Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This Securities Purchase Agreement (this “Agreement”) is dated as of March 28,
2005, by and among Intrusion Inc., a Delaware corporation (the “Company”), and
the purchasers identified on the signature pages hereto (each, including its
successors and assigns, a “Purchaser” and collectively the “Purchasers”).

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the
“Securities Act”) and Rule 506 promulgated thereunder, the Company desires to
issue and sell to each Purchaser, and each Purchaser, severally and not jointly,
desires to purchase from the Company, securities of the Company as more fully
described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy of which are hereby acknowledged, the Company and each Purchaser agree
as follows:

 

ARTICLE I

DEFINITIONS

 

1.1                                 DEFINITIONS.  IN ADDITION TO THE TERMS
DEFINED ELSEWHERE IN THIS AGREEMENT: (A) CAPITALIZED TERMS THAT ARE NOT
OTHERWISE DEFINED HEREIN HAVE THE MEANINGS GIVEN TO SUCH TERMS IN THE
CERTIFICATE OF DESIGNATIONS (AS DEFINED HEREIN), AND (B) THE FOLLOWING TERMS
HAVE THE MEANINGS INDICATED IN THIS SECTION 1.1:

 

“Action” shall have the meaning ascribed to such term in Section 3.1(j).

 

“Actual Minimum” means, as of any date, the maximum aggregate number of shares
of Common Stock then issued or potentially issuable in the future pursuant to
the Transaction Documents, including any Underlying Shares issuable upon
exercise or conversion in full of all Warrants and shares of Preferred Stock,
ignoring any conversion or exercise limits set forth therein, and assuming that
any previously unconverted shares of Preferred Stock are held until the third
anniversary of the Closing Date, subject to the limitation on the number of
shares of Common Stock issuable hereunder set forth in Sections 6(c) and 6(d) of
the Certificate of Designations.

 

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a
Person, as such terms are used in and construed under Rule 144 under the
Securities Act.  With respect to a Purchaser, any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as such Purchaser will be deemed to be an Affiliate of such Purchaser.

 

“Certificate of Designations” means the Certificate of Designations to be filed
prior to the Closing by the Company with the Secretary of State of Delaware, in
the form

 

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of Exhibit A attached hereto.

 

“Closing” means the closing of the purchase and sale of the Securities pursuant
to Section 2.1.

 

“Closing Date” means the Trading Day when all of the Transaction Documents have
been executed and delivered by the applicable parties thereto, and all
conditions precedent to (i) the Purchasers’ obligations to pay the Subscription
Amount and (ii) the Company’s obligations to deliver the Securities have been
satisfied or waived.

 

“Commission” means the Securities and Exchange Commission.

 

“Common Stock” means the common stock of the Company, par value $0.01 per share,
and any other class of securities into which such securities may hereafter have
been reclassified or changed into.

 

“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 Counsel” means Patton Boggs LLP.

 

“Conversion Price” shall have the meaning ascribed to such term in the
Certificate of Designations.

 

“Current 10-KSB” means the Company’s Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2004, a current draft of which is attached as Annex 1 to
the Disclosure Schedules, which the Company intends to file on the second
Trading Day following the Closing Date.

 

“Disclosure Schedules” shall have the meaning ascribed to such term in
Section 3.1.

 

“Effective Date” means the date that the initial Registration Statement filed by
the Company pursuant to the Registration Rights Agreement is first declared
effective by the Commission.

 

“Escrow Agent” shall have the meaning set forth in the Escrow Agreement.

 

“Escrow Agreement” shall mean the Escrow Agreement in substantially the form of
Exhibit E hereto executed and delivered contemporaneously with this Agreement.

 

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

 

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“Exempt Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of, or consultants to, the Company pursuant to
any stock or option plan duly adopted by a majority of the non-employee members
of the Board of Directors of the Company or a majority of the members of a
committee of non-employee directors established for such purpose, (b) securities
upon the exercise of or conversion of (i) any Securities issued hereunder or
(ii), convertible securities, options or warrants issued and outstanding on the
date of this Agreement, provided that in the case of this clause (ii) such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise or conversion price of
any such securities other than as a result of the operation of the anti-dilution
provisions thereof, (c) securities issued pursuant to acquisitions or strategic
transactions, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Company and in which the Company receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Company is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities, (d) shares of capital stock, convertible securities, options or
warrants issued in connection with any pro rata stock split or stock dividend in
respect of any series or class of capital stock of the Company or
recapitalization by the Company, (e) warrants issued pursuant to a commercial
borrowing, secured lending or lease financing transaction approved by the
Company’s Board of Directors, (f) shares of capital stock issued in a
firm-commitment underwritten public offering of securities pursuant to a
registration statement filed under the Securities Act with gross proceeds of at
least $30,000,000 and (g) securities issued upon the conversion or exercise of
any of the capital stock, convertible securities, options or warrants described
in clauses (a) through (f), provided that in the case of this clause (g) such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise or conversion price of
any such securities other than as a result of the operation of the anti-dilution
provisions thereof.

 

“Existing Preferred Stock” means the Company’s 1,000,000 shares of 5%
Convertible Preferred Stock, par value $0.01 per share, designated pursuant the
Certificate of Designation filed with the Delaware Secretary of State on
March 25, 2004.

 

“FW” means Feldman Weinstein LLP with offices located at 420 Lexington Avenue,
Suite 2620, New York, New York 10170-0002.

 

“GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

“Intellectual Property Rights” shall have the meaning ascribed to such term in
Section 3.1(o).

 

“Legend Removal Date” shall have the meaning ascribed to such term in
Section 4.1(c).

 

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“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction.

 

“Material Adverse Effect” shall have the meaning assigned to such term in
Section 3.1(b).

 

“Material Permits” shall have the meaning ascribed to such term in
Section 3.1(m).

 

“Maximum Rate” shall have the meaning ascribed to such term in Section 5.17.

 

“Participation Maximum” shall have the meaning ascribed to such term in
Section 4.13.

 

“Permitted Lien” means (i) any Lien for Taxes not yet due; (ii) any statutory
Lien or contractual landlord’s Lien or other Lien created by operation of law
arising in the ordinary course of business with respect to a Liability that is
not yet due; (iii) retention of title agreements with suppliers entered into in
the ordinary course of business; (iv) non-exclusive licenses of intellectual
property granted by the Company to third parties in the ordinary course of
business; (v) licenses and restrictions on use of third party intellectual
property licensed to or used by the Company in the ordinary course of business;
(vi) source code escrow arrangements; (vii) restrictions on transfer under
federal or state securities laws; and (viii) such imperfections of title and
non-monetary Liens as do not and will not materially detract from or interfere
with the use of the properties subject thereto or affected thereby or otherwise
materially impair business operations involving such properties.

 

 “Person” means an individual or corporation, partnership, trust, incorporated
or unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.

 

“Preferred Stock” means the up to 1,200,000 shares of the Company’s Series 2 5%
Convertible Preferred Stock issued hereunder having the rights, preferences and
privileges set forth in the Certificate of Designations.

 

“Pre-Notice” shall have the meaning ascribed to such term in Section 4.13.

 

“Proceeding” means an action, claim, suit, investigation or proceeding
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

 

“Purchaser Party” shall have the meaning ascribed to such term in Section 4.11.

 

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“Registration Rights Agreement” means the Registration Rights Agreement, dated
the date hereof, among the Company and the Purchasers, in the form of Exhibit B
attached hereto.

 

“Registration Statement” means a registration statement meeting the requirements
set forth in the Registration Rights Agreement and covering the resale of the
Underlying Shares by each Purchaser as provided for in the Registration Rights
Agreement.

 

“Required Approvals” shall have the meaning ascribed to such term in
Section 3.1(e).

 

“Rule 144” means Rule 144 promulgated by the Commission pursuant to the
Securities Act, as such Rule may be amended from time to time, or any similar
rule or regulation hereafter adopted by the Commission having substantially the
same effect as such Rule.

 

“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h) and
shall be deemed to include the Current 10-KSB.

 

“Securities” means the Preferred Stock, the Warrants and the Underlying Shares.

 

“Securities Act” means the Securities Act of 1933, as amended.

 

“Shareholder Approval” means such approval as may be required by the applicable
rules and regulations of the Trading Market (or any successor entity) from the
shareholders of the Company with respect to the transactions contemplated by the
Transaction Documents, including the issuance of all of the Underlying Shares
and shares of Common Stock issuable upon exercise of the Warrants in excess of
19.99% of the issued and outstanding Common Stock on the Closing Date.

 

“Short Sales” shall include all “short sales” as defined in Rule 200 of
Regulation SHO under the Exchange Act. 

 

 “Stated Value” means $2.50 per share of Preferred Stock.

 

“Subscription Amount” shall mean, as to each Purchaser, the amount to be paid
for the Preferred Stock purchased hereunder as specified below such Purchaser’s
name on the signature page of this Agreement and next to the heading
“Subscription Amount”, in United States Dollars and in immediately available
funds.

 

“Subsequent Financing” shall have the meaning ascribed to such term in
Section 4.13.

 

 

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“Subsequent Financing Notice” shall have the meaning ascribed to such term in
Section 4.13.

 

“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a)
or identified in an Exhibit included or incorporated in the SEC Reports pursuant
to Item 601(b)(21) of Regulation S-B.

 

“Trading Day” means a day on which the Common Stock is traded on a Trading
Market.

 

“Trading Market” means the following markets or exchanges on which the Common
Stock is listed or quoted for trading on the date in question: the Nasdaq
SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the
Nasdaq National Market or the OTC Bulletin Board.

 

“Transaction Documents” means this Agreement, the Certificate of Designations,
the Warrants, the Escrow Agreement, the Registration Rights Agreement and any
other documents or agreements executed in connection with the transactions
contemplated hereunder.

 

“Underlying Shares” means the shares of Common Stock issuable upon conversion of
the Preferred Stock, upon exercise of the Warrants and issued and issuable in
lieu of the cash payment of dividends on the Preferred Stock.

 

 “VWAP” means, for any date, the price determined by the first of the following
clauses that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg Financial L.P.
(based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time);
(b) if the Common Stock is not then listed or quoted on a Trading Market and if
prices for the Common Stock are then quoted on the OTC Bulletin Board, the
volume weighted average price of the Common Stock for such date (or the nearest
preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
listed or quoted on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by the Pink Sheets, LLC (or a
similar organization or agency succeeding to its functions of reporting prices),
the most recent bid price per share of the Common Stock so reported; or (c) in
all other cases, the fair market value of a share of Common Stock as determined
by an independent appraiser selected in good faith by the Purchasers and
reasonably acceptable to the Company.

 

“Warrants” means collectively the Common Stock purchase warrants, in the form of
Exhibit C delivered to the Purchasers at the Closing in accordance with
Section 2.2(a) hereof, which Warrants shall be exercisable beginning 6 months
following the issuance thereof and have a term of exercise equal to 5 years.

 

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“Warrant Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.

 

ARTICLE II

PURCHASE AND SALE

 

2.1                                 CLOSING.  ON THE CLOSING DATE, UPON THE
TERMS AND SUBJECT TO THE CONDITIONS SET FORTH HEREIN, CONCURRENT WITH THE
EXECUTION AND DELIVERY OF THIS AGREEMENT BY THE PARTIES HERETO, THE COMPANY
AGREES TO SELL, AND EACH PURCHASER AGREES TO PURCHASE IN THE AGGREGATE,
SEVERALLY AND NOT JOINTLY, UP TO 1,200,000 SHARES OF PREFERRED STOCK WITH AN
AGGREGATED STATED VALUE EQUAL TO SUCH PURCHASER’S SUBSCRIPTION AMOUNT AND
WARRANTS AS DETERMINED BY PURSUANT TO SECTION 2.2(A)(III).  THE AGGREGATE NUMBER
OF SHARES OF PREFERRED STOCK SOLD HEREUNDER SHALL BE UP TO 1,200,000.  EACH
PURCHASER SHALL DELIVER TO THE COMPANY VIA WIRE TRANSFER OR A CERTIFIED CHECK OF
IMMEDIATELY AVAILABLE FUNDS EQUAL TO THEIR SUBSCRIPTION AMOUNT AND THE COMPANY
SHALL DELIVER TO EACH PURCHASER THEIR RESPECTIVE SHARES OF PREFERRED STOCK AND
WARRANTS AS DETERMINED PURSUANT TO SECTION 2.2(A) AND THE OTHER ITEMS SET FORTH
IN SECTION 2.2 ISSUABLE AT THE CLOSING.  UPON SATISFACTION OF THE CONDITIONS SET
FORTH IN SECTIONS 2.2 AND 2.3, THE CLOSING SHALL OCCUR VIA FACSIMILE AND
ELECTRONIC TRANSMISSION AT THE OFFICES OF THE ESCROW AGENT, OR SUCH OTHER
LOCATION AS THE PARTIES SHALL MUTUALLY AGREE.

 

2.2                                                         DELIVERIES.

 

A)                                      ON THE CLOSING DATE, THE COMPANY SHALL
DELIVER OR CAUSE TO BE DELIVERED TO THE ESCROW AGENT WITH RESPECT TO EACH
PURCHASER THE FOLLOWING:

 

(I)                                     THIS AGREEMENT DULY EXECUTED BY THE
COMPANY;

 

(II)                                  A CERTIFICATE EVIDENCING A NUMBER OF
SHARES OF PREFERRED STOCK EQUAL TO SUCH PURCHASER’S SUBSCRIPTION AMOUNT DIVIDED
BY THE STATED VALUE, REGISTERED IN THE NAME OF SUCH PURCHASER;

 

(III)                               A WARRANT REGISTERED IN THE NAME OF SUCH
PURCHASER TO PURCHASE UP TO A NUMBER OF SHARES OF COMMON STOCK EQUAL TO 50% OF
SUCH PURCHASER’S SUBSCRIPTION AMOUNT DIVIDED BY $2.50, WITH AN EXERCISE PRICE
EQUAL TO $2.77, SUBJECT TO ADJUSTMENT THEREIN;

 

(IV)                              THE REGISTRATION RIGHTS AGREEMENT DULY
EXECUTED BY THE COMPANY;

 

(V)                                 THE ESCROW AGREEMENT DULY EXECUTED BY THE
COMPANY;

 

(VI)                              A LEGAL OPINION OF COMPANY COUNSEL, IN THE
FORM OF EXHIBIT D ATTACHED HERETO; AND

 

(VII)                           THE WRITTEN VOTING AGREEMENT, IN THE FORM OF
EXHIBIT F ATTACHED

 

 

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HERETO, OF ALL OF THE OFFICERS, DIRECTORS AND SHAREHOLDERS HOLDING MORE THAN 10%
OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK ON THE DATE HEREOF TO VOTE
ALL COMMON STOCK OWNED BY EACH OF SUCH OFFICERS, DIRECTORS AND SHAREHOLDERS AS
OF THE RECORD DATE FOR THE ANNUAL MEETING OF SHAREHOLDERS OF THE COMPANY IN
FAVOR OF SHAREHOLDER APPROVAL.

 

B)                                     ON THE CLOSING DATE, EACH PURCHASER SHALL
DELIVER OR CAUSE TO BE DELIVERED TO THE ESCROW AGENT THE FOLLOWING:

 

(I)                                     THIS AGREEMENT DULY EXECUTED BY SUCH
PURCHASER;

 

(II)                                  SUCH PURCHASER’S SUBSCRIPTION AMOUNT BY
WIRE TRANSFER TO THE ACCOUNT OF THE ESCROW AGENT;

 

(III)                               THE ESCROW AGREEMENT DULY EXECUTED BY SUCH
PURCHASER; AND

 

(IV)                              THE REGISTRATION RIGHTS AGREEMENT DULY
EXECUTED BY SUCH PURCHASER.

 

2.3                                                         CLOSING CONDITIONS.

 

A)                                      THE OBLIGATIONS OF THE COMPANY HEREUNDER
IN CONNECTION WITH THE CLOSING ARE SUBJECT TO THE FOLLOWING CONDITIONS BEING
MET:

 

(I)                                     THE ACCURACY IN ALL MATERIAL RESPECTS
WHEN MADE AND ON THE CLOSING DATE OF THE REPRESENTATIONS AND WARRANTIES OF THE
PURCHASERS CONTAINED HEREIN;

 

(II)                                  ALL OBLIGATIONS, COVENANTS AND AGREEMENTS
OF THE PURCHASERS REQUIRED TO BE PERFORMED AT OR PRIOR TO THE CLOSING DATE SHALL
HAVE BEEN PERFORMED;

 

(III)                               THE DELIVERY BY THE PURCHASERS OF THE ITEMS
SET FORTH IN SECTION 2.2(B) OF THIS AGREEMENT;

 

(IV)                              THE COMPANY SHALL HAVE RECEIVED THE REQUIRED
APPROVAL CONTEMPLATED BY SECTION 3.1(E)(III) FROM NASDAQ FOR THE LISTING OF THE
UNDERLYING SHARES; AND

 

(V)                                 THE COMPANY SHALL HAVE RECEIVED THE REQUIRED
APPROVAL OF THE HOLDERS OF THE EXISTING PREFERRED STOCK CONTEMPLATED BY
SECTION 3.1(E)(VI).

 

B)                                     THE RESPECTIVE OBLIGATIONS OF THE
PURCHASERS HEREUNDER IN CONNECTION WITH

 

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THE CLOSING ARE SUBJECT TO THE FOLLOWING CONDITIONS BEING MET:

 

(I)                                     THE ACCURACY IN ALL MATERIAL RESPECTS ON
THE CLOSING DATE OF THE REPRESENTATIONS AND WARRANTIES OF THE COMPANY CONTAINED
HEREIN;

 

(II)                                  ALL OBLIGATIONS, COVENANTS AND AGREEMENTS
OF THE COMPANY REQUIRED TO BE PERFORMED AT OR PRIOR TO THE CLOSING DATE SHALL
HAVE BEEN PERFORMED;

 

(III)                               THE DELIVERY BY THE COMPANY OF THE ITEMS SET
FORTH IN SECTION 2.2(A) OF THIS AGREEMENT;

 

(IV)                              THERE SHALL HAVE BEEN NO MATERIAL ADVERSE
EFFECT WITH RESPECT TO THE COMPANY SINCE THE DATE HEREOF; AND

 

(V)                                 FROM THE DATE HEREOF TO THE CLOSING DATE,
TRADING IN THE COMMON STOCK SHALL NOT HAVE BEEN SUSPENDED BY THE COMMISSION
(EXCEPT FOR ANY SUSPENSION OF TRADING OF LIMITED DURATION AGREED TO BY THE
COMPANY, WHICH SUSPENSION SHALL BE TERMINATED PRIOR TO THE CLOSING), AND, AT ANY
TIME PRIOR TO THE CLOSING DATE, TRADING IN SECURITIES GENERALLY AS REPORTED BY
BLOOMBERG FINANCIAL MARKETS SHALL NOT HAVE BEEN SUSPENDED OR LIMITED, OR MINIMUM
PRICES SHALL NOT HAVE BEEN ESTABLISHED ON SECURITIES WHOSE TRADES ARE REPORTED
BY SUCH SERVICE, OR ON ANY TRADING MARKET, NOR SHALL A BANKING MORATORIUM HAVE
BEEN DECLARED EITHER BY THE UNITED STATES OR NEW YORK STATE AUTHORITIES NOR
SHALL THERE HAVE OCCURRED ANY MATERIAL OUTBREAK OR ESCALATION OF HOSTILITIES OR
OTHER NATIONAL OR INTERNATIONAL CALAMITY OF SUCH MAGNITUDE IN ITS EFFECT ON, OR
ANY MATERIAL ADVERSE CHANGE IN, ANY FINANCIAL MARKET WHICH, IN EACH CASE, IN THE
REASONABLE JUDGMENT OF EACH PURCHASER, MAKES IT IMPRACTICABLE OR INADVISABLE TO
PURCHASE THE PREFERRED STOCK AT THE CLOSING.

