Exhibit 10.1

Execution Version

SECURITIES PURCHASE AGREEMENT

This Securities Purchase Agreement (“Agreement”) is entered into and effective
as of February 2, 2011 (“Effective Date”), by and among DayStar Technologies,
Inc., a Delaware corporation (“Company”), and Socius CG II, Ltd., a Bermuda
exempted company (including its designees, successors and assigns, “Investor”).

RECITALS

A. The Company’s board of directors has authorized the creation of the Preferred
Shares (as defined below) which consist of a new series of preferred stock of
the Company designated as Series B Preferred Stock, par value $0.01 per share,
the terms of which are set forth in the Certificate of Designations (as defined
below). Subject to the terms and conditions set forth in this Agreement, the
Company desires to issue and sell to the Investor, and the Investor desires to
purchase from the Company, (i) the Preferred Shares, (ii) the Additional
Investment Right (as defined below), (iii) shares of Common Stock (as defined
below) issuable upon exercise of the Additional Investment Right, (iii) Warrant
(as defined below), and (iv) shares of Common Stock issuable upon exercise of
the Warrant, in each case as more fully described in this Agreement.

B. The offer and sale of the Securities provided for herein are being made
without registration under the Act (as defined below), in reliance upon the
provisions of Section 4(2) of the Act, Regulation D promulgated under the Act,
and such other exemptions from the registration requirements of the Act as may
be available with respect to any or all of the purchases/exchanges of Securities
to be made hereunder.

AGREEMENT

In consideration of the premises, the mutual provisions of this Agreement, and
other good and valuable consideration the receipt and adequacy of which are
hereby acknowledged, Company and Investor agree as follows:

ARTICLE 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, and (b) the following terms have the
meanings indicated in this ARTICLE 1:

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

“Action” has the meaning set forth in Section 4.1(j).

“Additional Investment Right” has the meaning set forth in Section 2.3(c)(ii).

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“Additional Investment Shares” has the meaning set forth in Section 2.3(c)(ii).

“Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls, is controlled by, or is under common control with a
Person, as such terms are used in and construed under Rule 144 under the
Act. With respect to Investor, without limitation, any Person owning, owned by,
or under common ownership with Investor, and any investment fund or managed
account that is managed on a discretionary basis by the same investment manager
as Investor will be deemed to be an Affiliate.

“Agreement” shall have the meaning ascribed to such term in the preamble to this
Agreement.

“Automatic Termination” has the meaning set forth in Section 3.1.

“Bloomberg” means Bloomberg Financial Markets.

“Certificate of Designations” means the certificate to be filed with the
Secretary of State of the State of Delaware, in the form attached hereto as
Exhibit B.

“Closing” means any one of (i) the Commitment Closing and (ii) each Tranche
Closing.

“Closing Bid Price” and “Closing Sale Price” means, for any security as of any
date, the last closing bid price and last closing trade price, respectively, for
such security on the Trading Market, as reported by Bloomberg, or, if the
Trading Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00 p.m., Eastern time, as reported by Bloomberg, or, if the Trading
Market is not the principal securities exchange or trading market for such
security, the last closing bid price or last trade price, respectively, of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and Investor. If the Company and Investor are
unable to agree upon the fair market value of such security, then such dispute
shall be resolved pursuant to Section 6.7. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

“Commitment Closing” has the meaning set forth in Section 2.2(a).

 

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“Commitment Fee” means a non-refundable fee payable by the Company to Investor
on the earlier of (a) the first Tranche Closing Date, or (b) the six-month
anniversary of the Effective Date, which fee, at the option of the Company,
shall either be (i) an amount in cash equal to $250,000, delivered by wire
transfer of immediately available funds to an account designated by Investor
(provided, however, that if a cash Commitment Fee is paid on the first Tranche
Closing Date, such payment may be made by offsetting the first Tranche Amount),
or (ii) a number of shares of Common Stock, which shall be freely tradable,
determined by dividing (x) $294,120 by (y) the Closing Bid Price of the Common
Stock on the Trading Day immediately preceding the date on which the Commitment
Fee is payable. If not paid earlier, the Commitment Fee shall be due in payable
in full on the six-month anniversary of the Effective Date, whether or not any
Tranche Closings have occurred.

“Commitment Fee Shares” means any shares of Common Stock issued in payment of
the Commitment Fee.

“Common Shares” includes the Warrant Shares, the Additional Investment Shares,
and any Commitment Fee Shares.

“Common Stock” means the common stock, par value $0.01 per share, of the
Company, and any replacement or substitute thereof, or any share capital into
which such Common Stock shall have been changed or any share capital resulting
from a reclassification of such Common Stock.

“Company” shall have the meaning ascribed to such term in the preamble to this
Agreement.

“Company Parties” and “Company Party” have the meanings set forth in
Section 5.8(b).

“Company Termination” has the meaning set forth in Section 3.2.

“Conditions to Commitment Closing” has the meaning set forth in Section 2.2(b).

“Delisting Event” means any time during the term of this Agreement, that the
Common Stock is not listed for trading or quoted on a Trading Market, or is
suspended or delisted with respect to the trading of shares of Common Stock on a
Trading Market.

“Disclosure Schedules” means the disclosure schedules of the Company delivered
concurrently herewith and attached hereto. The Disclosure Schedules shall
contain no material, non-public information.

“DTC” means The Depository Trust Company, or any successor performing
substantially the same function for Company.

“DWAC Shares” means all Common Shares or other shares of Common Stock issued or
issuable to Investor or any Affiliate, successor or assign of Investor pursuant
to any of the Transaction Documents, including without limitation any Warrant
Shares, Additional Investment

 

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Shares, and Commitment Fee Shares, all of which shall be (a) issued in
electronic form, (b) freely tradable and without restriction on resale, and
(c) timely credited by Company to the specified Deposit/Withdrawal at Custodian
(DWAC) account with DTC under its Fast Automated Securities Transfer (FAST)
Program or any similar program hereafter adopted by DTC performing substantially
the same function, in accordance with irrevocable instructions issued to and
countersigned by the Transfer Agent, in the form attached hereto as Exhibit C or
in such other form agreed upon by the parties.

“Effective Date” has the meaning set forth in the preamble to this Agreement.

“Evaluation Date” has the meaning set forth in Section 4.1(r).

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“FINRA” has the meaning set forth in Section 4.1(e).

“Fundamental Transaction” means and shall be deemed to have occurred at such
time upon any of the following events:

(a) the Company shall, directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person or Persons, (ii) sell, assign,
transfer, convey or otherwise dispose of all or substantially all of the assets
of the Company to another Person, (iii) allow another Person to make a tender or
exchange offer that is accepted by the holders of more than 50% of the
outstanding shares of Common Stock (not including any shares of Common Stock
held by the Person or Persons making or party to, or associated or affiliated
with the Persons making or party to, such purchase, tender or exchange offer),
or (iv) consummate a stock purchase or other business combination (including,
without limitation, a reorganization, recapitalization, spin-off or scheme of
arrangement) with another Person whereby such other Person acquires more than
the 50% of the outstanding shares of Common Stock (not including any shares of
Common Stock held by the other Person or other Persons making or party to, or
associated or affiliated with the other Persons making or party to, such stock
purchase agreement or other business combination) (other than, in the case of
clause (i) above, (A) any such transaction pursuant to which holders of Common
Stock immediately prior to such transaction continue to hold more than 50% of
the total voting power of the outstanding shares of Common Stock or (B) any
merger or consolidation which is effected solely to change the jurisdiction of
incorporation of the Company, and in the case of clauses (iii) and (iv) above,
any transaction which is effected solely to change the jurisdiction of
incorporation of the Company and in the case of clauses (i) and (iv) above, any
transaction in which the Company is the surviving entity and continues to have
its Common Stock traded on a Trading Market following such transaction); or

(b) any “person” or “group” (as these terms are used for purposes of Sections
13(d) and 14(d) of the Exchange Act) is or shall become the “beneficial owner”
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
50% of the aggregate voting power of the outstanding shares of Common Stock,
other than persons or groups who exceed such ownership level as of the Effective
Date (until such point in time when the

 

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ownership level of such persons or groups falls below such ownership threshold)
and other than in connection with a transaction which is effected solely to
change the jurisdiction of incorporation of the Company.

“Funding Default” means a failure by Investor to accept a Tranche Notice
delivered by the Company, provided such Tranche Notice was delivered in
accordance with the terms and conditions of this Agreement (including the timely
and full satisfaction of the conditions to the obligation of Investor to accept
a Tranche Notice set forth in Section 2.3(b) of this Agreement), and to acquire
and pay for the Preferred Shares in accordance therewith upon delivery of such
Preferred Shares to the Investor in accordance with the terms of this Agreement
(and the timely delivery by the Company of the other Required Tranche Deliveries
required to be delivered by it and the timely and full satisfaction by the
Company of all other conditions for the Tranche Closing required to be satisfied
by it as set forth in Sections 2.3(d) and (e) of this Agreement.

“GAAP” means United States generally accepted accounting principles applied on a
consistent basis during the periods involved.

“Indebtedness” means (a) any liabilities for borrowed money or amounts owed in
excess of $100,000 (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 $100,000 due under
leases required to be capitalized in accordance with GAAP.

“Intellectual Property Rights” has the meaning set forth in Section 4.1(o).

“Investment Right Exercise Notice” means a notice issued by Investor to the
Company under this Agreement, in substantially the form attached hereto as
Exhibit A-2, to purchase Additional Investment Shares.

“Investor” shall have the meaning ascribed to such term in the preamble to this
Agreement.

“Investor Ownership Limit” has the meaning set forth in Section 2.3(c)(iii).

“Investor Parties” and “Investor Party” have the meanings set forth in
Section 5.8.

“Liens” means a lien, charge, security interest, encumbrance, right of first
refusal, preemptive right or other restriction (excluding restrictions on
transfer of securities under applicable U.S. federal or state securities or
“blue sky” laws).

“Lock-Up Agreements” means an agreement in the form attached as Exhibit D,
executed by each of the Company’s executive officers and directors, precluding
each such Person from

 

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participating in any sale of the Common Stock from the Tranche Notice Date
through the Tranche Closing Date.

“Losses” has the meaning set forth in Section 5.8.

“Material Adverse Effect” means a material adverse effect on (i) the legality,
validity or enforceability of any Transaction Document, (ii) the results of
operations, assets, business or financial condition of the Company, or (iii) the
Company’s ability to perform in any material respect its obligations under any
Transaction Document; provided, however, that none of the following,
individually or in the aggregate, shall be taken into account in determining
whether a Material Adverse Effect has occurred: (a) changes in conditions in the
U.S. or global capital, credit or financial markets generally, including changes
in the availability of capital or currency exchange rates that does not have a
disproportionate effect on the Company; (b) changes generally affecting the
industry in which the Company operates; (c) any deterioration in the results of
operations, assets, business or financial condition of the Company substantially
resulting from (1) circumstances, conditions or risks (including, without
limitation, the section entitled “Risk Factors” contained in the Company’s Form
10-K for its fiscal year ended December 31, 2009 and the Company’s Form 10-Qs
for the quarters ended March 31, 2010, June 30, 2010 and September 30, 2010)
existing as of the Effective Date that are set forth in any of the SEC Reports
or (2) any of the matters set forth in the Disclosure Schedule (as the same may
be updated pursuant to Section 2.3(c)(ii)); (d) any effect of the announcement
of this Agreement or the consummation of the transactions contemplated by this
Agreement on the Company’s relationships, contractual or otherwise, with
customers, suppliers, vendors, bank lenders, strategic venture partners or
employees; and (e) any decrease in the market price of the Common Stock (but
excluding herefrom any condition, occurrence, state of facts or event underlying
such decrease to the extent that such condition, occurrence, state of facts or
event otherwise would constitute a Material Adverse Effect).

“Material Agreement” includes any loan agreement, financing agreement, equity
investment agreement or securities instrument to which Company is a party, any
agreement or instrument to which Company and the Investor or any Affiliate of
the Investor is a party, and any other material agreement listed, or required to
be listed, on any of Company’s reports filed or required to be filed with the
SEC, including without limitation Forms 10-K, 10-Q or 8-K.

“Material Permits” has the meaning set forth in Section 4.1(m).

“Maximum Placement” means $5,000,000.00.

“Maximum Tranche Amount” means, subject to any other applicable limitations set
forth in this Agreement, the Maximum Placement less the amount of any previously
noticed and funded Tranches.

“Mintz Levin” means Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel
to Investor.

 

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“Officer’s Closing Certificate” means a certificate in customary form reasonably
acceptable to the Investor, executed by an authorized officer of the Company.

“Opinion” means an opinion from Company’s independent legal counsel, in the form
attached as Exhibit E, to be delivered in connection with the Commitment Closing
and any Tranche Closing.

“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 Shares” means shares of Series B Preferred Stock of the Company
provided for in the Certificate of Designations, to be issued to Investor
pursuant to this Agreement.

“Prospectus” includes each prospectus (within the meaning of the Act) related to
the sale or offering of any Warrant Shares, including without limitation any
prospectus contained within the Registration Statement.

“Registration Statement” means a valid, current and effective registration
statement registering for resale the Common Shares, and except where the context
otherwise requires, means the registration statement, as amended, including
(i) all documents filed as a part thereof, and (ii) any information contained in
a prospectus filed with the SEC in connection with such registration statement,
to the extent such information is deemed under the Act to be part of the
registration statement.

“Regulation D” means Regulation D promulgated under the Act.

“Required Approval” means any approval of the Trading Market and/or the
Company’s stockholders required to be obtained by Company prior to issuing the
Securities pursuant to any applicable rules of the Trading Market.

“Required Tranche Deliveries” has the meaning set forth in Section 2.3(e).

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

“Rule 144 Eligible” means eligible for immediate resale under Rule 144 without
limitation on the amount of securities sold under Rule 144(e) and
without requiring discharge by payment in full of any promissory notes given to
the Company prior to the sale of the securities under Rule 144(d)(2)(iii).

“SEC” means the United States Securities and Exchange Commission.

“SEC Reports” includes all reports required to be filed by the Company under the
Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof,
for the two years

 

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preceding the Effective Date (or such shorter period as the Company was required
by law to file such material).

“Securities” includes the Warrants, Additional Investment Right, Common Shares
and Preferred Shares issuable pursuant to this Agreement.

“Subsidiary” means any Person the Company owns or controls, or in which the
Company, directly or indirectly, owns a majority of the capital stock or similar
interest that would be disclosable pursuant to Regulation S-K, Item 601(b)(21).

“Termination Date” means the earlier of (i) the date that is two years after the
Effective Date, or (ii) the Tranche Closing Date on which the sum of the
aggregate Tranche Purchase Price for all Tranche Shares equals the Maximum
Placement.

“Termination Notice” has the meaning as set forth in Section 3.2.

“Trading Day” means any day on which the Common Stock is traded on the Trading
Market; provided that it shall not include any day on which the Common Stock is
(a) scheduled to trade for less than 5 hours, or (b) suspended from trading.

“Trading Market” means the OTC Bulletin Board, the NASDAQ Capital Market, the
NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Amex, or the New
York Stock Exchange, whichever is at the time the principal trading exchange or
market for the Common Stock.

“Tranche” has the meaning set forth in Section 2.3(a).

“Tranche Amount” means the amount of any individual purchase of a tranche of
Preferred Shares, as specified by the Company, and shall not exceed the Maximum
Tranche Amount.

“Tranche Closing” has the meaning set forth in Section 2.3(f).

“Tranche Closing Date” has the meaning set forth in Section 2.3(f).

“Tranche Notice” has the meaning set forth in Section 2.3(b).

“Tranche Notice Date” has the meaning set forth in Section 2.3(b).

“Tranche Purchase Price” has the meaning set forth in Section 2.3(b), and shall
be specified in writing by the Company.

“Tranche Share Price” means $10,000.00 per Preferred Share. The Company may not
issue fractional Preferred Shares.

 

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“Tranche Shares” means the Preferred Shares that are purchased by Investor
pursuant to a Tranche. For the Maximum Placement, the aggregate number of
Preferred Shares (not including any Preferred Shares that may be issued as
dividend payments) to be issued by the Company to the Investor shall be 500
shares.

