SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE

AGREEMENT

Dated as of July 19, 2004

among

HOME SOLUTIONS OF AMERICA, INC.

and

THE PURCHASERS LISTED ON EXHIBIT A

 

 

 

 

 

 

 

  

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TABLE OF CONTENTS

   

PAGE

ARTICLE I Purchase and Sale of Preferred
Stock............................................................................
1       Section 1.1       Purchase and Sale of
Stock...........................................................................
1   Section 1.2       The Conversion
Shares..................................................................................
1   Section 1.3       Purchase Price and
Closing............................................................................
1       ARTICLE II Representations and
Warranties...................................................................................
2       Section 2.1       Representations and Warranties of the
Company............................................ 2   Section 2.2      
Representations and Warranties of the
Purchasers.......................................... 13       ARTICLE III
Covenants.................................................................................................................
15       Section 3.1       Securities
Compliance..................................................................................
15   Section 3.2       Registration and
Listing................................................................................
15   Section 3.3       Inspection
Rights.........................................................................................
16   Section 3.4       Compliance with
Laws.................................................................................
16   Section 3.5       Keeping of Records and Books of
Account................................................. 16   Section 3.6      
Reporting
Requirements...............................................................................
16   Section 3.7       Status of
Dividends......................................................................................
16   Section 3.7      
Amendments...............................................................................................
16   Section 3.8       Other
Agreements.......................................................................................
18   Section 3.9      
Distributions................................................................................................
18   Section 3.10     Status of
Dividends......................................................................................
18   Section 3.11     Intentionally
Omitted....................................................................................
19   Section 3.12     Future Financings; Right of First Offer and
Refusal........................................ 20   Section 3.13    
Reservation of
Shares..................................................................................
20   Section 3.14     Transfer Agent
Instructions..........................................................................
19   Section 3.15     Disposition of
Assets...................................................................................
19       ARTICLE IV
Conditions................................................................................................................
21       Section 4.1       Conditions Precedent to the Obligation of the Company
to Sell the Shares..... 21   Section 4.2       Conditions Precedent to the
Obligation of the Purchasers to Purchase the Shares.. 21       ARTICLE V
Intentionally
Omitted...................................................................................................
23    

 

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ARTICLE VI Stock Certificate
Legend...........................................................................................
24       Section 6.1      
Legend..........................................................................................................
24       ARTICLE VII Intentionally
Omitted.................................................................................................
24     ARTICLE VIII
Indemnification........................................................................................................
24       Section 8.1       General
Indemnity..........................................................................................
25   Section 8.2       Indemnification
Procedure...............................................................................
25       ARTICLE IX
Miscellaneous............................................................................................................
26       Section 9.1       Fees and
Expenses.........................................................................................
26   Section 9.2       Specific Enforcement, Consent to
Jurisdiction.................................................. 26   Section
9.3       Entire Agreement;
Amendment........................................................................
27   Section 9.4      
Notices..........................................................................................................
27   Section 9.5      
Waivers..........................................................................................................
28   Section 9.6      
Headings........................................................................................................
28   Section 9.7       Successors and
Assigns...................................................................................
28   Section 9.8       No Third Party
Beneficiaries...........................................................................
28   Section 9.9       Governing
Law...............................................................................................
28   Section 9.10    
Survival..........................................................................................................
28   Section 9.11    
Counterparts..................................................................................................
29   Section 9.12    
Publicity.........................................................................................................
29   Section 9.13    
Severability.....................................................................................................
29   Section 9.14     Further
Assurances.........................................................................................
29

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SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

This SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement")
is dated as of July 19, 2004 by and among Home Solutions of America, Inc., a
Delaware corporation (the "Company"), and each of the Purchasers of shares of
Series B Convertible Preferred Stock of the Company whose names are set forth on
Exhibit A hereto (individually, a "Purchaser" and collectively, the
"Purchasers").

The parties hereto agree as follows:

ARTICLE I

Purchase and Sale of Preferred Stock

Section 1.1              Purchase and Sale of Stock.  Upon the following terms
and conditions, the Company shall issue and sell to the Purchasers and each of
the Purchasers shall purchase from the Company, the number of shares of the
Company's Series B Convertible Preferred Stock, par value $.001 per share (the
"Preferred Shares"), at a purchase price of $25,000 per share, set forth
opposite such Purchaser's name on Exhibit A hereto.  The aggregate purchase
price for the Preferred Shares shall be up to $1,000,000.  The designation,
rights, preferences and other terms and provisions of the Series B Convertible
Preferred Stock are set forth in the Certificate of Designation of the Relative
Rights and Preferences of the Series B Convertible Preferred Stock attached
hereto as Exhibit B (the "Certificate of Designation").  The Company and the
Purchasers are executing and delivering this Agreement in accordance with and in
reliance upon the exemption from securities registration afforded by Rule 506 of
Regulation D ("Regulation D") as promulgated by the United States Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act") or Section 4(2) of the Securities Act. 

Section 1.2              The Conversion Shares. The Company has authorized and
has reserved and covenants to continue to reserve, free of preemptive rights and
other similar contractual rights of stockholders, such number of shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all of the Preferred Shares then outstanding; provided that the number of
shares of Common Stock so reserved shall at no time be less than 120% of its
authorized but unissued shares of its Common Stock, to effect the conversion of
the Preferred Shares.  Any shares of Common Stock issuable upon conversion of
the Preferred Shares (and such shares when issued) are herein referred to as the
"Conversion Shares".  The Preferred Shares and the Conversion Shares are
sometimes collectively referred to as the "Shares".

Section 1.3              Purchase Price and Closing.  The Company agrees to
issue and sell to the Purchasers and, in consideration of and in express
reliance upon the representations, warranties, covenants, terms and conditions
of this Agreement, the Purchasers, severally but not jointly, agree to purchase
that number of the Preferred Shares set forth opposite their respective names on
Exhibit A.  The aggregate purchase price of the Preferred Shares being acquired
by each Purchaser is set forth opposite such Purchaser's name on Exhibit A (for
each such Purchaser, the "Purchase Price" and collectively referred to as the
"Purchase Prices").  The closing of the purchase and sale of the Preferred
Shares shall take place at such location as the Company and the Purchasers shall
agree (the "Closing") at 1:00 p.m. (eastern time) upon the satisfaction of each
of the conditions set forth in Article IV hereof (the "Closing Date"). Funding
with respect to the Closing shall take place by wire transfer of immediately
available funds on or prior to the Closing Date.

 

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ARTICLE II

Representations and Warranties

Section 2.1              Representations and Warranties of the Company.  The
Company hereby makes the following representations and warranties to the
Purchasers, except as set forth in the Company's disclosure schedule delivered
with this Agreement as follows:

(a)                Organization, Good Standing and Power.  The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the requisite corporate power to own,
lease and operate its properties and assets and to conduct its business as it is
now being conducted.  The Company does not have any subsidiaries except as set
forth in the Company's Form 10-KSB/A for the year ended December 31, 2003,
including the accompanying financial statements (the "Form 10-KSB"), or in the
Company's Form 10-QSB for the fiscal quarter ended March 31, 2004 (collectively,
the "Form 10-QSB"), or on Schedule 2.1(a) hereto.  The Company and each such
subsidiary is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary except for
any jurisdiction(s) (alone or in the aggregate) in which the failure to be so
qualified will not have a Material Adverse Effect (as defined in Section 2.1(c)
hereof) on the Company's financial condition.

(b)               Authorization; Enforcement.  The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement attached hereto as Exhibit C (the "Registration
Rights Agreement"), the Irrevocable Transfer Agent Instructions (as defined in
Section 3.14), and the Certificate of Designation (collectively, the
"Transaction Documents") and to issue and sell the Shares in accordance with the
terms hereof.  The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action, and no further consent or authorization of the
Company or its Board of Directors or stockholders is required.  This Agreement
has been duly executed and delivered by the Company.  The other Transaction
Documents will have been duly executed and delivered by the Company at the
Closing.  Each of the Transaction Documents constitutes, or shall constitute
when executed and delivered, a valid and binding obligation of the Company
enforceable against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation, conservatorship, receivership or
similar laws relating to, or affecting generally the enforcement of, creditor's
rights and remedies or by other equitable principles of general application.

 

 

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(c)                Capitalization.  The authorized capital stock of the Company
and the shares thereof currently issued and outstanding as of July 19, 2004 are
set forth on Schedule 2.1(c) hereto.  All of the outstanding shares of the
Company's Common Stock, Series A Convertible Preferred Stock, and Series B
Convertible Preferred Stock have been duly and validly authorized.  Except as
set forth in this Agreement and the Registration Rights Agreement and as set
forth on Schedule 2.1(c) hereto, no shares of Common Stock are entitled to
preemptive rights or registration rights and there are no outstanding options,
warrants, scrip, rights to subscribe to, call or commitments of any character
whatsoever relating to, or securities or rights convertible into, any shares of
capital stock of the Company (Purchasers are deemed to be aware, for all
purposes of this Agreement, of all agreements related to the Company's offering
of 80 shares of Series A Convertible Preferred Stock on March 1, 2004, a portion
of which was purchased by Victus Capital, L.P.).  Furthermore, except as set
forth in this Agreement and the Registration Rights Agreement or on Schedule
2.1(c), there are no contracts, commitments, understandings, or arrangements by
which the Company is or may become bound to issue additional shares of the
capital stock of the Company or options, securities or rights convertible into
shares of capital stock of the Company.  Except for customary transfer
restrictions contained in agreements entered into by the Company in order to
sell restricted securities or as set forth on Schedule 2.1(c) hereto, the
Company is not a party to any agreement granting registration or anti-dilution
rights to any person with respect to any of its equity or debt securities.  The
Company is not a party to, and it has no knowledge of, any agreement restricting
the voting or transfer of any shares of the capital stock of the Company. 
Except as set forth on Schedule 2.1(c) hereto, the offer and sale of all capital
stock, convertible securities, rights, warrants, or options of the Company
issued prior to the Closing complied with all applicable Federal and state
securities laws, and no stockholder has a right of rescission or claim for
damages with respect thereto which would have a Material Adverse Effect (as
defined below) on the Company's financial condition or operating results.  The
Company has furnished or made available to the Purchasers true and correct
copies of the Company's Certificate of Incorporation as in effect on the date
hereof (the "Certificate"), and the Company's Bylaws as in effect on the date
hereof (the "Bylaws").  For the purposes of this Agreement, "Material Adverse
Effect" means any material adverse effect on the business, operations,
properties, prospects, or financial condition of the Company and its
subsidiaries and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
perform any of its obligations under this Agreement in any material respect.