 

ARTICLE III

REPRESENTATIONS AND WARRANTIES

 

3.1                                 REPRESENTATIONS AND WARRANTIES OF THE
COMPANY.  EXCEPT AS SET FORTH UNDER THE CORRESPONDING SECTION OF THE DISCLOSURE
SCHEDULES DELIVERED TO THE PURCHASERS CONCURRENTLY HEREWITH (THE “DISCLOSURE
SCHEDULES”) WHICH DISCLOSURE SCHEDULES SHALL BE DEEMED A PART HEREOF, THE
COMPANY HEREBY MAKES THE REPRESENTATIONS AND WARRANTIES SET FORTH BELOW TO EACH
PURCHASER.  FOR ALL PURPOSES HEREIN, THE CURRENT 10-KSB SHALL CONSTITUTE A PART
OF, AND BE INCORPORATED IN, THE DISCLOSURE SCHEDULES AND SHALL QUALIFY THE
REPRESENTATIONS AND WARRANTIES OF THE COMPANY SET FORTH HEREIN.

 

(A)                                  SUBSIDIARIES.  ALL OF THE DIRECT AND
INDIRECT SUBSIDIARIES OF THE COMPANY ARE SET FORTH ON SCHEDULE 3.1(A) OR
IDENTIFIED IN AN EXHIBIT INCLUDED OR INCORPORATED IN THE

 

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SEC REPORTS PURSUANT TO ITEM 601(B)(21) OF REGULATION S-B.  THE COMPANY OWNS,
DIRECTLY OR INDIRECTLY, ALL OF THE CAPITAL STOCK OR OTHER EQUITY INTERESTS OF
EACH SUBSIDIARY FREE AND CLEAR OF ANY LIENS OTHER THAN PERMITTED LIENS, AND ALL
THE ISSUED AND OUTSTANDING SHARES OF CAPITAL STOCK OF EACH SUBSIDIARY ARE
VALIDLY ISSUED AND ARE FULLY PAID, NON-ASSESSABLE AND FREE OF PREEMPTIVE AND
SIMILAR RIGHTS TO SUBSCRIBE FOR OR PURCHASE SECURITIES.  IF THE COMPANY HAS NO
SUBSIDIARIES, THEN REFERENCES IN THE TRANSACTION DOCUMENTS TO THE SUBSIDIARIES
WILL BE DISREGARDED.

 

(B)                                 ORGANIZATION AND QUALIFICATION.  THE COMPANY
AND EACH OF THE SUBSIDIARIES IS AN ENTITY DULY INCORPORATED OR OTHERWISE
ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS OF THE
JURISDICTION OF ITS INCORPORATION OR ORGANIZATION (AS APPLICABLE), WITH THE
REQUISITE POWER AND AUTHORITY TO OWN AND USE ITS PROPERTIES AND ASSETS AND TO
CARRY ON ITS BUSINESS AS CURRENTLY CONDUCTED.  NEITHER THE COMPANY NOR ANY
SUBSIDIARY IS IN VIOLATION OR DEFAULT OF ANY OF THE PROVISIONS OF ITS RESPECTIVE
CERTIFICATE OR ARTICLES OF INCORPORATION, BYLAWS OR OTHER ORGANIZATIONAL OR
CHARTER DOCUMENTS.  EACH OF THE COMPANY AND THE SUBSIDIARIES IS DULY QUALIFIED
TO CONDUCT BUSINESS AND IS IN GOOD STANDING AS A FOREIGN CORPORATION OR OTHER
ENTITY IN EACH JURISDICTION IN WHICH THE NATURE OF THE BUSINESS CONDUCTED OR
PROPERTY OWNED BY IT MAKES SUCH QUALIFICATION NECESSARY, EXCEPT WHERE THE
FAILURE TO BE SO QUALIFIED OR IN GOOD STANDING, AS THE CASE MAY BE, COULD NOT
HAVE OR REASONABLY BE EXPECTED TO RESULT IN (I) A MATERIAL ADVERSE EFFECT ON THE
LEGALITY, VALIDITY OR ENFORCEABILITY OF ANY TRANSACTION DOCUMENT, (II) A
MATERIAL ADVERSE EFFECT ON THE RESULTS OF OPERATIONS, ASSETS, BUSINESS,
PROSPECTS OR FINANCIAL CONDITION OF THE COMPANY AND THE SUBSIDIARIES, TAKEN AS A
WHOLE (OTHER THAN ANY OF THE FOLLOWING, EITHER ALONE OR IN COMBINATION: (A) ANY
EFFECT OR CHANGE OCCURRING AS A RESULT OF (1) GENERAL ECONOMIC OR FINANCIAL
CONDITIONS OR (2) OTHER DEVELOPMENTS WHICH ARE NOT UNIQUE TO THE COMPANY BUT
ALSO AFFECT OTHER PERSONS OR ENTITIES IN THE COMPANY’S INDUSTRY; (B) ANY CHANGE
OR EFFECT RESULTING FROM A DELAY IN THE CLOSING NOT CAUSED DIRECTLY OR
INDIRECTLY BY THE COMPANY; OR (C) FAILURE OF THE COMPANY’S RESULTS OF OPERATIONS
TO MEET ANY INTERNAL OR EXTERNAL PROJECTIONS, PREDICTIONS, ESTIMATES OR
EXPECTATIONS, OR (III) A MATERIAL ADVERSE EFFECT ON THE COMPANY’S ABILITY TO
PERFORM IN ANY MATERIAL RESPECT ON A TIMELY BASIS ITS OBLIGATIONS UNDER ANY
TRANSACTION DOCUMENT (ANY OF (I), (II) OR (III), A “MATERIAL ADVERSE EFFECT”)
AND NO PROCEEDING HAS BEEN INSTITUTED IN ANY SUCH JURISDICTION REVOKING,
LIMITING OR CURTAILING OR SEEKING TO REVOKE, LIMIT OR CURTAIL SUCH POWER AND
AUTHORITY OR QUALIFICATION.

 

(C)                                  AUTHORIZATION; ENFORCEMENT.  SUBJECT TO
OBTAINING THE REQUIRED APPROVALS, THE COMPANY HAS THE REQUISITE CORPORATE POWER
AND AUTHORITY TO ENTER INTO AND TO CONSUMMATE THE TRANSACTIONS CONTEMPLATED BY
EACH OF THE TRANSACTION DOCUMENTS AND OTHERWISE TO CARRY OUT ITS OBLIGATIONS
THEREUNDER.  SUBJECT TO OBTAINING THE REQUIRED APPROVALS, THE EXECUTION AND
DELIVERY OF EACH OF THE TRANSACTION DOCUMENTS BY THE COMPANY AND THE
CONSUMMATION BY IT OF THE TRANSACTIONS CONTEMPLATED THEREBY HAVE BEEN DULY
AUTHORIZED BY ALL NECESSARY ACTION ON THE PART OF THE COMPANY AND NO FURTHER
ACTION IS REQUIRED BY THE COMPANY IN CONNECTION THEREWITH OTHER THAN IN
CONNECTION WITH THE REQUIRED APPROVALS.  SUBJECT TO OBTAINING THE REQUIRED
APPROVALS, EACH TRANSACTION DOCUMENTS HAS BEEN (OR UPON DELIVERY WILL HAVE BEEN)
DULY EXECUTED BY THE COMPANY AND, WHEN DELIVERED IN ACCORDANCE WITH THE TERMS
HEREOF, WILL CONSTITUTE THE VALID AND

 

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BINDING OBLIGATION OF THE COMPANY ENFORCEABLE AGAINST THE COMPANY IN ACCORDANCE
WITH ITS TERMS EXCEPT (I) AS LIMITED BY APPLICABLE BANKRUPTCY, INSOLVENCY,
REORGANIZATION, MORATORIUM AND OTHER LAWS OF GENERAL APPLICATION AFFECTING
ENFORCEMENT OF CREDITORS’ RIGHTS GENERALLY, (II) AS LIMITED BY LAWS RELATING TO
THE AVAILABILITY OF SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF OR OTHER EQUITABLE
REMEDIES, AND (III) TO THE EXTENT THE INDEMNIFICATION PROVISIONS OF THE
REGISTRATION RIGHTS AGREEMENT OR THIS AGREEMENT MAY BE LIMITED BY FEDERAL OR
STATE SECURITIES LAWS.

 

(D)                                 NO CONFLICTS.  SUBJECT TO OBTAINING THE
REQUIRED APPROVALS, THE EXECUTION, DELIVERY AND PERFORMANCE OF THE TRANSACTION
DOCUMENTS BY THE COMPANY AND THE CONSUMMATION BY THE COMPANY OF THE OTHER
TRANSACTIONS CONTEMPLATED THEREBY DO NOT AND WILL NOT: (I) CONFLICT WITH OR
VIOLATE ANY PROVISION OF THE COMPANY’S OR ANY SUBSIDIARY’S CERTIFICATE OR
ARTICLES OF INCORPORATION, BYLAWS OR OTHER ORGANIZATIONAL OR CHARTER DOCUMENTS,
OR (II) CONFLICT WITH, OR CONSTITUTE A DEFAULT (OR AN EVENT THAT WITH NOTICE OR
LAPSE OF TIME OR BOTH WOULD BECOME A DEFAULT) UNDER, RESULT IN THE CREATION OF
ANY LIEN UPON ANY OF THE PROPERTIES OR ASSETS OF THE COMPANY OR ANY SUBSIDIARY,
OR GIVE TO OTHERS ANY RIGHTS OF TERMINATION, AMENDMENT, ACCELERATION OR
CANCELLATION (WITH OR WITHOUT NOTICE, LAPSE OF TIME OR BOTH) OF, ANY AGREEMENT,
CREDIT FACILITY, DEBT OR OTHER INSTRUMENT (EVIDENCING A COMPANY OR SUBSIDIARY
DEBT OR OTHERWISE) OR OTHER UNDERSTANDING TO WHICH THE COMPANY OR ANY SUBSIDIARY
IS A PARTY OR BY WHICH ANY PROPERTY OR ASSET OF THE COMPANY OR ANY SUBSIDIARY IS
BOUND OR AFFECTED AND WHICH IS OR IS REQUIRED TO BE FILED OR INCORPORATED AS AN
EXHIBIT TO THE SEC REPORTS OR THE CURRENT 10-KSB, OR (III) CONFLICT WITH OR
RESULT IN A VIOLATION OF ANY LAW, RULE, REGULATION, ORDER, JUDGMENT, INJUNCTION,
DECREE OR OTHER RESTRICTION OF ANY COURT OR GOVERNMENTAL AUTHORITY TO WHICH THE
COMPANY OR A SUBSIDIARY IS SUBJECT (INCLUDING FEDERAL AND STATE SECURITIES LAWS
AND REGULATIONS EXCEPT TO THE EXTENT SUCH LAWS MAY LIMIT THE INDEMNIFICATION
PROVISIONS OF THE REGISTRATION RIGHTS AGREEMENT OR THIS AGREEMENT), OR BY WHICH
ANY PROPERTY OR ASSET OF THE COMPANY OR A SUBSIDIARY IS BOUND OR AFFECTED;
EXCEPT IN THE CASE OF EACH OF CLAUSES (II) AND (III), SUCH AS COULD NOT HAVE OR
REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT.

 

(E)                                  FILINGS, CONSENTS AND APPROVALS.  THE
COMPANY IS NOT REQUIRED TO OBTAIN ANY CONSENT, WAIVER, AUTHORIZATION OR ORDER
OF, GIVE ANY NOTICE TO, OR MAKE ANY FILING OR REGISTRATION WITH, ANY COURT OR
OTHER FEDERAL, STATE, LOCAL OR OTHER GOVERNMENTAL AUTHORITY OR OTHER PERSON IN
CONNECTION WITH THE EXECUTION, DELIVERY AND PERFORMANCE BY THE COMPANY OF THE
TRANSACTION DOCUMENTS, OTHER THAN (I) FILINGS REQUIRED PURSUANT TO SECTION 4.6,
(II) THE FILING WITH THE COMMISSION OF THE REGISTRATION STATEMENT, (III) THE
NOTICE AND/OR APPLICATION(S) TO EACH APPLICABLE TRADING MARKET FOR THE ISSUANCE
AND SALE OF THE PREFERRED STOCK AND WARRANTS AND THE LISTING OF THE UNDERLYING
SHARES FOR TRADING THEREON IN THE TIME AND MANNER REQUIRED THEREBY, (IV) THE
FILING OF FORM D WITH THE COMMISSION AND SUCH FILINGS AS ARE REQUIRED TO BE MADE
UNDER APPLICABLE STATE SECURITIES LAWS, (V) THE FILING OF THE CERTIFICATE OF
DESIGNATIONS WITH THE DELAWARE SECRETARY OF STATE, (VI) THE CONSENT OF THE
HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF EXISTING PREFERRED
STOCK AND (VII) SHAREHOLDER APPROVAL (COLLECTIVELY, THE “REQUIRED APPROVALS”).

 

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(F)                                    ISSUANCE OF THE SECURITIES.  SUBJECT TO
OBTAINING THE REQUIRED APPROVALS, THE SECURITIES ARE DULY AUTHORIZED AND, WHEN
ISSUED AND PAID FOR IN ACCORDANCE WITH THE APPLICABLE TRANSACTION DOCUMENTS,
WILL BE DULY AND VALIDLY ISSUED, FULLY PAID AND NONASSESSABLE, FREE AND CLEAR OF
ALL LIENS IMPOSED BY THE COMPANY OTHER THAN RESTRICTIONS ON TRANSFER PROVIDED
FOR IN THE TRANSACTION DOCUMENTS OR UNDER FEDERAL OR STATE SECURITIES LAWS. 
SUBJECT TO OBTAINING THE REQUIRED APPROVALS, THE UNDERLYING SHARES, WHEN ISSUED
IN ACCORDANCE WITH THE TERMS OF THE TRANSACTION DOCUMENTS, WILL BE VALIDLY
ISSUED, FULLY PAID AND NONASSESSABLE, FREE AND CLEAR OF ALL LIENS IMPOSED BY THE
COMPANY OTHER THAN RESTRICTIONS ON TRANSFER PROVIDED FOR IN THE TRANSACTION
DOCUMENTS OR UNDER FEDERAL OR STATE SECURITIES LAWS.  THE COMPANY HAS RESERVED
FROM ITS DULY AUTHORIZED CAPITAL STOCK A NUMBER OF SHARES OF COMMON STOCK FOR
ISSUANCE OF THE UNDERLYING SHARES AT LEAST EQUAL TO THE ACTUAL MINIMUM ON THE
DATE HEREOF.

 

(G)                                 CAPITALIZATION.  THE CAPITALIZATION OF THE
COMPANY AS OF MARCH 28, 2005 IS AS SET FORTH ON SCHEDULE 3.1(G).  THE COMPANY
HAS NOT ISSUED ANY CAPITAL STOCK SINCE ITS MOST RECENTLY FILED PERIODIC REPORT
UNDER THE EXCHANGE ACT, OTHER THAN PURSUANT TO THE EXERCISE OF EMPLOYEE STOCK
OPTIONS UNDER THE COMPANY’S STOCK OPTION PLANS, THE ISSUANCE OF SHARES OF COMMON
STOCK TO EMPLOYEES PURSUANT TO THE COMPANY’S EMPLOYEE STOCK PURCHASE PLAN AND
PURSUANT TO THE CONVERSION OR EXERCISE OF OUTSTANDING COMMON STOCK EQUIVALENTS. 
NO PERSON HAS ANY RIGHT OF FIRST REFUSAL, PREEMPTIVE RIGHT, RIGHT OF
PARTICIPATION, OR ANY SIMILAR RIGHT TO PARTICIPATE IN THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS OTHER THAN THE REQUIRED APPROVALS
WHICH HAVE NOT BEEN EXERCISED OR WAIVED AS OF THE CLOSING DATE.  EXCEPT AS A
RESULT OF THE PURCHASE AND SALE OF THE SECURITIES OR AS OTHERWISE PROVIDED IN
THE TRANSACTION DOCUMENTS OR SET FORTH ON SCHEDULE 3.1(G) OR IN THE SEC REPORTS
OR THE CURRENT 10-KSB, THERE ARE NO OUTSTANDING OPTIONS, WARRANTS, SCRIPT RIGHTS
TO SUBSCRIBE TO, CALLS OR COMMITMENTS OF ANY CHARACTER WHATSOEVER RELATING TO,
OR SECURITIES, RIGHTS OR OBLIGATIONS CONVERTIBLE INTO OR EXCHANGEABLE FOR, OR
GIVING ANY PERSON ANY RIGHT TO SUBSCRIBE FOR OR ACQUIRE, ANY SHARES OF COMMON
STOCK, OR CONTRACTS, COMMITMENTS, UNDERSTANDINGS OR ARRANGEMENTS BY WHICH THE
COMPANY OR ANY SUBSIDIARY IS OR MAY BECOME BOUND TO ISSUE ADDITIONAL SHARES OF
COMMON STOCK OR COMMON STOCK EQUIVALENTS.  THE ISSUANCE AND SALE OF THE
SECURITIES WILL NOT OBLIGATE THE COMPANY TO ISSUE SHARES OF COMMON STOCK OR
OTHER SECURITIES TO ANY PERSON (OTHER THAN THE PURCHASERS) AND WILL NOT RESULT
IN A RIGHT OF ANY HOLDER OF COMPANY SECURITIES TO ADJUST THE EXERCISE,
CONVERSION, EXCHANGE OR RESET PRICE UNDER SUCH SECURITIES. ALL OF THE
OUTSTANDING SHARES OF CAPITAL STOCK OF THE COMPANY ARE VALIDLY ISSUED, FULLY
PAID AND NONASSESSABLE, HAVE BEEN ISSUED IN COMPLIANCE WITH ALL FEDERAL AND
STATE SECURITIES LAWS, AND NONE OF SUCH OUTSTANDING SHARES WAS ISSUED IN
VIOLATION OF ANY PREEMPTIVE RIGHTS OR SIMILAR RIGHTS TO SUBSCRIBE FOR OR
PURCHASE SECURITIES.  NO FURTHER APPROVAL OR AUTHORIZATION OF ANY STOCKHOLDER,
THE BOARD OF DIRECTORS OF THE COMPANY OR OTHERS IS REQUIRED FOR THE ISSUANCE AND
SALE OF THE SHARES OF PREFERRED STOCK.  EXCEPT AS SET FORTH ON SCHEDULE 3.1(G),
IN THE SEC REPORTS OR IN THE CURRENT 10-KSB, THERE ARE NO STOCKHOLDERS
AGREEMENTS, VOTING AGREEMENTS OR OTHER SIMILAR AGREEMENTS WITH RESPECT TO THE
COMPANY’S CAPITAL STOCK TO WHICH THE COMPANY IS A PARTY OR, TO THE KNOWLEDGE OF
THE COMPANY, BETWEEN OR AMONG ANY OF THE COMPANY’S STOCKHOLDERS.