“Transaction Documents” include this Agreement, the Warrant, the Certificate of
Designations and the Exhibits hereto and thereto.

“Transfer Agent” means Computershare Investor Services, or any successor
transfer agent for the Common 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 for trading as reported by Bloomberg
(based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New
York City time)); (b) if the Common Stock is then listed or quoted on the OTC
Bulletin Board and the OTC Bulletin Board is not a Trading Market, 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
quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
are then reported in the “Pink Sheets” published by Pink OTC Markets, Inc. (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 (d) 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 Investor and
reasonably acceptable to the Company, the fees and expenses of which shall be
paid by the Company.

“Warrant” means the warrant issuable under this Agreement, in the form attached
hereto as Exhibit A-1, to initially purchase 1,114,650 shares of Common Stock,
at an initial exercise price per share equal to the Closing Bid Price of the
Common Stock as of the close of trading on the Effective Date, subject to
adjustment as provided therein.

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

ARTICLE 2

PURCHASE AND SALE

2.1 Agreement to Purchase. Subject to the terms and conditions herein and the
satisfaction of the conditions to Closing set forth in this ARTICLE 2:

(a) Investor hereby agrees to purchase such amounts of Preferred Shares as the
Company may, in its sole and absolute discretion, from time to time elect to
issue and sell to Investor according to one or more Tranches pursuant to
Section 2.3 below; and

 

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(b) The Company agrees to pay the Commitment Fee and issue the Preferred Shares,
Additional Investment Right, Warrant and Common Shares to Investor in accordance
with the terms of this Agreement.

2.2 Investment Commitment.

(a) Investment Commitment. The closing of this Agreement (the “Commitment
Closing”) shall be deemed to occur when this Agreement has been duly executed by
both Investor and the Company, and the other Conditions to the Commitment
Closing set forth in Section 2.2(b) have been met.

(b) Conditions to Investment Commitment. As a condition precedent to the
Commitment Closing, all of the following (the “Conditions to Commitment
Closing”) shall have been satisfied prior to or concurrently with the parties’
execution and delivery of this Agreement:

(i) the following documents shall have been delivered to Investor: (A) this
Agreement, executed by the Company; (B) a Secretary’s Certificate as to (w) the
resolutions of the Company’s board of directors authorizing this Agreement and
the Transaction Documents, and the transactions contemplated hereby and thereby,
(x) a copy of the Company’s current Certificate of Incorporation, (y) a copy of
the Company’s current Bylaws, and (z) the incumbency of the persons executing
the Transaction Documents; (C) a copy of the Certificate of Designations filed
with the Secretary of State of the State of Delaware; (D) the Opinion; and (E) a
copy of the press release announcing the transactions contemplated by this
Agreement and Current Report on Form 8-K of the Company describing the
transactions contemplated by, and attaching a complete copy of, the Transaction
Documents;

(ii) other than for losses incurred in the ordinary course of business, there
shall have been no Material Adverse Effect since the date of the last SEC Report
filed by the Company;

(iii) the representations and warranties of the Company in this Agreement shall
be true and correct in all material respects and the Company shall have
delivered an Officer’s Closing Certificate to such effect to Investor, signed by
an officer of the Company;

(iv) the Required Approval, if necessary, has been obtained; and

(v) the representations and warranties of Investor in this Agreement shall be
true and correct in all material respects.

(c) Delivery of the Warrant. Simultaneously with the Commitment Closing, the
Company shall deliver the Warrant to the Investor.

(d) Investor’s Obligation to Purchase. Subject to the prior satisfaction of all
conditions set forth in this Agreement, following the Investor’s receipt of a
validly delivered

 

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Tranche Notice, the Investor shall be required to purchase from the Company a
number of Tranche Shares equal to the permitted Tranche Share Amount, in the
manner described below.

2.3 Tranches to Investor.

(a) Procedure to Elect a Tranche. Subject to the Maximum Tranche Amount, the
Maximum Placement and the other conditions and limitations set forth in this
Agreement, at any time beginning on the time at which the Registration Statement
is declared effective, the Company may, in its sole and absolute discretion,
elect to exercise one or more tranches of Preferred Shares (each a “Tranche”)
according to the following procedure, provided that each subsequent Tranche
Notice Date (defined below) after the first Tranche Notice Date shall be no
sooner than the later of five (5) Trading Days following the preceding Tranche
Notice Date and the Trading Day after the date on which the Tranche Closing for
the prior Tranche has occurred.

(b) Delivery of Tranche Notice. The Company shall deliver an irrevocable written
notice (the “Tranche Notice”) the form of which is attached hereto as Exhibit F
(the date of such Tranche Notice being the “Tranche Notice Date”), to Investor
stating that the Company shall exercise a Tranche and stating the number of
Preferred Shares which the Company will sell to Investor at the Tranche Share
Price, and the aggregate purchase price for such Tranche (the “Tranche Purchase
Price”). A Tranche Notice may be delivered by the Company to Investor before
9:30 a.m., New York City time, on any Trading Day via facsimile or electronic
mail, with confirming copy by overnight carrier, in each case, to the address
set forth on the page immediately following the signature pages to this
Agreement. A Tranche Notice delivered after such time or on a non-Trading Day
shall be deemed delivered on the following Trading Day. Except with respect to
the delivery of a Tranche Notice prior to the first Tranche Closing Date, the
Company may not give a Tranche Notice unless the Tranche Closing for the prior
Tranche has occurred.

(c) Issuance of Warrant; Additional Investment Shares.

(i) Warrant. On each Tranche Notice Date, that portion of the Warrant equal to
the quotient calculated by dividing (A) the Tranche Amount specified in the
Tranche Notice delivered on such date by (B) the Maximum Placement, shall vest
and be automatically exercised, at the price per share set forth in the
Warrant. Investor shall document the automatic exercise of such portion of the
Warrant by delivering an Exercise Notice to the Company and shall make payment
for the shares issuable upon such exercise in cash, or through the issuance of a
recourse note in the form attached as Exhibit G to this Agreement, in each case,
as set forth in the Warrant. An Exercise Notice in respect of an automatic
exercise of the Warrant, and the payment of the exercise price in respect
thereof, shall be delivered on or before 4:00 p.m., New York City time, on the
Trading Day immediately following the date on which the Tranche Notice is deemed
to have been delivered.

(ii) Additional Investment Shares. On each Tranche Notice Date, Investor shall
become obligated, pursuant to a right automatically vesting on such Tranche
Notice Date (each, an “Additional Investment Right”), to purchase that number of
shares of Common Stock (“Additional Investment Shares”) equal in dollar amount
to 100% of the Tranche

 

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Amount set forth in the Tranche Notice at the price per share as determined by
the immediately following sentence. The exercise price per share of the
Additional Investment Right shall be as follows: (i) until the first Tranche
Notice Date, the Closing Bid Price as of the close of trading on the Effective
Date, and (ii) on and after the first Tranche Notice Date and each subsequent
Tranche Notice Date, an amount per share equal to the Closing Bid Price of a
share of Common Stock on the Trading Day immediately preceding the applicable
Tranche Notice Date. The purchase of Additional Investment Shares must occur no
later than sixty (60) calendar days following the Tranche Notice Date. The
Additional Investment Right may be exercised from time to time within such sixty
calendar day period, on such days as determined by the Investor, in one or more
tranches. Investor shall document the exercise the Additional Investment Right
by delivering an Investment Right Exercise Notice to the Company and shall pay
for the Additional Investment Shares in cash, or through the issuance of a
recourse note in the form attached as Exhibit G to this Agreement. An Investment
Right Exercise Notice, and the payment of the exercise price in respect of such
Investment Right Exercise Notice, that is (A) delivered on or before 4:00 p.m.,
New York City time, on any Trading Day shall be deemed to have been delivered on
such Trading Day, and (B) delivered after 4:00 p.m., New York City time, on any
Trading Day or on a day that is not a Trading Day shall be deemed to have been
delivered on the immediately following Trading Day.

(iii) Tranche Notice Restrictions.

(A) In no event shall the Company be permitted to deliver a Tranche Notice if
the total number of registered shares is insufficient to cover the number of
shares underlying Warrants (including the portion of the Warrant vesting on the
applicable Tranche Notice Date) and the Additional Investment Right issued on
the applicable Tranche Notice Date and, if applicable, the Commitment Fee
Shares.

(B) At no time may the Company deliver a Tranche Notice if the number of Warrant
Shares or Additional Investment Shares to be received pursuant to the automatic
exercise of the Warrant and the exercise of the Additional Investment Right
triggered by such Tranche Notice, aggregated with all other shares of Common
Stock and other voting securities then owned or deemed beneficially owned by
Investor and its Affiliates, would result in Investor and its Affiliates owning
or being deemed the beneficial owner of more than 9.99% of all of such Common
Stock and other voting securities as would be outstanding on the date of
exercise, with such ownership percentage determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder (the “Investor Ownership Limit”).

(iv) Issuance of Warrant Shares and Additional Investment Shares. No later than
the Trading Day immediately following the date on which the Company is deemed to
have received each of the Exercise Notice or the Investment Right Exercise
Notice, as the case may be, and the aggregate exercise price in respect thereof
(the “Exercise Delivery Date”), the Company shall transmit by facsimile an
acknowledgment of confirmation of receipt of thereof to the Holder and an
electronic copy of its share issuance instructions to the Holder and the
Transfer Agent (which such electronic transmissions to comply with the notice
provisions of Section 6.2 of this Agreement), and shall instruct and authorize
the Transfer Agent to

 

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immediately credit such aggregate number of freely tradable Common Shares to
which the Holder is entitled pursuant to such exercise to the Holder’s or its
designee’s balance account with The Depository Trust Company (DTC) through the
Fast Automated Securities Transfer (FAST) Program through its Deposit/Withdrawal
at Custodian (DWAC) system, with such credit to occur no later than 12:00 p.m.
Eastern Time on third Trading Day following the Exercise Delivery Date, time
being of the essence; provided, however, that in respect of an automatic
exercise of Warrants or an exercise of the Additional Investment Right on or
prior to the 2nd Trading Day immediately preceding the related Tranche Closing
Date, if the Common Shares are not credited as DWAC Shares by 5:00 p.m. Eastern
Time on the Trading Day following the Exercise Delivery Date, then the
applicable Tranche Closing Date shall be extended by one Trading Day for each
Trading Day that timely credit of DWAC Shares is not made.

(v) Security Agreement. If the Investor elects to pay for the exercise of any
portion of the Warrant or the Additional Investment Right with a recourse note
in the form attached hereto as Exhibit G, the Investor and the Company shall
execute and deliver to each other a security agreement in the form attached
hereto as Exhibit H simultaneously with the delivery of the first recourse note
in connection with such exercise.

(d) Conditions Precedent to a Tranche Notice. The right of the Company to
deliver a Tranche Notice and the obligation of the Investor to accept a Tranche
Notice and to acquire and pay for the Preferred Shares are subject to the
satisfaction, on the Tranche Notice Date, of each of the conditions set forth
below:

(i) the Common Stock shall be listed for trading or quoted on a Trading Market,
and to the Company’s knowledge there is no notice of any suspension or delisting
with respect to the trading or quotation of the shares of Common Stock on the
Trading Market;

(ii) the representations and warranties of the Company set forth in this
Agreement shall be true and correct in all material respects as if made on the
Tranche Notice Date, except for representations and warranties that are
expressly made as of a particular date in which case, such representations and
warranties shall be true and correct as of such particular date (provided,
however, that, in respect of any representation and warranty that is required to
be so true and correct as of the Tranche Notice Date which refers to the
Disclosure Schedules, any information disclosed by the Company in a filing with
the SEC after the Effective Date but prior to the date of the Tranche Notice
shall be deemed to update the Disclosure Schedules automatically and without any
further action on the part of the Company), the Company shall have performed,
satisfied and complied in all material respects with all covenants and
agreements required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Tranche Notice Date, and the Company
shall deliver an Officer’s Closing Certificate to such effect to Investor,
signed by an officer of the Company;

(iii) the representations and warranties of the Investor set forth in this
Agreement shall be true and correct in all material respects as if made on such
date, except for representations and warranties that are expressly made as of a
particular date in which case, such representations and warranties shall be true
and correct as of such particular date, and the

 

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Investor shall have performed, satisfied and complied in all material respects
with all covenants and agreements required by this Agreement to be performed,
satisfied or complied with by the Investor at or prior to such date;

(iv) other than losses incurred in the ordinary course of business, there shall
have been no Material Adverse Effect since the Commitment Closing;

(v) all Common Shares shall have been timely delivered pursuant to any Exercise
Notice properly delivered to the Company under the terms of the Warrant prior to
the applicable Tranche Notice Date;

(vi) all previously-issued Common Shares are DWAC Shares in electronic form
without restriction on resale;

(vii) none of the Company or any of its Subsidiaries is, or will be as a result
of the applicable Tranche, in default of this Agreement or any Material
Agreement (it being hereby acknowledged and agreed that for purposes of this
paragraph (vii), the trigger of any antidilution, price-reset or similar
provisions in any outstanding warrants or other derivative securities of the
Company as a result of the applicable Tranche shall not be deemed a default of
any Material Agreement, so long as such actions do not trigger a default under
such Material Agreement);

(viii) there is not then in effect any law, rule or regulation prohibiting the
transactions contemplated by any of the Transaction Documents, or requiring any
consent or approval which shall not have been obtained, nor is there any pending
proceeding or investigation which may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this Agreement; no
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or adopted by any court or governmental
authority of competent jurisdiction that prohibits the transactions contemplated
by this Agreement, and no actions, suits or proceedings shall be in progress or
pending by any person (other than Investor or any Affiliate of Investor) that
seek to enjoin or prohibit the transactions contemplated by this Agreement (it
being hereby acknowledged and agreed that for purposes of this paragraph (viii),
no proceeding shall be deemed pending unless one of the parties hereto has
received written notification thereof prior to the applicable Tranche Notice
Date);

(ix) the Common Stock is listed or quoted on a Trading Market and the Company is
in compliance with all requirements in order to maintain listing on its then
current Trading Market (including reporting requirements under the Exchange Act,
if applicable);

(x) the Required Approval, if necessary, has been obtained;

(xi) either (A) the Company has a current, valid and effective Registration
Statement covering the lawful resale of all Common Shares then issued or
issuable upon exercise of the Warrant, or (B) all of the Common Shares are Rule
144 Eligible;

 

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(xii) the Company has a sufficient number of duly authorized shares of Common
Stock reserved for issuance in such amount as may be required to issue all
Common Shares issuable pursuant to such Tranche, including, without limitation,
all Warrant Shares and Additional Investment Shares that are issuable in
connection with such Tranche;

(xiii) the Company has provided notice of its delivery of the Tranche Notice to
all signatories of a Lock-Up Agreement as required under the Lock-Up Agreement;

(xiv) the aggregate number of Warrant Shares issuable upon exercise of the
Warrant based on the then-current anticipated exercise price(s) of the Warrant,
aggregated with all other shares of Common Stock deemed beneficially owned by
the Investor and its Affiliates would not result in the Investor beneficially
owning more than 9.99% of the Common Stock outstanding on the Tranche Notice
Date, as determined in accordance with Section 13(d) of the Exchange Act and the
rules and regulations promulgated thereunder;

(xv) except in connection with the first Tranche Notice, Investor shall have
previously received the Commitment Fee;

(xvi) the Certificate of Designations shall have been duly filed with, and
accepted by, the Secretary of State of the State of Delaware; and

(xvii) all deliverables specified in Section 2.3(e) of this Agreement shall have
been delivered.

