwise prepaid at anytime
without penalty. The future minimum lease payments schedule, found in Note 5,
reflects the amended terms of this lease obligation.

 

 

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

 

 

SCHEDULE 4.8

 

None.

 

 

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

 

 

SCHEDULE 4.14

 

We are presently negotiating a new written employment agreement with Mr. Levin,
our Chief Executive Officer. The proposed terms are expected to be similar to
the terms of the recently expired agreement, but provide, among other things,
for the following: a two year term; a base annual salary of $250,000; if we
undergo a “change of control” in the first year under the new term and Mr. Levin
elects to terminate his employment, a payment of $540,000; and if we undergo a
“change of control” after the first year of the new term and Mr. Levin elects to
terminate his employment, a payment equal to 200% of his base compensation. A
change of control is proposed to be defined as follows:

 

•      a change in our ownership or management that is required to be reported
under the federal securities laws;

•      the acquisition, other than directly from Media Sciences, of more than
50% or more of our common stock or our voting securities by persons other than
Media Sciences or Levin;

•      a change in a majority of the current Board of Directors, excluding a
Board approved change that does not result from a proxy contest;

•      a reorganization, merger, consolidation or sale of substantially all of
our assets, after which our shareholders do not own, in the same proportion,
more than 50% of the voting power, after which a majority of the board of
directors changes, and after which a new shareholder beneficially owns more than
50% of the voting power; or

•      shareholder approval of our liquidation or dissolution.

 

The employment agreement is expected to provide for termination for cause, and
for severance in the event of early termination for reason other than cause, in
the amount of $290,000 if terminated during the first year of employment, and in
an amount equal to one year of his base salary if terminated after the first
year of employment.

 

 

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

 

 

SCHEDULE 4.17

 

On June 23, 2006, Xerox Corporation filed a patent infringement lawsuit in the
United States District Court, for the Southern District of New York, Case No.
06CV4872, against Media Sciences International, Inc. and Media Sciences, Inc.,
alleging that the Company’s solid inks designed for use in the Xerox Phaser 8500
and 8550 printers infringe four Xerox-held patents related to the shape of the
ink sticks in combination with the Xerox ink stick feed assembly. The suit seeks
unspecified damages and fees. In the Company’s answer and counterclaims in this
action, it denied infringement and it seeks a finding of invalidity of the Xerox
patents in question. The Company also submitted counterclaims against Xerox for
breach of contract and violation of U.S. antitrust laws, seeking treble damages
and recovery of legal fees. On September 14, 2007, the court denied Xerox’s
motion to dismiss the antitrust counterclaims brought by the Company. Pre-trial
discovery on the infringement action was completed in September 2007. Pre-trial
discovery on the Company’s antitrust action was completed in July 2008. Both
actions, which the court has ruled will be tried together, may be heard in the
summer or fall of 2009. The loss of all or a part of this lawsuit could have a
material adverse affect on our results of operations and financial position. The
Company believes that its inks do not infringe any valid U.S. patents and
therefore it has meritorious grounds for success in this case. The Company
intends to vigorously defend these allegations of infringement. There can be no
assurance, however, that the Company will be successful in its defense of this
action. Proceeds of this suit, if any, will be recorded in the period when
received.

 

In May 2005, the Company filed suit in New Jersey state court against our former
insurance broker for insurance malpractice. This litigation was settled in
August 2008. Under the settlement, Media Sciences received proceeds of $1.5
million. Proceeds of this settlement will be recognized in our results of
operations in the Company’s fiscal first quarter ended September 30, 2008.

 

Other than the above, as at September 23, 2008, we are not a party to any
material pending legal proceeding, other than ordinary routine litigation
incidental to our business.

 

 

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

 

 

SCHEDULE 4.18

 

None.

 

 

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

 

 

SCHEDULE 4.21

 

On May 6, 2008, the Company entered into an engagement agreement with
ThinkPanmure. The Company sent a letter of termination in August 2008.