(d)               Issuance of Shares.  The Preferred Shares to be issued at the
Closing have been duly authorized by all necessary corporate action and the
Preferred Shares, when paid for or issued in accordance with the terms hereof,
shall be validly issued and outstanding, fully paid and nonassessable and
entitled to the rights and preferences set forth in the Certificate of
Designation.  When the Conversion Shares are issued in accordance with the terms
of the Certificate of Designation, such shares will be duly authorized by all
necessary corporate action and validly issued and outstanding, fully paid and
nonassessable, and the holders shall be entitled to all rights accorded to a
holder of Common Stock.

 

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(e)                No Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company, the performance by the Company of its
obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated herein and therein do not and will not
(i) violate any provision of the Company's Certificate or Bylaws, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party or by which it or its properties or assets are
bound, (iii) create or impose a lien, mortgage, security interest, charge or
encumbrance of any nature on any property of the Company under any agreement or
any commitment to which the Company is a party or by which the Company is bound
or by which any of its respective properties or assets are bound, or (iv) result
in a violation of any federal, state, local or foreign statute, rule,
regulation, order, judgment or decree (including Federal and state securities
laws and regulations) applicable to the Company or any of its subsidiaries or by
which any property or asset of the Company or any of its subsidiaries are bound
or affected, except, in all cases other than violations pursuant to clauses (i)
and (iv) above, for such conflicts, defaults, terminations, amendments,
accelerations, cancellations and violations as would not, individually or in the
aggregate, have a Material Adverse Effect.  The business of the Company and its
subsidiaries is not being conducted in violation of any laws, ordinances or
regulations of any governmental entity, except for possible violations which
singularly or in the aggregate do not and will not have a Material Adverse
Effect.  The Company is not required under Federal, state or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents, or issue and sell the Preferred Shares or the Conversion Shares in
accordance with the terms hereof or thereof (other than any filings which may be
required to be made by the Company with the Commission or state securities
administrators subsequent to the Closing, any registration statement which may
be filed pursuant hereto, and the Certificate of Designation); provided that,
for purposes of the representation made in this sentence, the Company is
assuming and relying upon the accuracy of the relevant representations and
agreements of the Purchasers herein.

(f)                 Commission Documents, Financial Statements.  The Common
Stock is registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, since March 31,
2004, the Company has timely filed all reports, schedules, forms, statements and
other documents required to be filed by it with the Commission pursuant to the
reporting requirements of the Exchange Act, including material filed pursuant to
Section 13(a) or 15(d) of the Exchange Act (all of the foregoing including
filings incorporated by reference therein being referred to herein as the
"Commission Documents").  The Company has delivered or made available to each of
the Purchasers true and complete copies of the Commission Documents filed with
the Commission since December 31, 2002.  The Company has not provided to the
Purchasers any material non-public information or other information which,
according to applicable law, rule or regulation, was required to have been
disclosed publicly by the Company but which has not been so disclosed, other
than with respect to the transactions contemplated by this Agreement.  As of
their respective dates, the Form 10-KSB and the Form 10-QSB complied in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the Commission promulgated thereunder and other federal, state
and local laws, rules and regulations applicable to such documents, and, as of
their respective dates, none of the Form 10-KSB and the Form 10-QSB 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 Commission
Documents comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto.  Such financial
statements have been prepared in accordance with United States generally
accepted accounting principles ("GAAP") applied on a consistent basis during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements), and fairly present in all material respects the financial
position of the Company and its subsidiaries as of 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 year-end audit adjustments).

 

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(g)                Subsidiaries.  Schedule 2.1(g) hereto sets forth each
subsidiary of the Company, showing the jurisdiction of its incorporation or
organization and showing the percentage of each person's ownership.  For the
purposes of this Agreement, "subsidiary" shall mean any corporation or other
entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by the Company and/or any of its other
subsidiaries.  All of the outstanding shares of capital stock of each subsidiary
have been duly authorized and validly issued, and are fully paid and
nonassessable.  There are no outstanding preemptive, conversion or other rights,
options, warrants or agreements granted or issued by or binding upon any
subsidiary for the purchase or acquisition of any shares of capital stock of any
subsidiary or any other securities convertible into, exchangeable for or
evidencing the rights to subscribe for any shares of such capital stock. 
Neither the Company nor any subsidiary is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence.  Neither the Company
nor any subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.

(h)                No Material Adverse Change.  Since March 31, 2004, the
Company has not experienced or suffered any Material Adverse Effect, except as
disclosed on Schedule 2.1(h) hereto.

(i)                  No Undisclosed Liabilities.  Except as set forth on
Schedule 2.1(i) hereto, neither the Company nor any of its subsidiaries has any
liabilities, obligations, claims or losses (whether liquidated or unliquidated,
secured or unsecured, absolute, accrued, contingent or otherwise) other than
those incurred in the ordinary course of the Company's or its subsidiaries
respective businesses since March 31, 2004 and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect on the Company or
its subsidiaries.

(j)                 No Undisclosed Events or Circumstances.  Except as set forth
on Schedule 2.1(j) hereto, no event or circumstance has occurred or exists with
respect to the Company or its subsidiaries or their respective businesses,
properties, prospects, operations or financial condition, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or disclosed.

 

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(k)               Indebtedness.  The Form 10-KSB, Form 10-QSB or Schedule 2.1(k)
hereto sets forth as of a recent date all outstanding secured and unsecured
Indebtedness of the Company or any subsidiary, or for which the Company or any
subsidiary has commitments.  For the purposes of this Agreement, "Indebtedness"
shall mean (a) any liabilities for borrowed money or amounts owed in excess of
$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 $25,000 due under leases required to be
capitalized in accordance with GAAP.  Except as set forth on Schedule 2.1(k),
neither the Company nor any subsidiary is in default with respect to any
Indebtedness.

(l)                  Title to Assets.  Each of the Company and the subsidiaries
has good and marketable title to all of its real and personal property reflected
in the Form 10-KSB, free and clear of any mortgages, pledges, charges, liens,
security interests or other encumbrances, except for those indicated in the Form
10-KSB, Form 10-QSB or on Schedule 2.1(l) hereto or such that, individually or
in the aggregate, do not cause a Material Adverse Effect on the Company's
financial condition or operating results.  All said leases of the Company and
each of its subsidiaries are valid and subsisting and in full force and effect.

(m)              Actions Pending.  There is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or any other
proceeding pending or, to the knowledge of the Company, threatened against the
Company or any subsidiary which questions the validity of this Agreement or any
of the other Transaction Documents or the transactions contemplated hereby or
thereby or any action taken or to be taken pursuant hereto or thereto.  Except
as set forth in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(m) hereto, there
is no action, suit, claim, investigation, arbitration, alternate dispute
resolution proceeding or any other proceeding pending or, to the knowledge of
the Company, threatened, against or involving the Company, any subsidiary or any
of their respective properties or assets.  Except as set forth in the Form
10-KSB, Form 10-QSB or Schedule 2.1(m) hereto, there are no outstanding orders,
judgments, injunctions, awards or decrees of any court, arbitrator or
governmental or regulatory body against the Company or any subsidiary or any
officers or directors of the Company or subsidiary in their capacities as such.

(n)                Compliance with Law.  The business of the Company and the
subsidiaries has been and is presently being conducted in accordance with all
applicable federal, state and local governmental laws, rules, regulations and
ordinances, except as set forth in the Form 10-KSB, Form 10-QSB, or such that,
individually or in the aggregate, do not cause a Material Adverse Effect.  The
Company and each of its subsidiaries have all franchises, permits, licenses,
consents and other governmental or regulatory authorizations and approvals
necessary for the conduct of its business as now being conducted by it unless
the failure to possess such franchises, permits, licenses, consents and other
governmental or regulatory authorizations and approvals, individually or in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.

 

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(o)               Taxes.  Except as set forth in the Form 10-KSB or in the Form
10-QSB, the Company and each of the subsidiaries has accurately prepared and
filed all federal, state and other tax returns required by law to be filed by
it, has paid or made provisions for the payment of all taxes shown to be due and
all additional assessments, and adequate provisions have been and are reflected
in the financial statements of the Company and the subsidiaries for all current
taxes and other charges to which the Company or any subsidiary is subject and
which are not currently due and payable.  None of the federal income tax returns
of the Company or any subsidiary have been audited by the Internal Revenue
Service.  The Company has no knowledge of any additional assessments,
adjustments or contingent tax liability (whether federal or state) of any nature
whatsoever, whether pending or threatened against the Company or any subsidiary
for any period, nor of any basis for any such assessment, adjustment or
contingency.

(p)               Certain Fees.  Except as set forth in this Agreement or on
Schedule 2.1(p) hereto, no brokers, finders or financial advisory fees or
commissions will be payable by the Company or any subsidiary or any Purchaser
with respect to the transactions contemplated by this Agreement.

(q)               Disclosure.  To the best of the Company's knowledge, neither
this Agreement or the Schedules hereto nor any other documents, certificates or
instruments furnished to the Purchasers by or on behalf of the Company or any
subsidiary in connection with the transactions contemplated by this Agreement
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made herein or therein, in the light
of the circumstances under which they were made herein or therein, not
misleading.

(r)                 Operation of Business.  The Company and each of the
subsidiaries owns or possesses all patents, trademarks, domain names (whether or
not registered) and any patentable improvements or copyrightable derivative
works thereof, websites and intellectual property rights relating thereto,
service marks, trade names, copyrights, licenses and authorizations as set forth
in the Form 10-KSB, Form 10-QSB and on Schedule 2.1(r) hereto, and all rights
with respect to the foregoing, which are necessary for the conduct of its
business as now conducted without any conflict with the rights of others.