 

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(H)                                 SEC REPORTS; FINANCIAL STATEMENTS.  THE
COMPANY HAS FILED ALL REPORTS, SCHEDULES, FORMS, STATEMENTS AND OTHER DOCUMENTS
REQUIRED TO BE FILED BY IT UNDER THE SECURITIES ACT AND THE EXCHANGE ACT,
INCLUDING PURSUANT TO SECTION 13(A) OR 15(D) THEREOF, FOR THE TWO YEARS
PRECEDING THE DATE HEREOF (OR SUCH SHORTER PERIOD AS THE COMPANY WAS REQUIRED BY
LAW TO FILE SUCH MATERIAL) (THE FOREGOING MATERIALS, INCLUDING THE EXHIBITS
THERETO AND DOCUMENTS INCORPORATED BY REFERENCE THEREIN, BEING COLLECTIVELY
REFERRED TO HEREIN AS THE “SEC REPORTS”) ON A TIMELY BASIS OR HAS RECEIVED A
VALID EXTENSION OF SUCH TIME OF FILING AND HAS FILED ANY SUCH SEC REPORTS PRIOR
TO THE EXPIRATION OF ANY SUCH EXTENSION.  AS OF THEIR RESPECTIVE DATES, THE SEC
REPORTS COMPLIED IN ALL MATERIAL RESPECTS WITH THE REQUIREMENTS OF THE
SECURITIES ACT AND THE EXCHANGE ACT AND THE RULES AND REGULATIONS OF THE
COMMISSION PROMULGATED THEREUNDER, AND NONE OF THE SEC REPORTS, WHEN FILED,
CONTAINED ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMITTED TO STATE A MATERIAL
FACT REQUIRED TO BE STATED THEREIN OR NECESSARY IN ORDER TO MAKE THE STATEMENTS
THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT
MISLEADING.  THE FINANCIAL STATEMENTS OF THE COMPANY INCLUDED IN THE SEC REPORTS
COMPLY IN ALL MATERIAL RESPECTS WITH APPLICABLE ACCOUNTING REQUIREMENTS AND THE
RULES AND REGULATIONS OF THE COMMISSION WITH RESPECT THERETO AS IN EFFECT AT THE
TIME OF FILING.  SUCH FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH
UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES APPLIED ON A CONSISTENT
BASIS DURING THE PERIODS INVOLVED (“GAAP”), EXCEPT AS MAY BE OTHERWISE SPECIFIED
IN SUCH FINANCIAL STATEMENTS OR THE NOTES THERETO AND EXCEPT THAT UNAUDITED
FINANCIAL STATEMENTS MAY NOT CONTAIN ALL FOOTNOTES REQUIRED BY GAAP, AND FAIRLY
PRESENT IN ALL MATERIAL RESPECTS THE FINANCIAL POSITION OF THE COMPANY AND ITS
CONSOLIDATED SUBSIDIARIES AS OF AND FOR THE DATES THEREOF AND THE RESULTS OF
OPERATIONS AND CASH FLOWS FOR THE PERIODS THEN ENDED, SUBJECT, IN THE CASE OF
UNAUDITED STATEMENTS, TO NORMAL, IMMATERIAL, YEAR-END AUDIT ADJUSTMENTS.

 

(I)                                     MATERIAL CHANGES.  SINCE THE DATE OF THE
LATEST AUDITED FINANCIAL STATEMENTS INCLUDED WITHIN THE SEC REPORTS, EXCEPT AS
SPECIFICALLY DISCLOSED IN THE SEC REPORTS, (I) THERE HAS BEEN NO EVENT,
OCCURRENCE OR DEVELOPMENT THAT HAS HAD OR THAT COULD REASONABLY BE EXPECTED TO
RESULT IN A MATERIAL ADVERSE EFFECT, (II) THE COMPANY HAS NOT INCURRED ANY
LIABILITIES (CONTINGENT OR OTHERWISE) OTHER THAN (A) TRADE PAYABLES AND ACCRUED
EXPENSES INCURRED IN THE ORDINARY COURSE OF BUSINESS CONSISTENT WITH PAST
PRACTICE, (B) LIABILITIES NOT REQUIRED TO BE REFLECTED IN THE COMPANY’S
FINANCIAL STATEMENTS PURSUANT TO GAAP OR REQUIRED TO BE DISCLOSED IN FILINGS
MADE WITH THE COMMISSION AND (C) LIABILITIES INCURRED IN CONNECTION WITH THE
NEGOTIATION, PREPARATION, EXECUTION AND DELIVERY OF THE TRANSACTION DOCUMENTS
AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, (III) THE COMPANY
HAS NOT ALTERED ITS METHOD OF ACCOUNTING, EXCEPT AS REQUIRED BY GAAP, THE
SECURITIES ACT, THE EXCHANGE ACT OR THE COMMISSION OR AS OTHERWISE DISCLOSED IN
THE SEC REPORTS OR THE CURRENT 10-KSB, (IV) THE COMPANY HAS NOT DECLARED OR MADE
ANY DIVIDEND OR DISTRIBUTION OF CASH OR OTHER PROPERTY TO ITS STOCKHOLDERS
(OTHER THAN DIVIDENDS PAYABLE TO HOLDERS OF EXISTING PREFERRED STOCK) OR
PURCHASED, REDEEMED OR MADE ANY AGREEMENTS TO PURCHASE OR REDEEM ANY SHARES OF
ITS CAPITAL STOCK (OTHER THAN AS A RESULT OF THE CONVERSION OF OUTSTANDING
SHARES OF EXISTING PREFERRED STOCK) AND (V) THE COMPANY HAS NOT ISSUED ANY
EQUITY SECURITIES TO ANY OFFICER, DIRECTOR OR AFFILIATE, EXCEPT PURSUANT TO
EXISTING COMPANY STOCK OPTION PLANS OR THE TRANSACTION DOCUMENTS.  THE COMPANY
DOES

 

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NOT HAVE PENDING BEFORE THE COMMISSION ANY REQUEST FOR CONFIDENTIAL TREATMENT OF
INFORMATION.

 

(J)                                     LITIGATION.  EXCEPT AS SET FORTH IN THE
SEC REPORTS OR THE CURRENT 10-KSB, THERE IS NO ACTION, SUIT, INQUIRY, NOTICE OF
VIOLATION, PROCEEDING OR INVESTIGATION PENDING OR, TO THE KNOWLEDGE OF THE
COMPANY, THREATENED AGAINST OR AFFECTING THE COMPANY, ANY SUBSIDIARY OR ANY OF
THEIR RESPECTIVE PROPERTIES BEFORE OR BY ANY COURT, ARBITRATOR, GOVERNMENTAL OR
ADMINISTRATIVE AGENCY OR REGULATORY AUTHORITY (FEDERAL, STATE, COUNTY, LOCAL OR
FOREIGN) (COLLECTIVELY, AN “ACTION”) WHICH (I) ADVERSELY AFFECTS OR CHALLENGES
THE LEGALITY, VALIDITY OR ENFORCEABILITY OF ANY OF THE TRANSACTION DOCUMENTS OR
THE SECURITIES OR (II) COULD, IF THERE WERE AN UNFAVORABLE DECISION, HAVE OR
REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT.  NEITHER THE
COMPANY NOR ANY SUBSIDIARY, NOR ANY DIRECTOR OR OFFICER THEREOF, IS OR 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 KNOWLEDGE OF THE COMPANY, THERE IS NOT PENDING OR
CONTEMPLATED, ANY INVESTIGATION BY THE COMMISSION INVOLVING THE COMPANY OR ANY
CURRENT OR FORMER DIRECTOR OR OFFICER OF THE COMPANY.  THE COMMISSION 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 EXCHANGE
ACT OR THE SECURITIES ACT.

 

(K)                                  LABOR RELATIONS.  NO MATERIAL LABOR DISPUTE
EXISTS OR, TO THE KNOWLEDGE OF THE COMPANY, IS IMMINENT WITH RESPECT TO ANY OF
THE EMPLOYEES OF THE COMPANY WHICH COULD REASONABLY BE EXPECTED TO RESULT IN A
MATERIAL ADVERSE EFFECT.

 

(L)                                     COMPLIANCE.  SUBJECT TO OBTAINING THE
REQUIRED APPROVALS AND EXCEPT AS OTHERWISE SET FORTH IN THE SEC REPORTS OR THE
CURRENT 10-KSB, NEITHER THE COMPANY NOR ANY SUBSIDIARY (I) IS IN DEFAULT UNDER
OR IN VIOLATION OF (AND NO EVENT HAS OCCURRED THAT HAS NOT BEEN WAIVED THAT,
WITH NOTICE OR LAPSE OF TIME OR BOTH, WOULD RESULT IN A DEFAULT BY THE COMPANY
OR ANY SUBSIDIARY UNDER), NOR HAS THE COMPANY OR ANY SUBSIDIARY RECEIVED NOTICE
OF A CLAIM THAT IT IS IN DEFAULT UNDER OR THAT IT IS IN VIOLATION OF, ANY
INDENTURE, LOAN OR CREDIT AGREEMENT OR ANY OTHER AGREEMENT OR INSTRUMENT TO
WHICH IT IS A PARTY OR BY WHICH IT OR ANY OF ITS PROPERTIES IS BOUND (WHETHER OR
NOT SUCH DEFAULT OR VIOLATION HAS BEEN WAIVED) AND WHICH IS OR IS REQUIRED TO BE
FILED OR INCORPORATED AS AN EXHIBIT TO THE SEC REPORTS OR THE CURRENT 10-KSB,
(II) IS IN VIOLATION OF ANY ORDER OF ANY COURT, ARBITRATOR OR GOVERNMENTAL BODY,
OR (III) IS OR HAS BEEN IN VIOLATION OF ANY STATUTE, RULE OR REGULATION OF ANY
GOVERNMENTAL AUTHORITY, INCLUDING WITHOUT LIMITATION ALL FOREIGN, FEDERAL, STATE
AND LOCAL LAWS APPLICABLE TO ITS BUSINESS EXCEPT IN EACH CASE AS COULD NOT HAVE
A MATERIAL ADVERSE EFFECT.

 

(M)                               REGULATORY PERMITS.  THE COMPANY AND THE
SUBSIDIARIES POSSESS ALL CERTIFICATES, AUTHORIZATIONS AND PERMITS ISSUED BY THE
APPROPRIATE FEDERAL, STATE, LOCAL OR FOREIGN REGULATORY AUTHORITIES NECESSARY TO
CONDUCT THEIR RESPECTIVE BUSINESSES AS DESCRIBED IN THE SEC REPORTS AND THE
CURRENT 10-KSB, EXCEPT WHERE THE FAILURE TO POSSESS SUCH PERMITS COULD NOT HAVE
OR REASONABLY BE EXPECTED TO RESULT IN A MATERIAL ADVERSE EFFECT (“MATERIAL
PERMITS”), AND NEITHER THE COMPANY NOR ANY SUBSIDIARY HAS

 

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RECEIVED ANY NOTICE OF PROCEEDINGS RELATING TO THE REVOCATION OR MODIFICATION OF
ANY MATERIAL PERMIT.

 

(N)                                 TITLE TO ASSETS.  THE COMPANY AND THE
SUBSIDIARIES HAVE GOOD AND VALID TITLE TO ALL REAL PROPERTY OWNED BY THEM THAT
IS MATERIAL TO THE BUSINESS OF THE COMPANY AND THE SUBSIDIARIES AND GOOD AND
VALID TITLE IN ALL PERSONAL PROPERTY OWNED BY THEM THAT IS MATERIAL TO THE
BUSINESS OF THE COMPANY AND THE SUBSIDIARIES, IN EACH CASE FREE AND CLEAR OF ALL
LIENS, EXCEPT FOR PERMITTED LIENS.  ANY REAL PROPERTY AND FACILITIES HELD UNDER
LEASE BY THE COMPANY AND THE SUBSIDIARIES ARE HELD BY THEM UNDER VALID AND
SUBSISTING AND ENFORCEABLE AGAINST THE COMPANY OR THE SUBSIDIARY PARTY THERETO,
AND THE COMPANY OR SUCH SUBSIDIARY IS IN COMPLIANCE WITH THE TERMS THEREOF,
EXCEPT FOR SUCH NONCOMPLIANCE AS COULD NOT HAVE A MATERIAL ADVERSE EFFECT.

 

(O)                                 PATENTS AND TRADEMARKS.  TO THE KNOWLEDGE OF
THE COMPANY (WITHOUT ANY SPECIAL INVESTIGATION OR PATENT SEARCH) THE COMPANY AND
THE SUBSIDIARIES HAVE, OR HAVE RIGHTS TO USE, ALL PATENTS, PATENT APPLICATIONS,
TRADEMARKS, TRADEMARK APPLICATIONS, SERVICE MARKS, TRADE NAMES, COPYRIGHTS,
LICENSES AND OTHER SIMILAR RIGHTS THAT USED IN CONNECTION WITH THEIR RESPECTIVE
BUSINESSES AS DESCRIBED IN THE SEC REPORTS AND WHICH THE FAILURE TO SO HAVE
COULD HAVE A MATERIAL ADVERSE EFFECT (COLLECTIVELY, THE “INTELLECTUAL PROPERTY
RIGHTS”).  NEITHER THE COMPANY NOR ANY SUBSIDIARY HAS RECEIVED A WRITTEN NOTICE
THAT THE INTELLECTUAL PROPERTY RIGHTS USED BY THE COMPANY OR ANY SUBSIDIARY
VIOLATES OR INFRINGES UPON THE RIGHTS OF ANY PERSON. TO THE KNOWLEDGE OF THE
COMPANY (WITHOUT ANY SPECIAL INVESTIGATION OR PATENT SEARCH), ALL SUCH
INTELLECTUAL PROPERTY RIGHTS ARE ENFORCEABLE AND THERE IS NO EXISTING
INFRINGEMENT BY ANOTHER PERSON OF ANY OF THE INTELLECTUAL PROPERTY RIGHTS OF
OTHERS.

 

(P)                                 INSURANCE.  THE COMPANY AND THE SUBSIDIARIES
ARE INSURED BY INSURERS OF RECOGNIZED FINANCIAL RESPONSIBILITY AGAINST SUCH
LOSSES AND RISKS AND IN SUCH AMOUNTS AS ARE PRUDENT AND CUSTOMARY IN THE
BUSINESSES IN WHICH THE COMPANY AND THE SUBSIDIARIES ARE ENGAGED TO THE EXTENT
CONDUCTED BY COMPANIES OF SIMILAR SIZE AND FINANCIAL CONDITION, INCLUDING, BUT
NOT LIMITED TO, DIRECTORS AND OFFICERS INSURANCE COVERAGE AT LEAST EQUAL TO THE
AGGREGATE SUBSCRIPTION AMOUNT.  TO THE BEST OF COMPANY’S KNOWLEDGE, SUCH
INSURANCE CONTRACTS AND POLICIES ARE ACCURATE AND COMPLETE.  NEITHER THE COMPANY
NOR ANY SUBSIDIARY HAS ANY REASON TO BELIEVE THAT IT WILL NOT BE ABLE TO RENEW
ITS EXISTING INSURANCE COVERAGE AS AND WHEN SUCH COVERAGE EXPIRES OR TO OBTAIN
SIMILAR COVERAGE FROM SIMILAR INSURERS AS MAY BE NECESSARY TO CONTINUE ITS
BUSINESS WITHOUT A SIGNIFICANT INCREASE IN COST.

 

(Q)                                 TRANSACTIONS WITH AFFILIATES AND EMPLOYEES. 
OTHER THAN THE TRANSACTION DOCUMENTS AND EXCEPT AS SET FORTH IN THE SEC REPORTS
OR THE CURRENT 10-KSB, NONE OF THE OFFICERS OR DIRECTORS OF THE COMPANY AND, TO
THE KNOWLEDGE OF THE COMPANY, NONE OF THE EMPLOYEES OF THE COMPANY IS PRESENTLY
A PARTY TO ANY TRANSACTION WITH THE COMPANY OR ANY SUBSIDIARY (OTHER THAN 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
KNOWLEDGE OF THE

 

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COMPANY, ANY ENTITY IN WHICH ANY OFFICER, DIRECTOR, OR ANY SUCH EMPLOYEE HAS A
SUBSTANTIAL INTEREST OR IS AN OFFICER, DIRECTOR, TRUSTEE OR PARTNER, IN EACH
CASE IN EXCESS OF $60,000 OTHER THAN (I) FOR PAYMENT OF SALARY OR CONSULTING
FEES FOR SERVICES RENDERED, (II) REIMBURSEMENT FOR EXPENSES INCURRED ON BEHALF
OF THE COMPANY AND (III) FOR OTHER EMPLOYEE BENEFITS, INCLUDING STOCK OPTION
AGREEMENTS UNDER ANY STOCK OPTION PLAN OF THE COMPANY.