(e) Deliveries at Tranche Closing. The Closing of any Tranche and the parties’
obligations hereunder shall additionally be conditioned upon the delivery of
each of the following (the “Required Tranche Deliveries”), except as otherwise
indicated, on or before the applicable Tranche Closing Date:

(i) a number of Preferred Shares equal to the Tranche Purchase Price divided by
the Tranche Share Price shall have been delivered to Investor or an account
specified by Investor for the Tranche Shares;

(ii) the Tranche Purchase Price shall have been paid by the Investor to the
Company by wire transfer of immediately available funds to an account designated
by the Company prior to the applicable Tranche Closing Date;

(iii) Investor shall have received that portion of the Commitment Fee, if any,
that is payable as set forth in the definition of Commitment Fee set forth in
Article I hereof;

(iv) the following executed documents shall have been delivered to Investor: the
Opinion and the Officer’s Closing Certificate;

 

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(v) with respect to the first Tranche Closing only, the Lock-Up Agreements shall
have been delivered to Investor;

(vi) a “Use of Proceeds” certificate, signed by an officer of the Company, and
setting forth how the Tranche Purchase Price will be applied by the Company,
shall have been delivered to Investor;

(vii) all Warrant Shares and Additional Investment Shares shall have been timely
delivered to Investor in accordance with any exercise notice properly delivered
to Company prior to the applicable Tranche Closing Date;

(viii) all documents, instruments and other writings required to be delivered by
the parties on or before the Tranche Closing Date pursuant to any provision of
this Agreement in order to implement and effect the transactions contemplated
herein;

(ix) payment of a $5,000.00 non-refundable administrative fee to Mintz Levin, by
offset against the Tranche Amount, or wire transfer of immediately available
funds; and

(x) on each Tranche Closing Date (other than the first Tranche Closing Date), a
“bring-down” certificate relating to the good standing of the Company.

(f) Mechanics of Tranche Closing. Each of the Company and Investor shall deliver
all Required Tranche Deliveries required to be delivered by either of them
pursuant to Sections 2.3(d) and 2.3(e) of this Agreement, as applicable, at or
prior to each Tranche Closing. Subject to such delivery and the satisfaction (or
where legally permissible, the waiver) of the conditions set forth in
Section 2.3(d) as of the Tranche Closing Date, the closing of the purchase by
Investor of Preferred Shares shall occur by 5:00 p.m., New York City time, on
the date which is ten (10) Trading Days following the Tranche Notice Date (each
a “Tranche Closing Date”) at the offices of Investor; provided, however, that if
any Warrant Shares or Additional Investment Shares, with respect to any portion
of the Warrant or Additional Investment Right exercised before the Tranche
Closing Date have not been timely delivered in accordance with the Transaction
Documents, then the Tranche Closing Date shall be extended one Trading Day for
each Trading Day that such delivery is not made; and provided, further, that if
any Warrant Shares or Additional Investment Shares are not DWAC Shares upon
delivery, then the Tranche Closing Date shall be extended one Trading Day for
each Trading Day that such shares are not DWAC Shares. On or before each Tranche
Closing Date, Investor shall pay to the Company the Tranche Purchase Price to be
paid for such Tranche Shares by wire transfer of immediately available funds to
an account designated by the Company prior to the applicable Tranche Closing
Date. The closing (each a “Tranche Closing”) for each Tranche shall occur on the
date that all Required Tranche Deliveries, as applicable, have been delivered to
the applicable party pursuant to Section 2.3(e) of this Agreement.

(g) Limitation on Obligations to Purchase and Sell. Notwithstanding anything
herein to the contrary, in the event the Closing Bid Price of the Common Stock
during any one or more of the nine (9) Trading Days following the Tranche Notice
Date falls below

 

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75.0% of the Closing Bid Price of the Common Stock on the Trading Day
immediately prior to the Tranche Notice Date, the Company shall not issue any of
Tranche Shares on the Tranche Closing Date, Investor shall not purchase any of
the Tranche Shares, and the Tranche shall be cancelled; provided, however, that
Investor shall retain any Warrant Shares or Additional Investment Shares issued
in connection with the Tranche Notice.

(g) Good Standing. Promptly upon receipt of the proceeds from the first Tranche
Closing, the Company shall pay all outstanding franchise taxes with the State of
Delaware. Promptly thereafter, the Company shall provide Investor with a
“long-form” certificate issued by the Secretary of State of the State of
Delaware stating that the Company is a corporation in good standing and has paid
all outstanding franchise taxes.

2.4 Maximum Placement. Investor shall not be obligated to purchase any
additional Tranche Shares once the aggregate Tranche Purchase Price paid by
Investor equals the Maximum Placement.

2.5 Share Sufficiency. On or before the date on which the Warrants first become
exercisable, the Company shall have a sufficient number of duly authorized
shares of Common Stock for issuance in such amount as may be required to fulfill
its obligations pursuant to the Transaction Documents and any outstanding
agreements with Investor and any Affiliate of Investor.

ARTICLE 3

TERMINATION

3.1 Automatic Termination. This Agreement shall terminate automatically (each,
an “Automatic Termination”) upon the occurrence of any of the following:

(a) if, at any time after the Effective Date, either the Company or the
Investor, or any director or executive officer of the Company or the Investor,
has engaged in a transaction or conduct related to the Company or the Investor,
as applicable, that has resulted in (i) a SEC enforcement action, or (ii) a
civil judgment or criminal conviction for fraud or misrepresentation, or for any
other offense that, if prosecuted criminally, would constitute a felony under
applicable law;

(b) on any date after a Delisting Event that lasts for an aggregate of 20
Trading Days during any calendar year;

(c) if at any time the Company has filed for and/or is subject to any
bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors instituted by or against the Company or any subsidiary of the Company;

(d) upon the occurrence of a Fundamental Transaction;

 

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(e) the Company or any of its Subsidiaries is in breach or default of any
Material Agreement, which breach or default has had a Material Adverse Effect;

(f) the Company is in breach or default of any material term of this Agreement,
any Transaction Document, or any agreement with Investor or any Affiliate of
Investor;

(g) so long as any Preferred Shares are outstanding, the Company (i) creates or
publicly announces its intention to create a class of Common Stock or series of
preferred stock senior to the Series B Preferred Stock with respect to dividend
or liquidation rights or (ii) substantially alters or publicly announces its
intention to substantially alter the capital structure of the Company in a
manner that materially adversely effects the rights or preferences of the Series
B Preferred Stock, in each case without the prior approval of the holders or a
majority of the Preferred Shares then outstanding; and

(h) on the Termination Date.

3.2 Company Termination. The Company may at any time in its sole discretion
terminate (a “Company Termination”) this Agreement by providing 30 days’ advance
written notice (“Termination Notice”) to Investor.

3.3 Other Termination. The Investor may terminate this Agreement by providing
three days’ advance written notice to the Company, if the Company is in breach
or default of any Material Agreement which would reasonably be expected to have
a Material Adverse Effect, and such breach or default is not cured within 20
Trading Days after notice of such breach or default is delivered to the Company.
The Company or the Investor may terminate this Agreement by providing three
days’ advance written notice to the other, if the other party is in material
breach or default of this Agreement or any Transaction Document, and such
material breach or default is not cured within 10 Trading Days after notice of
such material breach or default is delivered to the breaching party. This
Agreement may be terminated at any time by the mutual written consent of both
the Company and the Investor, effective as of the date of such mutual written
consent unless otherwise provided in such written consent.

3.4 Effect of Termination. In the event of termination by the Company or the
Investor pursuant to Section 3.2 or 3.3, as applicable, written notice thereof
shall forthwith be given to the other party as provided in Section 6.2 and the
transactions contemplated by this Agreement shall be terminated without further
action by either party. If this Agreement is terminated as provided in
Section 3.1, 3.2 or 3.3 herein, this Agreement shall become void and of no
further force and effect, except as provided in Section 6.8 hereof and in this
Section 3.4. Nothing in this Section 3.4 shall be deemed to release the Company
or the Investor from any liability for any breach or default under this
Agreement or any of the other Transaction Documents occurring prior to such
termination, or to impair the rights of the Company and the Investor to compel
specific performance by the other party of its obligations under this Agreement
arising prior to such termination, or to impair rights of indemnification under
this Agreement or any other Transaction Document. The termination of this
Agreement will have no effect on any Preferred Shares, Warrant (except as
provided therein in the event of a Funding Default) or Warrant Shares previously
issued or delivered, or on any rights of any holder thereof;

 

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provided, however, that in the event that the sum of the aggregate Tranche
Purchase Price for all Tranche Shares reaches the Maximum Placement hereunder,
any portion of the Warrant or Additional Investment Right that remains unvested
on such Termination Date shall automatically vest and become exercisable in
accordance with Section 2.3 (as if the Termination Date was the Tranche Notice
Date), with no further action of the Company, Investor or the holder of the
Warrant or Additional Investment Right, as the case may be, as of such
Termination Date. Notwithstanding any other provision, (a) all fees paid to
Investor or its counsel are non-refundable, and (b) the Commitment Fee shall be
payable irrespective of any termination of this Agreement.

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

4.1 Representations and Warranties of the Company. Except as set forth below as
being qualified by the corresponding section of the Disclosure Schedules (as the
same may be updated or deemed updated pursuant to Section 2.3(c)(ii)), which
shall be deemed a part hereof, or as set forth below as being qualified by the
SEC Reports, which, in each case, shall qualify any representation or warranty
made herein to the extent of such disclosure, the Company hereby represents and
warrants to, and as applicable covenants with, Investor as follows:

(a) No Subsidiaries. The Company does not own, directly or indirectly, any
capital stock or other equity interests in any Subsidiary.

(b) Organization and Qualification. Except as disclosed in Schedule 4.1(b) of
the Disclosure Schedules, the Company is an entity duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, with the
requisite power and authority to own and use its properties and assets and to
carry on its business as currently conducted. The Company is not in violation or
default of any of the provisions of its certificate of incorporation or bylaws
as currently in effect, except where such violation or default would not,
individually or in the aggregate, constitute a Material Adverse Effect. The
Company is duly qualified to conduct business and is in good standing as a
foreign corporation 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,
would not have or reasonably be expected to result in 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, except as would not have or reasonably be expected
to result in a Material Adverse Effect.

(c) Authorization; Enforcement. 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
hereunder or thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby or thereby have been duly authorized by all necessary
corporate action on the part of the Company and no further consent or
authorization of the Company or its board of directors or stockholders is
required. Each of the Transaction Documents has been, or upon delivery will be,
duly executed by the Company and,

 

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when delivered in accordance with the terms hereof, will constitute the valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies.

(d) No Conflicts. Assuming each of the filings, consents and approvals referred
to in Section 4.1(e) are obtained, given or made on a timely basis, as
applicable, the execution, delivery and performance of the Transaction Documents
by the Company, the issuance and sale of the Securities 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 certificate of
incorporation or bylaws as currently in effect, 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 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 debt or otherwise) or other understanding to
which the Company is a party or by which any property or asset of the Company is
bound or affected, 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 is subject (including
U.S. federal and state securities laws and regulations), or by which any
property or asset of the Company is bound or affected; except in the case of
each of clauses (ii) and (iii), such as would 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) the filing of the Certificate of Designations, (ii) such as may be required
under the Act (including, without limitation, the filing of a Form D with the
SEC and any Registration Statement required to be filed pursuant to this
Agreement) or the Exchange Act (including, without limitation, the filing of a
Current Report on Form 8-K of the Company describing the transactions
contemplated by, and attaching a complete copy of, the Transaction Documents),
(iii) such as may be required under applicable state securities or “blue sky”
laws, (iv) such as may be required under the rules and regulations of the
Trading Market or the Financial Industry Regulatory Authority (the “FINRA”) and
(v) such consents, waivers, authorizations, order, notices, filings or
registrations, the failure of which to obtain, give or make would not,
individually or in the aggregate, result in a Material Adverse Effect; provided,
that, for purposes of the representation made in this Section 4.1(e), the
Company is assuming and relying upon the accuracy of the representations and
warranties of the Investor contained in Sections 4.2(d) through and including
4.2(m), and the full performance of and compliance with the covenants and
agreements of the Investor contained in Section 5.1 of this Agreement.

(f) Issuance of the Securities. The Securities are duly authorized and, when
issued and paid for in accordance with the applicable Transaction Documents, and
subject to, and in reliance on, the representations, warranties, covenants and
agreements made herein by the

 

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Investor, will be duly and validly issued, fully paid and nonassessable, and
subject to Section 5.14, free and clear of all Liens. The Company has reserved
from its duly authorized capital stock a number of shares of Common Stock and
Preferred Stock for issuance of the Securities at least equal to the number of
Securities which could be issued pursuant to the terms of this Agreement based
on the then-current anticipated exercise price(s) of the Warrant.

(g) Capitalization. The authorized capital stock of the Company as of
September 30, 2010 and the number of shares of Common Stock issued and
outstanding as of November 8, 2010 is as described in the Company’s Quarterly
Report on Form 10-Q for its fiscal quarter ended September 30, 2010. 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 as disclosed in the SEC Reports, except as a result of the
purchase and sale of the Securities and for stock options issued by the Company
to its employees, directors and consultants, 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 securities convertible into or
exercisable for shares of Common Stock. 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 U.S. 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. Except as disclosed in
the SEC Reports, 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.

(h) SEC Reports; Financial Statements. Except as set forth in Schedule 4.1(h) of
the Disclosure Schedules, the Company has filed all required SEC Reports for the
two years preceding the Effective Date (or such shorter period as the Company
was required by law to file such material) 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 Act and
the Exchange Act and the rules and regulations of the SEC promulgated
thereunder, as applicable, 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 SEC with respect thereto as in effect at the time
of filing. Such financial statements have been prepared in accordance with 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.

 

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(i) Material Changes. Since the date of the latest audited financial statements
included within the SEC Reports, except as disclosed in the SEC Reports,
(i) there has been no event, occurrence or development that has had or that
would 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 and (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 SEC, (iii) the Company has not altered its
method of accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company equity incentive
plans. The Company does not have pending before the SEC any request for
confidential treatment of information.

(j) Litigation. Except as set forth in Schedule 4.1(j) of the Disclosure
Schedules or as set forth in the SEC Reports, 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 or any of its
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) would, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect. Neither the
Company, nor to the knowledge of the Company any director or officer of the
Company, is or has been during the past five years the subject of any Action
involving a claim of violation of or liability under U.S. federal or state
securities laws or a claim of breach of fiduciary duty. During the past five
years, there has not been, and to the knowledge of the Company, there is not
pending or contemplated, any investigation by the SEC involving the Company or
any current or former director or officer of the Company in their capacity as a
director or officer of the Company. During the past five years, the SEC has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company under the Exchange Act or the Act.

(k) Labor Relations. Except as set forth in Schedule 4.1(k) of the Disclosure
Schedules or in the SEC Reports, 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 would reasonably be expected to result in a Material Adverse
Effect.

(l) Compliance. Except as set forth in Schedule 4.1(l), the Company (i) is not
in default under or in violation of (and, to the Company’s knowledge, 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 under), nor has the Company
received written 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 similar
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),
(ii) is in violation of any order of any court, arbitrator or governmental body
applicable to the Company, or (iii) is or has been in

 

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violation of any statute, rule or regulation of any governmental authority
applicable to the Company, including without limitation all foreign, federal,
state and local laws applicable to its business, except in each of the cases
referenced in clauses (i), (ii) and (iii) above as would 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, except where the failure
to possess such permits would not, individually or in the aggregate, have or
reasonably be expected to result in a Material Adverse Effect (“Material
Permits”), and neither the Company nor any Subsidiary has received any written
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 marketable
title in fee simple to all real property owned by them that is material to the
business of the Company and the Subsidiaries and good and marketable 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 Liens as do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such property
by the Company and the Subsidiaries and Liens for the payment of federal, state
or other taxes, the payment of which is neither delinquent nor subject to
penalties. Any real property and facilities held under lease by the Company and
the Subsidiaries are held by them under valid, subsisting and enforceable leases
of which the Company and the Subsidiaries are in compliance.

(o) Patents and Trademarks. The Company has, or has rights to use, all patents,
patent applications, trademarks, trademark applications, service marks, trade
names, copyrights, licenses and other similar rights that are necessary or
material for use in connection with their respective businesses as described in
the SEC Reports and which the failure to so have would have a Material Adverse
Effect (collectively, the “Intellectual Property Rights”). The Company has not
received a written notice that the Intellectual Property Rights used by the
Company violates or infringes upon the rights of any Person. To the knowledge of
the Company, all such Intellectual Property Rights are enforceable and there is
no existing infringement by another Person of any of the Intellectual Property
Rights of the Company.