(s)                Environmental Compliance.  The Company and each of its
subsidiaries have obtained all material approvals, authorization, certificates,
consents, licenses, orders and permits or other similar authorizations of all
governmental authorities, or from any other person, that are required under any 
Environmental Laws.  The Form 10-KSB or Form 10-QSB describes all material
permits, licenses and other authorizations issued under any Environmental Laws
to the Company or its subsidiaries.  "Environmental Laws" shall mean all
applicable laws relating to the protection of the environment including, without
limitation, all requirements pertaining to reporting, licensing, permitting,
controlling, investigating or remediating emissions, discharges, releases or
threatened releases of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, materials or wastes, whether solid, liquid or
gaseous in nature, into the air, surface water, groundwater or land, or relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature.  The Company has all necessary governmental approvals
required under all Environmental Laws and used in its business or in the
business of any of its subsidiaries.  The Company and each of its subsidiaries
are also in compliance with all other limitations, restrictions, conditions,
standards, requirements, schedules and timetables required or imposed under all
Environmental Laws.  Except for such instances as would not individually or in
the aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions relating to
or in any way affecting the Company or its subsidiaries that violate or may
violate any Environmental Law after the Closing Date or that may give rise to
any environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture, processing,
distribution, use, treatment, storage (including without limitation underground
storage tanks), disposal, transport or handling, or the emission, discharge,
release or threatened release of any hazardous substance. 

 

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(t)                 Books and Record Internal Accounting Controls.  The books
and records of the Company and its subsidiaries accurately reflect in all
material respects the information relating to the business of the Company and
the subsidiaries, the location and collection of their assets, and the nature of
all transactions giving rise to the obligations or accounts receivable of the
Company or any subsidiary.  The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient, in the judgment of the
Company, 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
actions is taken with respect to any differences.

(u)                Material Agreements.  Except as set forth in the Form 10-KSB,
Form 10-QSB or on Schedule 2.1(u) hereto, neither the Company nor any subsidiary
is a party to any written or oral contract, instrument, agreement, commitment,
obligation, plan or arrangement, a copy of which would be required to be filed
with the Commission as an exhibit to a registration statement on Form S-3 or
applicable form (collectively, "Material Agreements") if the Company or any
subsidiary were registering securities under the Securities Act.  Except as set
forth on Schedule 2.1(u) or in the Commission Documents, the Company and each of
its subsidiaries has in all material respects performed all the obligations
required to be performed by them to date under the foregoing agreements, have
received no notice of default and, to the best of the Company's knowledge are
not in default under any Material Agreement now in effect, the result of which
could cause a Material Adverse Effect.  Except as set forth on Schedule 2.1(u)
or in the Commission Documents, no written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement of the Company or of any
subsidiary limits or shall limit the payment of dividends on the Company's
Preferred Shares, other Preferred Stock, if any, or its Common Stock.

(v)                Transactions with Affiliates.  Except as set forth in the
Form 10-KSB, Form 10-QSB or on Schedule 2.1(v) hereto, there are no loans,
leases, agreements, contracts, royalty agreements, management contracts or
arrangements or other continuing transactions between (a) the Company, any
subsidiary or any of their respective customers or suppliers on the one hand,
and (b) on the other hand, any officer, employee, consultant or director of the
Company, or any of its subsidiaries, or any person owning any capital stock of
the Company or any subsidiary or any member of the immediate family of such
officer, employee, consultant, director or stockholder or any corporation or
other entity controlled by such officer, employee, consultant, director or
stockholder, or a member of the immediate family of such officer, employee,
consultant, director or stockholder.

 

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(w)              Securities Act of 1933.  Based in material part upon the
representations herein of the Purchasers, the Company has complied and will
comply with all applicable federal and state securities laws in connection with
the offer, issuance and sale of the Shares hereunder.  Neither the Company nor
anyone acting on its behalf, directly or indirectly, has or will sell, offer to
sell or solicit offers to buy any of the Shares or similar securities to, or
solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person, or has taken or
will take any action so as to bring the issuance and sale of any of the Shares
under the registration provisions of the Securities Act and applicable state
securities laws, and neither the Company nor any of its affiliates, nor any
person acting on its or their behalf, has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation D under
the Securities Act) in connection with the offer or sale of any of the Shares.

(x)                Governmental Approvals.  Except as set forth in the Form
10-KSB or Form 10-QSB, and except for the filing of any notice prior or
subsequent to the Closing Date that may be required under applicable state
and/or Federal securities laws (which if required, shall be filed on a timely
basis), including the filing of a Form D and a registration statement or
statements pursuant to the Registration Rights Agreement, and the filing of the
Certificate of Designation with the Secretary of State for the State of
Delaware, no authorization, consent, approval, license, exemption of, filing or
registration with any court or governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, is or will be necessary
for, or in connection with, the execution or delivery of the Preferred Shares,
or for the performance by the Company of its obligations under the Transaction
Documents.

(y)                Employees.  Neither the Company nor any subsidiary has any
collective bargaining arrangements or agreements covering any of its employees,
except as set forth in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(y)
hereto.  Except as set forth in the Form 10-KSB, Form 10-QSB or on Schedule
2.1(y) hereto, neither the Company nor any subsidiary has any employment
contract, agreement regarding proprietary information, non-competition
agreement, non-solicitation agreement, confidentiality agreement, or any other
similar contract or restrictive covenant, relating to the right of any officer,
employee or consultant to be employed or engaged by the Company or such
subsidiary.  Since September 30, 2002, no officer, consultant or key employee of
the Company or any subsidiary whose termination, either individually or in the
aggregate, could have a Material Adverse Effect, has terminated or, to the
knowledge of the Company, has any present intention of terminating his or her
employment or engagement with the Company or any subsidiary.

 

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(z)                Absence of Certain Developments.  Except as provided on
Schedule 2.1(z) hereto, since March 31, 2004, neither the Company nor any
subsidiary has:

(i)                  issued any stock, bonds or other corporate securities or
any rights, options or warrants with respect thereto;

(ii)                borrowed any amount or incurred or become subject to any
liabilities (absolute or contingent) except current liabilities incurred in the
ordinary course of business which are comparable in nature and amount to the
current liabilities incurred in the ordinary course of business during the
comparable portion of its prior fiscal year, as adjusted to reflect the current
nature and volume of the Company's or such subsidiary's business;

(iii)               discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current liabilities
paid in the ordinary course of business;

(iv)              declared or made any payment or distribution of cash or other
property to stockholders with respect to its stock, or purchased or redeemed, or
made any agreements so to purchase or redeem, any shares of its capital stock;

(v)                sold, assigned or transferred any other tangible assets, or
canceled any debts or claims, except in the ordinary course of business;

(vi)              sold, assigned or transferred any patent rights, trademarks,
trade names, copyrights, trade secrets or other intangible assets or
intellectual property rights, or disclosed any proprietary confidential
information to any person except to customers in the ordinary course of business
or to the Purchasers or their representatives;

(vii)             suffered any substantial losses or waived any rights of
material value, whether or not in the ordinary course of business, or suffered
the loss of any material amount of prospective business;

(viii)           made any changes in employee compensation except in the
ordinary course of business and consistent with past practices;

(ix)              made capital expenditures or commitments therefor that
aggregate in excess of $100,000;

(x)                entered into any other transaction other than in the ordinary
course of business, or entered into any other material transaction, whether or
not in the ordinary course of business;

(xi)              made charitable contributions or pledges in excess of $25,000;

(xii)             suffered any material damage, destruction or casualty loss,
whether or not covered by insurance;

 

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(xiii)           experienced any material problems with labor or management in
connection with the terms and conditions of their employment;

(xiv)           effected any two or more events of the foregoing kind which in
the aggregate would be material to the Company or its subsidiaries; or

(xv)            entered into an agreement, written or otherwise, to take any of
the foregoing actions.

(aa)            Public Utility Holding Company Act and Investment Company Act
Status.  The Company is not a "holding company" or a "public utility company" as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended.  The Company is not, and as a result of and immediately upon the
Closing will not be, an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

(bb)           ERISA.  No liability to the Pension Benefit Guaranty Corporation
has been incurred with respect to any Plan by the Company or any of its
subsidiaries which is or would be materially adverse to the Company and its
subsidiaries.  The execution and delivery of this Agreement and the issuance and
sale of the Preferred Shares will not involve any transaction which is subject
to the prohibitions of Section 406 of ERISA or in connection with which a tax
could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986,
as amended, provided that, if any of the Purchasers, or any person or entity
that owns a beneficial interest in any of the Purchasers, is an "employee
pension benefit plan" (within the meaning of Section 3(2) of ERISA) with respect
to which the Company is a "party in interest" (within the meaning of Section
3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if
applicable, are met.  As used in this Section 2.1(ac), the term "Plan" shall
mean an "employee pension benefit plan" (as defined in Section 3 of ERISA) which
is or has been established or maintained, or to which contributions are or have
been made, by the Company or any subsidiary or by any trade or business, whether
or not incorporated, which, together with the Company or any subsidiary, is
under common control, as described in Section 414(b) or (c) of the Code.

(cc)            Dilutive Effect.  The Company understands and acknowledges that
the number of Conversion Shares issuable upon conversion of the Preferred Shares
will increase in certain circumstances.  The Company further acknowledges that
its obligation to issue Conversion Shares upon conversion of the Preferred
Shares in accordance with this Agreement and the Certificate of Designation is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interest of other stockholders of the Company.

(dd)           Delisting Notification.  The Company has not received notice
(written or oral) from the American Stock Exchange to the effect that the
Company is not in compliance with the listing or maintenance requirements of
such market. 

 

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(ee)            Independent Nature of Purchasers.  The Company acknowledges that
the obligations of each Purchaser under the Transaction Documents are several
and not joint with the obligations of any other Purchaser, and no Purchaser
shall be responsible in any way for the performance of the obligations of any
other Purchaser under the Transaction Documents.  The Company acknowledges that
the decision of each Purchaser to purchase Securities pursuant to this Agreement
has been made by such Purchaser independently of any other purchase and
independently of any information, materials, statements or opinions as to the
business, affairs, operations, assets, properties, liabilities, results of
operations, condition (financial or otherwise) or prospects of the Company or of
its Subsidiaries which may have made or given by any other Purchaser or by any
agent or employee of any other Purchaser, and no Purchaser or any of its agents
or employees shall have any liability to any Purchaser (or any other person)
relating to or arising from any such information, materials, statements or
opinions.  The Company acknowledges that nothing contained herein, or in any
Transaction Document, and no action taken by any Purchaser pursuant hereto or
thereto, shall be deemed to constitute the Purchasers as a partnership, an
association, a joint venture or any other kind of entity, or create a
presumption that the Purchasers are in any way acting in concert or as a group
with respect to such obligations or the transactions contemplated by the
Transaction Documents.  The Company acknowledges that each Purchaser shall be
entitled to independently protect and enforce its rights, including without
limitation, the rights arising out of this Agreement or out of the other
Transaction Documents, and it shall not be necessary for any other Purchaser to
be joined as an additional party in any proceeding for such purpose.  The
Company acknowledges that it has elected to provide all Purchasers with the same
terms and Transaction Documents for the convenience of the Company and not
because it was required or requested to do so by the Purchasers.  The Company
acknowledges that such procedure with respect to the Transaction Documents in no
way creates a presumption that the Purchasers are in any way acting in concert
or as a group with respect to the Transaction Documents or the transactions
contemplated hereby or thereby.