 

(R)                                    SARBANES-OXLEY; INTERNAL ACCOUNTING
CONTROLS.  THE COMPANY IS IN MATERIAL COMPLIANCE WITH ALL PROVISIONS OF THE
SARBANES-OXLEY ACT OF 2002 WHICH ARE APPLICABLE TO IT AS OF THE CLOSING DATE. 
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 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 EXCHANGE 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 ITS
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 EXCHANGE 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 DATE PRIOR TO THE FILING DATE OF
THE MOST RECENTLY FILED PERIODIC REPORT UNDER THE EXCHANGE ACT (SUCH DATE, THE
“EVALUATION DATE”).  THE COMPANY PRESENTED IN ITS MOST RECENTLY FILED PERIODIC
REPORT UNDER THE EXCHANGE 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 307(B) OF REGULATION S-K UNDER THE EXCHANGE ACT) OR, TO THE
COMPANY’S KNOWLEDGE, IN OTHER FACTORS THAT COULD SIGNIFICANTLY AFFECT THE
COMPANY’S INTERNAL CONTROLS.

 

(S)                                  CERTAIN FEES.  NO BROKERAGE OR FINDER’S
FEES OR COMMISSIONS ARE OR WILL BE PAYABLE BY THE COMPANY TO ANY BROKER,
FINANCIAL ADVISOR OR CONSULTANT, FINDER, PLACEMENT AGENT, INVESTMENT BANKER,
BANK OR OTHER PERSON WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED BY THIS
AGREEMENT.  THE PURCHASERS SHALL HAVE NO OBLIGATION WITH RESPECT TO ANY FEES OR
WITH RESPECT TO ANY CLAIMS MADE BY OR ON BEHALF OF OTHER PERSONS FOR FEES OF A
TYPE CONTEMPLATED IN THIS SECTION THAT MAY BE DUE IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.

 

(T)                                    PRIVATE PLACEMENT. ASSUMING THE ACCURACY
OF THE PURCHASERS REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 3.2, NO
REGISTRATION UNDER THE SECURITIES ACT IS REQUIRED FOR THE OFFER AND SALE OF THE
SECURITIES BY THE COMPANY TO THE PURCHASERS AS CONTEMPLATED HEREBY. SUBJECT TO
OBTAINING THE REQUIRED APPROVALS, THE ISSUANCE AND

 

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SALE OF THE SECURITIES HEREUNDER DOES NOT CONTRAVENE THE RULES AND REGULATIONS
OF THE TRADING MARKET.

 

(U)                                 INVESTMENT COMPANY. THE COMPANY IS NOT, AND
IS NOT AN AFFILIATE OF, AND IMMEDIATELY AFTER RECEIPT OF PAYMENT FOR THE SHARES
OF PREFERRED STOCK, WILL NOT BE OR BE AN AFFILIATE OF, AN “INVESTMENT COMPANY”
WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED.  THE
COMPANY SHALL CONDUCT ITS BUSINESS IN A MANNER SO THAT IT WILL NOT BECOME
SUBJECT TO THE INVESTMENT COMPANY ACT.

 

(V)                                 REGISTRATION RIGHTS.  OTHER THAN EACH OF THE
PURCHASERS, NO PERSON HAS ANY RIGHT TO CAUSE THE COMPANY TO EFFECT THE
REGISTRATION UNDER THE SECURITIES ACT OF ANY SECURITIES OF THE COMPANY.

 

(W)                               LISTING AND MAINTENANCE REQUIREMENTS.  THE
COMPANY’S COMMON STOCK IS REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE
ACT, AND THE COMPANY HAS TAKEN NO ACTION DESIGNED TO, OR WHICH TO ITS KNOWLEDGE
IS LIKELY TO HAVE THE EFFECT OF, TERMINATING THE REGISTRATION OF THE COMMON
STOCK UNDER THE EXCHANGE ACT NOR HAS THE COMPANY RECEIVED ANY NOTIFICATION THAT
THE COMMISSION IS CONTEMPLATING TERMINATING SUCH REGISTRATION.  EXCEPT AS SET
FORTH IN THE SEC REPORTS OR THE CURRENT 10-KSB, THE COMPANY HAS NOT, IN THE 12
MONTHS PRECEDING THE DATE HEREOF, RECEIVED NOTICE FROM ANY TRADING MARKET ON
WHICH THE COMMON STOCK IS OR HAS BEEN LISTED OR QUOTED TO THE EFFECT THAT THE
COMPANY IS NOT IN COMPLIANCE WITH THE LISTING OR MAINTENANCE REQUIREMENTS OF
SUCH TRADING MARKET. SUBJECT TO OBTAINING THE REQUIRED APPROVALS, THE COMPANY IS
IN COMPLIANCE WITH ALL SUCH LISTING AND MAINTENANCE REQUIREMENTS.

 

(X)                                   APPLICATION OF TAKEOVER PROTECTIONS.  THE
COMPANY AND ITS BOARD OF DIRECTORS HAVE TAKEN ALL NECESSARY ACTION, IF ANY, IN
ORDER TO RENDER INAPPLICABLE ANY CONTROL SHARE ACQUISITION, BUSINESS
COMBINATION, POISON PILL (INCLUDING ANY DISTRIBUTION UNDER A RIGHTS AGREEMENT)
OR OTHER SIMILAR ANTI-TAKEOVER PROVISION UNDER THE COMPANY’S CERTIFICATE OF
INCORPORATION (OR SIMILAR CHARTER DOCUMENTS) OR THE LAWS OF ITS STATE OF
INCORPORATION THAT IS OR COULD BECOME APPLICABLE TO THE PURCHASERS AS A RESULT
OF THE PURCHASERS AND THE COMPANY FULFILLING THEIR OBLIGATIONS OR EXERCISING
THEIR RIGHTS UNDER THE TRANSACTION DOCUMENTS, INCLUDING WITHOUT LIMITATION THE
COMPANY’S ISSUANCE OF THE SECURITIES AND THE PURCHASERS’ OWNERSHIP OF THE
SECURITIES.

 

(Y)                                 DISCLOSURE.  EXCEPT FOR THE INFORMATION
CONTAINED IN THE CURRENT 10-KSB AND FOR THE EXISTENCE OF THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS, THE COMPANY CONFIRMS THAT NEITHER IT
NOR ANY OTHER PERSON ACTING ON ITS BEHALF HAS PROVIDED ANY OF THE PURCHASERS OR
THEIR AGENTS OR COUNSEL WITH ANY INFORMATION THAT CONSTITUTES OR MIGHT
CONSTITUTE MATERIAL, NONPUBLIC INFORMATION, EXCEPT TO THE EXTENT SUCH
INFORMATION WAS PROVIDED TO A PURCHASER WHO HAS EXECUTED A CONFIDENTIALITY OR
NON-DISCLOSURE AGREEMENT ON OR PRIOR TO THE DATE HEREOF.  THE COMPANY
UNDERSTANDS AND CONFIRMS THAT THE PURCHASERS WILL RELY ON THE FOREGOING
REPRESENTATIONS AND COVENANTS IN EFFECTING TRANSACTIONS IN SECURITIES OF THE
COMPANY.  ALL DISCLOSURE PROVIDED TO THE PURCHASERS REGARDING THE COMPANY, ITS
BUSINESS AND THE TRANSACTIONS CONTEMPLATED HEREBY, INCLUDING THE DISCLOSURE
SCHEDULES TO THIS AGREEMENT, FURNISHED BY OR ON BEHALF OF THE COMPANY

 

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WITH RESPECT TO THE REPRESENTATIONS AND WARRANTIES MADE HEREIN ARE TRUE AND
CORRECT WITH RESPECT TO SUCH REPRESENTATIONS AND WARRANTIES AND DO NOT CONTAIN
ANY UNTRUE STATEMENT OF A MATERIAL FACT OR OMIT TO STATE ANY MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS MADE THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING. THE COMPANY
ACKNOWLEDGES AND AGREES THAT NO PURCHASER MAKES OR HAS MADE ANY REPRESENTATIONS
OR WARRANTIES WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY OTHER THAN
THOSE SPECIFICALLY SET FORTH IN SECTION 3.2 HEREOF.

 

(Z)                                   NO INTEGRATED OFFERING.  ASSUMING THE
ACCURACY OF THE PURCHASERS’ REPRESENTATIONS AND WARRANTIES SET FORTH IN
SECTION 3.2, NEITHER THE COMPANY, NOR ANY OF ITS AFFILIATES, NOR ANY PERSON
ACTING ON ITS OR THEIR BEHALF HAS, DIRECTLY OR INDIRECTLY, MADE ANY OFFERS OR
SALES OF ANY SECURITY OR SOLICITED ANY OFFERS TO BUY ANY SECURITY, UNDER
CIRCUMSTANCES THAT WOULD CAUSE THIS OFFERING OF THE SECURITIES TO BE INTEGRATED
WITH PRIOR OFFERINGS BY THE COMPANY FOR PURPOSES OF THE SECURITIES ACT OR ANY
APPLICABLE SHAREHOLDER APPROVAL PROVISIONS, INCLUDING, WITHOUT LIMITATION, UNDER
THE RULES AND REGULATIONS OF ANY TRADING MARKET ON WHICH ANY OF THE SECURITIES
OF THE COMPANY ARE LISTED OR DESIGNATED.

 

(AA)                            SOLVENCY.  BASED ON THE FINANCIAL CONDITION OF
THE COMPANY AS OF THE CLOSING DATE AFTER GIVING EFFECT TO THE RECEIPT BY THE
COMPANY OF THE PROCEEDS FROM THE SALE OF THE SECURITIES HEREUNDER, (I) THE
COMPANY BELIEVES ITS AVAILABLE CASH, CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
ARE SUFFICIENT TO FUND THE OPERATION OF ITS BUSINESS FOR THE NEXT TWELVE MONTHS
AND (II) THE COMPANY WILL NOT BE SUBJECT TO A “GOING CONCERN” OPINION FROM ITS
ACCOUNTANTS IN THE FINANCIAL STATEMENTS INCLUDED IN THE CURRENT 10-KSB.  THE
COMPANY DOES NOT INTEND TO INCUR DEBTS BEYOND ITS ABILITY TO PAY SUCH DEBTS AS
THEY MATURE (TAKING INTO ACCOUNT THE TIMING AND AMOUNTS OF CASH TO BE PAYABLE ON
OR IN RESPECT OF ITS DEBT).  THE COMPANY HAS NO KNOWLEDGE OF ANY FACTS OR
CIRCUMSTANCES WHICH LEAD IT TO BELIEVE THAT IT WILL FILE FOR REORGANIZATION OR
LIQUIDATION UNDER THE BANKRUPTCY OR REORGANIZATION LAWS OF ANY JURISDICTION
WITHIN ONE YEAR FROM THE CLOSING DATE.  THE SEC REPORTS AND THE CURRENT 10-KSB
SET FORTH AS OF THE DATES THEREOF ALL OUTSTANDING SECURED AND UNSECURED
INDEBTEDNESS OF THE COMPANY OR ANY SUBSIDIARY, OR FOR WHICH THE COMPANY OR ANY
SUBSIDIARY HAS COMMITMENTS.  FOR THE PURPOSES OF THIS AGREEMENT, “INDEBTEDNESS”
SHALL MEAN (A) ANY LIABILITIES FOR BORROWED MONEY OR AMOUNTS OWED IN EXCESS OF
$50,000 (OTHER THAN TRADE ACCOUNTS PAYABLE INCURRED IN THE ORDINARY COURSE OF
BUSINESS), (B) ALL GUARANTIES, ENDORSEMENTS AND OTHER CONTINGENT OBLIGATIONS IN
RESPECT OF INDEBTEDNESS OF OTHERS, WHETHER OR NOT THE SAME ARE OR SHOULD BE
REFLECTED IN THE COMPANY’S BALANCE SHEET (OR THE NOTES THERETO), EXCEPT
GUARANTIES BY ENDORSEMENT OF NEGOTIABLE INSTRUMENTS FOR DEPOSIT OR COLLECTION OR
SIMILAR TRANSACTIONS IN THE ORDINARY COURSE OF BUSINESS; AND (C) THE PRESENT
VALUE OF ANY LEASE PAYMENTS IN EXCESS OF $50,000 DUE UNDER LEASES REQUIRED TO BE
CAPITALIZED IN ACCORDANCE WITH GAAP.  NEITHER THE COMPANY NOR ANY SUBSIDIARY IS
IN DEFAULT WITH RESPECT TO ANY INDEBTEDNESS.

 

(BB)                          FORM S-3 ELIGIBILITY.  THE COMPANY IS ELIGIBLE TO
REGISTER THE RESALE OF THE UNDERLYING SHARES FOR RESALE BY THE PURCHASER ON FORM
S-3 PROMULGATED UNDER THE SECURITIES ACT PURSUANT TO GENERAL INSTRUCTION I.B.3
OF FORM S-3.

 

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(CC)                            TAX STATUS.  EXCEPT FOR MATTERS THAT WOULD NOT,
INDIVIDUALLY OR IN THE AGGREGATE, HAVE OR REASONABLY BE EXPECTED TO RESULT IN A
MATERIAL ADVERSE EFFECT, THE COMPANY AND EACH SUBSIDIARY HAS FILED ALL NECESSARY
FEDERAL, STATE AND FOREIGN INCOME AND FRANCHISE TAX RETURNS AND HAS PAID OR
ACCRUED ALL TAXES SHOWN AS DUE THEREON, AND THE COMPANY HAS NO KNOWLEDGE OF A
TAX DEFICIENCY WHICH HAS BEEN ASSERTED OR THREATENED AGAINST THE COMPANY OR ANY
SUBSIDIARY.

 

(DD)                          NO GENERAL SOLICITATION.  NEITHER THE COMPANY NOR
ANY PERSON ACTING ON BEHALF OF THE COMPANY HAS OFFERED OR SOLD ANY OF THE
SECURITIES BY ANY FORM OF GENERAL SOLICITATION OR GENERAL ADVERTISING.  THE
COMPANY HAS OFFERED THE SECURITIES FOR SALE ONLY TO THE PURCHASERS AND CERTAIN
OTHER “ACCREDITED INVESTORS” WITHIN THE MEANING OF RULE 501 UNDER THE SECURITIES
ACT.

 

(EE)                            FOREIGN CORRUPT PRACTICES.  NEITHER THE COMPANY,
NOR TO THE KNOWLEDGE OF THE COMPANY, ANY AGENT OR OTHER PERSON ACTING ON BEHALF
OF THE COMPANY, HAS (I) DIRECTLY OR INDIRECTLY, USED ANY FUNDS FOR UNLAWFUL
CONTRIBUTIONS, GIFTS, ENTERTAINMENT OR OTHER UNLAWFUL EXPENSES RELATED TO
FOREIGN OR DOMESTIC POLITICAL ACTIVITY, (II) MADE ANY UNLAWFUL PAYMENT TO
FOREIGN OR DOMESTIC GOVERNMENT OFFICIALS OR EMPLOYEES OR TO ANY FOREIGN OR
DOMESTIC POLITICAL PARTIES OR CAMPAIGNS FROM CORPORATE FUNDS, (III) FAILED TO
DISCLOSE FULLY ANY CONTRIBUTION MADE BY THE COMPANY (OR MADE BY ANY PERSON
ACTING ON ITS BEHALF OF WHICH THE COMPANY IS AWARE) WHICH IS IN VIOLATION OF
LAW, OR (IV) VIOLATED IN ANY MATERIAL RESPECT ANY PROVISION OF THE FOREIGN
CORRUPT PRACTICES ACT OF 1977, AS AMENDED

 

(FF)                                ACCOUNTANTS.  THE COMPANY’S ACCOUNTANTS ARE
SET FORTH ON SCHEDULE 3.1(FF) OF THE DISCLOSURE SCHEDULE.  TO THE COMPANY’S
KNOWLEDGE, SUCH ACCOUNTANTS, WHO THE COMPANY EXPECTS WILL EXPRESS THEIR OPINION
WITH RESPECT TO THE FINANCIAL STATEMENTS TO BE INCLUDED IN THE COMPANY’S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDING DECEMBER 31, 2004 ARE A REGISTERED
PUBLIC ACCOUNTING FIRM AS REQUIRED BY THE SECURITIES ACT.

 

(GG)                          SENIORITY.  AS OF THE CLOSING DATE, NO OTHER
EQUITY OF THE COMPANY IS SENIOR TO THE PREFERRED STOCK IN RIGHT OF PAYMENT,
WHETHER WITH RESPECT TO INTEREST OR UPON LIQUIDATION OR DISSOLUTION, OR
OTHERWISE.

 

(HH)                          NO DISAGREEMENTS WITH ACCOUNTANTS AND LAWYERS. 
THERE ARE NO DISAGREEMENTS OF ANY KIND PRESENTLY EXISTING, OR REASONABLY
ANTICIPATED BY THE COMPANY TO ARISE, BETWEEN THE ACCOUNTANTS AND LAWYERS
FORMERLY OR PRESENTLY EMPLOYED BY THE COMPANY AND THE COMPANY IS CURRENT WITH
RESPECT TO ANY FEES OWED TO ITS ACCOUNTANTS AND LAWYERS.

 

(II)                                  ACKNOWLEDGMENT REGARDING PURCHASERS’
PURCHASE OF SECURITIES.  THE COMPANY ACKNOWLEDGES AND AGREES THAT EACH OF THE
PURCHASERS IS ACTING SOLELY IN THE CAPACITY OF AN ARM’S LENGTH PURCHASER WITH
RESPECT TO THE TRANSACTION DOCUMENTS AND THE TRANSACTIONS CONTEMPLATED HEREBY. 
THE COMPANY FURTHER ACKNOWLEDGES THAT NO PURCHASER IS ACTING AS A FINANCIAL
ADVISOR OR FIDUCIARY OF THE COMPANY (OR IN ANY SIMILAR CAPACITY) WITH RESPECT TO
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY AND ANY ADVICE

 

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GIVEN BY ANY PURCHASER OR ANY OF THEIR RESPECTIVE REPRESENTATIVES OR AGENTS IN
CONNECTION WITH THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY IS
MERELY INCIDENTAL TO THE PURCHASERS’ PURCHASE OF THE SECURITIES.  THE COMPANY
FURTHER REPRESENTS TO EACH PURCHASER THAT THE COMPANY’S DECISION TO ENTER INTO
THIS AGREEMENT HAS BEEN BASED SOLELY ON THE INDEPENDENT EVALUATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY BY THE COMPANY AND ITS REPRESENTATIVES.