(p) Insurance. The Company is 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 is engaged. Except as set
forth in the SEC Reports, the Company has no 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. Except as set forth in the SEC
Reports, 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

 

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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 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 $120,000 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 equity incentive 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 date of the Commitment Closing. 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 materially affect the Company’s
internal controls.

(s) Certain Fees. Except for the payment of the Commitment Fee and except as set
forth in Schedule 4.1(s) to the Disclosure Schedules, the issuance of the
Warrant and the other payments to be made pursuant to the Transaction Documents,
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. Except as a result of any agreements or
arrangements made by the Investor or its representatives or Affiliates, to the
Company’s knowledge, Investor shall have no obligation with respect to any such
fees or commissions of a type contemplated in this Section 4.1(s) that may be
due in connection with the transactions contemplated by this Agreement.

(t) Private Placement. Assuming the accuracy of Investor representations and
warranties set forth in Section 4.2, no registration under the Act is required
for the offer and

 

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sale of the Securities by the Company to Investor as contemplated hereby. The
issuance and 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 Securities, 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. Except as set forth in Schedule 4.1(v) of the
Disclosure Schedules, no Person has any right to cause the Company to effect the
registration under the Act of any securities of the Company that have not been
registered.

(w) Listing and Maintenance Requirements. The Common Stock is registered
pursuant to Section 12 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, to
the Company’s knowledge, is the SEC contemplating terminating such
registration. Except as set forth in Schedule 4.1(w) to the Disclosure Schedules
or as set forth in the SEC Reports, the Company has not, in the 12 months
preceding the Effective Date, 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. Except as set forth in the SEC Reports, 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 the laws of its state of
incorporation that is or could become applicable to Investor as a result of
Investor 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 Investor’s ownership of the Securities.

(y) Disclosure. Except with respect to (i) the transactions contemplated by the
Transaction Documents and (ii) the information that will be publicly disclosed
by the Company pursuant to Section 2.2(b)(i)(E) and Section 5.4, the Company
confirms that neither the Company nor any other Person acting on its behalf has
provided Investor or its agents or counsel with any information that constitutes
material, non-public information that, according to applicable law, rule or
regulation, should have been disclosed publicly by the Company prior to the
Effective Date but which has not been so publicly disclosed. The Company
understands and confirms that Investor will rely on the foregoing
representations and covenants in effecting transactions in securities of the
Company. All disclosure provided to Investor regarding the Company, its business
and the transactions contemplated hereby, furnished by or on behalf of the
Company with respect to the representations and warranties made herein are true
and correct in all material respects and do not contain any untrue statement of
a material fact or omit to state

 

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any material fact necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading.

(z) No Integrated Offering. Neither the Company, nor any of its Affiliates, nor
any Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any 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 Act or which
could violate any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of the applicable Trading Market.

(aa) Financial Condition. Based on the financial condition of the Company as of
the date of the Commitment Closing: (i) the fair saleable market value of the
Company’s assets exceeds the amount that will be required to be paid on or in
respect of the Company’s existing debts and other liabilities (including known
contingent liabilities) as they mature; (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current
fiscal year as now conducted and as proposed to be conducted including its
capital needs taking into account the particular capital requirements of the
business conducted by the Company, and projected capital requirements and
capital availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all
of its assets, after taking into account all anticipated uses of the cash, would
be sufficient to pay all amounts on or in respect of its debt when such amounts
are required to be paid. 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 date of the Commitment
Closing. The Company’s Quarterly Report on Form 10-Q for its fiscal quarter
ended September 30, 2010 sets forth as of September 30, 2010 all outstanding
secured and unsecured Indebtedness of the Company, or for which the Company has
commitments. The Company is not in default with respect to any indebtedness for
borrowed money.

(bb) Tax Status. Except as set forth in Schedule 4.1(hh) to the Disclosure
Schedules, the Company and each of its Subsidiaries has made or filed all
federal, state and foreign income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books provisions reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provisions reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim. The Company has not executed a
waiver with respect to the statute of limitations relating to the assessment or
collection of any foreign, federal, statue or local tax. None of the Company’s
tax returns is presently being audited by any taxing authority.

 

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(cc) No General Solicitation or Advertising. Except for the Registration
Statement to be filed as contemplated by this Agreement, neither the Company
nor, to the knowledge of the Company, any of its directors or officers (i) has
conducted or will conduct any general solicitation (as that term is used in Rule
502(c) of Regulation D) or general advertising with respect to the sale of the
Securities, or (ii) made any offers or sales of any security or solicited any
offers to buy any security under any circumstances that would require
registration of the Securities under the Act or made any “directed selling
efforts” as defined in Rule 902 of Regulation S.

(dd) 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 corrupt 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.

(ee) Acknowledgment Regarding Investor’s Purchase of Securities. The Company
acknowledges and agrees that Investor is acting solely in the capacity of arm’s
length purchaser with respect to this Agreement and the transactions
contemplated hereby. The Company further acknowledges that Investor is not
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 statement made by Investor or any of its representatives or
agents in connection with this Agreement and the transactions contemplated
hereby is not advice or a recommendation and is merely incidental to Investor’s
purchase of the Securities. The Company further represents to Investor that the
Company’s decision to enter into this Agreement has been based solely on the
independent evaluation of the Company and its representatives.

(ff) Accountants. The Company’s accountants are set forth in the SEC Reports. To
the Company’s knowledge, such accountants are an independent registered public
accounting firm as required by the Act.

(gg) 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.

(hh) Registration Statements and Prospectuses.

(i) Company will use its commercially reasonable efforts to file within 30
calendar days after the Effective Date (or as soon as possible thereafter),
cause to become effective as soon as possible thereafter, and remain effective
until the earlier of (A) the first date on which all Common Shares covered
thereby have been sold or are Rule 144 Eligible or (B) in the event that no
Tranche Closing ever occurs, the Termination Date, a Registration Statement
covering the public resale by the Investor of all Common Shares issued pursuant
to the

 

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Transaction Documents. Such Registration Statement, on the date it is filed with
the SEC and on the date it becomes effective, and, as amended or supplemented,
at the time of any Tranche Notice Date, Tranche Closing Date, or issuance of any
Warrant Shares, will comply as to form, in all material respects, with the
requirements of the Act.

(ii) Such Registration Statement, as of its effective date, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided that this representation and warranty does not apply to statements in
or omissions from the Registration Statement made in reliance upon and in
conformity with information relating to the Investor furnished to the Company in
writing by or on behalf of the Investor expressly for use therein, which to the
Company’s knowledge are not false or misleading.

(iii) The Prospectus, on the date it is filed with the SEC and as of its date,
and, at the time of any Tranche Notice Date, Tranche Closing Date, or issuance
of any Common Shares, and at all times during which a prospectus is required by
the Act to be delivered in connection with any sale of Common Shares covered
thereby, will comply as to form, in all material respects, with the requirements
of the Act.

(iv) The Prospectus and any amendment or supplement thereto, as of its date,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided that this
representation and warranty does not apply to statements in or omissions from
the Prospectus or any amendment or supplement thereto made in reliance upon and
in conformity with information relating to the Investor furnished to the Company
in writing by or on behalf of the Investor expressly for use therein, which to
the Company’s knowledge are not false or misleading.

(v) The Registration Statement, as of its effective date, will meet the
requirements of subsections (a)(1)(i) and/or (a)(1)(iii) of Rule 415 under the
Act or any other applicable subsections thereof.

4.2 Representations and Warranties of Investor. Investor hereby represents and
warrants to, and as applicable covenants with, the Company as follows:

(a) Organization; Authority. Investor is an entity duly formed, validly existing
and in good standing under the laws of the jurisdiction of its organization,
with the requisite power and authority to own and use its properties and assets
and to carry on its business as currently conducted. Investor has the requisite
company power and authority to enter into and to consummate the transactions
contemplated by this Agreement and otherwise to carry out its obligations
hereunder. The execution and delivery of the Transaction Documents to which
Investor is a party and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary company action on
the part of Investor and no further consent or authorization of Investor or its
members is required. Each Transaction Document to which Investor is a party has
been (or will be) duly executed by Investor, and when delivered by Investor in
accordance with the terms hereof or thereof, will constitute the valid and

 

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legally binding obligation of Investor, enforceable against Investor in
accordance with its terms, subject to applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors’ rights and
remedies.

(b) No Conflicts. The execution, delivery and performance of the Transaction
Documents to which Investor is a party do not and will not conflict with or
violate any provision of Investor’s memorandum of association or bye-laws (or
similar organizational documents) as currently in effect.

(c) Investor Status. At the time Investor was offered the Securities, it was,
and it is: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
(a)(3), (a)(7) or (a)(8) under the Act or (ii) a “qualified institutional buyer”
as defined in Rule 144A(a) under the Act.

(d) Experience of Investor. Investor, 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. Investor 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) Information. The Investor and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by the Investor. The Investor and its advisors, if any, have been
afforded the opportunity to ask questions of the Company; provided, however,
that neither such inquiries nor any other due diligence investigations conducted
by Investor or its representatives shall modify, amend or affect Investor’s
right to rely on the Company’s representations and warranties contained in
Section 4.1. The Investor has sought such accounting, legal and tax advice as it
has considered necessary to make an informed investment decision with respect to
its acquisition of the Securities. The Investor understands that it (and not the
Company) shall be responsible for its own tax liabilities that may arise as a
result of this investment or the transactions contemplated by this Agreement.

(f) General Solicitation. Investor 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.

(g) No Public Sale or Distribution. Investor is acquiring the Securities for its
own account, and not as a nominee or agent. Investor is acquiring the Securities
for investment purposes, and not with a view towards, or for resale in
connection with, the public sale or distribution of any part thereof, except
pursuant to transactions registered under the Act or exempt from such
registration; provided, however, that the disposition of its property shall at
all times be within its control. Investor does not presently have any contract,
agreement, undertaking, arrangement or understanding, directly or indirectly,
with any non-Affiliate of Investor to sell, transfer, pledge, assign or
otherwise distribute any of the Securities.

 

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(h) Acknowledgement of Private Placement. Investor understands that the offer
and sale of the Securities provided for herein is being made without
registration under the Act, in reliance upon the provisions of Section 4(2) of
the Act, Regulation D promulgated under the Act, and such other exemptions from
the registration requirements of the Act as may be available with respect to any
or all of the purchases of Securities to be made hereunder, and that the Company
is relying in part upon the truth and accuracy of, and such Investor’s
compliance with, the representations, warranties, agreements, covenants,
acknowledgments and understandings of such Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of such
Investor to acquire the Securities.

(i) Transfer or Resale. Investor understands that: (i) the Preferred Shares, the
Additional Investment Right and the Warrants have not been and are not being
registered under the Act or any state securities or “blue sky” laws, (ii) as of
the Effective Date, the Common Shares have not been registered under the Act or
any state securities or “blue sky” laws and (iii) except as expressly provided
in the Transaction Documents with respect to the Common Shares, neither the
Company nor any other Person is under any obligation to register the Securities
under the Act or any state securities or “blue sky” laws or to comply with the
terms and conditions of any exemption thereunder.

(j) Trading Restrictions; Compliance with Securities Laws. The Investor
covenants and agrees that during the period beginning on the Trading Day
immediately preceding the Effective Date and ending on the Trading Day next
following the termination of this Agreement, neither the Investor nor any of its
Affiliates nor any entity managed or controlled by the Investor will, directly
or indirectly, enter into or execute or cause or assist any Person to enter into
or execute any “short sale” (as such term is defined in Rule 200 of Regulation
SHO, or any successor regulation, promulgated by the SEC under the Exchange Act)
of the Common Stock.

(k) Not an Affiliate. The Investor is not an officer, director or Affiliate of
the Company.

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

(m) Public Resale of Common Shares. The Investor agrees that unless the Common
Shares covered by any Registration Statement are Rule 144 Eligible, it will
publicly resell such Common Shares only pursuant to such Registration Statement,
in a manner described under the caption “Plan of Distribution” in the
Registration Statement, and in a manner in compliance with any applicable
prospectus delivery requirements of the Securities Act.

The Company acknowledges and agrees that Investor 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 4.2.

 

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ARTICLE 5

OTHER AGREEMENTS OF THE PARTIES

5.1 Transfer Restrictions.

(a) The Securities constitute “restricted securities” as such term is defined in
Rule 144(a)(3) under the Act and may only be disposed of in compliance with U.S.
federal securities laws and applicable state securities or “blue sky”
laws. Without limiting the generality of the foregoing, except for a transfer to
an Affiliate of Investor or a bona fide pledge of the Securities, the Securities
may not be offered for sale, sold, transferred, assigned, pledged or otherwise
distributed unless (i) subsequently registered thereunder, (ii) Investor shall
have delivered to the Company an opinion of counsel reasonably acceptable to the
Company (which may be Mintz Levin, in a form generally acceptable to the
Company, to the effect that such Securities to be offered for sale, sold,
transferred, assigned, pledged or otherwise distributed may be offered for sale,
sold, transferred, assigned, pledged or otherwise distributed pursuant to an
exemption from such registration, or (iii) such Securities can be offered for
sale, sold, transferred, assigned, pledged or otherwise distributed pursuant to
Rule 144 or Rule 144A promulgated under the Act, as applicable.

(b) The parties acknowledge and agree that the Common Shares will be issued
without any restrictive legends. Investor agrees to the imprinting, for so long
as is required by this Section 5.1, upon the certificates or other instruments
representing the Preferred Shares and Warrants of any legends required by
applicable state securities or “blue sky” laws, in addition to the following
restrictive legend (and that a stop transfer order shall be placed against
transfer of such certificates):

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE 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 ACCORDANCE WITH APPLICABLE STATE
SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL 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.

5.2 Furnishing of Information. As long as Investor owns Securities, the Company
covenants to timely file (or obtain extensions in respect thereof and file
within the applicable grace period) all reports required to be filed by the
Company after the Effective Date pursuant to

 

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the Exchange Act. Upon the request of Investor, the Company shall deliver to
Investor a written certification of a duly authorized officer as to whether it
has complied with the preceding sentence. As long as Investor owns Securities,
if the Company is not required to file reports pursuant to such laws, it will
prepare and furnish to Investor and make publicly available in accordance with
Rule 144(c) such information as is required for Investor to sell the Securities
under Rule 144 until such time as Investor may sell all such Securities without
restriction 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 Securities
without registration under the Act within the limitation of the exemptions
provided by Rule 144.

5.3 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 Act) that would be integrated with the offer or sale of the Securities in
a manner that would require the registration under the Act of the sale of the
Securities to Investor or that would be integrated with the offer or which could
violate any applicable stockholder approval provisions, including, without
limitation, under the rules and regulations of the applicable Trading Market.

5.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m., New
York City time, on the Trading Day immediately following the Effective Date,
issue a press release and shall, by 5:30 p.m., New York City time, on the fourth
(4th) Trading Day immediately following the Effective Date, file a Current
Report on Form 8-K describing the transactions contemplated by, and attaching a
complete copy of, the Transaction Documents. Such press release and Current
Report on Form 8-K shall be reasonably acceptable to Investor. The Company and
Investor shall consult with each other in issuing any additional press releases
with respect to the transactions contemplated hereby, and neither the Company
nor Investor shall issue any such press release or otherwise make any such
public statement without the prior consent of the Company, with respect to any
such press release of Investor, or without the prior consent of Investor, with
respect to any such press release of the Company, which consent shall not
unreasonably be withheld or delayed, except if such disclosure is required by
law, Trading Market regulations or judicial process, in which case the
disclosing party shall promptly provide the other party with prior notice of
such public statement or communication. The Company shall provide Investor with
prior notice of any public disclosure of the name of Investor or contemplated
inclusion of the name of Investor in any filing with the SEC or any regulatory
agency or Trading Market (it being hereby acknowledged and agreed by Investor
that Investor’s name may be disclosed, to the extent required, in a supplemental
listing application with the Trading Market, any Current Report on Form 8-K of
the Company describing the transactions contemplated by the Transaction
Documents, in any Registration Statement and Prospectus covering any Common
Shares, and in other reports of the Company required to be filed by the Company
under the Act and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof).