(ff)               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 the offering of the Shares
pursuant to this Agreement to be integrated with prior offerings by the Company
for purposes of the Securities Act which would prevent the Company from selling
the Shares pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its affiliates or subsidiaries take any action or steps that would cause the
offering of the Shares to be integrated with other offerings.  The Company does
not have any registration statement pending before the Commission or currently
under the Commission's review.

(gg)            Sarbanes-Oxley Act

(hh)            .  The Company is in substantial compliance with the applicable
provisions of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), and the
rules and regulations promulgated thereunder, that are effective and intends to
comply substantially with other applicable provisions of the Sarbanes-Oxley Act,
and the rules and regulations promulgated thereunder, upon the effectiveness of
such provisions.

Section 2.2              Representations and Warranties of the Purchasers.  Each
of the Purchasers hereby makes the following representations and warranties to
the Company:

 

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(a)                Organization and Standing of the Purchasers.  If the
Purchaser is an entity, such Purchaser is a corporation or partnership duly
incorporated or organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization.

(b)               Authorization and Power.  The Purchaser has the requisite
power and authority to enter into and perform this Agreement and to purchase the
Preferred Shares being sold to it hereunder.  The execution, delivery and
performance of this Agreement and the Registration Rights Agreement by such
Purchaser and the consummation by it of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate or partnership
action, and no further consent or authorization of such Purchaser or its Board
of Directors, stockholders, or partners, as the case may be, is required.  Each
of this Agreement and the Registration Rights Agreement has been duly
authorized, executed and delivered by such Purchaser and constitutes, or shall
constitute when executed and delivered, a valid and binding obligation of the
Purchaser enforceable against the Purchaser in accordance with the terms
thereof.

(c)                No Conflicts.  The execution, delivery and performance of
this Agreement and the Registration Rights Agreement and the consummation by
such Purchaser of the transactions contemplated hereby and thereby or relating
hereto do not and will not (i) result in a violation of such Purchaser's charter
documents or bylaws or other organizational documents or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of any agreement, indenture or
instrument or obligation to which such Purchaser is a party or by which its
properties or assets are bound, or result in a violation of any law, rule, or
regulation, or any order, judgment or decree of any court or governmental agency
applicable to such Purchaser or its properties (except for such conflicts,
defaults and violations as would not, individually or in the aggregate, have a
material adverse effect on such Purchaser).  Such Purchaser is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under this Agreement or the
Registration Rights Agreement or to purchase the Preferred Shares in accordance
with the terms hereof, provided that for purposes of the representation made in
this sentence, such Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.

(d)               Acquisition for Investment.  Such Purchaser is acquiring the
Preferred Shares solely for its own account for the purpose of investment and
not with a view to or for sale in connection with distribution.  Such Purchaser
does not have a present intention to sell the Preferred Shares, nor a present
arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares to or through any person or entity;
provided, however, that by making the representations herein and subject to
Section 2.2(f) below, such Purchaser does not agree to hold the Shares for any
minimum or other specific term and reserves the right to dispose of the Shares
at any time in accordance with Federal and state securities laws applicable to
such disposition.  Such Purchaser acknowledges that it is able to bear the
financial risks associated with an investment in the Preferred Shares and that
it has been given full access to such records of the Company and the
subsidiaries and to the officers of the Company and the subsidiaries and
received such information as it has deemed necessary or appropriate to conduct
its due diligence investigation and has sufficient knowledge and experience in
investing in companies similar to the Company in terms of the Company's stage of
development so as to be able to evaluate the risks and merits of its investment
in the Company.

 

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(e)                Status of Purchasers.  Such Purchaser is an "accredited
investor" as defined in Regulation D promulgated under the Securities Act.  Such
Purchaser is not required to be registered as a broker-dealer under Section 15
of the Exchange Act and such Purchaser is not a broker-dealer.

(f)                 Opportunities for Additional Information.  Each Purchaser
acknowledges that such Purchaser has had the opportunity to ask questions of and
receive answers from, or obtain additional information from, the executive
officers of the Company concerning the financial and other affairs of the
Company, and to the extent deemed necessary in light of such Purchaser's
personal knowledge of the Company's affairs, such Purchaser has asked such
questions and received answers to the full satisfaction of such Purchaser, and
such Purchaser desires to invest in the Company.

(g)                No General Solicitation.  Each Purchaser acknowledges that
the Preferred Shares were not offered to such Purchaser by means of any form of
general or public solicitation or general advertising, or publicly disseminated
advertisements or sales literature, including (i) any advertisement, article,
notice or other communication published in any newspaper, magazine, or similar
media, or broadcast over television or radio, or (ii) any seminar or meeting to
which such Purchaser was invited by any of the foregoing means of
communications.

(h)                Rule 144.  Such Purchaser understands that the Shares must be
held indefinitely unless such Shares are registered under the Securities Act or
an exemption from registration is available.  Such Purchaser acknowledges that
such Purchaser is familiar with Rule 144 of the rules and regulations of the
Commission, as amended, promulgated pursuant to the Securities Act ("Rule 144"),
and that such person has been advised that Rule 144 permits resales only under
certain circumstances.  Such Purchaser understands that to the extent that Rule
144 is not available, such Purchaser will be unable to sell any Shares without
either registration under the Securities Act or the existence of another
exemption from such registration requirement.

(i)                  General.  Such Purchaser understands that the Shares are
being offered and sold in reliance on a transactional exemption from the
registration requirement of Federal and state securities laws and the Company is
relying upon the truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of such Purchaser set forth
herein in order to determine the applicability of such exemptions and the
suitability of such Purchaser to acquire the Shares.

(j)                 Independent Investment.  No Purchaser has agreed to act with
any other Purchaser for the purpose of acquiring, holding, voting or disposing
of the Shares purchased hereunder for purposes of Section 13(d) under the
Exchange Act, and each Purchaser is acting independently with respect to its
investment in the Shares.

 

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ARTICLE III

Covenants

The Company covenants with each of the Purchasers as follows, which covenants
are for the benefit of the Purchasers and their permitted assignees (as defined
herein):

Section 3.1              Securities Compliance.  (a) The Company shall notify
the Commission in accordance with their rules and regulations, of the
transactions contemplated by any of the Transaction Documents, including filing
a Form D with respect to the Preferred Shares and Conversion Shares as required
under Regulation D, and shall take all other necessary action and proceedings as
may be required and permitted by applicable law, rule and regulation, for the
legal and valid issuance of the Preferred Shares and the Conversion Shares to
the Purchasers or subsequent holders.

(b)               Unless waived by a Purchaser by means of providing sixty-one
(61) days notice to the Company, in connection with a Voluntary Conversion (as
such term is defined in the Certificate of Designation), the Company covenants
and agrees that upon receipt of a Conversion Notice pursuant to Section 5(b)(ii)
of the Certificate of Designation that it will not convert such number of shares
that, when aggregated with all other shares of Common Stock then owned by a
Purchaser beneficially or deemed beneficially owned by a Purchaser, would result
in a Purchaser owning more than 4.99% of all of such Common Stock as would be
outstanding on such date of conversion, as determined in accordance with Section
16 of the Exchange Act and the regulations promulgated thereunder; provided,
however, that if pursuant to this Section the Company does not convert or issue
the number of shares requested under the applicable Conversion Notice or
Exercise Form, the Company will not be subject to Section 5(b)(v) of the
Certificate of Designation as a result of such failure to convert.

Section 3.2              Registration and Listing.  The Company will cause its
Common Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, will comply in all respects with its reporting and filing
obligations under the Exchange Act, will comply with all requirements related to
any registration statement filed pursuant to this Agreement or the Registration
Rights Agreement, and will not take any action or file any document (whether or
not permitted by the Securities Act or the rules promulgated thereunder) to
terminate or suspend such registration or to terminate or suspend its reporting
and filing obligations under the Exchange Act or Securities Act, except as
permitted herein.  The Company will take all action necessary to continue the
listing or trading of its Common Stock on the over-the-counter electronic
bulletin board.

Section 3.3              Inspection Rights.  The Company shall permit, during
normal business hours and upon reasonable request and reasonable notice, each
Purchaser or any employees, agents or representatives thereof, so long as such
Purchaser shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding, for purposes reasonably related to such
Purchaser's interests as a stockholder to examine and make reasonable copies of
and extracts from the records and books of account of, and visit and inspect the
properties, assets, operations and business of the Company and any subsidiary,
and to discuss the affairs, finances and accounts of the Company and any
subsidiary with any of its officers, consultants, directors, and key employees. 

 

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Section 3.4              Compliance with Laws.  The Company shall comply, and
cause each subsidiary to comply, with all applicable laws, rules, regulations
and orders, noncompliance with which could have a Material Adverse Effect.

Section 3.5              Keeping of Records and Books of Account.  The Company
shall keep and cause each subsidiary to keep adequate records and books of
account, in which complete entries will be made in accordance with GAAP
consistently applied, reflecting all financial transactions of the Company and
its subsidiaries, and in which, for each fiscal year, all proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and other
purposes in connection with its business shall be made.