 

 

(jj)                                  Acknowledgement Regarding Purchasers’
Trading Activity.  Anything in this Agreement or elsewhere herein to the
contrary notwithstanding (except for Section 4.16 hereof), it is understood and
agreed by the Company (i) that none of the Purchasers have been asked to agree,
nor has any Purchaser agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities
issued by the Company or to hold the Securities for any specified term; (ii)
that past or future open market or other transactions by any Purchaser,
including Short Sales, and specifically including, without limitation, Short
Sales or “derivative” transactions, before or after the closing of this or
future private placement transactions, may negatively impact the market price of
the Company’s publicly-traded securities; (iii) that any Purchaser, and counter
parties in “derivative” transactions to which any such Purchaser is a party,
directly or indirectly, presently may have a “short” position in the Common
Stock, and (iv) that each Purchaser shall not be deemed to have any affiliation
with or control over any arm’s length counter-party in any “derivative”
transaction.

 

3.2                                 REPRESENTATIONS AND WARRANTIES OF THE
PURCHASERS.  EACH PURCHASER HEREBY, FOR ITSELF AND FOR NO OTHER PURCHASER,
REPRESENTS AND WARRANTS AS OF THE DATE HEREOF AND AS OF THE CLOSING DATE TO THE
COMPANY AS FOLLOWS:

 

(A)                                  ORGANIZATION; AUTHORITY.  SUCH PURCHASER IS
AN ENTITY DULY ORGANIZED, VALIDLY EXISTING AND IN GOOD STANDING UNDER THE LAWS
OF THE JURISDICTION OF ITS ORGANIZATION WITH FULL RIGHT, CORPORATE OR
PARTNERSHIP POWER AND AUTHORITY TO ENTER INTO AND TO CONSUMMATE THE TRANSACTIONS
CONTEMPLATED BY THE TRANSACTION DOCUMENTS AND OTHERWISE TO CARRY OUT ITS
OBLIGATIONS THEREUNDER. THE EXECUTION, DELIVERY AND PERFORMANCE BY SUCH
PURCHASER OF THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT HAVE BEEN DULY
AUTHORIZED BY ALL NECESSARY CORPORATE OR SIMILAR ACTION ON THE PART OF SUCH
PURCHASER.  EACH TRANSACTION DOCUMENTS TO WHICH IT IS A PARTY HAS BEEN DULY
EXECUTED BY SUCH PURCHASER, AND WHEN DELIVERED BY SUCH PURCHASER IN ACCORDANCE
WITH THE TERMS HEREOF, WILL CONSTITUTE THE VALID AND LEGALLY BINDING OBLIGATION
OF SUCH PURCHASER, ENFORCEABLE AGAINST IT IN ACCORDANCE WITH ITS TERMS, EXCEPT
(I) AS LIMITED BY GENERAL EQUITABLE PRINCIPLES AND APPLICABLE BANKRUPTCY,
INSOLVENCY, REORGANIZATION, MORATORIUM AND OTHER LAWS OF GENERAL APPLICATION
AFFECTING ENFORCEMENT OF CREDITORS’ RIGHTS GENERALLY, (II) AS LIMITED BY LAWS
RELATING TO THE AVAILABILITY OF SPECIFIC PERFORMANCE, INJUNCTIVE RELIEF OR OTHER
EQUITABLE REMEDIES AND (III) INSOFAR AS INDEMNIFICATION AND CONTRIBUTION
PROVISIONS MAY BE LIMITED BY APPLICABLE LAW.

 

(B)                                 OWN ACCOUNT.  SUCH PURCHASER UNDERSTANDS
THAT THE SECURITIES ARE “RESTRICTED SECURITIES” AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAW AND IS ACQUIRING
THE SECURITIES AS PRINCIPAL FOR ITS OWN

 

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ACCOUNT AND NOT WITH A VIEW TO OR FOR DISTRIBUTING OR RESELLING SUCH SECURITIES
OR ANY PART THEREOF, HAS NO PRESENT INTENTION OF DISTRIBUTING ANY OF SUCH
SECURITIES AND HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY OTHER PERSONS
REGARDING THE DISTRIBUTION OF SUCH SECURITIES (THIS REPRESENTATION AND WARRANTY
NOT LIMITING SUCH PURCHASER’S RIGHT TO SELL THE SECURITIES PURSUANT TO THE
REGISTRATION STATEMENT OR OTHERWISE IN COMPLIANCE WITH APPLICABLE FEDERAL AND
STATE SECURITIES LAWS).  SUCH PURCHASER IS ACQUIRING THE SECURITIES HEREUNDER IN
THE ORDINARY COURSE OF ITS BUSINESS. SUCH PURCHASER DOES NOT HAVE ANY AGREEMENT
OR UNDERSTANDING, DIRECTLY OR INDIRECTLY, WITH ANY PERSON TO DISTRIBUTE ANY OF
THE SECURITIES.

 

(C)                                  PURCHASER STATUS.  AT THE TIME SUCH
PURCHASER WAS OFFERED THE SECURITIES, IT WAS, AND AT THE DATE HEREOF IT IS, AND
ON EACH DATE ON WHICH IT EXERCISES ANY WARRANTS, IT WILL BE EITHER: (I) AN
“ACCREDITED INVESTOR” AS DEFINED IN RULE 501(A)(1), (A)(2), (A)(3), (A)(7) OR
(A)(8) UNDER THE SECURITIES ACT OR (II) A “QUALIFIED INSTITUTIONAL BUYER” AS
DEFINED IN RULE 144A(A) UNDER THE SECURITIES ACT.  SUCH PURCHASER IS NOT
REQUIRED TO BE REGISTERED AS A BROKER-DEALER UNDER SECTION 15 OF THE EXCHANGE
ACT.

 

(D)                                 EXPERIENCE OF SUCH PURCHASER.  SUCH
PURCHASER, EITHER ALONE OR TOGETHER WITH ITS REPRESENTATIVES, HAS SUCH
KNOWLEDGE, SOPHISTICATION AND EXPERIENCE IN BUSINESS AND FINANCIAL MATTERS SO AS
TO BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF THE PROSPECTIVE INVESTMENT
IN THE SECURITIES, AND HAS SO EVALUATED THE MERITS AND RISKS OF SUCH
INVESTMENT.  SUCH PURCHASER IS ABLE TO BEAR THE ECONOMIC RISK OF AN INVESTMENT
IN THE SECURITIES AND, AT THE PRESENT TIME, IS ABLE TO AFFORD A COMPLETE LOSS OF
SUCH INVESTMENT.

 

(E)                                  GENERAL SOLICITATION.  SUCH PURCHASER IS
NOT PURCHASING THE SECURITIES AS A RESULT OF ANY ADVERTISEMENT, ARTICLE, NOTICE
OR OTHER COMMUNICATION REGARDING THE SECURITIES PUBLISHED IN ANY NEWSPAPER,
MAGAZINE OR SIMILAR MEDIA OR BROADCAST OVER TELEVISION OR RADIO OR PRESENTED AT
ANY SEMINAR OR ANY OTHER GENERAL SOLICITATION OR GENERAL ADVERTISEMENT.

 

(F)                                    SHORT SALES AND CONFIDENTIALITY.  OTHER
THAN THE TRANSACTION CONTEMPLATED HEREUNDER, SUCH PURCHASER HAS NOT DIRECTLY OR
INDIRECTLY, NOR HAS ANY PERSON ACTING ON BEHALF OF OR PURSUANT TO ANY
UNDERSTANDING WITH SUCH PURCHASER, EXECUTED ANY DISPOSITION, INCLUDING SHORT
SALES (BUT NOT INCLUDING THE LOCATION AND/OR RESERVATION OF BORROWABLE SHARES OF
COMMON STOCK), IN THE SECURITIES OF THE COMPANY DURING THE PERIOD COMMENCING
FROM THE TIME THAT SUCH PURCHASER FIRST RECEIVED A TERM SHEET FROM THE COMPANY
OR ANY OTHER PERSON SETTING FORTH THE MATERIAL TERMS OF THE TRANSACTIONS
CONTEMPLATED HEREUNDER UNTIL THE DATE HEREOF (“DISCUSSION TIME”). 
NOTWITHSTANDING THE FOREGOING, IN THE CASE OF A PURCHASER THAT IS A
MULTI-MANAGED INVESTMENT VEHICLE WHEREBY SEPARATE PORTFOLIO MANAGERS MANAGE
SEPARATE PORTIONS OF SUCH PURCHASER’S ASSETS AND THE PORTFOLIO MANAGERS HAVE NO
DIRECT KNOWLEDGE OF THE INVESTMENT DECISIONS MADE BY THE PORTFOLIO MANAGERS
MANAGING OTHER PORTIONS OF SUCH PURCHASER’S ASSETS, THE REPRESENTATION SET FORTH
ABOVE SHALL ONLY APPLY WITH RESPECT TO THE PORTION OF ASSETS MANAGED BY THE
PORTFOLIO MANAGER THAT MADE THE INVESTMENT DECISION TO PURCHASE THE SECURITIES
COVERED BY THIS AGREEMENT.  OTHER THAN TO OTHER PERSONS PARTY TO THIS AGREEMENT,
SUCH PURCHASER

 

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HAS MAINTAINED THE CONFIDENTIALITY OF ALL DISCLOSURES MADE TO IT IN CONNECTION
WITH THIS TRANSACTION (INCLUDING THE EXISTENCE AND TERMS OF THIS TRANSACTION).

 

(G)                                 OPPORTUNITIES FOR ADDITIONAL INFORMATION.
EACH PURCHASER ACKNOWLEDGES THAT SUCH PURCHASER HAS HAD THE OPPORTUNITY TO ASK
QUESTIONS OF AND RECEIVE ANSWERS FROM, OR OBTAIN ADDITIONAL INFORMATION FROM,
THE EXECUTIVE OFFICERS OF THE COMPANY CONCERNING THE FINANCIAL AND OTHER AFFAIRS
OF THE COMPANY, AND TO THE EXTENT DEEMED NECESSARY BY SUCH PURCHASER IN LIGHT OF
SUCH PURCHASER’S PERSONAL KNOWLEDGE OF THE COMPANY’S AFFAIRS, SUCH PURCHASER HAS
ASKED SUCH QUESTIONS AND RECEIVED ANSWERS TO THE FULL SATISFACTION OF SUCH
PURCHASER, AND SUCH PURCHASER DESIRES TO INVEST IN THE COMPANY.

 

The Company acknowledges and agrees that each Purchaser does not make or has not
made any representations or warranties with respect to the transactions
contemplated hereby other than those specifically set forth in this Section 3.2.

 

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

 

4.1                                 TRANSFER RESTRICTIONS.

 

(A)                                  THE SECURITIES MAY ONLY BE DISPOSED OF IN
COMPLIANCE WITH STATE AND FEDERAL SECURITIES LAWS.  IN CONNECTION WITH ANY
TRANSFER OF SECURITIES OTHER THAN PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR RULE 144, TO THE COMPANY OR TO AN AFFILIATE OF A PURCHASER WHO
AGREES TO BE BOUND BY THE PROVISIONS OF THIS AGREEMENT AND THE REGISTRATION
RIGHTS AGREEMENT OR IN CONNECTION WITH A PLEDGE AS CONTEMPLATED IN
SECTION 4.1(B), THE COMPANY MAY REQUIRE THE TRANSFEROR THEREOF TO PROVIDE TO THE
COMPANY AN OPINION OF COUNSEL SELECTED BY THE TRANSFEROR AND REASONABLY
ACCEPTABLE TO THE COMPANY, THE FORM AND SUBSTANCE OF WHICH OPINION SHALL BE
REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH TRANSFER DOES
NOT REQUIRE REGISTRATION OF SUCH TRANSFERRED SECURITIES UNDER THE SECURITIES
ACT.  AS A CONDITION OF TRANSFER, ANY SUCH TRANSFEREE SHALL AGREE IN WRITING TO
BE BOUND BY THE TERMS OF THIS AGREEMENT AND SHALL HAVE THE RIGHTS OF A PURCHASER
UNDER THIS AGREEMENT AND THE REGISTRATION RIGHTS AGREEMENT.

 

(B)                                 THE PURCHASERS AGREE TO THE IMPRINTING, SO
LONG AS IS REQUIRED BY THIS SECTION 4.1(B), OF A LEGEND ON ANY OF THE SECURITIES
IN THE FOLLOWING FORM:

 

[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO
AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN

 

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ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION
OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE
REASONABLY ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES
ISSUABLE UPON EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A
BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The Company acknowledges and agrees that a Purchaser may from time to time
pledge pursuant to a bona fide margin agreement with a registered broker-dealer
or grant a security interest in some or all of the Securities to a financial
institution that is an “accredited investor” as defined in Rule 501(a) under the
Securities Act and who agrees to be bound by the provisions of this Agreement
and the Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties.  Such a pledge or transfer would not be subject to
approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith.  Further, no
notice shall be required of such pledge.  At the appropriate Purchaser’s
expense, the Company will execute and deliver such reasonable documentation as a
pledgee or secured party of Securities may reasonably request in connection with
a pledge or transfer of the Securities, including, if the Securities are subject
to registration pursuant to the Registration Rights Agreement, the preparation
and filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.

 

(C)                                  CERTIFICATES EVIDENCING THE UNDERLYING
SHARES SHALL NOT CONTAIN ANY LEGEND (INCLUDING THE LEGEND SET FORTH IN
SECTION 4.1(B) HEREOF): (I) WHILE A REGISTRATION STATEMENT (INCLUDING THE
REGISTRATION STATEMENT) COVERING THE RESALE OF SUCH SECURITY IS EFFECTIVE UNDER
THE SECURITIES ACT, OR (II) FOLLOWING ANY SALE OF SUCH UNDERLYING SHARES
PURSUANT TO RULE 144, OR (III) IF SUCH UNDERLYING SHARES ARE ELIGIBLE FOR SALE
UNDER RULE 144(K), OR (IV) IF SUCH LEGEND IS NOT REQUIRED UNDER APPLICABLE
REQUIREMENTS OF THE SECURITIES ACT (INCLUDING JUDICIAL INTERPRETATIONS AND
PRONOUNCEMENTS ISSUED BY THE STAFF OF THE COMMISSION). THE COMPANY SHALL CAUSE
ITS COUNSEL TO ISSUE A LEGAL OPINION TO THE COMPANY’S TRANSFER AGENT PROMPTLY
AFTER THE EFFECTIVE DATE IF REQUIRED BY THE COMPANY’S TRANSFER AGENT TO EFFECT
THE REMOVAL OF THE LEGEND HEREUNDER. IF ALL OR ANY SHARES OF PREFERRED STOCK OR
ANY PORTION OF A WARRANT IS CONVERTED OR EXERCISED (AS APPLICABLE) AT A TIME
WHEN THERE IS AN EFFECTIVE REGISTRATION STATEMENT TO COVER THE RESALE OF THE
UNDERLYING SHARES, OR IF SUCH UNDERLYING SHARES MAY BE SOLD UNDER RULE 144(K) OR
IF SUCH LEGEND IS NOT OTHERWISE REQUIRED UNDER APPLICABLE REQUIREMENTS OF THE
SECURITIES ACT (INCLUDING JUDICIAL INTERPRETATIONS THEREOF) THEN SUCH UNDERLYING
SHARES SHALL BE ISSUED FREE OF ALL LEGENDS.  THE COMPANY AGREES THAT FOLLOWING
THE EFFECTIVE DATE OR AT SUCH TIME AS SUCH LEGEND IS NO LONGER REQUIRED UNDER
THIS SECTION 4.1(C), IT WILL, NO LATER THAN THREE TRADING DAYS FOLLOWING THE
DELIVERY BY A PURCHASER TO THE COMPANY OR THE COMPANY’S TRANSFER AGENT OF A
CERTIFICATE REPRESENTING UNDERLYING SHARES, AS APPLICABLE, ISSUED WITH A
RESTRICTIVE LEGEND (SUCH THIRD TRADING DAY, THE “LEGEND REMOVAL DATE”),

 

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DELIVER OR CAUSE TO BE DELIVERED TO SUCH PURCHASER A CERTIFICATE REPRESENTING
SUCH SHARES THAT IS FREE FROM ALL RESTRICTIVE AND OTHER LEGENDS.  THE COMPANY
MAY NOT MAKE ANY NOTATION ON ITS RECORDS OR GIVE INSTRUCTIONS TO ANY TRANSFER
AGENT OF THE COMPANY THAT ENLARGE THE RESTRICTIONS ON TRANSFER SET FORTH IN THIS
SECTION.  IF REQUESTED BY THE APPLICABLE PURCHASER, CERTIFICATES FOR SECURITIES
SUBJECT TO LEGEND REMOVAL HEREUNDER SHALL BE TRANSMITTED BY THE TRANSFER AGENT
OF THE COMPANY TO THE PURCHASERS BY CREDITING THE ACCOUNT OF THE PURCHASER’S
PRIME BROKER WITH THE DEPOSITORY TRUST COMPANY SYSTEM.

 

(d)                                 In addition to such Purchaser’s other
available remedies, the Company shall pay to a Purchaser, in cash, as partial
liquidated damages and not as a penalty, for each $1,000 of Underlying Shares
(based on the VWAP of the Common Stock on the date such Securities are submitted
to the Company’s transfer agent) delivered for removal of the restrictive legend
and subject to this Section 4.1(c), $10 per Trading Day (increasing to $20 per
Trading Day 5 Trading Days after such damages have begun to accrue) for each
Trading Day after the Legend Removal Date until such certificate is delivered
without a legend.  Nothing herein shall limit such Purchaser’s right to pursue
actual damages for the Company’s failure to deliver certificates representing
any Securities as required by the Transaction Documents, and such Purchaser
shall have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.

 

(e)                                  Each Purchaser, severally and not jointly
with the other Purchasers, agrees that the removal of the restrictive legend
from certificates representing Securities as set forth in this Section 4.1 is
predicated upon the Company’s and the Company’s counsel’s reliance that the
Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus delivery
requirements, or an exemption therefrom.  The Company’s counsel, from time to
time, is expressly authorized to rely upon this covenant of Section 4.1(e).

 

(f)                                    Until the one year anniversary of the
Effective Date, the Company shall not undertake a reverse or forward stock split
or reclassification of the Common Stock without the prior written consent of the
Purchasers holding a majority in interest of the shares of Preferred Stock.