5.5 Shareholders Rights Plan. No claim will be made or enforced by the Company
or, to the knowledge of the Company, any other Person that Investor is an
“Acquiring Person” under any shareholders rights plan or similar plan or
arrangement in effect or hereafter adopted by the Company, or that Investor
could be deemed to trigger the provisions of any such plan or

 

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arrangement, by virtue of receiving Securities under the Transaction Documents
or under any other agreement between the Company and Investor. The Company shall
conduct its business in a manner so that it will not become subject to the
Investment Company Act of 1940, as amended.

5.6 Non-Public Information. The Company covenants and agrees that neither it nor
any Person acting on its behalf will provide, Investor or its agents or counsel
with any information that the Company believes constitutes material non-public
information, unless prior thereto Investor shall have executed a written
agreement regarding the confidentiality and use of such information. The Company
understands and confirms that Investor shall be relying on the foregoing
covenant in effecting transactions in securities of the Company.

5.7 Reimbursement. If Investor 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 Investor
to or with any current stockholder), solely as a result of Investor’s
acquisition of the Securities under this Agreement, the Company will reimburse
Investor 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, or will assume the defense
of Investor in such matter. 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 Investor 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 Investor 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, Investor and any such Affiliate and
any such Person.

5.8 Indemnification.

(a) Indemnification by Company. Subject to the provisions of this
Section 5.8(a), the Company will indemnify and hold Investor and any Warrant
holder, their Affiliates and attorneys, and each of their directors, officers,
shareholders, partners, employees, agents, and any Person who controls Investor
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
(collectively, the “Investor Parties” and each an “Investor 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 (collectively, “Losses”) that any Investor 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, (b) any action instituted
against any Investor Party, or any of them or their respective Affiliates, by
any stockholder of the Company who is not an Affiliate of an Investor Party,
with respect to any of the transactions contemplated by the Transaction
Documents (unless such action is based upon a breach of Investor’s
representation, warranties or covenants or agreements under the Transaction
Documents or any agreements or understandings Investor may have with any such
stockholder or any violations by Investor of state or federal securities laws or
any conduct by Investor which constitutes fraud, gross negligence, willful
misconduct or malfeasance), (c) any untrue statement or alleged untrue statement
of a material fact contained

 

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in a Registration Statement (or in a Registration Statement as amended by any
post-effective amendment thereof by the Company) or arising out of or based upon
any omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and/or
(d) any untrue statement or alleged untrue statement of a material fact included
in any Prospectus ( or any amendments or supplements to any Prospectus ), or
arising out of or based upon any omission or alleged omission to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that (i) the Company shall not be obligated to indemnify any Investor Party for
any Losses finally adjudicated to have been caused solely by an untrue statement
of a material fact or an omission to state a material fact made in reliance upon
and conformity with information furnished to the Company in writing by or on
behalf of such Person expressly for use in the Registration Statement or the
Prospectus (or any amendment or supplement thereto) and (ii) the foregoing
indemnity shall not inure to the benefit of any Investor Party from whom the
Person asserting any Losses purchased Securities, if a copy of the Prospectus
(as then supplemented) was not sent or given by or on behalf of such Investor
Party to such Person, if required by law to have been delivered, at or prior to
the written confirmation of the sale of such Securities to such person, and if
delivery of the Prospectus (as then supplemented) would have cured the defect
giving rise to such Losses. The parties intend that any Losses subject to
indemnification under this Section 5.8(a) will be net of insurance proceeds
(which Investor agrees to use commercially reasonable efforts to recover or
cause any Investor Party to recover). Accordingly, the amount which the Company
is required to pay any Investor Party under this Section 5.8(a) will be reduced
by any insurance proceeds actually recovered by or on behalf of any Investor
Party in reduction of the related Losses. In addition, if an Investor Party
receives indemnification from the Company under this Section 5.8(a) in respect
of any Losses and subsequently receives any such insurance proceeds, then
Investor will pay, or will cause such other Investor Party to pay, to the
Company an amount equal to the indemnification payment received under this
Section 5.8(a) less the amount of the indemnification payment that would have
been due if the insurance proceeds had been received, realized or recovered
before such indemnification payment was made. However, no provision herein
regarding insurance proceeds shall delay payment by the Company to any Investor
Party for any indemnified Losses.

(b) Indemnification by Investor. Subject to the provisions of this
Section 5.8(b), Investor will indemnify and hold the Company, its Affiliates and
attorneys, and each of the Company’s directors, officers, shareholders,
employees, agents, and any Person who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act (collectively, the
“Company Parties” and each an “Company Party”), harmless from any and all Losses
that any Company Party has been finally adjudicated to have suffered or incurred
solely as a result of (a) any unexcused material breach of any material
representations, warranties, covenants or agreements made by Investor in this
Agreement or in the other Transaction Documents, (b) any conduct by Investor
which constitutes fraud, willful misconduct or malfeasance, (c) any untrue
statement of a material fact contained in a Registration Statement (or in a
Registration Statement as amended by any post-effective amendment thereof by the
Company) based upon any omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case, to the extent the untrue statement or omission was made in reliance upon,
and in conformity with, information furnished to the Company in writing by or on
behalf of any Investor Party expressly for use in the

 

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Registration Statement (or any amendment thereto) and/or (d) any untrue
statement of a material fact included in any Prospectus (or any amendments or
supplements to any Prospectus), or based upon any omission to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in each case, to the
extent the untrue statement or omission was made in reliance upon, and in
conformity with, information furnished to the Company in writing by or on behalf
of any Investor Party expressly for use in the Prospectus (or any supplement
thereto). The parties intend that any Losses subject to indemnification under
this Section 5.8(b) will be net of insurance proceeds (which the Company agrees
to use commercially reasonable efforts to recover or cause any Company Party to
recover). Accordingly, the amount which Investor is required to pay any Company
Party under this Section 5.8(b) will be reduced by any insurance proceeds
actually recovered by or on behalf of any Company Party in reduction of the
related Losses. In addition, if a Company Party receives indemnification from
Investor under this Section 5.8(b) in respect of any Losses and subsequently
receives any such insurance proceeds, then the Company will pay, or will cause
such other Company Party to pay, to Investor an amount equal to the
indemnification payment received under this Section 5.8(b) less the amount of
the indemnification payment that would have been due if the insurance proceeds
had been received, realized or recovered before such indemnification payment was
made. However, no provision herein regarding insurance proceeds shall delay
payment by Investor to any Company Party for any indemnified Losses.

(c) Procedure for Indemnification Claims. Promptly after a Person receives
notice of a claim or the commencement of an action for which the Person intends
to seek indemnification under this Section 5.8, the Person will notify the
indemnifying party in writing of the claim or commencement of the action, suit
or proceeding; provided, however, that failure to notify the indemnifying party
will not relieve the indemnifying party from liability under this Section 5.8,
except to the extent it has been materially prejudiced by the failure to give
notice. The indemnifying party will be entitled to participate in the defense of
any claim, action, suit or proceeding as to which indemnification is being
sought, and if the indemnifying party is the Company, the indemnifying party may
(but will not be required to) assume the defense against the claim, action, suit
or proceeding with counsel satisfactory to it. Subject to the immediately
following sentence, if the Company notifies an indemnified party that it wishes
to assume the defense of a claim, action, suit or proceeding, the Company will
not be liable for any legal or other expenses incurred by the indemnified party
in connection with the defense against the claim, action, suit or proceeding. If
the Company notifies an indemnified party that it wishes to assume the defense
of a claim, action, suit or proceeding, the indemnified 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 indemnified 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 with respect to the dispute in
question on any material issue between the position of the Company and the
position of the indemnified party such that it would be inappropriate for one
counsel to represent both parties. No indemnifying party will be liable to any
indemnified party under this Agreement for any settlement by such indemnified
party of any action effected by such indemnified party without the indemnifying
party’s prior written consent, which shall not be unreasonably withheld or
delayed.

 

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5.9 Reservation of Securities. 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.

5.10 Limited Standstill. The Company will use reasonable efforts to deliver to
Investor on or before the first Tranche Closing Date, and will thereafter honor
and enforce the provisions of, the Lock-Up Agreements with the Company’s
executive officers, directors and beneficial owners of 10% or more of the Common
Stock.

5.11 Issuance of Additional Securities. The Company agrees that for the period
commencing on each Tranche Notice Date and ending on the tenth (10th) day after
such Tranche Notice Date, neither the Company nor any of its Subsidiaries shall,
without the prior written consent of the Investor, (i) directly or indirectly,
issue, offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any share of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or file any registration statement under the Act (other than a
Registration Statement on Form S-8) with respect to any of the foregoing, or
(ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise; provided, however, that nothing in the
foregoing clauses (i) and (ii) shall be construed as limiting the Company’s
ability to negotiate and/or otherwise prepare to consummate a transaction
following the expiration of the restricted period so long as such transaction is
not publicly announced prior to the expiration of the restricted period. The
provisions of this Section 5.11 shall not apply to (A) the Securities to be
issued and sold hereunder or issuable upon conversion or exercise of the
Securities, (B) issuances of shares of Common Stock issuable upon conversion or
exchange of currently outstanding convertible securities, (C) granting options
or other securities under the Company’s incentive compensation plans existing on
the date hereof or issuances of shares of Common Stock issuable in connection
with outstanding awards thereunder as of the date hereof, (D) issuances of
shares of Common Stock issuable pursuant to agreements in effect as of the date
hereof or amendments related thereto, (E) issuances of shares of Common Stock in
connection with strategic acquisitions, or (F) issuances of shares of Common
Stock subject to shareholder approval; provided, however, that in the case of
clause (B) above, no shares of Common Stock shall be issued as a result of an
amendment to such securities after the date hereof and prior to the expiration
of the restricted period.

5.12 Prospectus Availability and Changes. The Company will make available to
Investor upon request, and thereafter from time to time will furnish Investor,
as many copies of any Prospectus (or of the Prospectus as amended or
supplemented if the Company shall have made any amendments or supplements
thereto after the effective date of the applicable Registration Statement) as
Investor may request for the purposes contemplated by the Act; and in case
Investor is required to deliver a prospectus after the nine-month period
referred to in Section 10(a)(3) of the Act in connection with the sale of the
Common Shares, or after the time a post-effective amendment to the applicable
Registration Statement is required pursuant to Item 512(a)

 

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of Regulation S-K under the Act, the Company will prepare, at its expense,
promptly upon request such amendment or amendments to the Registration Statement
and the Prospectus as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act or Item 512(a) of Regulation S-K
under the Act, as the case may be.

The Company will advise Investor promptly of the happening of any event within
the time during which a Prospectus is required to be delivered by Investor under
the Act which, in the good faith judgment of the Company, following consultation
with its independent legal counsel, would require the making of any change in
the Prospectus then being used so that the Prospectus would not include an
untrue statement of material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they are made, not misleading, and to advise Investor promptly if, during
such period, in the good faith judgment of the Company, following consultation
with its independent legal counsel, it shall become necessary to amend or
supplement any Prospectus to cause such Prospectus to comply with the
requirements of the Act, and in each case, during such time, to prepare and
furnish, at the Company’s expense, to Investor promptly such amendments or
supplements to such Prospectus as may be necessary to reflect any such change or
to effect such compliance. The Company shall not be required to disclose to the
Investor the substance or specific reasons of any of the events referred to in
the immediately preceding sentence, but rather, shall only be required to
disclose that the event has occurred. Notwithstanding anything herein to the
contrary, the Company need not advise the Investor regarding any supplement to
the Prospectus the purpose of which is to update the Prospectus and the
Registration Statement to include information the Company has previously filed
with the SEC pursuant to Section 13 or 15(d) or 14(a) of the Exchange Act and
the rules and regulations promulgated thereunder.

5.13 Required Approval. No transactions contemplated under this Agreement or the
Transaction Documents shall be consummated for an amount that would require
approval by the Company’s stockholders under any approval provisions, rules or
regulations of any Trading Market applicable to the Company, unless and until
such approval is obtained. Company shall use its reasonable best efforts to
obtain any required approval as soon as possible.

5.14 Activity Restrictions. For so long as Investor or any of its Affiliates
holds any Securities, neither Investor nor any Affiliate will: (i) vote any
shares of Common Stock owned or controlled by it, solicit any proxies, or seek
to advise or influence any Person with respect to any voting securities of the
Company; (ii) engage or participate in any actions, plans or proposals which
relate to or would result in (a) acquiring additional securities of the Company,
alone or together with any other Person, which would result in beneficially
owning or controlling, or being deemed to beneficially own or control, more than
9.99% of the total outstanding Common Stock or other voting securities of the
Company, (b) an extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving Company or any of its subsidiaries,
(c) a sale or transfer of a material amount of assets of the Company or any of
its subsidiaries, (d) any change in the present board of directors or management
of the Company, including any plans or proposals to change the number or term of
directors or to fill any existing vacancies on the board, (e) any material
change in the present capitalization or dividend policy of the Company, (f) any
other material change in the Company’s business or corporate structure,
including but not limited to, if the Company is a registered closed-end
investment company, any plans or proposals to

 

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make any changes in its investment policy for which a vote is required by
Section 13 of the Investment Company Act of 1940, (g) changes in the Company’s
charter, bylaws or instruments corresponding thereto or other actions which may
impede the acquisition of control of the Company by any Person, (h) causing a
class of securities of the Company to be delisted from a national securities
exchange or to cease to be authorized to be quoted in an inter-dealer quotation
system of a registered national securities association, (i) a class of equity
securities of the Company becoming eligible for termination of registration
pursuant to Section 12(g)(4) of the Act, or (j) any action, intention, plan or
arrangement similar to any of those enumerated above; or (iii) request the
Company or its directors, officers, employees, agents or representatives to
amend or waive any provision of this Section 5.13.

ARTICLE 6

MISCELLANEOUS

6.1 Fees and Expenses. Except for the reasonable fees and expenses of Mintz
Levin, as to which the $20,000.00 non-refundable document preparation fee
previously paid by the Company shall be applied, and the $5,000.00
non-refundable administrative fee payable to counsel for Investor at each
Tranche Closing, and as may be otherwise provided in this Agreement, each party
shall pay the fees and expenses of its own 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 the
Transaction Documents. The Investor acknowledges receipt by Mintz Levin on or
prior to the Effective Date of $20,000.00 toward such amount. The Company
acknowledges and agrees that Mintz Levin solely represents Investor, and does
not represent the Company or its interests in connection with the Transaction
Documents or the transactions contemplated thereby. The Company shall pay
(i) all Transfer Agent fees and expenses (including related fees and expenses of
any counsel to such persons), (ii) all fees and expenses relating to the
approval of the Common Shares for book-entry transfer through the systems of the
DTC, (iii) the fees and expenses incurred in connection with the registration or
qualification and determination of eligibility for investment of the Securities
under the “blue sky” laws, (iv) stamp taxes and other taxes and duties levied in
connection with the delivery of any Securities to the Investor, and (v) all fees
and expenses relating to the listing or quotation of the Common Shares on the
Trading Market. The obligations of the Company under this Section 6.1 shall
survive the termination of this Agreement.

6.2 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 on the earliest of: (a) the date of transmission, if such
notice or communication is delivered via facsimile or electronic mail prior to
5:30 p.m., New York City time, on a Trading Day and an electronic confirmation
of delivery is received by the sender, (b) the next Trading Day after the date
of transmission, if such notice or communication is delivered later than 5:30
p.m., New York City time, or on a day that is not a Trading Day, (c) three
Trading Days 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 addresses for such notices and
communications are those set forth following the signature page hereof, or such
other address as may be designated in writing hereafter, in the same manner, by
such Person.

 

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6.3 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 Investor 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.

6.4 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.

6.5 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 Investor, which consent will not be
unreasonably withheld or delayed. Investor may not assign any or all of its
rights under this Agreement.

6.6 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 expressly set forth in Section 5.8 hereof.

6.7 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 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

 

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other party for its attorneys’ fees and other costs and expenses reasonably
incurred in connection with the investigation, preparation and prosecution of
such action or proceeding.