Section 3.6              Reporting Requirements.  If the Commission ceases
making periodic reports filed under Section 13 of the Exchange Act available via
its Election Data Gathering Retrieval and Analysis System, then at a Purchaser's
request the Company shall furnish the following to such Purchaser so long as
such Purchaser shall be obligated hereunder to purchase the Preferred Shares or
shall beneficially own any Preferred Shares, or shall own Conversion Shares
which, in the aggregate, represent more than 2% of the total combined voting
power of all voting securities then outstanding:

(a)                Quarterly Reports filed with the Commission on Form 10-QSB as
soon as practical after the document is filed with the Commission, and in any
event within fifty-five (55) days after the end of each of the first three
fiscal quarters of the Company;

(b)               Annual Reports filed with the Commission on Form 10-KSB as
soon as practical after the document is filed with the Commission, and in any
event within one hundred (100) days after the end of each fiscal year of the
Company; and

(c)                Copies of all notices and information, including without
limitation notices and proxy statements in connection with any meetings, that
are provided to holders of shares of Common Stock, contemporaneously with the
delivery of such notices or information to such holders of Common Stock.

Section 3.7              Amendments.  The Company shall not amend or waive any
provision of the Certificate or Bylaws of the Company in any way that would
adversely affect the liquidation preferences, dividends rights, conversion
rights, voting rights or redemption rights of the Preferred Shares; provided,
however, that any creation and issuance of another series of Junior Stock (as
defined in the Certificate of Designation) or any other class or series of
equity securities which by its terms shall rank on parity with the Preferred
Shares shall not be deemed to materially and adversely affect such rights,
preferences or privileges.

 

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Section 3.8              Other Agreements.  The Company shall not enter into any
agreement in which the terms of such agreement would restrict or impair the
right or ability to perform of the Company or any subsidiary under any
Transaction Document.

Section 3.9              Distributions.  So long as any Preferred Shares remain
outstanding, the Company agrees that it shall not (i) declare or pay any
dividends or make any distributions to any holder(s) of Common Stock or (ii)
purchase or otherwise acquire for value, directly or indirectly, any Common
Stock or other equity security of the Company.

Section 3.10          Status of Dividends.  The Company covenants and agrees
that (i) no Federal income tax return or claim for refund of Federal income tax
or other submission to the Internal Revenue Service will adversely affect the
Preferred Shares, any other series of its Preferred Stock, or the Common Stock,
and any deduction shall not operate to jeopardize the availability to Purchasers
of the dividends received deduction provided by Section 243(a)(1) of the Code or
any successor provision, (ii) in no report to shareholders or to any
governmental body having jurisdiction over the Company or otherwise will it
treat the Preferred Shares other than as equity capital or the dividends paid
thereon other than as dividends paid on equity capital unless required to do so
by a governmental body having jurisdiction over the accounts of the Company or
by a change in generally accepted accounting principles required as a result of
action by an authoritative accounting standards setting body, and (iii) other
than pursuant to this Agreement or the Certificate of Designation, it will take
no action which would result in the dividends paid by the Company on the
Preferred Shares out of the Company's current or accumulated earnings and
profits being ineligible for the dividends received deduction provided by
Section 243(a)(1) of the Code.  The preceding sentence shall not be deemed to
prevent the Company from designating the Preferred Stock as "Convertible
Preferred Stock" in its annual and quarterly financial statements in accordance
with its prior practice concerning other series of preferred stock of the
Company.  Notwithstanding the foregoing, the Company shall not be required to
restate or modify its tax returns for periods prior to the Closing Date.  In the
event that the Purchasers have reasonable cause to believe that dividends paid
by the Company on the Preferred Shares out of the Company's current or
accumulated earnings and profits will not be treated as eligible for the
dividends received deduction provided by Section 243(a)(1) of  the Code, or any
successor provision, the Company will, at the reasonable request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers
in the submission to the Service of a request for a ruling that dividends paid
on the Shares will be so eligible for Federal income tax purposes, at the
Purchasers' expense.  In addition, the Company will reasonably cooperate with
the Purchasers (at Purchasers' expense) in any litigation, appeal or other
proceeding challenging or contesting any ruling, technical advice, finding or
determination that earnings and profits are not eligible for the dividends
received deduction provided by Section 243(a)(1) of the Code, or any successor
provision to the extent that the position to be taken in any such litigation,
appeal, or other proceeding is not contrary to any provision of the Code or
incurred in connection with any such submission, litigation, appeal or other
proceeding.  Notwithstanding the foregoing, nothing herein contained shall be
deemed to preclude the Company from claiming a deduction with respect to such
dividends if (i) the Code shall hereafter be amended, or final Treasury
regulations thereunder are issued or modified, to provide that dividends on the
Preferred Shares or Conversion Shares should not be treated as dividends for
Federal income tax purposes or that a deduction with respect to all or a portion
of the dividends on the Shares is allowable for Federal income tax purposes, or
(ii) in the absence of such an amendment, issuance or modification and after a
submission of a request for ruling or technical advice, the service shall rule
or advise that dividends on the shares should not be treated as dividends for
Federal income tax purposes.  If the Service determines that the Preferred
Shares or Conversion Shares constitute debt, the Company may file protective
claims for refund.

 

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Section 3.11          Use of Proceeds.  The proceeds from the sale of the
Preferred Shares will be used by the Company for working capital and general
corporate purposes. 

Section 3.12          Future Financings; Right of First Offer and Refusal.  (a)
For purposes of this Agreement, a "Subsequent Financing" shall be defined as any
subsequent offer or sale to, or exchange with (or other type of distribution
to), any third party of Common Stock or any securities convertible, exercisable
or exchangeable into Common Stock, including debt securities so convertible, in
a private transaction (collectively, the "Financing Securities") other than a
Permitted Financing (as defined hereinafter).  For purposes of this Agreement,
"Permitted Financing" shall mean any transaction involving (i) the Company's
issuance of any Financing Securities (other than for cash) in connection with a
merger and/or acquisition, consolidation, sale or disposition of all or
substantially all of the Company's assets, (ii) the Company's issuance of
Financing Securities in connection with strategic license agreements so long as
such issuances are not for the purpose of raising capital, (iii) the Company's
issuance of Financing Securities in connection with underwritten public
offerings of its securities, (iv) the Company's issuance of Common Stock or the
issuance or grants of options to purchase Common Stock pursuant to the Company's
stock option plans and employee stock purchase plans outstanding on the date
hereof, or (v) as a result of the exercise of options or warrants or conversion
of convertible notes or preferred stock which are granted or issued as of the
date of this Agreement.

(b)               During the period commencing on the Closing Date and ending on
the date that is twelve (12) months following the Closing Date, the Company
covenants and agrees to promptly notify (in no event later than five (5) days
after making or receiving an applicable offer) in writing (a "Rights Notice")
each Purchaser of the terms and conditions of any proposed Subsequent
Financing.  The Rights Notice shall describe, in reasonable detail, the proposed
Subsequent Financing, the proposed closing date of the Subsequent Financing,
which shall be within thirty (30) calendar days from the date of the Rights
Notice, including, without limitation, all of the terms and conditions thereof
and proposed definitive documentation to be entered into in connection
therewith.  The Rights Notice shall provide each Purchaser an option (the
"Rights Option"), during the fifteen (15) trading days following delivery of the
Rights Notice (the "Option Period") to inform the Company whether such Purchaser
will purchase up to its pro rata portion of the Purchase Price for the
securities being offered in such Subsequent Financing on the same, absolute
terms and conditions as contemplated by such Subsequent Financing (the "First
Refusal Rights").  Delivery of any Rights Notice constitutes a representation
and warranty by the Company that there are no other material terms and
conditions, arrangements, agreements or otherwise except for those disclosed in
the Rights Notice, to provide additional compensation to any party participating
in any proposed Subsequent Financing, including, but not limited to, additional
compensation based on changes in the Purchase Price or any type of reset or
adjustment of a purchase or conversion price or to issue additional securities
at any time after the closing date of a Subsequent Financing.  If the Company
does not receive notice of exercise of the Rights Option from the Purchasers
within the Option Period, the Company shall have the right to close the
Subsequent Financing on the scheduled closing date with a third party; provided
that all of the material terms and conditions of the closing are the same as
those provided to the Purchasers in the Rights Notice.  If the closing of the
proposed Subsequent Financing does not occur on that date, any closing of the
contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 3.12, including, without
limitation, the delivery of a new Rights Notice.  The provisions of this Section
3.12(b) shall not apply to issuances of Financing Securities in a Permitted
Financing.

 

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(c)                Notwithstanding anything to the contrary contained in this
Section 3.12, the First Refusal Rights of the Purchasers granted hereunder shall
be subordinate in full to any rights of first offer or first refusal granted by
the Company to (i) Laurus Master Fund, Ltd. pursuant to Section 38 of that
certain Security Agreement dated January 22, 2004 between the Company and Laurus
Master Fund, Ltd., and (ii) the holders of the Company's Series A Convertible
Preferred Stock on March 1, 2004.

Section 3.13          Reservation of Shares.  So long as any of the Preferred
Shares remain outstanding, the Company shall take all action necessary to at all
times have authorized, and reserved for the purpose of issuance, no less than
120% of the aggregate number of shares of Common Stock needed to provide for the
issuance of the Conversion Shares.

Section 3.14          Transfer Agent Instructions.  The Company shall issue
irrevocable instructions to its transfer agent, and any subsequent transfer
agent, to issue certificates, registered in the name of each Purchaser or its
respective nominee(s), for the Conversion Shares in such amounts as specified
from time to time by each Purchaser to the Company upon conversion of the
Preferred Shares in the form of Exhibit D attached hereto (the "Irrevocable
Transfer Agent Instructions").  Prior to registration of the Conversion Shares
under the Securities Act, all such certificates shall bear the restrictive
legend specified in Section 6.1 of this Agreement.  The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.14 will be given by the Company to its transfer agent and that
the Shares shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the Registration
Rights Agreement.  Nothing in this Section 3.14 shall affect in any way each
Purchaser's obligations and agreements set forth in Section 6.1 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Shares.  If a Purchaser provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Shares
can be sold pursuant to Rule 144 without any restriction as to the number of
securities acquired as of a particular date that can then be immediately sold,
the Company shall permit the transfer, and, in the case of the Conversion
Shares, promptly instruct its transfer agent to issue one or more certificates
in such name and in such denominations as specified by such Purchaser and
without any restrictive legend.  The Company acknowledges that a breach by it of
its obligations under this Section 3.14 will cause irreparable harm to the
Purchasers by vitiating the intent and purpose of the transaction contemplated
hereby.  Accordingly, the Company acknowledges that the remedy at law for a
breach of its obligations under this Section 3.14 will be inadequate and agrees,
in the event of a breach or threatened breach by the Company of the provisions
of this Section 3.14, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being required.