 

4.2                                 ACKNOWLEDGMENT OF DILUTION.  THE COMPANY
ACKNOWLEDGES THAT THE ISSUANCE OF THE SECURITIES MAY RESULT IN DILUTION OF THE
OUTSTANDING SHARES OF COMMON STOCK, WHICH DILUTION MAY BE SUBSTANTIAL UNDER
CERTAIN MARKET CONDITIONS.  THE COMPANY FURTHER ACKNOWLEDGES THAT ITS
OBLIGATIONS UNDER THE TRANSACTION DOCUMENTS, INCLUDING WITHOUT LIMITATION ITS
OBLIGATION TO ISSUE THE UNDERLYING SHARES PURSUANT TO THE TRANSACTION DOCUMENTS,
ARE UNCONDITIONAL AND ABSOLUTE AND NOT SUBJECT TO ANY RIGHT OF SET OFF,
COUNTERCLAIM, DELAY OR REDUCTION, REGARDLESS OF THE EFFECT OF ANY SUCH DILUTION
OR ANY CLAIM THE COMPANY MAY HAVE AGAINST ANY PURCHASER AND REGARDLESS OF THE
DILUTIVE EFFECT THAT SUCH ISSUANCE MAY HAVE ON THE OWNERSHIP OF THE OTHER
STOCKHOLDERS OF THE COMPANY.

 

4.3                                 FURNISHING OF INFORMATION.  AS LONG AS ANY
PURCHASER OWNS SECURITIES, THE COMPANY COVENANTS TO TIMELY FILE (OR OBTAIN
EXTENSIONS IN RESPECT THEREOF AND FILE WITHIN THE

 

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APPLICABLE GRACE PERIOD) ALL REPORTS REQUIRED TO BE FILED BY THE COMPANY AFTER
THE DATE HEREOF PURSUANT TO THE EXCHANGE ACT.  AS LONG AS ANY PURCHASER OWNS
SECURITIES, IF THE COMPANY IS NOT REQUIRED TO FILE REPORTS PURSUANT TO THE
EXCHANGE ACT, IT WILL PREPARE AND FURNISH TO THE PURCHASERS AND MAKE PUBLICLY
AVAILABLE IN ACCORDANCE WITH RULE 144(C) SUCH INFORMATION AS IS REQUIRED FOR THE
PURCHASERS TO SELL THE SECURITIES UNDER RULE 144.  THE COMPANY FURTHER COVENANTS
THAT IT WILL TAKE SUCH FURTHER ACTION AS ANY HOLDER OF SECURITIES MAY REASONABLY
REQUEST, ALL TO THE EXTENT REQUIRED FROM TIME TO TIME TO ENABLE SUCH PERSON TO
SELL SUCH SECURITIES WITHOUT REGISTRATION UNDER THE SECURITIES ACT WITHIN THE
LIMITATION OF THE EXEMPTIONS PROVIDED BY RULE 144; PROVIDED, HOWEVER, THAT THE
COMPANY SHALL NOT BE REQUIRED TO DISCLOSE TO SUCH PERSON ANY MATERIAL NON-PUBLIC
INFORMATION REGARDING THE COMPANY.

 

4.4                                 INTEGRATION.  THE COMPANY SHALL NOT SELL,
OFFER FOR SALE OR SOLICIT OFFERS TO BUY OR OTHERWISE NEGOTIATE IN RESPECT OF ANY
SECURITY (AS DEFINED IN SECTION 2 OF THE SECURITIES ACT) THAT WOULD BE
INTEGRATED WITH THE OFFER OR SALE OF THE SECURITIES IN A MANNER THAT WOULD
REQUIRE THE REGISTRATION UNDER THE SECURITIES ACT OF THE SALE OF THE SECURITIES
TO THE PURCHASERS OR THAT WOULD BE INTEGRATED WITH THE OFFER OR SALE OF THE
SECURITIES FOR PURPOSES OF THE RULES AND REGULATIONS OF ANY TRADING MARKET.

 

4.5                                 CONVERSION AND EXERCISE PROCEDURES.  EXCEPT
FOR DELIVERY OF THE PREFERRED STOCK CERTIFICATE AND/OR THE WARRANT CERTIFICATE
TO THE COMPANY UPON THE FINAL CONVERSION OF THE PREFERRED STOCK OR EXERCISE OF
THE WARRANTS, AS APPLICABLE, THE FORM OF NOTICE OF EXERCISE INCLUDED IN THE
WARRANTS AND THE NOTICE OF CONVERSION INCLUDED IN THE CERTIFICATE OF
DESIGNATIONS SET FORTH THE TOTALITY OF THE PROCEDURES REQUIRED OF THE PURCHASERS
IN ORDER TO EXERCISE THE WARRANTS OR CONVERT THE PREFERRED STOCK.  NO ADDITIONAL
LEGAL OPINION OR OTHER INFORMATION OR INSTRUCTIONS SHALL BE REQUIRED OF THE
PURCHASERS TO EXERCISE THEIR WARRANTS OR CONVERT THEIR PREFERRED STOCK.  THE
COMPANY SHALL HONOR EXERCISES OF THE WARRANTS AND CONVERSIONS OF THE PREFERRED
STOCK AND SHALL DELIVER UNDERLYING SHARES IN ACCORDANCE WITH THE TERMS,
CONDITIONS AND TIME PERIODS SET FORTH IN THE TRANSACTION DOCUMENTS.

 

4.6                                 SECURITIES LAWS DISCLOSURE; PUBLICITY.  THE
COMPANY SHALL, (A) BY 8:30 A.M. EASTERN TIME ON THE TRADING DAY FOLLOWING THE
CLOSING DATE, ISSUE A PRESS RELEASE, REASONABLY ACCEPTABLE TO THE PURCHASERS
ACQUIRING A MAJORITY OF THE SHARES OF PREFERRED STOCK AT THE CLOSING DISCLOSING
THE MATERIAL TERMS OF THE TRANSACTIONS CONTEMPLATED HEREBY AND (B) BY 8:30 A.M.
EASTERN TIME ON THE SECOND TRADING DAY FOLLOWING THE CLOSING DATE, ISSUE A
CURRENT REPORT ON FORM 8-K, REASONABLY ACCEPTABLE TO EACH PURCHASER DISCLOSING
THE MATERIAL TERMS OF THE TRANSACTIONS CONTEMPLATED HEREBY AND SHALL ATTACH THE
TRANSACTION DOCUMENTS THERETO AS EXHIBITS.  THE COMPANY AND EACH PURCHASER SHALL
CONSULT WITH EACH OTHER IN ISSUING ANY OTHER PRESS RELEASES WITH RESPECT TO THE
TRANSACTIONS CONTEMPLATED HEREBY, AND NEITHER THE COMPANY NOR ANY PURCHASER
SHALL ISSUE ANY SUCH PRESS RELEASE OR OTHERWISE MAKE ANY SUCH PUBLIC STATEMENT
WITHOUT THE PRIOR CONSENT OF THE COMPANY, WITH RESPECT TO ANY PRESS RELEASE OF
ANY PURCHASER, OR WITHOUT THE PRIOR CONSENT OF THE PURCHASERS ACQUIRING A
MAJORITY OF THE SHARES OF PREFERRED STOCK AT THE CLOSING, WITH RESPECT TO ANY
PRESS RELEASE OF THE COMPANY, WHICH CONSENT SHALL NOT UNREASONABLY BE WITHHELD,
EXCEPT IF SUCH DISCLOSURE IS REQUIRED BY LAW, IN WHICH CASE THE DISCLOSING PARTY
SHALL PROMPTLY PROVIDE THE OTHER PARTY WITH PRIOR NOTICE OF SUCH PUBLIC
STATEMENT OR COMMUNICATION.  NOTWITHSTANDING THE FOREGOING, THE COMPANY SHALL
NOT PUBLICLY DISCLOSE THE NAME OF ANY PURCHASER, OR INCLUDE THE NAME OF ANY
PURCHASER IN ANY FILING WITH THE COMMISSION OR ANY

 

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REGULATORY AGENCY OR TRADING MARKET, WITHOUT THE PRIOR WRITTEN CONSENT OF SUCH
PURCHASER, EXCEPT (I) AS REQUIRED BY FEDERAL SECURITIES LAW IN CONNECTION WITH
THE REGISTRATION STATEMENT CONTEMPLATED BY THE REGISTRATION RIGHTS AGREEMENT AND
(II) TO THE EXTENT SUCH DISCLOSURE IS REQUIRED BY LAW OR TRADING MARKET
REGULATIONS, IN WHICH CASE THE COMPANY SHALL PROVIDE THE PURCHASERS WITH PRIOR
NOTICE OF SUCH DISCLOSURE PERMITTED UNDER SUBCLAUSE (I) OR (II).

 

4.7                                 Shareholder Rights Plan.  No claim will be
made or enforced by the Company or, to the knowledge of the Company, any other
Person that any Purchaser is an “Acquiring Person” under any shareholder rights
plan or similar plan or arrangement in effect or hereafter adopted by the
Company, or that any Purchaser could be deemed to trigger the provisions of any
such plan or arrangement, by virtue of receiving Securities under the
Transaction Documents or under any other agreement between the Company and the
Purchasers. The Company shall conduct its business in a manner so that it will
not become subject to the Investment Company Act.

 

4.8                                 NON-PUBLIC INFORMATION.  EXCEPT TO THE
EXTENT PROVIDING SUCH INFORMATION IS REQUIRED PURSUANT TO THE TERMS OF THIS
AGREEMENT (INCLUDING, WITHOUT LIMITATION, INFORMATION REGARDING A SUBSEQUENT
FINANCING PROVIDED PURSUANT TO SECTION 4.13), THE COMPANY COVENANTS AND AGREES
THAT NEITHER IT NOR ANY OTHER PERSON ACTING ON ITS BEHALF WILL PROVIDE ANY
PURCHASER OR ITS AGENTS OR COUNSEL WITH ANY INFORMATION THAT THE COMPANY
BELIEVES CONSTITUTES MATERIAL NON-PUBLIC INFORMATION, UNLESS PRIOR THERETO SUCH
PURCHASER SHALL HAVE EXECUTED A WRITTEN AGREEMENT REGARDING THE CONFIDENTIALITY
AND USE OF SUCH INFORMATION.  THE COMPANY UNDERSTANDS AND CONFIRMS THAT EACH
PURCHASER SHALL BE RELYING ON THE FOREGOING REPRESENTATIONS IN EFFECTING
TRANSACTIONS IN SECURITIES OF THE COMPANY.  NOTWITHSTANDING THE FOREGOING, EACH
PURCHASER (I) ACKNOWLEDGES THAT (A) UNTIL THE COMPANY’S COMPLIANCE WITH
SECTION 4.6, THE TERMS OF THE TRANSACTION DOCUMENTS AND THE CONSUMMATION OF THE
TRANSACTIONS CONTEMPLATED HEREBY, (B) UNTIL ITS FILING WITH THE COMMISSION, THE
INFORMATION CONTAINED OR INCORPORATED IN THE CURRENT 10-KSB, EXCEPT TO THE
EXTENT OTHERWISE DISCLOSED IN AN ANOTHER SEC REPORT OR BY THE COMPANY PURSUANT
TO SECTION 4.6, AND (C) ANY INFORMATION PROVIDED TO SUCH PURCHASER PURSUANT TO
SECTION 4.13 (OTHER THAN A PRE-NOTICE), MAY CONSTITUTE MATERIAL NON-PUBLIC
INFORMATION AS DEFINED BY U.S. SECURITIES LAW REGULATION FD; AND (II) AGREES (A)
TO KEEP SUCH INFORMATION CONFIDENTIAL (B) NOT TO DISCLOSE SUCH INFORMATION TO
ANY THIRD-PARTY UNLESS AND UNTIL SUCH INFORMATION IS MADE PUBLICLY AVAILABLE BY
THE COMPANY, (C) TO OTHERWISE COMPLY WITH REGULATION FD AND (D) TO REFRAIN FROM
TRADING IN THE COMPANY’S COMMON STOCK UNTIL SUCH INFORMATION IS MADE PUBLICLY
AVAILABLE (OTHER THAN AS A RESULT OF A BREACH OF THIS SECTION 4.8).

 

4.9                                 USE OF PROCEEDS.  EXCEPT AS SET FORTH ON
SCHEDULE 4.9 ATTACHED HERETO, THE COMPANY SHALL USE THE NET PROCEEDS FROM THE
SALE OF THE SECURITIES HEREUNDER FOR WORKING CAPITAL PURPOSES AND NOT FOR THE
SATISFACTION OF ANY PORTION OF THE COMPANY’S DEBT (OTHER THAN PAYMENT OF TRADE
PAYABLES IN THE ORDINARY COURSE OF THE COMPANY’S BUSINESS AND PRIOR PRACTICES),
TO REDEEM COMMON STOCK OR COMMON STOCK EQUIVALENTS OR TO SETTLE ANY OUTSTANDING
LITIGATION.  PRIOR TO THE RECEIPT OF SHAREHOLDER APPROVAL, THE COMPANY SHALL NOT
DECLARE OR PAY ANY CASH DIVIDEND ON ITS SHARES OF COMMON STOCK WHILE ANY SHARES
OF PREFERRED STOCK REMAIN OUTSTANDING.

 

4.10                           REIMBURSEMENT.  IF ANY PURCHASER BECOMES INVOLVED
IN ANY CAPACITY IN ANY PROCEEDING BY OR AGAINST ANY PERSON WHO IS A STOCKHOLDER
OF THE COMPANY (EXCEPT AS A RESULT OF SALES, PLEDGES, MARGIN SALES AND SIMILAR
TRANSACTIONS BY SUCH PURCHASER TO OR WITH ANY CURRENT

 

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STOCKHOLDER), SOLELY AS A RESULT OF SUCH PURCHASER’S ACQUISITION OF THE
SECURITIES UNDER THIS AGREEMENT, THE COMPANY WILL REIMBURSE SUCH PURCHASER FOR
ITS REASONABLE LEGAL AND OTHER EXPENSES (INCLUDING THE COST OF ANY INVESTIGATION
PREPARATION AND TRAVEL IN CONNECTION THEREWITH) INCURRED IN CONNECTION
THEREWITH, AS SUCH EXPENSES ARE INCURRED.  THE REIMBURSEMENT OBLIGATIONS OF THE
COMPANY UNDER THIS PARAGRAPH SHALL BE IN ADDITION TO ANY LIABILITY WHICH THE
COMPANY MAY OTHERWISE HAVE, SHALL EXTEND UPON THE SAME TERMS AND CONDITIONS TO
ANY AFFILIATES OF THE PURCHASERS WHO ARE ACTUALLY NAMED IN SUCH ACTION,
PROCEEDING OR INVESTIGATION, AND PARTNERS, DIRECTORS, AGENTS, EMPLOYEES AND
CONTROLLING PERSONS (IF ANY), AS THE CASE MAY BE, OF THE PURCHASERS AND ANY SUCH
AFFILIATE, AND SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF ANY SUCCESSORS,
ASSIGNS, HEIRS AND PERSONAL REPRESENTATIVES OF THE COMPANY, THE PURCHASERS AND
ANY SUCH AFFILIATE AND ANY SUCH PERSON.  THE COMPANY ALSO AGREES THAT NEITHER
THE PURCHASERS NOR ANY SUCH AFFILIATES, PARTNERS, DIRECTORS, AGENTS, EMPLOYEES
OR CONTROLLING PERSONS SHALL HAVE ANY LIABILITY TO THE COMPANY OR ANY PERSON
ASSERTING CLAIMS ON BEHALF OF OR IN RIGHT OF THE COMPANY SOLELY AS A RESULT OF
ACQUIRING THE SECURITIES UNDER THIS AGREEMENT, UNLESS SUCH ACTION IS BASED UPON
A BREACH OF SUCH PURCHASER’S REPRESENTATIONS, WARRANTIES OR COVENANTS UNDER THE
TRANSACTION DOCUMENTS.

 

4.11                           INDEMNIFICATION OF PURCHASERS.   SUBJECT TO THE
PROVISIONS OF THIS SECTION 4.11, THE COMPANY WILL INDEMNIFY AND HOLD THE
PURCHASERS AND THEIR DIRECTORS, OFFICERS, SHAREHOLDERS, PARTNERS, EMPLOYEES AND
AGENTS (EACH, A “PURCHASER PARTY”) HARMLESS FROM ANY AND ALL LOSSES,
LIABILITIES, OBLIGATIONS, CLAIMS, CONTINGENCIES, DAMAGES, COSTS AND EXPENSES,
INCLUDING ALL JUDGMENTS, AMOUNTS PAID IN SETTLEMENTS, COURT COSTS AND REASONABLE
ATTORNEYS’ FEES AND COSTS OF INVESTIGATION THAT ANY SUCH PURCHASER PARTY MAY
SUFFER OR INCUR AS A RESULT OF OR RELATING TO (A) ANY BREACH OF ANY OF THE
REPRESENTATIONS, WARRANTIES, COVENANTS OR AGREEMENTS MADE BY THE COMPANY IN THIS
AGREEMENT OR IN THE OTHER TRANSACTION DOCUMENTS OR (B) ANY ACTION INSTITUTED
AGAINST A PURCHASER, OR ANY OF THEM OR THEIR RESPECTIVE AFFILIATES, BY ANY
STOCKHOLDER OF THE COMPANY WHO IS NOT AN AFFILIATE OF SUCH PURCHASER, WITH
RESPECT TO ANY OF THE TRANSACTIONS CONTEMPLATED BY THE TRANSACTION DOCUMENTS
(UNLESS SUCH ACTION IS BASED UPON A BREACH OF SUCH PURCHASER’S REPRESENTATION,
WARRANTIES OR COVENANTS UNDER THE TRANSACTION DOCUMENTS OR ANY AGREEMENTS OR
UNDERSTANDINGS SUCH PURCHASER MAY HAVE WITH ANY SUCH STOCKHOLDER OR ANY
VIOLATIONS BY THE PURCHASER OF STATE OR FEDERAL SECURITIES LAWS OR ANY CONDUCT
BY SUCH PURCHASER WHICH CONSTITUTES FRAUD, GROSS NEGLIGENCE, WILLFUL MISCONDUCT
OR MALFEASANCE).  IF ANY ACTION SHALL BE BROUGHT AGAINST ANY PURCHASER PARTY IN
RESPECT OF WHICH INDEMNITY MAY BE SOUGHT PURSUANT TO THIS AGREEMENT, SUCH
PURCHASER PARTY SHALL PROMPTLY NOTIFY THE COMPANY IN WRITING, AND THE COMPANY
SHALL HAVE THE RIGHT TO ASSUME THE DEFENSE THEREOF WITH COUNSEL OF ITS OWN
CHOOSING.  ANY PURCHASER PARTY SHALL HAVE THE RIGHT TO EMPLOY SEPARATE COUNSEL
IN ANY SUCH ACTION AND PARTICIPATE IN THE DEFENSE THEREOF, BUT THE FEES AND
EXPENSES OF SUCH COUNSEL SHALL BE AT THE EXPENSE OF SUCH PURCHASER PARTY EXCEPT
TO THE EXTENT THAT (I) THE EMPLOYMENT THEREOF HAS BEEN SPECIFICALLY AUTHORIZED
BY THE COMPANY IN WRITING, (II) THE COMPANY HAS FAILED AFTER A REASONABLE PERIOD
OF TIME TO ASSUME SUCH DEFENSE AND TO EMPLOY COUNSEL OR (III) IN SUCH ACTION
THERE IS, IN THE REASONABLE OPINION OF SUCH SEPARATE COUNSEL, A MATERIAL
CONFLICT ON ANY MATERIAL ISSUE BETWEEN THE POSITION OF THE COMPANY AND THE
POSITION OF SUCH PURCHASER PARTY.  THE COMPANY WILL NOT BE LIABLE TO ANY
PURCHASER PARTY UNDER THIS AGREEMENT (I) FOR ANY SETTLEMENT BY A PURCHASER PARTY
EFFECTED WITHOUT THE COMPANY’S PRIOR WRITTEN CONSENT, WHICH SHALL NOT BE
UNREASONABLY WITHHELD OR DELAYED; OR (II) TO THE EXTENT, BUT ONLY TO THE EXTENT
THAT A LOSS, CLAIM, DAMAGE OR LIABILITY IS ATTRIBUTABLE TO ANY PURCHASER PARTY’S
BREACH OF ANY OF THE REPRESENTATIONS,

 

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WARRANTIES, COVENANTS OR AGREEMENTS MADE BY THE PURCHASERS IN THIS AGREEMENT OR
IN THE OTHER TRANSACTION DOCUMENTS.