6.8 Survival. The representations and warranties, covenants, indemnification
provisions and fees and expenses provisions contained herein (including the
payment of the Commitment Fee) shall survive the Closing and the delivery and/or
exercise of the Securities, as applicable.

6.9 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.

6.10 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.

6.11 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.

6.12 Remedies. In addition to being entitled to exercise all rights provided
herein or granted by law, including recovery of damages, each of Investor 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 under
the Transaction Documents 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.

6.13 Payment Set Aside. To the extent that the Company makes a payment or
payments to Investor pursuant to any Transaction Document or Investor 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

 

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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.

6.14 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.

6.15 Time of the Essence. Time is of the essence with respect to all provisions
of this Agreement that specify a time for performance.

6.16 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.

6.17 Entire Agreement. The Transaction Documents contain the entire agreement
and understanding of the parties, and supersede all prior and contemporaneous
agreements, term sheets, letters, discussions, communications and
understandings, both oral and written, which the parties acknowledge have been
merged into the Transaction Documents. Neither party has relied upon any
agreement, assurance, promise, understanding or representation not expressly set
forth in the Transaction Documents and each party agrees that it may only rely
on the agreements, assurances, promises, understandings and representations set
forth therein.

6.18 Further Assurances. From and after the Effective Date, upon the request of
Investor or the Company, each of the Company and Investor shall execute and
deliver such instruments, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Agreement.

[Signature Page Follows]

 

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

 

DAYSTAR TECHNOLOGIES, INC. By:  

/s/ Christopher T. Lail

Name:   Title:  

 

SOCIUS CG II, LTD. By:  

/s/ Terren Peizer

Name:   Terren Peizer Title:   Managing Director

[Signature Page – Securities Purchase Agreement]

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Addresses for Notice

 

To Company: DayStar Technologies, Inc. 1010 South Milpitas Boulevard Milpitas,
CA 95035 Fax No.: (408) 343-8491 Attention: Christopher T. Lail Email:
clail@daystartech.com with a copy (which shall not constitute notice) to:
Greenberg Traurig, LLP One International Place Boston, MA 02110
Attention: Stephen T. Adams, Esq. Fax No.: (617) 279-8416
Email: Adamss@gtlaw.com

 

To Investor:

Socius CG II, Ltd.

Clarendon House

2 Church Street

Hamilton HM 11 Bermuda

Fax No.: (310) 444-4394

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

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

666 Third Avenue

New York, New York 10017

Attention: Kenneth R. Koch, Esq.

Fax No.: (212) 983-3115

Email: krkoch@mintz.com

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Exhibit A-1

Form of Warrant

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NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION
OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS
SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.

DAYSTAR TECHNOLOGIES, INC.

WARRANT TO PURCHASE COMMON STOCK

 

Warrant No.:                 Issuance Date: February 2, 2011 Number of Warrant
Shares: 1,114,650    Initial Exercise Price: $1.57

DayStar Technologies, Inc., a Delaware corporation (“Company”), hereby certifies
that, for good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Socius CG II, Ltd., a Bermuda exempted company, the
holder hereof, or its designees or assigns (“Holder”), is entitled, subject to
the terms set forth below, to purchase from the Company, at the Exercise Price
(as defined below) then in effect, upon automatic exercise of this Warrant to
Purchase Common Stock (including any Warrants to Purchase Common Stock issued in
exchange, transfer or replacement hereof, the “Warrant”), at any time or times
during the Exercise Period (as defined below), that number of duly authorized,
validly issued, fully paid and non-assessable shares of Common Stock set forth
above (the “Warrant Shares”). The number of Warrant Shares set forth above,
subject to adjustment in accordance with the terms of this Warrant, shall be
referred to herein as the “Maximum Warrant Share Amount.” In respect of any
Tranche Notice delivered by the Company from time to time, this Warrant shall
automatically be exercised for that number of shares of Common Stock as set
forth below.

This Warrant is issued pursuant to the Securities Purchase Agreement dated
February 2, 2011, by and among the Company and Socius CG II, Ltd. (the “Purchase
Agreement”). Except as otherwise defined herein, capitalized terms in this
Warrant shall have the meanings set forth in this Warrant or, if not defined in
this Warrant, in the Purchase Agreement.

This Warrant shall vest and become automatically exercisable in tranches (each,
a “Warrant Tranche”) upon each delivery of a Tranche Notice under the Purchase
Agreement. Each Tranche Notice will obligate the Holder to exercise a portion of
this Warrant and purchase up to a number of shares of Common Stock that may be
purchased by payment of an Aggregate Exercise Price equal to 35% of the Tranche
Purchase Price specified in such Tranche Notice divided by the Exercise Price;
provided, however, that the aggregate number of Warrant Shares issued upon
exercise of this Warrant shall not exceed the Maximum Warrant

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Share Amount. Attached to this Warrant is a schedule (the “Warrant Tranche
Schedule”) that sets forth the issuance date, the number of Warrant Shares, and
the Exercise Price for each Warrant Tranche. The Warrant Tranche Schedule shall
be updated by the Company, with an updated copy provided to the Holder, promptly
following each exercise of this Warrant.

In no event shall the Company be permitted to deliver a Tranche Notice if the
number of registered shares underlying this Warrant is insufficient to cover the
portion of the Warrant that will vest and become exercisable in connection with
such Tranche Notice.

ARTICLE 1

EXERCISE OF WARRANT.

1.1 Mechanics of Exercise.

(a) Subject to the terms and conditions hereof, this Warrant shall be
automatically exercised by the Holder on each Tranche Notice Date, in whole or
in part, with each such automatic exercise documented by (i) delivery of a
written notice to the Company, in the form attached hereto as Appendix 1 (the
“Exercise Notice”), of the Holder’s exercise of this Warrant and (ii) payment to
the Company of an amount equal to the applicable Exercise Price multiplied by
the number of Warrant Shares as to which this Warrant is being exercised (the
“Aggregate Exercise Price”), which payment shall be made, at the option of the
Holder, in cash or by wire transfer of immediately available funds, by the
issuance and delivery of a recourse promissory note substantially in the form
attached as Exhibit G to the Purchase Agreement (each, a “Recourse Note”), or,
if applicable and permitted by Section 1.4, by cashless exercise pursuant to
Section 1.4. The Holder shall not be required to deliver the original Warrant in
order to effect an exercise hereunder. Execution and delivery of the Exercise
Notice with respect to less than all of the Warrant Shares shall have the same
effect as cancellation of the original Warrant and issuance of a new Warrant
evidencing the right to purchase the remaining number of Warrant Shares.

(b) On the Trading Day immediately following the Exercise Delivery Date, the
Company shall transmit by facsimile an acknowledgment of confirmation of receipt
of the Exercise Delivery Documents to the Holder and an electronic copy of its
share issuance instructions to the Holder and the Company’s transfer agent (the
“Transfer Agent”) (which such electronic transmissions to comply with the notice
provisions of Section 6.2 of the Purchase Agreement), and shall instruct and
authorize the Transfer Agent to credit such aggregate number of freely tradable
Warrant Shares to which the Holder is entitled pursuant to such exercise to the
Holder’s or its designee’s balance account with The Depository Trust Company
(DTC) through the Fast Automated Securities Transfer (FAST) Program through its
Deposit/Withdrawal at Custodian (DWAC) system, with such credit to occur no
later than 12:00 p.m. Eastern Time on third Trading Day following the Exercise
Delivery Date, time being of the essence; provided, however, that if the Warrant
Shares are not credited as DWAC Shares by 5:00 p.m. Eastern Time on the Trading
Day following the Exercise Delivery Date, then the Tranche Closing Date
applicable to the Exercise Notice shall be extended by one Trading Day for each
Trading Day that timely credit of DWAC Shares is not made. Upon automatic
exercise of any portion of this Warrant, the Holder shall be deemed for all
corporate purposes to have become the holder of

 

2

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record of the Warrant Shares with respect to which this Warrant has been
exercised, irrespective of the date such Warrant Shares are credited to the
Holder’s DTC account or the date of delivery of the certificate(s) evidencing
the Warrant Shares (as the case may be).

(c) If this Warrant is submitted in connection with any exercise pursuant to
this Section 1.1 and the number of Warrant Shares represented by this Warrant
submitted for exercise is greater than the number of Warrant Shares being
acquired upon an exercise, then the Company, upon the request of the Holder,
shall as soon as practicable and in no event later than three Trading Days after
any exercise and return of the previously issued Warrant, at its own expense
issue a new Warrant representing the right to purchase the number of Warrant
Shares purchasable immediately prior to such exercise under this Warrant, less
the number of Warrant Shares with respect to which this Warrant is exercised. No
fractional shares of Common Stock are to be issued upon the exercise of this
Warrant, but rather the number of shares of Common Stock to be issued shall be
rounded up to the nearest whole number. The Company shall pay any and all taxes
which may be payable with respect to the issuance and delivery of Warrant Shares
upon exercise of this Warrant.

1.2 Exercise Price. For purposes of this Warrant, “Exercise Price” means,
subject to adjustment as provided herein: (i) until the first Tranche Notice
Date, $1.57 per Warrant Share as set forth on the face of this Warrant, and
(ii) on and after the first Tranche Notice Date and each subsequent Tranche
Notice Date, an amount per Warrant Share equal to the Closing Bid Price of a
share of Common Stock on the Trading Day immediately preceding the applicable
Tranche Notice Date.

1.3 Number of Shares. The number of Warrant Shares underlying this Warrant and
each Warrant Tranche, subject to further adjustment as provided under Article 2
herein, shall be, with respect to the portion of this Warrant that becomes
automatically exercisable on any Tranche Notice Date including the first Tranche
Notice Date, a number of shares equal to the Tranche Purchase Price set forth in
the applicable Tranche Notice multiplied by 35%, with the resulting sum divided
by the Exercise Price then in effect (in respect of any Warrant Tranche, the
“Warrant Tranche Shares”). For example, if the Tranche Purchase Price is
$1,000,000 and the Exercise Price then in effect is $0.20, then the number of
Warrant Shares underlying the Warrant that become vested and automatically
exercised shall be $1,000,000 x 35% = $350,000 divided by $0.20 = 1,750,000
shares of Common Stock. On each Tranche Notice Date, the number of Warrant
Shares underlying the related Warrant Tranche shall vest and become exercisable,
and the Maximum Warrant Share Amount and the aggregate number of Warrant Shares
underlying this Warrant that are currently exercisable shall automatically
adjust up or down to account for the change in the number of Warrant Shares
covered by the new Warrant Tranche and for any Warrant Shares issued upon any
prior or simultaneous exercise of this Warrant.

If a portion of the Warrant has been automatically exercised pursuant to the
terms of this Warrant but the related Tranche Closing fails to occur, the
Maximum Warrant Share Amount shall be increased by the number of Warrant Shares
that were issued in connection with such automatic exercise. Notwithstanding
anything to the contrary herein, until the Securities Purchase Agreement has
been terminated in accordance with its terms, the number of Warrant

 

3

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Shares underlying this Warrant shall be adjusted, as necessary, to permit the
issuance of all Warrant Tranche Shares in connection with any Warrant Tranche.

1.4 Cashless Exercise. Notwithstanding anything contained herein to the contrary
(other than Sections 1.1(b) above and 1.6 below), if at any time a registration
statement is not effective (or the prospectus contained therein is not available
for use) for the resale by the Holder of the Warrant Shares that are the subject
of the Exercise Notice (the “Unavailable Warrant Shares”), the Holder may, in
its sole discretion, exercise this Warrant in whole or in part and, in lieu of
making the cash payment otherwise contemplated to be made to the Company upon
such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the “Net Number” of shares of Common Stock determined
according to the following formula (a “Cashless Exercise”):

 

Net Number = (B-C) x A   

    B

  

For purposes of the foregoing formula:

A = the total number of shares with respect to which this Warrant is then being
exercised.

B = the average of the Closing Bid Prices of the shares of Common Stock (as
reported by Bloomberg) for the five (5) consecutive Trading Days ending on the
date immediately preceding the date of the Exercise Notice.

C = the Exercise Price then in effect for the applicable Warrant Shares at the
time of such exercise.

1.5 Company’s Failure to Timely Deliver Securities. If the Company shall fail
for any reason or for no reason to credit, by 5:00 p.m. Eastern Time on the
Trading Day following the Exercise Delivery Date, the Holder’s balance account
with DTC for such number of Warrant Shares to which the Holder is entitled upon
the Holder’s automatic exercise of this Warrant (as the case may be), then, in
addition to all other remedies available to the Holder, the Company shall pay in
cash to the Holder on each day that the issuance of such Warrant Shares is not
timely effected an amount equal to 1.5% of the product of (A) the sum of the
number of Warrant Shares not issued to the Holder on a timely basis and to which
the Holder is entitled and (B) the Closing Sale Price of the shares of Common
Stock on the Trading Day immediately preceding the last possible date which the
Company could have issued such Warrant Shares to the Holder without violating
Section 1.1. In addition to the foregoing, if after the Company’s receipt of the
applicable Exercise Delivery Documents the Company shall fail to timely credit
the Holder’s balance account with DTC for the number of Warrant Shares to which
the Holder is entitled upon the Holder’s automatic exercise hereunder, and the
Holder purchases (in an open market transaction or otherwise) shares of Common
Stock to deliver in satisfaction of a sale by the Holder of Warrant Shares
issuable upon such exercise that the Holder anticipated receiving from the
Company (a “Buy-In”), then the Company shall, within three Trading Days after
the Holder’s request and in the Holder’s discretion, either (i) pay cash to the
Holder in an amount equal to the Holder’s total purchase price (including
brokerage commissions, if any) for the shares of

 

4

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Common Stock so purchased (the “Buy-In Price”), at which point the Company’s
obligation to credit such Holder’s balance account with DTC for the number of
Warrant Shares to which the Holder is entitled upon the Holder’s exercise
hereunder and to issue such Warrant Shares shall terminate, or (ii) promptly
honor its obligation to credit such Holder’s (or its designee’s) balance account
with DTC for the number of Warrant Shares to which the Holder is entitled upon
the Holder’s exercise hereunder and pay cash to the Holder in an amount equal to
the excess (if any) of the Buy-In Price over the product of (A) such number of
shares of Common Stock sold by Holder in satisfaction of its obligations, times
(B) the Closing Bid Price on the date of exercise.

1.6 Exercise Limitation. Notwithstanding any other provision, at no time may the
Company deliver a Tranche Notice if the automatic exercise of this Warrant would
result in the number of Warrant Shares to be received pursuant to such exercise,
aggregated with all other shares of Common Stock then owned by the Holder
beneficially or deemed beneficially owned by the Holder, to exceed 9.99% of all
of such Common Stock as would be outstanding on such Exercise Date, as
determined in accordance with Section 13(d) of the Exchange Act and the rules
and regulations promulgated thereunder. In addition, as of any date, the
aggregate number of shares of Common Stock into which this Warrant is
exercisable within 61 days, together with all other shares of Common Stock then
beneficially owned (as such term is defined in Rule 13(d) under the Exchange
Act) by Holder and its affiliates, shall not exceed 9.99% of the total
outstanding shares of Common Stock as of such date. At no time when the number
of Warrant Shares then owned by the Holder, when aggregated with all other
shares of Common Stock then owned by the Holder beneficially or deemed
beneficially owned by the Holder, would result in the Holder owning more than
1.0% of all outstanding Common Stock will Holder vote or cause to be voted any
such shares.