 

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Section 3.15          Disposition of Assets.  So long as the Preferred Shares
remain outstanding, neither the Company nor any Subsidiary shall sell, transfer
or otherwise dispose of any of its properties, assets and rights including,
without limitation, its software and intellectual property, to any person except
for sales to customers in the ordinary course of business or with the prior
written consent of the holders of a majority of the Preferred Shares then
outstanding.

Section 3.16          Reporting Status; Eligibility to Use Form S-3.  So long as
a Purchaser beneficially owns any of the Securities, the Company shall timely
file all reports required to be filed with the Commission pursuant to the
Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.  The Company
currently meets, and will take all necessary action to continue to meet, the
"registrant eligibility" requirements set forth in the general instructions to
Form S-3 applicable to "resale" registrations on Form S-3 during the
Effectiveness Period (as defined in the Registration Rights Agreement).

Section 3.17          Disclosure of Transaction.  The Company may, in its
discretion, issue a press release describing the material terms of the
transactions contemplated hereby (the "Press Release") after the Closing, and/or
file with the Commission a Current Report on Form 8-K (the "Form 8-K")
describing the material terms of the transactions contemplated hereby (and
attaching as exhibits thereto this Agreement and the Registration Rights
Agreement) following the date of execution of this Agreement. 

Section 3.18          Disclosure of Material Information.  The Company covenants
and agrees that neither it nor any other person acting on its behalf has
provided or will provide any Purchaser or its agents or counsel with any
information that the Company believes constitutes material non-public
information, unless prior thereto such Purchaser shall have executed a written
agreement regarding the confidentiality and use of such information.  The
Company understands and confirms that each Purchaser shall be relying on the
foregoing representations in effecting transactions in securities of the
Company.

Section 3.19          Pledge of Securities.  The Company acknowledges and agrees
that the Securities may be pledged by a Purchaser in connection with a bona fide
margin agreement or other loan or financing arrangement that is secured by the
Common Stock.  The pledge of Common Stock shall not be deemed to be a transfer,
sale or assignment of the Common Stock hereunder, and no Purchaser effecting a
pledge of Common Stock shall be required to provide the Company with any notice
thereof or otherwise make any delivery to the Company pursuant to this Agreement
or any other Transaction Document; provided that a Purchaser and its pledgee
shall be required to comply with the provisions of Article V hereof in order to
effect a sale, transfer or assignment of Common Stock to such pledgee. At the
Purchasers' expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Common Stock may reasonably request in
connection with a pledge of the Common Stock to such pledgee by a Purchaser.

 

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ARTICLE IV

CONDITIONS

Section 4.1              Conditions Precedent to the Obligation of the Company
to Sell the Shares.  The obligation hereunder of the Company to issue and sell
the Preferred Shares to the Purchasers is subject to the satisfaction or waiver,
at or before the Closing, of each of the conditions set forth below.  These
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion.

(a)                Accuracy of Each Purchaser's Representations and Warranties. 
The representations and warranties of each Purchaser shall be true and correct
in all material respects as of the date when made and as of the Closing Date as
though made at that time, except for representations and warranties that are
expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.

(b)               Performance by the Purchasers.  Each Purchaser shall have
performed, satisfied and complied in all material respects with all covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Purchaser at or prior to the Closing.

(c)                No Injunction.  No statute, rule, regulation, executive
order, decree, ruling or injunction shall have been enacted, entered,
promulgated or endorsed by any court or governmental authority of competent
jurisdiction which prohibits the consummation of any of the transactions
contemplated by this Agreement.

(d)               Delivery of Purchase Price.  The Purchase Price for the
Preferred Shares has been delivered to the Company at the Closing Date.

(e)                Delivery of Transaction Documents.  The Transaction Documents
have been duly executed and delivered by the Purchasers to the Company.

Section 4.2              Conditions Precedent to the Obligation of the
Purchasers to Purchase the Shares.  The obligation hereunder of each Purchaser
to acquire and pay for the Preferred Shares is subject to the satisfaction or
waiver, at or before the Closing, of each of the conditions set forth below. 
These conditions are for each Purchaser's sole benefit and may be waived by such
Purchaser at any time in its sole discretion.

(a)                Accuracy of the Company's Representations and Warranties. 
Each of the representations and warranties of the Company shall be true and
correct in all material respects as of the date when made and as of the Closing
Date as though made at that time (except for representations and warranties that
are expressly made as of a particular date), which shall be true and correct in
all material respects as of such date.

 

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(b)               Performance by the Company.  The Company shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied
with by the Company at or prior to the Closing.

(c)                No Suspension, Etc.  From the date hereof to the Closing
Date, trading in the Company's Common Stock shall not have been suspended by the
Commission or the American Stock Exchange (except for any suspension of trading
of limited duration agreed to by the Company, which suspension shall be
terminated prior to the applicable Closing), and, at any time prior to the
Closing, trading in securities generally as reported by Bloomberg Financial
Markets ("Bloomberg") shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are reported
by Bloomberg, or on the New York Stock Exchange, nor shall a banking moratorium
have been declared either by the United States or New York State authorities,
nor shall there have occurred any material outbreak or escalation of hostilities
or other national or international calamity or crisis of such magnitude in its
effect on, or any material adverse change in any financial market which, in each
case, in the judgment of such Purchaser, makes it impracticable or inadvisable
to purchase the Preferred Shares.

(d)               No Injunction.  No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement.

(e)                No Proceedings or Litigation.  No action, suit or proceeding
before any arbitrator or any governmental authority shall have been commenced,
and no investigation by any governmental authority shall have been threatened,
against the Company or any subsidiary, or any of the officers, directors or
affiliates of the Company or any subsidiary seeking to restrain, prevent or
change the transactions contemplated by this Agreement, or seeking damages in
connection with such transactions.

(f)                 Certificate of Designation of Rights and Preferences.  Prior
to the Closing, the Certificate of Designation in the form of Exhibit B attached
hereto shall have been filed with the Secretary of State of Delaware.

(g)                Opinion of Counsel, Etc. At the Closing, the Purchasers shall
have received an opinion of counsel to the Company, dated the date of the
Closing, in the form of Exhibit E hereto, and such other certificates and
documents as the Purchasers or its counsel shall reasonably require incident to
the Closing.

(h)                Registration Rights Agreement.  At the Closing, the Company
shall have executed and delivered the Registration Rights Agreement to each
Purchaser.

(i)                  Certificates.  The Company shall have executed and
delivered to the Purchasers the certificates (in such denominations as such
Purchaser shall request) for the Preferred Shares being acquired by such
Purchaser at the Closing.

 

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(j)                 Resolutions.  The Board of Directors of the Company shall
have adopted resolutions consistent with Section 2.1(b) above in a form
reasonably acceptable to such Purchaser (the "Resolutions").

(k)               Reservation of Shares.  As of the Closing Date, the Company
shall have reserved out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Preferred Shares, a number of
shares of Common Stock equal to at least 120% of the aggregate number of
Conversion Shares issuable upon conversion of the Preferred Shares outstanding
on the Closing Date (after giving effect to the Preferred Shares to be issued on
the Closing Date and assuming all such Preferred Shares were fully convertible
on such date regardless of any limitation on the timing or amount of such
conversion).

(l)                  Transfer Agent Instructions.  The Irrevocable Transfer
Agent Instructions, in the form of Exhibit D attached hereto, shall have been
delivered to and acknowledged in writing by the Company's transfer agent.

(m)              Secretary's Certificate.  The Company shall have delivered to
such Purchaser a secretary's certificate, dated as of the Closing Date, as to
(i) the Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the
Certificate of Designation, each as in effect at the Closing, and (iv) the
authority and incumbency of the officers of the Company executing the
Transaction Documents and any other documents required to be executed or
delivered in connection therewith.

(n)                Officer's Certificate.  The Company shall have delivered to
the Purchasers a certificate of an executive officer of the Company, dated as of
the Closing Date, confirming the accuracy of the Company's representations,
warranties and covenants as of such Closing Date and confirming the compliance
by the Company with the conditions precedent set forth in this Section 4.2 as of
the Closing Date.

(o)               Material Adverse Effect.  No Material Adverse Effect shall
have occurred at or before the Closing Date.

ARTICLE V

Intentionally Omitted

ARTICLE VI

Stock Certificate Legend

Section 6.1              Legend.  Each certificate representing the Preferred
Shares and securities issued upon conversion thereof, shall be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or "blue sky"
laws):

 

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THESE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SECURITIES") HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR HOME SOLUTIONS OF AMERICA, INC. SHALL HAVE RECEIVED AN
OPINION OF ITS COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES
ACT AND UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.

The Company agrees to reissue certificates representing the Shares without the
legend set forth above if at such time, prior to making any transfer of any
Shares or Shares, such holder thereof shall give written notice to the Company
describing the manner and terms of such transfer and removal as the Company may
reasonably request, and (x) the Shares have been registered for sale under the
Securities Act and the holder is selling such shares and is complying with its
prospectus delivery requirement under the Securities Act, (y) the holder is
selling such Shares in compliance with the provisions of Rule 144 or (z) the
provisions of paragraph (k) of Rule 144 apply to such Shares.  Whenever a
certificate representing the Conversion Shares is required to be issued to a
Purchaser without a legend, in lieu of delivering physical certificates
representing the Conversion Shares, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer program, the Company shall use its reasonable best efforts to cause its
transfer agent to electronically transmit the Conversion Shares to a Purchaser
by crediting the account of such Purchaser's Prime Broker with DTC through its
Deposit Withdrawal Agent Commission ("DWAC") system (to the extent not
inconsistent with any provisions of this Agreement).

ARTICLE VII

Intentionally Omitted.

ARTICLE VIII

Indemnification

Section 8.1              General Indemnity.  The Company agrees to indemnify and
hold harmless the Purchasers and any finder (and their respective directors,
officers, affiliates, agents, successors and assigns) from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys' fees, charges and disbursements)
incurred by the Purchasers as a result of any inaccuracy in or breach of the
representations, warranties or covenants made by the Company herein.  Each
Purchaser severally but not jointly agrees to indemnify and hold harmless the
Company and its directors, officers, affiliates, agents, successors and assigns
from and against any and all losses, liabilities, deficiencies, costs, damages
and expenses (including, without limitation, reasonable attorneys' fees, charges
and disbursements) incurred by the Company as result of any inaccuracy in or
breach of the representations, warranties or covenants made by such Purchaser
herein.  The maximum aggregate liability of each Purchaser pursuant to its
indemnification obligations under this Article 8 shall not exceed the portion of
the Purchase Price paid by such Purchaser hereunder.