 

4.12                           RESERVATION AND LISTING OF SECURITIES.

 

(A)                                  THE COMPANY SHALL MAINTAIN A RESERVE FROM
ITS DULY AUTHORIZED SHARES OF COMMON STOCK FOR ISSUANCE PURSUANT TO THE
TRANSACTION DOCUMENTS IN SUCH AMOUNT AS MAY BE REQUIRED TO FULFILL ITS
OBLIGATIONS IN FULL UNDER THE TRANSACTION DOCUMENTS.

 

(B)                                 RESERVED.

 

(C)                                  THE COMPANY SHALL, IF APPLICABLE: (I) IN
THE TIME AND MANNER REQUIRED BY THE TRADING MARKET, PREPARE AND FILE WITH SUCH
TRADING MARKET AN ADDITIONAL SHARES LISTING APPLICATION COVERING A NUMBER OF
SHARES OF COMMON STOCK AT LEAST EQUAL TO THE ACTUAL MINIMUM ON THE DATE OF SUCH
APPLICATION, (II) TAKE ALL STEPS NECESSARY TO CAUSE SUCH SHARES OF COMMON STOCK
TO BE APPROVED FOR LISTING ON THE TRADING MARKET AS SOON AS POSSIBLE THEREAFTER,
(III) PROVIDE TO THE PURCHASERS EVIDENCE OF SUCH LISTING, AND (IV) MAINTAIN THE
LISTING OF SUCH COMMON STOCK ON ANY DATE AT LEAST EQUAL TO THE ACTUAL MINIMUM ON
SUCH DATE ON SUCH TRADING MARKET OR ANOTHER TRADING MARKET. IN ADDITION, THE
COMPANY SHALL HOLD A SPECIAL MEETING OF SHAREHOLDERS (WHICH MAY ALSO BE AT THE
ANNUAL MEETING OF SHAREHOLDERS) WITHIN 120 DAYS AFTER THE DATE HEREOF FOR THE
PURPOSE OF OBTAINING SHAREHOLDER APPROVAL, WITH THE RECOMMENDATION OF THE
COMPANY’S BOARD OF DIRECTORS THAT SUCH PROPOSAL BE APPROVED, AND THE COMPANY
SHALL SOLICIT PROXIES FROM ITS SHAREHOLDERS IN CONNECTION THEREWITH IN THE SAME
MANNER AS ALL OTHER MANAGEMENT PROPOSALS IN SUCH PROXY STATEMENT AND ALL
MANAGEMENT-APPOINTED PROXYHOLDERS SHALL VOTE THEIR PROXIES IN FAVOR OF SUCH
PROPOSAL. IF THE COMPANY DOES NOT OBTAIN SHAREHOLDER APPROVAL AT THE FIRST
MEETING, THE COMPANY SHALL CALL A MEETING EVERY FOUR MONTHS THEREAFTER TO SEEK
SHAREHOLDER APPROVAL UNTIL THE EARLIER OF THE DATE SHAREHOLDER APPROVAL IS
OBTAINED OR THE PREFERRED STOCK IS NO LONGER OUTSTANDING.

 

4.13                           PARTICIPATION IN FUTURE FINANCING.

 

(a)                                  From the date hereof until the date that is
the 180 days after the Effective Date, upon any financing by the Company or any
of its Subsidiaries of Common Stock or Common Stock Equivalents (a “Subsequent
Financing”), each Purchaser that (A) still owns shares of Preferred immediately
prior to date of the Pre-Notice, (B) purchased shares of Preferred stock on the
Closing Date, and (C) was not an officer or director of the Company as of the
Closing Date (any such Purchaser, for such purpose, an “Eligible Purchaser”)
shall have the right to participate in up to an amount of the Subsequent
Financing equal to 100% of the Subsequent Financing (the “Participation
Maximum”).

 

(b)                                 At least 5 Trading Days prior to the closing
of the Subsequent Financing, the Company shall deliver to each Eligible
Purchaser a written notice of its intention to effect a Subsequent Financing
(“Pre-Notice”), which Pre-Notice shall ask such Purchaser if it wants to review
the details of such financing (such additional notice, a “Subsequent Financing
Notice”).  Upon the request of an Eligible Purchaser, and only upon a request

 

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by such Eligible Purchaser, for a Subsequent Financing Notice, the Company shall
promptly, but no later than 1 Trading Day after such request, deliver a
Subsequent Financing Notice to such Eligible Purchaser.  The Subsequent
Financing Notice shall describe in reasonable detail the proposed terms of such
Subsequent Financing, the amount of proceeds intended to be raised thereunder,
the Person with whom such Subsequent Financing is proposed to be effected, and
attached to which shall be a term sheet or similar document relating thereto.

 

(c)                                  Any Eligible Purchaser desiring to
participate in such Subsequent Financing must provide written notice to the
Company by not later than 5:30 p.m. (New York City time) on the fifth Trading
Day after all of the Eligible Purchasers have received the Pre-Notice that the
Eligible Purchaser is willing to participate in the Subsequent Financing, the
amount of the Eligible Purchaser’s participation, and that the Eligible
Purchaser has such funds ready, willing, and available for investment on the
terms set forth in the Subsequent Financing Notice.  If the Company receives no
notice from an Eligible Purchaser as of such 5th Trading Day, such Eligible
Purchaser shall be deemed to have notified the Company that it does not elect to
participate.

 

(d)                                 If by 5:30 p.m. (New York City time) on the
fifth Trading Day after all of the Eligible Purchasers have received the
Pre-Notice, notifications by the Eligible Purchasers of their willingness to
participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the Subsequent
Financing, then the Company may effect the remaining portion of such Subsequent
Financing on the terms and to the Persons set forth in the Subsequent Financing
Notice.

 

(e)                                  If by 5:30 p.m. (New York City time) on the
fifth Trading Day after all of the Eligible Purchasers have received the
Pre-Notice, the Company receives responses to a Subsequent Financing Notice from
Eligible Purchasers seeking to purchase more than the aggregate amount of the
Participation Maximum, each such Eligible Purchaser shall have the right to
purchase the greater of (a) their Pro Rata Portion (as defined below) of the
Participation Maximum and (b) the difference between the Participation Maximum
and the aggregate amount of participation by all other Eligible Purchasers. 
“Pro Rata Portion” is the ratio of (x) the Subscription Amount of Securities
purchased on the Closing Date by an Eligible Purchaser participating under this
Section 4.13 and (y) the sum of the aggregate Subscription Amounts of Securities
purchased on the Closing Date by all Eligible Purchasers participating under
this Section 4.13.

 

(f)                                    The Company must provide the Eligible
Purchasers with a second Subsequent Financing Notice, and the Eligible
Purchasers will again have the right of participation set forth above in this
Section 4.13, if the Subsequent Financing subject to the initial Subsequent
Financing Notice is not consummated for any reason on the terms set forth in
such Subsequent Financing Notice within 60 Trading Days after the date of the
initial Subsequent Financing Notice.

 

(g)                                 Notwithstanding the foregoing, this
Section 4.13 shall not apply in respect of an Exempt Issuance.

 

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4.14                           Subsequent Equity Sales.

 

(a)                                  From the date hereof until 180 days after
the Effective Date, neither the Company nor any Subsidiary shall issue shares of
Common Stock or Common Stock Equivalents; provided, however, the 180 day period
set forth in this Section 4.14 shall be extended for the number of Trading Days
during such period in which (i) trading in the Common Stock is suspended by any
Trading Market, 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 Purchasers for the resale of the Underlying Shares.

 

(b)                                 From the date hereof until such time as no
Purchaser holds any of the Preferred Stock and Warrants, 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.

 

(c)                                  Notwithstanding the foregoing, this
Section 4.14 shall not apply in respect of an Exempt Issuance, except that no
Variable Rate Transaction shall be an Exempt Issuance.

 

4.15                           EQUAL TREATMENT OF PURCHASERS.  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 PURCHASER BY THE COMPANY AND NEGOTIATED SEPARATELY BY EACH
PURCHASER, AND IS INTENDED TO TREAT FOR THE COMPANY THE PURCHASERS AS A CLASS
AND SHALL NOT IN ANY WAY BE CONSTRUED AS THE PURCHASERS ACTING IN CONCERT OR AS
A GROUP WITH RESPECT TO THE PURCHASE, DISPOSITION OR VOTING OF SECURITIES OR
OTHERWISE.  FURTHER, THE RIGHTS OF ELIGIBLE PURCHASERS UNDER SECTION 4.13 OR A
WAIVER OF THE TERMS THEREOF SHALL NOT BE DEEMED TO BE UNEQUAL TREATMENT OF ANY
NON-ELIGIBLE PURCHASERS

 

4.16                           SHORT SALES AND CONFIDENTIALITY.  EACH PURCHASER
COVENANTS THAT NEITHER IT NOR ANY AFFILIATES ACTING ON ITS BEHALF OR PURSUANT TO
ANY UNDERSTANDING WITH IT WILL EXECUTE ANY SHORT SALES DURING THE PERIOD AFTER
THE DISCUSSION TIME UNTIL PRIOR TO THE TIME THAT THE TRANSACTIONS CONTEMPLATED
BY THIS AGREEMENT ARE FIRST PUBLICLY ANNOUNCED AS DESCRIBED IN SECTION 4.6. 
EACH

 

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PURCHASER, SEVERALLY AND NOT JOINTLY WITH THE OTHER PURCHASERS, COVENANTS THAT
UNTIL SUCH TIME AS THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT ARE PUBLICLY
DISCLOSED BY THE COMPANY AS DESCRIBED IN SECTION 4.6, SUCH PURCHASER WILL
MAINTAIN, THE CONFIDENTIALITY OF ALL DISCLOSURES MADE TO IT IN CONNECTION WITH
THIS TRANSACTION (INCLUDING THE EXISTENCE AND TERMS OF THIS TRANSACTION).  EACH
PURCHASER UNDERSTANDS AND ACKNOWLEDGES, SEVERALLY AND NOT JOINTLY WITH ANY OTHER
PURCHASER, THAT THE COMMISSION CURRENTLY TAKES THE POSITION THAT COVERAGE OF
SHORT SALES OF SHARES OF THE COMMON STOCK “AGAINST THE BOX” PRIOR TO THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT WITH THE SECURITIES IS A VIOLATION
OF SECTION 5 OF THE SECURITIES ACT, AS SET FORTH IN ITEM 65, SECTION 5 UNDER
SECTION A, OF THE MANUAL OF PUBLICLY AVAILABLE TELEPHONE INTERPRETATIONS, DATED
JULY 1997, COMPILED BY THE OFFICE OF CHIEF COUNSEL, DIVISION OF CORPORATION
FINANCE.  NOTWITHSTANDING THE FOREGOING, NO PURCHASER MAKES ANY REPRESENTATION,
WARRANTY OR COVENANT HEREBY THAT IT WILL NOT ENGAGE IN SHORT SALES IN THE
SECURITIES OF THE COMPANY AFTER THE TIME THAT THE TRANSACTIONS CONTEMPLATED BY
THIS AGREEMENT ARE FIRST PUBLICLY ANNOUNCED AS DESCRIBED IN SECTION 4.6. 
NOTWITHSTANDING THE FOREGOING, IN THE CASE OF A PURCHASER THAT IS A
MULTI-MANAGED INVESTMENT VEHICLE WHEREBY SEPARATE PORTFOLIO MANAGERS MANAGE
SEPARATE PORTIONS OF SUCH PURCHASER’S ASSETS AND THE PORTFOLIO MANAGERS HAVE NO
DIRECT KNOWLEDGE OF THE INVESTMENT DECISIONS MADE BY THE PORTFOLIO MANAGERS
MANAGING OTHER PORTIONS OF SUCH PURCHASER’S ASSETS, THE COVENANT SET FORTH ABOVE
SHALL ONLY APPLY WITH RESPECT TO THE PORTION OF ASSETS MANAGED BY THE PORTFOLIO
MANAGER THAT MADE THE INVESTMENT DECISION TO PURCHASE THE SECURITIES COVERED BY
THIS AGREEMENT.

 

ARTICLE V

MISCELLANEOUS

 

5.1                                 TERMINATION.  THIS AGREEMENT MAY BE
TERMINATED BY ANY PURCHASER, AS TO SUCH PURCHASER’S OBLIGATIONS HEREUNDER ONLY
AND WITHOUT ANY EFFECT WHATSOEVER ON THE OBLIGATIONS BETWEEN THE COMPANY AND THE
OTHER PURCHASERS, BY WRITTEN NOTICE TO THE OTHER PARTIES, IF THE CLOSING HAS NOT
BEEN CONSUMMATED ON OR BEFORE MARCH 31, 2005; PROVIDED, HOWEVER, THAT NO SUCH
TERMINATION WILL AFFECT THE RIGHT OF ANY PARTY TO SUE FOR ANY BREACH BY THE
OTHER PARTY (OR PARTIES).

 

5.2                                 FEES AND EXPENSES.  EXCEPT AS EXPRESSLY SET
FORTH IN THE TRANSACTION DOCUMENTS TO THE CONTRARY, EACH PARTY SHALL PAY THE
FEES AND EXPENSES OF ITS ADVISERS, COUNSEL, ACCOUNTANTS AND OTHER EXPERTS, IF
ANY, AND ALL OTHER EXPENSES INCURRED BY SUCH PARTY INCIDENT TO THE NEGOTIATION,
PREPARATION, EXECUTION, DELIVERY AND PERFORMANCE OF THIS AGREEMENT.  THE COMPANY
SHALL PAY ALL TRANSFER AGENT FEES, STAMP TAXES AND OTHER TAXES AND DUTIES LEVIED
IN CONNECTION WITH THE DELIVERY OF ANY SECURITIES.

 

5.3                                 ENTIRE AGREEMENT.  THE TRANSACTION
DOCUMENTS, TOGETHER WITH THE EXHIBITS AND SCHEDULES THERETO, CONTAIN THE ENTIRE
UNDERSTANDING OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF AND
SUPERSEDE ALL PRIOR AGREEMENTS AND UNDERSTANDINGS, ORAL OR WRITTEN, WITH RESPECT
TO SUCH MATTERS, WHICH THE PARTIES ACKNOWLEDGE HAVE BEEN MERGED INTO SUCH
DOCUMENTS, EXHIBITS AND SCHEDULES.

 

5.4                                 NOTICES.  ANY AND ALL NOTICES OR OTHER
COMMUNICATIONS OR DELIVERIES REQUIRED OR PERMITTED TO BE PROVIDED HEREUNDER
SHALL BE IN WRITING AND SHALL BE DEEMED GIVEN AND EFFECTIVE

 

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ON THE EARLIEST OF (A) THE DATE OF TRANSMISSION, IF SUCH NOTICE OR COMMUNICATION
IS DELIVERED VIA FACSIMILE AT THE FACSIMILE NUMBER SET FORTH ON THE SIGNATURE
PAGES ATTACHED HERETO PRIOR TO 5:30 P.M. (NEW YORK CITY TIME) ON A TRADING DAY,
(B) THE NEXT TRADING DAY AFTER THE DATE OF TRANSMISSION, IF SUCH NOTICE OR
COMMUNICATION IS DELIVERED VIA FACSIMILE AT THE FACSIMILE NUMBER SET FORTH ON
THE SIGNATURE PAGES ATTACHED HERETO ON A DAY THAT IS NOT A TRADING DAY OR LATER
THAN 5:30 P.M. (NEW YORK CITY TIME) ON ANY TRADING DAY, (C) THE SECOND TRADING
DAY FOLLOWING THE DATE OF MAILING, IF SENT BY U.S. NATIONALLY RECOGNIZED
OVERNIGHT COURIER SERVICE, OR (D) UPON ACTUAL RECEIPT BY THE PARTY TO WHOM SUCH
NOTICE IS REQUIRED TO BE GIVEN.  THE ADDRESS FOR SUCH NOTICES AND COMMUNICATIONS
SHALL BE AS SET FORTH ON THE SIGNATURE PAGES ATTACHED HERETO.

 

5.5                                 AMENDMENTS; WAIVERS.  NO PROVISION OF THIS
AGREEMENT MAY BE WAIVED OR AMENDED EXCEPT IN A WRITTEN INSTRUMENT SIGNED, IN THE
CASE OF AN AMENDMENT, BY THE COMPANY AND EACH PURCHASER OR, IN THE CASE OF A
WAIVER, BY THE PARTY AGAINST WHOM ENFORCEMENT OF ANY SUCH WAIVER IS SOUGHT.  NO
WAIVER OF ANY DEFAULT WITH RESPECT TO ANY PROVISION, CONDITION OR REQUIREMENT OF
THIS AGREEMENT SHALL BE DEEMED TO BE A CONTINUING WAIVER IN THE FUTURE OR A
WAIVER OF ANY SUBSEQUENT DEFAULT OR A WAIVER OF ANY OTHER PROVISION, CONDITION
OR REQUIREMENT HEREOF, NOR SHALL ANY DELAY OR OMISSION OF EITHER PARTY TO
EXERCISE ANY RIGHT HEREUNDER IN ANY MANNER IMPAIR THE EXERCISE OF ANY SUCH
RIGHT.