1.7 Restrictions. For so long as Holder holds this Warrant or any Warrant
Shares, Holder will not: (i) vote any shares of Common Stock owned or controlled
by it, solicit any proxies, or seek to advise or influence any Person with
respect to any voting securities of the Company; (ii) engage or participate in
any actions, plans or proposals which relate to or would result in (a) acquiring
additional securities of the Company, alone or together with any other Person,
which would result in beneficially owning or controlling, or being deemed to
beneficially own or control, more than 9.99% of the total outstanding Common
Stock or other voting securities of the Company, (b) an extraordinary corporate
transaction, such as a merger, reorganization or liquidation, involving Company
or any of its subsidiaries, (c) a sale or transfer of a material amount of
assets of the Company or any of its subsidiaries, (d) any change in the present
board of directors or management of the Company, including any plans or
proposals to change the number or term of directors or to fill any existing
vacancies on the board, (e) any material change in the present capitalization or
dividend policy of the Company, (f) any other material change in the Company’s
business or corporate structure, including but not limited to, if the Company is
a registered closed-end investment company, any plans or proposals to make any
changes in its investment policy for which a vote is required by Section 13 of
the Investment Company Act of 1940, (g) changes in the Company’s charter, bylaws
or instruments corresponding thereto or other actions which may impede the
acquisition of control of the Company by any Person, (h) causing a class of
securities of the Company to be delisted from a national securities exchange or
to cease to be authorized to be quoted in an inter-dealer quotation system of a
registered national securities association, (i) a class of equity securities of
the

 

5

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Company becoming eligible for termination of registration pursuant to
Section 12(g)(4) of the Act, or (j) any action, intention, plan or arrangement
similar to any of those enumerated above; or (iii) request the Company or its
directors, officers, employees, agents or representatives to amend or waive any
provision of this Section 1.7.

1.8 Disputes. In the case of a dispute as to the determination of the Exercise
Price or the arithmetic calculation of the Warrant Shares, the Company shall
promptly issue to the Holder the number of Warrant Shares that are not disputed
and resolve such dispute in accordance with Section 12.

1.9 Insufficient Authorized Shares. If at any time while this Warrant (or any
portion thereof) remains outstanding the Company does not have a sufficient
number of authorized and unreserved shares of Common Stock to satisfy its
obligation to reserve for issuance upon exercise of this Warrant at least a
number of shares of Common Stock equal to 110% of the number of shares of Common
Stock as shall from time to time be necessary to effect the exercise in full of
any unexercised portion of this Warrant (the “Required Reserve Amount”) (an
“Authorized Share Failure”), then the Company shall immediately take all action
necessary to increase the Company’s authorized shares of Common Stock to an
amount sufficient to allow the Company to reserve the Required Reserve Amount
for the unexercised portion of the Warrant then outstanding. Without limiting
the generality of the foregoing sentence, as soon as practicable after the date
of the occurrence of an Authorized Share Failure, but in no event later than 90
days after the occurrence of such Authorized Share Failure, the Company shall
use commercially reasonable efforts to hold a meeting of its stockholders for
the approval of an increase in the number of authorized shares of Common
Stock. In connection with such meeting, the Company shall provide each
stockholder with a proxy statement and shall use its commercially reasonable
efforts to solicit its stockholders’ approval of such increase in authorized
shares of Common Stock and to cause its board of directors to recommend to the
stockholders that they approve such proposal.

ARTICLE 2

ADJUSTMENT UPON SUBDIVISION OR COMBINATION OF COMMON STOCK

If the Company at any time on or after the Issuance Date subdivides (by any
stock split, stock dividend, recapitalization or otherwise) one or more classes
of its outstanding shares of Common Stock into a greater number of shares, the
Exercise Price in effect immediately prior to such subdivision will be
proportionately reduced and the number of Warrant Shares will be proportionately
increased. If the Company at any time on or after the Issuance Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately
decreased. Any adjustment under this ARTICLE 2 shall become effective at the
close of business on the date the subdivision or combination becomes effective.

ARTICLE 3

PURCHASE RIGHTS; FUNDAMENTAL TRANSACTIONS

 

6

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3.1 Purchase Rights. In addition to any adjustments pursuant to ARTICLE 2 above,
if at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of shares of Common Stock (the
“Purchase Rights”), then the Holder will be entitled to acquire, upon the terms
applicable to such Purchase Rights, the aggregate Purchase Rights which the
Holder could have acquired if the Holder had held the number of shares of Common
Stock acquirable upon complete exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) immediately before the date on
which a record is taken for the grant, issuance or sale of such Purchase Rights,
or, if no such record is taken, the date as of which the record holders of
shares of Common Stock are to be determined for the grant, issue or sale of such
Purchase Rights.

3.2 Fundamental Transactions. The Company shall not enter into or be party to a
Fundamental Transaction unless the Successor Entity assumes in writing all of
the obligations of the Company under this Warrant in accordance with the
provisions of this Section 3.2 pursuant to written agreements in form and
substance reasonably satisfactory to the Required Holders and approved by the
Required Holders prior to such Fundamental Transaction, including agreements to
deliver to each holder of Warrants in exchange for such Warrants a security of
the Successor Entity evidenced by a written instrument substantially similar in
form and substance to this Warrant, including, without limitation, an adjusted
exercise price equal to the value for the shares of Common Stock reflected by
the terms of such Fundamental Transaction, and exercisable for a corresponding
number of shares of capital stock equivalent to the shares of Common Stock
acquirable and receivable upon exercise of this Warrant (without regard to any
limitations on the exercise of this Warrant) prior to such Fundamental
Transaction, and satisfactory to the Required Holders. Upon the occurrence of
any Fundamental Transaction, the Successor Entity shall succeed to, and be
substituted for (so that from and after the date of such Fundamental
Transaction, the provisions of this Warrant referring to the “Company” shall
refer instead to the Successor Entity), and may exercise every right and power
of the Company and shall assume all of the obligations of the Company under this
Warrant with the same effect as if such Successor Entity had been named as the
Company herein. Upon consummation of the Fundamental Transaction, the Successor
Entity shall deliver to the Required Holders confirmation that there shall be
issued upon exercise of this Warrant at any time after the consummation of the
Fundamental Transaction, in lieu of the shares of the Common Stock (or other
securities, cash, assets or other property) purchasable upon the exercise of
this Warrant prior to such Fundamental Transaction, such shares of stock,
securities, cash, assets or any other property whatsoever (including warrants or
other purchase or subscription rights) which the Required Holders would have
been entitled to receive upon the happening of such Fundamental Transaction had
this Warrant been converted immediately prior to such Fundamental Transaction,
as adjusted in accordance with the provisions of this Warrant. In addition to
and not in substitution for any other rights hereunder, prior to the
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate Event”), the Company
shall make appropriate provision to insure that the Required Holders will
thereafter have the right to receive upon an exercise of this Warrant at any
time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common

 

7

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Stock (or other securities, cash, assets or other property) purchasable upon the
exercise of this Warrant prior to such Fundamental Transaction, such shares of
stock, securities, cash, assets or any other property whatsoever (including
warrants or other purchase or subscription rights) which the Required Holders
would have been entitled to receive upon the happening of such Fundamental
Transaction had this Warrant been exercised immediately prior to such
Fundamental Transaction. Provision made pursuant to the preceding sentence shall
be in a form and substance reasonably satisfactory to the Required Holders. The
provisions of this Section 3.2 shall apply similarly and equally to successive
Fundamental Transactions and Corporate Events and shall be applied without
regard to any limitations on the exercise of this Warrant.

ARTICLE 4

NONCIRCUMVENTION

The Company hereby covenants and agrees that the Company will not, by amendment
of its Certificate of Incorporation, Bylaws or through any reorganization,
transfer of assets, consolidation, merger, scheme of arrangement, dissolution,
issue or sale of securities, or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms of this Warrant, and
will at all times in good faith carry out all the provisions of this Warrant and
take all action as may be required to protect the rights of the Holder. Without
limiting the generality of the foregoing, the Company (i) shall not increase the
par value of any shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, (ii) shall take all such
actions as may be necessary or appropriate in order that the Company may validly
and legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, and (iii) shall, so long as the Warrant (or any
portion thereof) is outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued shares of Common Stock, solely for
the purpose of effecting the exercise of the Warrant, 110% of the number of
shares of Common Stock as shall from time to time be necessary to effect the
exercise of the unexercised portion of the Warrant then outstanding (without
regard to any limitations on exercise).

ARTICLE 5

WARRANT HOLDER NOT DEEMED A STOCKHOLDER

Except as otherwise specifically provided herein, the Holder, solely in such
Person’s capacity as a holder of this Warrant, shall not be entitled to vote or
receive dividends or be deemed the holder of share capital of the Company for
any purpose, nor shall anything contained in this Warrant be construed to confer
upon the Holder, solely in such Person’s capacity as the Holder of this Warrant,
any of the rights of a stockholder of the Company or any right to vote, give or
withhold consent to any corporate action (whether any reorganization, issue of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares
which such Person is then entitled to receive upon the due exercise of this
Warrant. In addition, nothing contained in this Warrant shall be construed as
imposing any liabilities on the Holder to purchase any securities (upon exercise
of this Warrant or otherwise) or as a stockholder of the Company, whether such
liabilities are asserted by the

 

8

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Company or by creditors of the Company. Notwithstanding this ARTICLE 5, the
Company shall provide the Holder with copies of the same notices and other
information given to the stockholders of the Company generally,
contemporaneously with the giving thereof to the stockholders.

ARTICLE 6

REISSUANCE OF WARRANTS; COMPANY CALL RIGHT

6.1 Transfer of Warrant.

(a) This Warrant and the Warrant Shares constitute “restricted securities” as
such term is defined in Rule 144(a)(3) under the Securities Act of 1933, as
amended (the “Act”) and may only be disposed of in compliance with U.S. federal
securities laws and applicable state securities or “blue sky” laws. Without
limiting the generality of the foregoing, except in connection with a bona fide
pledge or transfer to an affiliate of Holder, (i) the Warrant and the Warrant
Shares may not be offered for sale, sold, transferred, assigned, pledged or
otherwise distributed unless (A) subsequently registered thereunder,
(B) Investor shall have delivered to the Company an opinion of counsel
reasonably acceptable to the Company (which may be Mintz Levin), in a form
generally acceptable to the Company, to the effect that the Warrant or the
Warrant Shares, as applicable, to be offered for sale, sold, transferred,
assigned, pledged or otherwise distributed may be offered for sale, sold,
transferred, assigned, pledged or otherwise distributed pursuant to an exemption
from such registration, or (C) the Warrant or the Warrant Shares, as applicable,
can be offered for sale, sold, transferred, assigned, pledged or otherwise
distributed pursuant to Rule 144 or Rule 144A promulgated under the Act, as
applicable.

(b) So long as is required by this Section 6.1, the certificates or other
instruments representing the Warrant shall bear any legends as required by
applicable state securities or “blue sky” laws, in addition to the restrictive
legend set forth on the front page of this Warrant. The parties acknowledge and
agree that the Warrant Shares will be issued without any restrictive legends.

(c) If this Warrant is to be transferred, in accordance with this Section 6.1,
the Holder shall surrender this Warrant to the Company, whereupon the Company
will forthwith issue and deliver upon the order of the Holder a new Warrant,
registered as the Holder may request, representing the right to purchase the
number of Warrant Shares being transferred by the Holder and, if less then the
total number of Warrant Shares then underlying this Warrant is being
transferred, a new Warrant to the Holder representing the right to purchase the
number of Warrant Shares not being transferred.

6.2 Lost, Stolen or Mutilated Warrant. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of loss, theft or destruction, of
any indemnification undertaking by the Holder to the Company in customary form
and, in the case of mutilation, upon surrender and cancellation of this Warrant,
the Company shall execute and deliver to the Holder a new Warrant representing
the right to purchase the Warrant Shares then underlying this Warrant.

 

9

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6.3 Exchangeable for Multiple Warrants. This Warrant is exchangeable, upon the
surrender hereof by the Holder at the principal office of the Company, for a new
Warrant or Warrants representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant
will represent the right to purchase such portion of such Warrant Shares as is
designated by the Holder at the time of such surrender; provided, however, that
no Warrants for fractional shares of Common Stock shall be given.

6.4 Issuance of New Warrants. Whenever the Company is required to issue a new
Warrant pursuant to the terms of this Warrant, such new Warrant (i) shall be of
like tenor with this Warrant, (ii) shall represent, as indicated on the face of
such new Warrant, the right to purchase the Warrant Shares then underlying this
Warrant (or in the case of a new Warrant being issued pursuant to Section 6.1 or
Section 6.3, the Warrant Shares designated by the Holder which, when added to
the number of shares of Common Stock underlying the other new Warrants issued in
connection with such issuance, does not exceed the number of Warrant Shares then
underlying this Warrant), (iii) shall have an issuance date, as indicated on the
face of such new Warrant which is the same as the Issuance Date, and (iv) shall
have the same rights and conditions as this Warrant.

6.5 Company Call Right. If a Funding Default occurs and the Holder has not
previously exercised this Warrant in full, the Company shall have the right to
demand the surrender of this Warrant, or any remaining portion thereof, from the
Holder without compensation, and the Holder shall promptly surrender this
Warrant, or remaining portion thereof. Following such demand for surrender, this
Warrant shall automatically be canceled and shall have no further force or
effect.

ARTICLE 7

NOTICES

Whenever notice is required to be given under this Warrant, unless otherwise
provided herein, such notice shall be given in accordance with Section 6.2 of
the Purchase Agreement. The Company shall provide the Holder with prompt written
notice of all actions taken pursuant to this Warrant, including in reasonable
detail a description of such action and the reason therefore. Without limiting
the generality of the foregoing, the Company will give written notice to the
Holder (i) as soon as practicable upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) at least fifteen days prior to the date on which the Company
closes its books or takes a record (A) with respect to any dividend or
distribution upon the shares of Common Stock, (B) with respect to any grants,
issuances or sales of any Options, Convertible Securities or rights to purchase
stock, warrants, securities or other property to holders of shares of Common
Stock as such or (C) for determining rights to vote with respect to any
Fundamental Transaction, dissolution or liquidation, provided in each case that
such information shall be made known to the public prior to or in conjunction
with such notice being provided to the Holder.

ARTICLE 8

AMENDMENT AND WAIVER

 

10

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Except as otherwise provided herein, the provisions of this Warrant may be
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company has
obtained the written consent of the Required Holders; provided that except as
provided herein, no such action may increase the exercise price of the Warrant
or decrease the number of shares or class of stock obtainable upon exercise of
the Warrant without the written consent of each Holder. No such amendment shall
be effective to the extent that it applies to less than all of the holders of
the Warrants then outstanding

ARTICLE 9

GOVERNING LAW

This Warrant shall be governed by and construed and enforced in accordance with,
and all questions concerning the construction, validity, interpretation and
performance of this Warrant shall be governed by, the internal laws of the State
of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of New York.

ARTICLE 10

CONSTRUCTION; HEADINGS

This Warrant shall be deemed to be jointly drafted by the Company and the Holder
and shall not be construed against any person as the drafter hereof. The
headings of this Warrant are for convenience of reference and shall not form
part of, or affect the interpretation of, this Warrant.

ARTICLE 11

DISPUTE RESOLUTION

In the case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within 2
Trading Days of receipt of the Exercise Notice giving rise to such dispute, as
the case may be, to the Holder. If the Holder and the Company are unable to
agree upon such determination or calculation of the Exercise Price or the
Warrant Shares within three Trading Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within 2 Trading Days submit via facsimile (a) the disputed determination of the
Exercise Price or arithmetic calculation to an independent, reputable investment
bank or independent registered public accounting firm selected by Holder subject
to Company’s approval, which may not be unreasonably withheld or delayed, or
(b) the disputed arithmetic calculation of the Warrant Shares to the Company’s
independent registered public accounting firm. The Company shall cause at its
expense the investment bank or the accountant, as the case may be, to perform
the determinations or calculations and notify the Company and the Holder of the
results no later than 3 Trading Days from the time it receives the

 

11

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disputed determinations or calculations. Such investment bank’s or accountant’s
determination or calculation, as the case may be, shall be binding upon all
parties absent demonstrable error.

ARTICLE 12

REMEDIES, OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF

The remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant, at law or in equity (including a
decree of specific performance and/or other injunctive relief), and nothing
herein shall limit the right of the Holder right to pursue actual damages for
any failure by the Company to comply with the terms of this Warrant. The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Holder and that the remedy at law for any such breach
may be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the holder of this Warrant shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.

ARTICLE 13

DEFINITIONS

For purposes of this Warrant, the following terms shall have the following
meanings:

13.1 “Bloomberg” means Bloomberg Financial Markets.