 

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Section 8.2              Indemnification Procedure.  Any party entitled to
indemnification under this Article VIII (an "indemnified party") will give
written notice to the indemnifying party of any matters giving rise to a claim
for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VIII except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice.  In case any action, proceeding or claim is brought against an
indemnified party in respect of which indemnification is sought hereunder, the
indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it
and the indemnifying party may exist with respect of such action, proceeding or
claim, to assume the defense thereof with counsel reasonably satisfactory to the
indemnified party.  In the event that the indemnifying party advises an
indemnified party that it will contest such a claim for indemnification
hereunder, or fails, within thirty (30) days of receipt of any indemnification
notice to notify, in writing, such person of its election to defend, settle or
compromise, at its sole cost and expense, any action, proceeding or claim (or
discontinues its defense at any time after it commences such defense), then the
indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim.  In any event, unless and until the indemnifying party
elects in writing to assume and does so assume the defense of any such claim,
proceeding or action, the indemnified party's costs and expenses arising out of
the defense, settlement or compromise of any such action, claim or proceeding
shall be losses subject to indemnification hereunder.  The indemnified party
shall cooperate fully with the indemnifying party in connection with any
negotiation or defense of any such action or claim by the indemnifying party and
shall furnish to the indemnifying party all information reasonably available to
the indemnified party which relates to such action or claim.  The indemnifying
party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto.  If
the indemnifying party elects to defend any such action or claim, then the
indemnified party shall be entitled to participate in such defense with counsel
of its choice at its sole cost and expense.  The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without
its prior written consent.  Notwithstanding anything in this Article VIII to the
contrary, the indemnifying party shall not, without the indemnified party's
prior written consent, settle or compromise any claim or consent to entry of any
judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to the indemnified party of a
release from all liability in respect of such claim.  The indemnification
required by this Article VIII shall be made by periodic payments of the amount
thereof during the course of investigation or defense, as and when bills are
received or expense, loss, damage or liability is incurred, so long as the
indemnified party irrevocably agrees to refund such moneys if it is ultimately
determined by a court of competent jurisdiction that such party was not entitled
to indemnification.  The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party
against the indemnifying party or others, and (b) any liabilities the
indemnifying party may be subject to pursuant to the law.

 

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ARTICLE IX

Miscellaneous

Section 9.1              Fees and Expenses.  Except as otherwise set forth in
this Agreement, the Registration Rights Agreement or the Certificate of
Designation, each party shall pay the fees and expenses of its advisors,
counsel, accountants and other experts, if any, and all other expenses, incurred
by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement, provided that the Company shall pay, at the
Closing (i) all actual attorneys' fees and expenses (exclusive of disbursements
and out-of-pocket expenses) incurred by the Purchasers up to $25,000 in
connection with the preparation, negotiation, execution and delivery of this
Agreement, the Registration Rights Agreement and the transactions contemplated
thereunder, and (ii) in connection with the filing and declaration of
effectiveness by the Commission of the Registration Statement (as defined in the
Registration Rights Agreement) and any amendments, modifications or waivers of
this Agreement or any of the other Transaction Documents.  In addition, the
Company shall pay all reasonable fees and expenses incurred by the Purchasers in
connection with the enforcement of this Agreement or any of the other
Transaction Documents, including, without limitation, all reasonable attorneys'
fees and expenses.  The Company shall pay all stamp or other similar taxes and
duties levied in connection with issuance of the Preferred Shares pursuant
hereto.

Section 9.2              Specific Enforcement, Consent to Jurisdiction. 

(a)                The Company and the Purchasers acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement, the Certificate of Designation or the Registration Rights Agreement
were not performed in accordance with their specific terms or were otherwise
breached.  It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent or cure breaches of the provisions of this
Agreement or the Registration Rights Agreement and to enforce specifically the
terms and provisions hereof or thereof, this being in addition to any other
remedy to which any of them may be entitled by law or equity.

(b)               Each of the Company and the Purchasers (i) hereby irrevocably
submits to the jurisdiction of the United States District Court sitting in the
Southern District of New York and the courts of the State of New York located in
New York county for the purposes of any suit, action or proceeding arising out
of or relating to this Agreement or any of the other Transaction Documents or
the transactions contemplated hereby or thereby and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper.  Each of the Company and the
Purchasers consents to process being served in any such suit, action or
proceeding by mailing a copy thereof 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 in this
Section 9.2 shall affect or limit any right to serve process in any other manner
permitted by law.

 

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Section 9.3              Entire Agreement; Amendment.  This Agreement contains
the entire understanding of the parties with respect to the matters covered
hereby and, except as specifically set forth herein or in the Transaction
Documents or the Certificate of Designation,  neither the Company nor any of the
Purchasers makes any representations, warranty, covenant or undertaking with
respect to such matters and they supersede all prior understandings and
agreements with respect to said subject matter, all of which are merged herein. 
No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the holders of at least 75% of the
Preferred Shares then outstanding, and no provision hereof may be waived other
than by an a written instrument signed by the party against whom enforcement of
any such amendment or waiver is sought.  No such amendment shall be effective to
the extent that it applies to less than all of the holders of the Preferred
Shares then outstanding.  No consideration shall be offered or paid to any
person to amend or consent to a waiver or modification of any provision of any
of the Transaction Documents or the Certificate of Designation unless the same
consideration is also offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.

Section 9.4              Notices.  Any notice, demand, request, waiver or other
communication required or permitted to be given hereunder shall be in writing
and shall be effective (a) upon hand delivery by telex (with correct answer back
received), telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur.  The addresses for
such communications shall be:

If to the Company:

Home Solutions of America, Inc. 
5565 Red Bird Center Drive
Dallas, TX 75237
Attention: Rick J. O'Brien, CFO
Tel. No.: (214) 623-8446
Fax No.:  (214) 333-9435

 

with copies to:

J. Paul Caver
Attorney at Law
2724 Routh Street
Dallas, Texas 75201
Tel. No.: (214) 468-8868
Fax No.: (214) 468-8867

 

If to any Purchaser:

At the address of such Purchaser set forth on Exhibit A to this Agreement, with
copies to Purchaser's counsel as set forth on Exhibit A or as specified in
writing by such Purchaser.

 

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Any party hereto may from time to time change its address for notices by giving
at least ten (10) days written notice of such changed address to the other party
hereto.

Section 9.5              Waivers.  No waiver by either party 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 other
provisions, condition or requirement hereof, nor shall any delay or omission of
any party to exercise any right hereunder in any manner impair the exercise of
any  such right accruing to it thereafter.

Section 9.6              Headings.  The article, section and subsection headings
in this Agreement are for convenience only and shall not constitute a part of
this Agreement for any other purpose and shall not be deemed to limit or affect
any of the provisions hereof.

Section 9.7              Successors and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
assigns.  

Section 9.8              No Third Party Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.

Section 9.9              Governing Law.  This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York, without
giving effect to the choice of law provisions.  This Agreement shall not
interpreted or construed with any presumption against the party causing this
Agreement to be drafted.

Section 9.10          Survival.  The representations and warranties of the
Company and the Purchasers contained in Sections 2.1(o) and (s) should survive
indefinitely and those contained in Article II, with the exception of Sections
2.1(o) and (s), shall survive the execution and delivery hereof and the Closing
until the date three (3) years from the Closing Date, and the agreements and
covenants set forth in Articles I, III, VIII and IX of this Agreement shall
survive the execution and delivery hereof and the Closing hereunder until the
Purchasers in the aggregate beneficially own (determined in accordance with Rule
13d-3 under the Exchange Act) less than 10% of the total combined voting power
of all voting securities then outstanding, provided, that Sections 3.1, 3.2,
3.4, 3.5, 3.7, 3.8, 3.9, 3.10, 3.12, 3.13 and 3.14 shall not expire until the
Registration Statement required by Section 2 of the Registration Rights
Agreement is no longer required to be effective under the terms and conditions
of Registration Rights Agreement.

Section 9.11          Counterparts.  This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and shall become effective when counterparts have been signed by
each party and delivered to the other parties hereto, it being understood that
all parties need not sign the same counterpart.  In the event any signature is
delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered
to the other parties within five days of the execution and delivery hereof.

Section 9.12          Publicity.  The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Purchasers
without the consent of the Purchasers unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.

 

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Section 9.13          Severability.  The provisions of this Agreement, the
Certificate of Designation and the Registration Rights Agreement are severable
and, in the event that any court of competent jurisdiction shall determine that
any one or more of the provisions or part of the provisions contained in this
Agreement, the Certificate of Designation or the Registration Rights Agreement
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision or part of a provision of this Agreement, the Certificate of
Designation or the Registration Rights Agreement shall be reformed and construed
as if such invalid or illegal or unenforceable provision, or part of such
provision, had never been contained herein, so that such provisions would be
valid, legal and enforceable to the maximum extent possible.

Section 9.14          Further Assurances.  From and after the date of this
Agreement, upon the request of any Purchaser or the Company, each of the Company
and the Purchasers shall execute and deliver such instrument, 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, the
Preferred Shares, the Conversion Shares, the Certificate of Designation, and the
Registration Rights Agreement.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

 

 

29

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

HOME SOLUTIONS OF AMERICA, INC.

By:                                                                     

          Rick J. O'Brien
          Chief Financial Officer

   

PURCHASER

VICTUS CAPITAL, L.P.

By:                                                                     
          Name:
          Title:  

 

PURCHASER

   

VICIS CAPITAL MASTER FUND

 

By: VICIS CAPITAL, LLC

By:                                                                     
          Name:
          Title:  

 

 

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EXHIBIT A to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HOME SOLUTIONS OF AMERICA, INC.

 

 

Names and Addresses 
of Purchaser

Number of Preferred Shares
Purchased  Dollar Amount of
Investment Victus Capital, L.P. 20   $500,000 25 East 78th Street     New York,
NY 10021           Vicis Capital Master Fund  20  $500,000 c/o Vicis Capital,
LLC     25 East 78th Street     New York, NY 10021    

 

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EXHIBIT B to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HOME SOLUTIONS OF AMERICA, INC.