 

5.6                                 HEADINGS THE HEADINGS HEREIN ARE FOR
CONVENIENCE ONLY, DO NOT CONSTITUTE A PART OF THIS AGREEMENT AND SHALL NOT BE
DEEMED TO LIMIT OR AFFECT ANY OF THE PROVISIONS HEREOF.  THE LANGUAGE USED IN
THIS AGREEMENT WILL BE DEEMED TO BE THE LANGUAGE CHOSEN BY THE PARTIES TO
EXPRESS THEIR MUTUAL INTENT, AND NO RULES OF STRICT CONSTRUCTION WILL BE APPLIED
AGAINST ANY PARTY.

 

5.7                                 SUCCESSORS AND ASSIGNS.  THIS AGREEMENT
SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES AND THEIR
SUCCESSORS AND PERMITTED ASSIGNS.  THE COMPANY MAY NOT ASSIGN THIS AGREEMENT OR
ANY RIGHTS OR OBLIGATIONS HEREUNDER WITHOUT THE PRIOR WRITTEN CONSENT OF EACH
PURCHASER.  ANY PURCHASER MAY ASSIGN ANY OR ALL OF ITS RIGHTS UNDER THIS
AGREEMENT TO ANY PERSON TO WHOM SUCH PURCHASER ASSIGNS OR TRANSFERS ANY
SECURITIES, PROVIDED SUCH TRANSFEREE AGREES IN WRITING TO BE BOUND, WITH RESPECT
TO THE TRANSFERRED SECURITIES, BY THE PROVISIONS HEREOF THAT APPLY TO THE
“PURCHASERS”.

 

5.8                                 NO THIRD-PARTY BENEFICIARIES.  THIS
AGREEMENT IS INTENDED FOR THE BENEFIT OF THE PARTIES HERETO AND THEIR RESPECTIVE
SUCCESSORS AND PERMITTED ASSIGNS AND IS NOT FOR THE BENEFIT OF, NOR MAY ANY
PROVISION HEREOF BE ENFORCED BY, ANY OTHER PERSON, EXCEPT AS OTHERWISE SET FORTH
IN SECTION 4.1(E), SECTION 4.10 AND SECTION 4.11.

 

5.9                                 GOVERNING LAW.  ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THE TRANSACTION
DOCUMENTS SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF
CONFLICTS OF LAW THEREOF.  EACH PARTY AGREES THAT ALL LEGAL PROCEEDINGS
CONCERNING THE INTERPRETATIONS, ENFORCEMENT AND DEFENSE OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT AND ANY OTHER TRANSACTION DOCUMENTS (WHETHER
BROUGHT AGAINST A PARTY HERETO OR ITS RESPECTIVE AFFILIATES, DIRECTORS,
OFFICERS, SHAREHOLDERS, EMPLOYEES OR AGENTS) SHALL BE COMMENCED EXCLUSIVELY IN
THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW

 

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YORK.  EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF
THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF
MANHATTAN FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION
HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN
(INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS),
AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR
PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF
ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER OR INCONVENIENT
VENUE FOR SUCH PROCEEDING.  EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL
SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR
OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN
EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL
CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.  NOTHING
CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS
IN ANY MANNER PERMITTED BY LAW.  THE PARTIES HEREBY WAIVE ALL RIGHTS TO A TRIAL
BY JURY.  IF EITHER PARTY SHALL COMMENCE AN ACTION OR PROCEEDING TO ENFORCE ANY
PROVISIONS OF THE TRANSACTION DOCUMENTS, THEN THE PREVAILING PARTY IN SUCH
ACTION OR PROCEEDING SHALL BE REIMBURSED BY THE OTHER PARTY FOR ITS ATTORNEYS’
FEES AND OTHER COSTS AND EXPENSES INCURRED WITH THE INVESTIGATION, PREPARATION
AND PROSECUTION OF SUCH ACTION OR PROCEEDING.

 

5.10                           SURVIVAL.  THE REPRESENTATIONS AND WARRANTIES
CONTAINED HEREIN SHALL SURVIVE THE CLOSING AND THE DELIVERY, EXERCISE AND/OR
CONVERSION OF THE SECURITIES, AS APPLICABLE FOR THE APPLICABLE STATUE OF
LIMITATIONS.

 

5.11                           EXECUTION.  THIS AGREEMENT MAY BE EXECUTED IN TWO
OR MORE COUNTERPARTS, ALL OF WHICH WHEN TAKEN TOGETHER SHALL BE CONSIDERED ONE
AND THE SAME AGREEMENT AND SHALL BECOME EFFECTIVE WHEN COUNTERPARTS HAVE BEEN
SIGNED BY EACH PARTY AND DELIVERED TO THE OTHER PARTY, IT BEING UNDERSTOOD THAT
BOTH PARTIES NEED NOT SIGN THE SAME COUNTERPART.  IN THE EVENT THAT ANY
SIGNATURE IS DELIVERED BY FACSIMILE TRANSMISSION, SUCH SIGNATURE SHALL CREATE A
VALID AND BINDING OBLIGATION OF THE PARTY EXECUTING (OR ON WHOSE BEHALF SUCH
SIGNATURE IS EXECUTED) WITH THE SAME FORCE AND EFFECT AS IF SUCH FACSIMILE
SIGNATURE PAGE WERE AN ORIGINAL THEREOF.

 

5.12                           SEVERABILITY.  IF ANY PROVISION OF THIS AGREEMENT
IS HELD TO BE INVALID OR UNENFORCEABLE IN ANY RESPECT, THE VALIDITY AND
ENFORCEABILITY OF THE REMAINING TERMS AND PROVISIONS OF THIS AGREEMENT SHALL NOT
IN ANY WAY BE AFFECTED OR IMPAIRED THEREBY AND THE PARTIES WILL ATTEMPT TO AGREE
UPON A VALID AND ENFORCEABLE PROVISION THAT IS A REASONABLE SUBSTITUTE THEREFOR,
AND UPON SO AGREEING, SHALL INCORPORATE SUCH SUBSTITUTE PROVISION IN THIS
AGREEMENT.

 

5.13                           RESCISSION AND WITHDRAWAL RIGHT.  NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED IN (AND WITHOUT LIMITING ANY SIMILAR
PROVISIONS OF) THE TRANSACTION DOCUMENTS, WHENEVER ANY PURCHASER EXERCISES A
RIGHT, ELECTION, DEMAND OR OPTION UNDER A TRANSACTION DOCUMENTS AND THE COMPANY
DOES NOT TIMELY PERFORM ITS RELATED OBLIGATIONS WITHIN THE PERIODS THEREIN
PROVIDED, THEN SUCH PURCHASER MAY RESCIND OR WITHDRAW, IN ITS SOLE DISCRETION
FROM TIME TO TIME UPON WRITTEN NOTICE TO THE COMPANY, ANY RELEVANT NOTICE,
DEMAND OR ELECTION IN WHOLE OR IN PART WITHOUT PREJUDICE TO ITS FUTURE ACTIONS
AND RIGHTS; PROVIDED, HOWEVER, IN THE CASE OF A RESCISSION OF A CONVERSION OF
THE PREFERRED STOCK OR EXERCISE OF A WARRANT, THE PURCHASER SHALL BE REQUIRED TO
RETURN ANY SHARES OF COMMON STOCK SUBJECT TO ANY SUCH RESCINDED CONVERSION OR
EXERCISE NOTICE.

 

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5.14                           REPLACEMENT OF SECURITIES.  IF ANY CERTIFICATE OR
INSTRUMENT EVIDENCING ANY SECURITIES IS MUTILATED, LOST, STOLEN OR DESTROYED,
THE COMPANY SHALL ISSUE OR CAUSE TO BE ISSUED IN EXCHANGE AND SUBSTITUTION FOR
AND UPON CANCELLATION THEREOF, OR IN LIEU OF AND SUBSTITUTION THEREFOR, A NEW
CERTIFICATE OR INSTRUMENT, BUT ONLY UPON RECEIPT OF EVIDENCE REASONABLY
SATISFACTORY TO THE COMPANY OF SUCH LOSS, THEFT OR DESTRUCTION AND CUSTOMARY AND
REASONABLE INDEMNITY, IF REQUESTED.  THE APPLICANTS FOR A NEW CERTIFICATE OR
INSTRUMENT UNDER SUCH CIRCUMSTANCES SHALL ALSO PAY ANY REASONABLE THIRD-PARTY
COSTS ASSOCIATED WITH THE ISSUANCE OF SUCH REPLACEMENT SECURITIES.

 

5.15                           REMEDIES.  IN ADDITION TO BEING ENTITLED TO
EXERCISE ALL RIGHTS PROVIDED HEREIN OR GRANTED BY LAW, INCLUDING RECOVERY OF
DAMAGES, EACH OF THE PURCHASERS AND THE COMPANY WILL BE ENTITLED TO SPECIFIC
PERFORMANCE UNDER THE TRANSACTION DOCUMENTS.  THE PARTIES AGREE THAT MONETARY
DAMAGES MAY NOT BE ADEQUATE COMPENSATION FOR ANY LOSS INCURRED BY REASON OF ANY
BREACH OF OBLIGATIONS DESCRIBED IN THE FOREGOING SENTENCE AND HEREBY AGREES TO
WAIVE IN ANY ACTION FOR SPECIFIC PERFORMANCE OF ANY SUCH OBLIGATION THE DEFENSE
THAT A REMEDY AT LAW WOULD BE ADEQUATE.

 

5.16                           PAYMENT SET ASIDE. TO THE EXTENT THAT THE COMPANY
MAKES A PAYMENT OR PAYMENTS TO ANY PURCHASER PURSUANT TO ANY TRANSACTION
DOCUMENT OR A PURCHASER ENFORCES OR EXERCISES ITS RIGHTS THEREUNDER, AND SUCH
PAYMENT OR PAYMENTS OR THE PROCEEDS OF SUCH ENFORCEMENT OR EXERCISE OR ANY PART
THEREOF ARE SUBSEQUENTLY INVALIDATED, DECLARED TO BE FRAUDULENT OR PREFERENTIAL,
SET ASIDE, RECOVERED FROM, DISGORGED BY OR ARE REQUIRED TO BE REFUNDED, REPAID
OR OTHERWISE RESTORED TO THE COMPANY, A TRUSTEE, RECEIVER OR ANY OTHER PERSON
UNDER ANY LAW (INCLUDING, WITHOUT LIMITATION, ANY BANKRUPTCY LAW, STATE OR
FEDERAL LAW, COMMON LAW OR EQUITABLE CAUSE OF ACTION), THEN TO THE EXTENT OF ANY
SUCH RESTORATION THE OBLIGATION OR PART THEREOF ORIGINALLY INTENDED TO BE
SATISFIED SHALL BE REVIVED AND CONTINUED IN FULL FORCE AND EFFECT AS IF SUCH
PAYMENT HAD NOT BEEN MADE OR SUCH ENFORCEMENT OR SETOFF HAD NOT OCCURRED.

 

5.17                           USURY.  TO THE EXTENT IT MAY LAWFULLY DO SO, THE
COMPANY HEREBY AGREES NOT TO INSIST UPON OR PLEAD OR IN ANY MANNER WHATSOEVER
CLAIM, AND WILL RESIST ANY AND ALL EFFORTS TO BE COMPELLED TO TAKE THE BENEFIT
OR ADVANTAGE OF, USURY LAWS WHEREVER ENACTED, NOW OR AT ANY TIME HEREAFTER IN
FORCE, IN CONNECTION WITH ANY CLAIM, ACTION OR PROCEEDING THAT MAY BE BROUGHT BY
ANY PURCHASER IN ORDER TO ENFORCE ANY RIGHT OR REMEDY UNDER ANY TRANSACTION
DOCUMENT.  NOTWITHSTANDING ANY PROVISION TO THE CONTRARY CONTAINED IN ANY
TRANSACTION DOCUMENT, IT IS EXPRESSLY AGREED AND PROVIDED THAT THE TOTAL
LIABILITY OF THE COMPANY UNDER THE TRANSACTION DOCUMENTS FOR PAYMENTS IN THE
NATURE OF INTEREST SHALL NOT EXCEED THE MAXIMUM LAWFUL RATE AUTHORIZED UNDER
APPLICABLE LAW (THE “MAXIMUM RATE”), AND, WITHOUT LIMITING THE FOREGOING, IN NO
EVENT SHALL ANY RATE OF INTEREST OR DEFAULT INTEREST, OR BOTH OF THEM, WHEN
AGGREGATED WITH ANY OTHER SUMS IN THE NATURE OF INTEREST THAT THE COMPANY MAY BE
OBLIGATED TO PAY UNDER THE TRANSACTION DOCUMENTS EXCEED SUCH MAXIMUM RATE.  IT
IS AGREED THAT IF THE MAXIMUM CONTRACT RATE OF INTEREST ALLOWED BY LAW AND
APPLICABLE TO THE TRANSACTION DOCUMENTS IS INCREASED OR DECREASED BY STATUTE OR
ANY OFFICIAL GOVERNMENTAL ACTION SUBSEQUENT TO THE DATE HEREOF, THE NEW MAXIMUM
CONTRACT RATE OF INTEREST ALLOWED BY LAW WILL BE THE MAXIMUM RATE APPLICABLE TO
THE TRANSACTION DOCUMENTS FROM THE EFFECTIVE DATE FORWARD, UNLESS SUCH
APPLICATION IS PRECLUDED BY APPLICABLE LAW.  IF UNDER ANY CIRCUMSTANCES
WHATSOEVER, INTEREST IN EXCESS OF THE MAXIMUM RATE IS PAID BY THE COMPANY TO ANY
PURCHASER WITH RESPECT TO INDEBTEDNESS EVIDENCED BY THE

 

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TRANSACTION DOCUMENTS, SUCH EXCESS SHALL BE APPLIED BY SUCH PURCHASER TO THE
UNPAID PRINCIPAL BALANCE OF ANY SUCH INDEBTEDNESS OR BE REFUNDED TO THE COMPANY,
THE MANNER OF HANDLING SUCH EXCESS TO BE AT SUCH PURCHASER’S ELECTION.

 

5.18                           INDEPENDENT NATURE OF PURCHASERS’ OBLIGATIONS AND
RIGHTS.  THE OBLIGATIONS OF EACH PURCHASER UNDER ANY TRANSACTION DOCUMENT ARE
SEVERAL AND NOT JOINT WITH THE OBLIGATIONS OF ANY OTHER PURCHASER, AND NO
PURCHASER SHALL BE RESPONSIBLE IN ANY WAY FOR THE PERFORMANCE OF THE OBLIGATIONS
OF ANY OTHER PURCHASER UNDER ANY TRANSACTION DOCUMENT.  NOTHING CONTAINED HEREIN
OR IN ANY TRANSACTION DOCUMENT, AND NO ACTION TAKEN BY ANY PURCHASER PURSUANT
THERETO, SHALL BE DEEMED TO CONSTITUTE THE PURCHASERS AS A PARTNERSHIP, AN
ASSOCIATION, A JOINT VENTURE OR ANY OTHER KIND OF ENTITY, OR CREATE A
PRESUMPTION THAT THE PURCHASERS 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 PURCHASER 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 PURCHASER TO BE JOINED AS AN ADDITIONAL PARTY IN
ANY PROCEEDING FOR SUCH PURPOSE.  EACH PURCHASER HAS BEEN REPRESENTED BY ITS OWN
SEPARATE LEGAL COUNSEL IN THEIR REVIEW AND NEGOTIATION OF THE TRANSACTION
DOCUMENTS.  FOR REASONS OF ADMINISTRATIVE CONVENIENCE ONLY, PURCHASERS AND THEIR
RESPECTIVE COUNSEL HAVE CHOSEN TO COMMUNICATE WITH THE COMPANY THROUGH FW.  FW
DOES NOT REPRESENT ANY OF THE PURCHASERS BUT ONLY STONEGATE SECURITIES, INC.,
WHO HAS ACTED AS PLACEMENT AGENT TO THE TRANSACTION.  THE COMPANY HAS ELECTED TO
PROVIDE ALL PURCHASERS WITH THE SAME TERMS AND TRANSACTION DOCUMENTS FOR THE
CONVENIENCE OF THE COMPANY AND NOT BECAUSE IT WAS REQUIRED OR REQUESTED TO DO SO
BY THE PURCHASERS.

 

5.19                           LIQUIDATED DAMAGES.  THE COMPANY’S OBLIGATIONS TO
PAY ANY PARTIAL LIQUIDATED DAMAGES OR OTHER AMOUNTS OWING UNDER THE TRANSACTION
DOCUMENTS IS A CONTINUING OBLIGATION OF THE COMPANY AND SHALL NOT TERMINATE
UNTIL ALL UNPAID PARTIAL LIQUIDATED DAMAGES AND OTHER AMOUNTS HAVE BEEN PAID
NOTWITHSTANDING THE FACT THAT THE INSTRUMENT OR SECURITY PURSUANT TO WHICH SUCH
PARTIAL LIQUIDATED DAMAGES OR OTHER AMOUNTS ARE DUE AND PAYABLE SHALL HAVE BEEN
CANCELED.

 

5.20                           CONSTRUCTION. THE PARTIES AGREE THAT EACH OF THEM
AND/OR THEIR RESPECTIVE COUNSEL HAS REVIEWED AND HAD AN OPPORTUNITY TO REVISE
THE TRANSACTION DOCUMENTS AND, THEREFORE, THE NORMAL RULE OF CONSTRUCTION TO THE
EFFECT THAT ANY AMBIGUITIES ARE TO BE RESOLVED AGAINST THE DRAFTING PARTY SHALL
NOT BE EMPLOYED IN THE INTERPRETATION OF THE TRANSACTION DOCUMENTS OR ANY
AMENDMENTS HERETO.

 

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

 

 

INTRUSION INC.

Address for Notice:

 

 

By:

/s/ G. Ward Paxton

 

1101 E. Arapaho Road 

 

Name: G. Ward Paxton

Richardson, TX 75081 

 

Title: Chairman, President & CEO

Fax: 972.301.3892 

 

ATTN: Chief Financial Officer

With a copy to (which shall not constitute notice):

 

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

 

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[PURCHASER SIGNATURE PAGES TO INTZ SECURITIES PURCHASE AGREEMENT]

 

IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase
Agreement to be duly executed by their respective authorized signatories as of
the date first indicated above.

 

Name of Purchaser:

 

 

Signature of Authorized Signatory of Purchaser:

 

 

Name of Authorized Signatory:

 

 

Title of Authorized Signatory:

 

 

Email Address of Purchaser:

 

 

 

Address for Notice of Purchaser:

 

 

 

Address for Delivery of Securities for Purchaser (if not same as above):

 

 

 

Subscription Amount:

Shares of Preferred Stock:

Warrant Shares:

EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]

 

[SIGNATURE PAGES CONTINUE]

 

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