13.2 “Closing Bid Price” and “Closing Sale Price” means, for any security as of
any date, the last closing bid price and last closing trade price, respectively,
for such security on the Trading Market, as reported by Bloomberg, or, if the
Trading Market begins to operate on an extended hours basis and does not
designate the closing bid price or the closing trade price, as the case may be,
then the last bid price or last trade price, respectively, of such security
prior to 4:00 p.m., Eastern time, as reported by Bloomberg, or, if the Trading
Market is not the principal securities exchange or trading market for such
security, the last closing bid price or last trade price, respectively, of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last closing bid price or last trade price, respectively, of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price or last
trade price, respectively, is reported for such security by Bloomberg, the
average of the bid prices, or the ask prices, respectively, of any market makers
for such security as reported in the “pink sheets” by Pink Sheets LLC (formerly
the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing
Sale Price cannot be calculated for a security on a particular date on any of
the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the
case may be, of such security on such date shall be the fair market value as
mutually determined by the Company and the Holder. If the Company and the Holder
are unable to agree upon the fair market value of such security, then such
dispute shall be resolved pursuant to ARTICLE 11. All such determinations to be
appropriately adjusted for any stock dividend, stock split, stock combination or
other similar transaction during the applicable calculation period.

 

12

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13.3 “Common Stock” means (i) the Company’s shares of Common Stock, par value
$0.01 per share, and (ii) any share capital into which such Common Stock shall
have been changed or any share capital resulting from a reclassification of such
Common Stock.

13.4 “Convertible Securities” means any stock or securities (other than Options)
directly or indirectly convertible into or exercisable or exchangeable for
shares of Common Stock.

13.5 “Exercise Delivery Date” shall mean the Trading Day on which the Company is
deemed to have received each of the Exercise Notice and the Aggregate Exercise
Price in accordance with the terms of the Purchase Agreement.

13.6 “Exercise Delivery Documents” in respect of any exercise of this Warrant
shall mean each of the Exercise Notice and the Aggregate Exercise Price in
respect of such exercise.

13.7 “Exercise Period” means that period beginning on the Trading Day
immediately following the effective date of the Registration Statement (or, in
the case of a cashless exercise pursuant to Section 1.4 hereof, the first date
on which Warrant Shares are eligible for resale without limitation under Rule
144) and continuing until the earlier of (i) 11:59 p.m., Eastern time, on the
second (2nd) anniversary of the effective date of the Registration Statement, or
(ii) a Funding Default; provided, however, that the Exercise Period shall be
suspended for any period during which either (A) the effectiveness of the
Registration Statement lapses for any reason (including, without limitation, the
issuance of a stop order by the SEC) or the Registration Statement or prospectus
included therein is otherwise unavailable for the resale of Warrant Shares, or
(B) Warrant Shares are not eligible for resale without limitation under Rule 144
under the Securities Act (it being understood that the Holder shall not be
permitted to exercise all or any portion of this Warrant during any such
suspension period).

13.8 “Fundamental Transaction” means and shall be deemed to have occurred at
such time upon any of the following events: (a) the Company shall, directly or
indirectly, in one or more related transactions, (i) consolidate or merge with
or into (whether or not the Company is the surviving corporation) another Person
or Persons, (ii) sell, assign, transfer, convey or otherwise dispose of all or
substantially all of the assets of the Company to another Person, (iii) allow
another Person to make a tender or exchange offer that is accepted by the
holders of more than 50% of the outstanding shares of Common Stock (not
including any shares of Common Stock held by the Person or Persons making or
party to, or associated or affiliated with the Persons making or party to, such
purchase, tender or exchange offer), or (iv) consummate a stock purchase or
other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock purchase agreement or other business
combination) (other than, in the case of clause (i) above, (A) any such
transaction pursuant to which holders of Common Stock immediately prior to such
transaction continue to hold more than 50% of the total voting power of the
outstanding shares of Common Stock or (B) any merger or consolidation which is
effected solely to change the jurisdiction of

 

13

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incorporation of the Company, and in the case of clauses (iii) and (iv) above,
any transaction which is effected solely to change the jurisdiction of
incorporation of the Company); or (b) any “person” or “group” (as these terms
are used for purposes of Sections 13(d) and 14(d) of the Exchange Act) is or
shall become the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% of the aggregate voting power of the
outstanding shares of Common Stock, other than persons or groups who exceed such
ownership level as of the Effective Date (until such point in time when the
ownership level of such persons or groups falls below such ownership threshold)
and other than in connection with a transaction which is effected solely to
change the jurisdiction of incorporation of the Company.

13.9 “Funding Default” means a failure by Investor to accept a Tranche Notice
delivered by the Company, provided such Tranche Notice was delivered in
accordance with the terms and conditions of the Purchase Agreement (including
the timely and full satisfaction of the conditions to the obligation of Investor
to accept a Tranche Notice set forth in Section 2.3(b) of the Purchase
Agreement), and to acquire and pay for the Preferred Shares in accordance
therewith upon delivery of such Preferred Shares to the Investor in accordance
with the terms of the Purchase Agreement (and the timely delivery by the Company
of the other Required Tranche Deliveries required to be delivered by it and the
timely and full satisfaction by the Company of all other conditions for the
Tranche Closing required to be satisfied by it as set forth in
Sections 2.3(d) and (e) of the Purchase Agreement).

13.10 “Investor” means Socius CG II, Ltd., a Bermuda exempted company (including
its designees, successors and assigns).

13.11 “Options” means any rights, warrants or options to subscribe for or
purchase shares of Common Stock or Convertible Securities.

13.12 “Parent Entity” of a Person means an entity that, directly or indirectly,
controls the applicable Person and whose common stock or equivalent equity
security is quoted or listed on a Trading Market, or, if there is more than one
such Person or Parent Entity, the Person or Parent Entity with the largest
public market capitalization as of the date of consummation of the Fundamental
Transaction.

13.13 “Person” means an individual, a limited liability company, a partnership,
a joint venture, a corporation, a trust, an unincorporated organization, any
other entity and a government or any department or agency thereof.

13.14 “Preferred Shares” means shares of Series B Preferred Stock of the Company
provided for in the Certificate of Designations, to be issued to Investor
pursuant to the Purchase Agreement.

13.15 “Purchase Agreement” means the Securities Purchase Agreement dated
February 2, 2011 by and among the Company and the investors referred to therein.

13.16 “Registration Statement” means a registration statement registering for
resale the Common Shares, and except where the context otherwise requires, means
the registration

 

14

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statement, as amended, including (i) all documents filed as a part thereof and
(ii) any information contained in a prospectus filed with the Securities and
Exchange Commission in connection with such registration statement, to the
extent such information is deemed under the Act to be part of the registration
statement.

13.17 “Required Holders” means the Holders of the Warrants representing at least
a majority of shares of Warrant Shares underlying the Warrants then outstanding.

13.18 “Trading Market” means the OTC Bulletin Board, the NASDAQ Capital Market,
the NASDAQ Global Market, the NASDAQ Global Select Market, the NYSE Amex, or the
New York Stock Exchange, whichever is at the time the principal trading exchange
or market for the Common Stock.

13.19 “Public Successor Entity” means a Successor Entity that is a publicly
traded corporation whose stock is quoted or listed for trading on a Trading
Market.

13.20 “Successor Entity” means the Person (or, if so elected by the Required
Holders, the Parent Entity) formed by, resulting from or surviving any
Fundamental Transaction or the Person (or, if so elected by the Required
Holders, the Parent Entity) with which such Fundamental Transaction shall have
been entered into.

13.21 “Trading Day” means any day on which the Common Stock is traded on a
Trading Market; provided that it shall not include any day on which the Common
Stock (a) is suspended from trading, or (b) is scheduled to trade on such
exchange or market for less than 5 hours.

13.22 “Tranche Closing” has the meaning set forth in the Purchase Agreement.

[Signature Page Follows]

 

15

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IN WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common Stock
to be duly executed as of the Issuance Date set out above.

 

DAYSTAR TECHNOLOGIES, INC. By:  

/s/ Christopher T. Lail

Name:  

 

Title:  

 

[Signature Page – Warrant]

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APPENDIX 1

EXERCISE NOTICE

DAYSTAR TECHNOLOGIES, INC.

The undersigned hereby exercises the right to purchase                     
shares of Common Stock (“Warrant Shares”) of DayStar Technologies, Inc., a
Delaware corporation (“Company”), evidenced by the attached Warrant to Purchase
Common Stock (“Warrant”). Capitalized terms used herein and not otherwise
defined shall have the respective meanings set forth in the Warrant. The Holder
intends that payment of the Exercise Price shall be made as:

 

               Cash Exercise with respect to                      Warrant Shares
having an exercise price of $             per share         

 

               Cashless Exercise with respect to                      Warrant
Shares having an exercise price of $             per share         

 

               Recourse Note Exercise with respect to                     
Warrant Shares having an exercise price of $             per share

Please issue said shares in electronic form to the Deposit/Withdrawal at
Custodian (DWAC) account with Depository Trust Company (DTC) specified below:

 

 

Name and Contact for Broker:

 

 

   

 

 

  Broker no:  

 

 

  Account no:  

 

 

  Account holder:  

 

HOLDER NAME:

 

 

  By:  

 

Name:  

 

 

 

Title:  

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ACKNOWLEDGMENT

The Company hereby acknowledges the foregoing Exercise Notice and hereby directs
Computershare Investor Services to issue the above indicated number of shares of
Common Stock as specified above, in accordance with the Transfer Agent
Instructions dated February 2, 2011 from the Company, and acknowledged and
agreed to by the transfer agent.

 

DAYSTAR TECHNOLOGIES, INC. By:  

 

Name:  

 

Title:  

 

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Exhibit A-2

Investment Right Exercise Notice

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INVESTMENT RIGHT EXERCISE NOTICE

The undersigned, Socius CG II, Ltd., a Bermuda exempted company (the
“Investor”), hereby exercises the right to purchase
                                         shares of common stock, par value $0.01
per share (the “Common Stock”), of DayStar Technologies, Inc., a Delaware
corporation (“Company”), pursuant to the Additional Investment Right contained
in the Securities Purchase Agreement, dated as of February 2, 2011, between the
Company and the Investor (the “Purchase Agreement”). Capitalized terms used
herein and not otherwise defined shall have the respective meanings set forth in
the Purchase Agreement.

(1) Payment shall take the form of (check applicable box):

 

  [  ] lawful money of the United States; or

 

  [  ] recourse promissory note(s).

(2) Tranche Amount: $                                        

(3) Applicable Exercise Price: $             per share of common stock

(4) Number of shares of Common Stock to be Issued:              shares of common
stock

(5) DWAC Instructions:

 

  Number of shares of Common Stock for DWAC:  

 

 

 

Name and Contact for Broker:

 

 

   

 

 

  Broker no:  

 

 

  Account no:  

 

 

  Account holder:  

 

SOCIUS CG II, LTD.

 

By:  

 

Name: Terren Peizer Title: Managing Director

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

Exhibit B

Certificate of Designations

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

Exhibit C

Transfer Agent Instructions

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Exhibit D

Lock-Up Agreement

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

                     , 20    

Socius CG II, Ltd.

c/o Socius Capital Group, LLC

11150 Santa Monica Boulevard, Suite 1500

Los Angeles, CA 90025

Ladies and Gentlemen:

This Lock-Up Agreement is being delivered to you in connection with the
Securities Purchase Agreement dated February 2, 2011 (“Purchase Agreement”) and
entered into by and among DayStar Technologies, Inc., a Delaware corporation
(the “Company”), and Socius CG II, Ltd., a Bermuda exempted company
(“Investor”), with respect to the purchase without registration under the
Securities Act of 1933, as amended (the “Act”), in reliance on Section 4(2) of
the Act and Rule 506 of Regulation D promulgated thereunder, of shares of the
Company’s Series B Preferred Stock and related Securities. Capitalized terms
used herein without definition shall have the respective meanings ascribed to
them in the Purchase Agreement.

In order to induce Investor to enter into the Purchase Agreement, the
undersigned agrees that, for a period of ten Trading Days beginning on each date
the Company delivers a Tranche Notice to Investor (the “Tranche Notice Date”)
and ending on the Tranche Closing Date pursuant to the terms of the Purchase
Agreement (the “Lock-up Period”), the undersigned will not, without the prior
written consent of Investor, (a) sell, offer to sell, contract or agree to sell,
hypothecate, pledge, grant any option to purchase or otherwise dispose of or
agree to dispose of, directly or indirectly, in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Securities Exchange Act of
1934, as amended, and the rules and regulations of the SEC promulgated
thereunder (the “Exchange Act”) with respect to, any Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
warrants or other rights to purchase Common Stock or any such securities, or any
securities substantially similar to the Common Stock, (b) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any such securities, or
warrants or other rights to purchase Common Stock, whether any such transaction
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise or (c) publicly announce an intention to effect any transaction
specified in clause (a) or (b).

The foregoing sentence shall not apply to (a) bona fide gifts, provided the
recipient thereof agrees in writing to be bound by the terms of this Lock-Up
Agreement, (b) dispositions to any trust for the direct or indirect benefit of
the undersigned and/or the immediate family of

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

the undersigned, provided that such trust agrees in writing to be bound by the
terms of this Lock-Up Agreement, (c) sales made pursuant to any written sales
plans established prior to the date of this Lock-Up Agreement in conformity with
the requirements of Rule 10b5-1(c) promulgated under the Exchange Act or
(d) exercise of options for Common Stock and the disposition (whether by sale,
gift or otherwise) of Common Stock underlying such options. Notwithstanding
subsection (a) above, the undersigned may make a bona fide gift of up to 10,000
shares of Common Stock to a charity or other non-profit entity and such charity
or entity shall not be required to be bound by the terms of this Lock-Up
Agreement; provided, however, that in the event the undersigned exercises
options during the Lock-Up Period, the undersigned may not, during the Lock-Up
Period, dispose of the number of shares of Common Stock underlying such
exercised options equal to the number of shares of Common Stock gifted by the
undersigned pursuant to this sentence during the Lock-Up Period. For purposes of
this paragraph, “immediate family” shall mean the undersigned and the spouse,
any lineal descendent, father, mother, brother or sister of the undersigned.

The Company agrees to provide the undersigned with notice that the Company has
delivered a Tranche Notice to Investor prior to, or simultaneous with, its
delivery of the Tranche Notice to Investor. Such notice shall provide the
undersigned with the Tranche Notice Date and clearly indicate the beginning of
the Lock-up Period.

Upon the termination of the Purchase Agreement, this Lock-Up Agreement shall be
terminated and the undersigned shall be released from its obligations hereunder.

 

Sincerely,

 

[NAME OF STOCKHOLDER]

Acknowledged and Agreed:

DayStar Technologies, Inc.

 

By:  

 

Name:  

 

Title:  

 

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

Exhibit E

Opinion

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

Exhibit F

Tranche Notice

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

Dated:                     , 20    

Socius CG II, Ltd.

c/o Socius Capital Group, LLC

11150 Santa Monica Boulevard, Suite 1500

Los Angeles, CA 90025

 

Re: Tranche Notice

Ladies & Gentlemen:

Pursuant to the Securities Purchase Agreement dated February 2, 2011
(“Agreement”) between DayStar Technologies, Inc., a Delaware corporation
(“Company”), and Socius CG II, Ltd. (“Investor”), Company hereby elects to
exercise a Tranche. Capitalized terms not otherwise defined herein shall have
the meanings defined in the Agreement.

At the Tranche Closing, Company will sell to Investor              Preferred
Shares at $10,000.00 per share for a Tranche Amount of $            .

On behalf of Company, the undersigned hereby certifies to Investor as follows:

1. The undersigned is a duly authorized officer of Company;

2. The above Tranche Amount does not exceed the Maximum Tranche Amount; and

3. All of the conditions precedent to the right of the Company to deliver a
Tranche Notice set forth in Section 2.3(d) of the Agreement have been satisfied.

IN WITNESS WHEREOF, the Company has executed and delivered this Tranche Notice
as of the date first written above.

 

DAYSTAR TECHNOLOGIES, INC. By:  

 

Name:  

 

Title:  

 

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Exhibit G

Form of Secured Promissory Note

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

Exhibit H

Form of Security Agreement