 

FORM OF CERTIFICATE OF DESIGNATION

 

 

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EXHIBIT C to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HOME SOLUTIONS OF AMERICA, INC.

 

 

FORM OF REGISTRATION RIGHTS AGREEMENT

 

 

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EXHIBIT D to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HOME SOLUTIONS OF AMERICA, INC.

 FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

 HOME SOLUTIONS OF AMERICA, INC.

as of July 19, 2004

[Name and address of Transfer Agent]
Attn:  _____________

 

Ladies and Gentlemen:

Reference is made to that certain Series B Convertible Preferred Stock Purchase
Agreement (the "Purchase Agreement"), dated as of July 19, 2004, by and among
Home Solutions of America, Inc., a Delaware corporation (the "Company"), and the
purchasers named therein (collectively, the "Purchasers") pursuant to which the
Company is issuing to the Purchasers shares of its Series B Convertible
Preferred Stock, par value $.001 per share, (the "Preferred Shares") , which are
convertible into shares of the Company's common stock, par value $.001 per share
(the "Common Stock").  This letter shall serve as our irrevocable authorization
and direction to you (subject to Section 3.1(a) of the Purchase Agreement and
provided that you are the transfer agent of the Company at such time) to issue
shares of Common Stock upon conversion of the Preferred Shares (the "Conversion
Shares") to or upon the order of a Purchaser from time to time upon (i)
surrender to you of a properly completed and duly executed Conversion Notice, in
the form attached hereto as Exhibit I, (ii) a copy of the certificates (with the
original certificates delivered to the Company) representing Preferred Shares
being converted (or an indemnification undertaking with respect to such share
certificates in the case of their loss, theft or destruction), and (iii)
delivery of a treasury order or other appropriate order duly executed by a duly
authorized officer of the Company.  So long as you have previously received (x)
written confirmation from counsel to the Company that a registration statement
covering resales of the Conversion Shares has been declared effective by the
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 Act"), and no subsequent notice by the Company or its
counsel of the suspension or termination of its effectiveness and (y) a copy of
such registration statement, and if the Purchaser represents in writing that the
Conversion Shares were sold pursuant to the Registration Statement, then
certificates representing the Conversion Shares shall not bear any legend
restricting transfer of the Conversion Shares thereby and should not be subject
to any stop-transfer restriction.  Provided, however, that if you have not
previously received (i) written confirmation from counsel to the Company that a
registration statement covering resales of the Conversion Shares has been
declared effective by the SEC under the 1933 Act, and (ii) a copy of such
registration statement, then the certificates for the Conversion Shares shall
bear the following legend:

     "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT"), OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS
REGISTERED UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR HOME
SOLUTIONS OF AMERICA, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED."

 

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

and, provided further, that the Company may from time to time notify you to
place stop-transfer restrictions on the certificates for the Conversion Shares
in the event a registration statement covering the Conversion Shares is subject
to amendment for events then current.

A form of written confirmation from counsel to the Company that a registration
statement covering resales of the Conversion Shares has been declared effective
by the SEC under the 1933 Act is attached hereto as Exhibit II.

Please be advised that the Purchasers are relying upon this letter as an
inducement to enter into the Securities Purchase Agreement and, accordingly,
each Purchaser is a third party beneficiary to these instructions.

Please execute this letter in the space indicated to acknowledge your agreement
to act in accordance with these instructions.  Should you have any questions
concerning this matter, please contact me at ___________.

Very truly yours,

HOME SOLUTIONS OF AMERICA, INC.

By:                                                                  

Name:                                                      
                                                                                           
Title:                                                        

ACKNOWLEDGED AND AGREED:

[TRANSFER AGENT]

By:      
                                                                       
Name:                                                                         
Title:    
                                                                       
Date:                           

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EXHIBIT I

HOME SOLUTIONS OF AMERICA, INC.
CONVERSION NOTICE

Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series B Preferred Stock of Home Solutions of America, Inc.
(the "Certificate of Designation").  In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series B Preferred Stock, par value $.001 per share (the "Preferred
Shares"), of Home Solutions of America, Inc., a Delaware corporation (the
"Company"), indicated below into shares of Common Stock, par value $.001 per
share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.

Date of Conversion:                                          
                                                                       

Number of Preferred Shares to be converted:                

Stock certificate no(s). of Preferred Shares to be converted:                   

The Common Stock have been sold pursuant to the Registration Statement (as
defined in the Registration Rights Agreement): YES
____                                                 NO____

Please confirm the following information:

Conversion Price:                                             
                                                                       

Number of shares of Common Stock
to be issued:                                                     
                                                                       

Number of shares of Common Stock beneficially owned or deemed beneficially owned
by the Holder on the Date of Conversion: _________________________

Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:

Issue to:                                                           
                                                                       
                                                                           
                                                                       

Facsimile Number:                                            
                                                                       

Authorization:                                                   
                                                                       

By:                                                                  
                                                                                   
Title:                                                                

Dated:

 

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EXHIBIT II

FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT

[Name and address of Transfer Agent]
Attn:  _____________

Re:       Home Solutions of America, Inc.

Ladies and Gentlemen:

We are counsel to Home Solutions of America, Inc., a Delaware corporation (the
"Company"), and have represented the Company in connection with that certain
Series B Convertible Preferred Stock Purchase Agreement (the "Purchase
Agreement"), dated as of July 19, 2004, by and among the Company and the
purchasers named therein (collectively, the "Purchasers") pursuant to which the
Company issued to the Purchasers shares of its Series B Convertible Preferred
Stock, par value $.001 per share, (the "Preferred Shares"), which are
convertible into shares of the Company's common stock, par value $.001 per share
(the "Common Stock").  Pursuant to the Purchase Agreement, the Company has also
entered into a Registration Rights Agreement with the Purchasers (the
"Registration Rights Agreement"), dated as of July 19, 2004, pursuant to which
the Company agreed, among other things, to register the Registrable Securities
(as defined in the Registration Rights Agreement), including the shares of
Common Stock issuable upon conversion of the Preferred Shares, under the
Securities Act of 1933, as amended (the "1933 Act").  In connection with the
Company's obligations under the Registration Rights Agreement, on
________________, 2004, the Company filed a Registration Statement on Form S-3
(File No. 333-________) (the "Registration Statement") with the Securities and
Exchange Commission (the "SEC") relating to the resale of the Registrable
Securities which names each of the present Purchasers as a selling stockholder
thereunder.

In connection with the foregoing, we advise you that a member of the SEC's staff
has advised us by telephone that the SEC has entered an order declaring the
Registration Statement effective under the 1933 Act at [ENTER TIME OF
EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge, after
telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and accordingly, the
Registrable Securities are available for resale under the 1933 Act pursuant to
the Registration Statement.

Very truly yours,

[COMPANY COUNSEL]

By:                                                                  

cc:        [LIST NAMES OF PURCHASERS]

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EXHIBIT E to the
SERIES B CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR
HOME SOLUTIONS OF AMERICA, INC.

 FORM OF OPINION OF COUNSEL

 

1.                   The Company is a corporation duly incorporated, validly
existing and in good standing under the laws of the state of Delaware and has
the requisite corporate power to own, lease and operate its properties and
assets, and to carry on its business as presently conducted.  The company is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary.

2.                   The Company has the requisite corporate power and authority
to enter into and perform its obligations under the Transaction Documents and to
issue the Preferred Stock and the Common Stock issuable upon conversion of the
Preferred Stock.  The execution, delivery and performance of each of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action 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 duly executed and delivered, and the Preferred
Stock has been duly issued and delivered by the Company and each of the
Transaction Documents constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its respective
terms.  The Common Stock issuable upon conversion of the Preferred Stock is not
subject to any preemptive rights under the Certificate of Incorporation or the
Bylaws.

3.                   The Preferred Stock has been duly authorized and, when
delivered against payment in full as provided in the Purchase Agreement, will be
validly issued, fully paid and nonassessable.  The shares of Common Stock
issuable upon conversion of the Preferred Stock has been duly authorized and
reserved for issuance, and, when delivered upon conversion or against payment in
full as provided in the Certificate of Designation, will be validly issued,
fully paid and nonassessable.

4.                   The execution, delivery and performance of and compliance
with the terms of the Transaction Documents and the issuance of the Preferred
Stock and the Common Stock issuable upon conversion of the Preferred Stock do
not (i) violate any provision of the Certificate of Incorporation or Bylaws,
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company is a party, (iii)
create or impose a lien, charge or encumbrance on any property of the Company
under any agreement or any commitment to which the Company is a party or by
which the Company is bound or by which any of its respective properties or
assets are bound, or (iv) (a) result in a violation of any federal, state, local
or foreign statute, rule, regulation, order, judgment, injunction or decree
(including Federal and state securities laws and regulations) applicable to the
Company or by which any property or asset of the Company is bound or affected,
except, in all cases other than violations pursuant to clause (i) above, for
such conflicts, default, terminations, amendments, acceleration, cancellations
and violations as would not, individually or in the aggregate, have a Material
Adverse Effect.

5.                   No consent, approval or authorization of or designation,
declaration or filing with any governmental authority on the part of the Company
is required under Federal, state or local law, rule or regulation in connection
with the valid execution and delivery of the Transaction Documents, or the
offer, sale or issuance of the Preferred Stock or the Common Stock issuable upon
conversion of the Preferred Stock other than the Certificate of Designation and
the Registration Statement.

 

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

6.                   There is no action, suit, claim, investigation or
proceeding pending or threatened against the Company which questions the
validity of this Agreement or the transactions contemplated hereby or any action
taken or to be taken pursuant hereto or thereto.  There is no action, suit,
claim, investigation or proceeding pending, or to our knowledge, threatened,
against or involving the Company or any of its properties or assets and which,
if adversely determined, is reasonably likely to result in a Material Adverse
Effect.  There are no outstanding orders, judgments, injunctions, awards or
decrees of any court, arbitrator or governmental or regulatory body against the
Company or any officers or directors of the Company in their capacities as such.

7.                   The offer, issuance and sale of the Preferred Stock and the
offer, issuance and sale of the shares of Common Stock issuable upon conversion
of the Preferred Stock pursuant to the Purchase Agreement and the Certificate of
Designation are exempt from the registration requirements of the Securities Act.

8.                   The Company is not, and as a result of and immediately upon
Closing will not be, an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.

                        Very truly yours,