EXECUTION COPY

SIDE LETTER

 
Reference is made to that certain Preferred Stock Purchase Agreement dated as of
February 27, 2009 among Paradigm Holdings, Inc. (the “Company”), Hale Capital
Partners, LP (“HCP”) and the other Purchasers party thereto (the “Purchase
Agreement”).  Capitalized terms used but not defined herein shall have the
meanings given to them in the Purchase Agreement.
 
1.           Pursuant to the Certificate of Designations, at any time that (x)
an aggregate of not less than fifteen percent (15%) of the Company’s Series A-1
Senior Preferred Stock (the “Preferred Shares”) purchased on the Closing Date
are outstanding, (y) Warrants to purchase an aggregate of not less than twenty
percent (20%) of the Underlying Shares issuable pursuant to all Warrants on the
Closing Date are outstanding, or (z) the original holders of the Preferred
Shares and/or their transferee(s), in the aggregate, own not less than fifteen
percent (15%) of the Common Stock issuable upon exercise of all Warrants on the
Closing Date, the holders of a majority of the then outstanding Preferred Shares
(the “Majority Holders”) shall have the exclusive right, voting separately as a
class, to elect (A) two (2) directors to the Board of Directors of the Company
(the “Board”), and (B) until the Amendment Date, two (2) observers, and, from
and after the Amendment Date, one (1) observer, to the Board; provided that upon
the election of the Majority Holders such observer(s) shall be automatically
appointed to the Board as a director (such two (2) directors in accordance with
clause (A) and, upon the Majority Holders’ election in accordance with clause
(B), such one (1) or two (2) director(s), as applicable, collectively, the
“Series A-1 Directors”).  If, at any time from and after the Amendment Date, the
Majority Holders elect to convert the observer to a Series A-1 Director pursuant
to clause (B) above and there are greater than four (4) directors on the Board
at such time, the Majority Holders shall remove a director (other than a Series
A-1 Director) from the Board such that after the conversion pursuant to clause
(B) the Board shall consist of five (5) directors.  If the Majority Holders
makes such election prior to the Amendment Date, the number of directors on the
Board after such conversion shall be seven (7) until the Amendment Date, upon
which the Majority Holders shall remove two (2) directors (including one (1)
Series A-1 Director if there are four (4) Series A-1 Directors at such time, but
otherwise, other than any Series A-1 Directors) such that the Board shall
consist of five (5) directors.  Unless otherwise determined by HCP, it is hereby
agreed that these rights of the Majority Holders under the Certificate of
Designations shall be vested in and exercisable only by HCP.
 
2.           Pursuant to the Certificate of Designations, at any time that (x)
an aggregate of fifteen percent (15%) or less of the Preferred Shares purchased
on the Closing Date are outstanding, (y) Warrants to purchase an aggregate of
less than twenty percent (20%) of the Underlying Shares issuable pursuant to all
Warrants on the Closing Date are outstanding, and (z) the holders of the
Preferred Shares and/or their transferee(s), in the aggregate, own less than
fifteen percent (15%) of the Common Stock issuable upon exercise of all Warrants
on the Closing Date, then the Majority Holders shall have the exclusive right,
voting separately as a class, to elect (A) one (1) Series A-1 Director to the
Board, and (B) one (1) observer to the Board.  Unless otherwise determined by
HCP, it is hereby agreed that these rights of the Majority Holders under the
Certificate of Designations shall be vested in and exercisable only by HCP.

 
 

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3.           Any vacancy in the position of any Series A-1 Director may be
filled only by the holders of the Series A-1 Preferred Stock.  Any Series A-1
Director may, during his or her term of office, be removed at any time, with or
without cause, by and only by the Majority Holders.  Any vacancy created by such
removal may also be filled by the Majority Holders.  Unless otherwise determined
by HCP, it is hereby agreed that these rights of the Majority Holders under the
Certificate of Designations shall be vested in and exercisable only by HCP.
 
4.           Subject to the fiduciary duties of the Board under applicable law,
the Company will include the Series A-1 Directors as the Company’s nominees for
election as directors at each annual or special meeting of stockholders or
action by written consent of stockholders at which directors will be elected.
 
5.           The membership of all committees of the Board shall be reassigned,
subject to HCP’s reasonable approval, upon the Closing.  Provided that the
Series A-1 Directors meet the applicable membership requirements of the
Commission and the Trading Market (if applicable), the Board shall elect the
Series A-1 Directors to all committees of the Board requested by HCP.  The
Company shall provide the same compensation and rights and benefits of indemnity
to the Series A-1 Directors as are provided to other non-employee directors of
the Company.  The Series A-1 Directors may resign from the Board at any time
without notice.  In the event that any Series A-1 Director shall cease to serve
as a director of the Company for any reason, at the discretion of HCP, the Board
shall fill the vacancy resulting therefrom with another Series A-1 Director
designated by HCP that is reasonably acceptable to the Board, it being
understood, subject to the fiduciary duties of the Board under applicable law,
that any senior professional of HCP or any of its Affiliates shall be acceptable
to the Board .
 
6.  Prior to being converted into a Series A-1 Director, any observer appointed
by HCP in accordance with clause (B) of Sections 1 or 2 above shall be allowed
to attend all meetings of the Board in a non-voting capacity, and in connection
with each such Board observer’s attendance, the Company shall give such Board
observer copies of all notices, minutes, consents and other materials, financial
or otherwise, which the Company provides to the Board prior to any such
meeting.  HCP shall provide the Company with written notice identifying any
individuals who shall exercise Board observation rights on behalf of HCP from
time to time.  Effective upon execution and delivery of this letter agreement,
HCP hereby initially appoints Alice Lee as a Board observer.  The Company agrees
that if any of the Purchasers or the Board observer so requests, neither the
Company nor any other person acting on its behalf will provide such Purchaser or
its agents (including any Board observer) or counsel with any information that
the Company believes constitutes material non-public information.
 
This Side Letter shall be governed by and construed in accordance with the laws
of the State of New York and each of the parties hereto irrevocably consents to
the exclusive jurisdiction of all courts, federal and state, located in the City
of New York for the adjudication of any dispute arising hereunder.  This Side
Letter may not be amended or waived except in writing, by a document executed by
the Company and HCP.
 
This Side Letter may be executed in two (2) or more counterparts, together
constituting one (1) agreement, and may be executed by facsimile, having the
same force as if originally executed.

 
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IN WITNESS WHEREOF, each of the Purchasers has entered into this Side Letter as
of February 27, 2009.

Hale Capital Partners, LP
       
By:
/s/Martin Hale Jr.
Name:  Martin Hale Jr.
Title: CEO
       
EREF PARA, LLC
   
By:
Hale Fund Management, LLC
 
 its Managing Member
   
By:
/s/Martin Hale Jr.
Name:  Martin Hale Jr.
Title:  CEO
       
Acknowledged and agreed by the Company:
       
Paradigm Holdings, Inc.
       
By:
/s/Peter B. LaMontagne
Name:  Peter B. LaMontagne
Title:  President and Chief Executive Officer
   
Date:  February 27, 2009

 
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