EX-10.1 SECURITIES PURCHASE AGREEMENT



 





Exhibit 10.1




EXECUTION COPY




SECURITIES PURCHASE AGREEMENT




     SECURITIES PURCHASE AGREEMENT (the “Agreement”), dated as of August 2, 2007, by and among
Stinger Systems, Inc., a Nevada corporation, with headquarters located at 2701 N. Rocky Point
Drive, Suite 1130, Tampa, Florida 33607 (the “Company”), and the investors listed on the Schedule
of Buyers attached hereto (individually, a “Buyer” and collectively, the “Buyers”).



     WHEREAS:



     A. The Company and each Buyer is executing and delivering this Agreement in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as
amended (the “1933 Act”), and Rule 506 of Regulation D (“Regulation D”) as promulgated by the
United States Securities and Exchange Commission (the “SEC”) under the 1933 Act.



     B. The Company has authorized a new series of senior secured convertible notes of the Company
which notes shall be convertible into the Company’s common stock, par value $0.001 per share (the
“Common Stock”), in accordance with the terms of the Notes (as defined below).



     C. Each Buyer wishes to purchase, and the Company wishes to sell, upon the terms and
conditions stated in this Agreement, (i) that aggregate principal amount of the Notes, in
substantially the form attached hereto as Exhibit A (the “Notes”), set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers attached hereto (which aggregate amount for
all Buyers shall be $3,000,000 (as converted, collectively, the “Conversion Shares”), and (ii)
warrants, in substantially the form attached hereto as Exhibit B (the “Warrants”), to
acquire that number of shares of Common Stock set forth opposite such Buyer’s name in column (4) on
the Schedule of Buyers (as exercised, collectively, the “Warrant Shares”).



     D. The Notes bear interest, which at the option of the Company, subject to certain conditions,
may be paid in shares of Common Stock (the “Interest Shares”).



     E. Contemporaneously with the execution and delivery of this Agreement, the parties hereto are
executing and delivering a Registration Rights Agreement, substantially in the form attached hereto
as Exhibit C (the “Registration Rights Agreement”), pursuant to which the Company has
agreed to provide certain registration rights with respect to the Registrable Securities (as
defined in the Registration Rights Agreement) under the 1933 Act and the rules and regulations
promulgated thereunder, and applicable state securities laws.



     F. The Notes, the Conversion Shares, the Interest Shares, the Warrants and the Warrant Shares
collectively are referred to herein as the “Securities”.



     G. The Notes will rank senior to all outstanding and future indebtedness of the Company and
will be secured by a first priority, perfected security interest in all of the assets of the
Company and the stock and assets of each of the Company’s subsidiaries, as evidenced by the the
security agreement attached hereto as Exhibit D (the “Security Agreement”).



 









 





     NOW, THEREFORE, the Company and each Buyer hereby agree as follows:



     1. PURCHASE AND SALE OF NOTES AND WARRANTS.



          (a) Purchase of Notes and Warrants. Subject to the satisfaction (or waiver) of the
conditions set forth in Sections 6(a) and 7(a) below, the Company shall issue and sell to each
Buyer, and each Buyer severally, but not jointly, agrees to purchase from the Company on the
Closing Date (as defined below), (x) a principal amount of Notes as is set forth opposite such
Buyer’s name in column (3) on the Schedule of Buyers and (y) Warrants to acquire that number of
Warrant Shares as is set forth opposite such Buyer’s name in column (4) on the Schedule of Buyers
(the “Closing”).




          (b) Closing. The Closing shall occur on the Closing Date at the offices of Schulte
Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022.




          (c) Purchase Price. The purchase price for each Buyer of the Notes and the Warrants
to be purchased by each such Buyer at the Closing shall be the amount set forth opposite such
Buyer’s name in column (5) of the Schedule of Buyers (the “Purchase Price”). Each Buyer shall pay
$1.00 for each $1.00 of principal amount of Notes and the related Warrants to be purchased at the
Closing.




          (d) Closing Date. The date and time of the Closing (the “Closing Date”) shall be
10:00 a.m., New York City Time, on the date hereof after notification of satisfaction (or waiver)
of the conditions to the Closing set forth in Sections 6(a) and 7(a) below (or such later date as
is mutually agreed to by the Company and each Buyer).




          (e) Form of Payment. On the Closing Date, each Buyer shall pay the Purchase Price to
the Company for the Notes and the Warrants to be issued and sold to such Buyer at the Closing (A)
by wire transfer of immediately available funds in accordance with the Company’s written wire
instructions. At the Closing, the Company shall deliver to each Buyer (A) the Notes (in the
principal amounts as such Buyer shall request) which such Buyer is then purchasing and (B) the
Warrants (in the amounts as such Buyer shall request) such Buyer is purchasing, in each case duly
executed on behalf of the Company and registered in the name of such Buyer or its designee.




     2. BUYER’S REPRESENTATIONS AND WARRANTIES.



          Each Buyer represents and warrants with respect to only itself that:




          (a) No Public Sale or Distribution. Such Buyer is (i) acquiring the Notes and the
Warrants and (ii) upon conversion of the Notes and exercise of the Warrants (other than pursuant to
a Cashless Exercise (as defined in the Warrants)) will acquire the Conversion Shares issuable upon
conversion of the Notes and the Warrant Shares issuable upon exercise of the Warrants for its own
account and not with a view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, such Buyer does not
agree to hold any of the Securities for any minimum or other specific term and reserves the right
to dispose of the Securities at any time in accordance with or pursuant to a registration statement




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or an exemption under the 1933 Act. Such Buyer is acquiring the Securities hereunder in the
ordinary course of its business. Such Buyer does not presently have any agreement or
understanding, directly or indirectly, with any Person to distribute any of the Securities.




          (b) Accredited Investor Status. Such Buyer is an “accredited investor” as that term
is defined in Rule 501(a) of Regulation D.




          (c) Reliance on Exemptions. Such Buyer understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Buyer’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Buyer set forth herein in order to determine
the availability of such exemptions and the eligibility of such Buyer to acquire the Securities.




          (d) Information. Such Buyer and its advisors, if any, have been furnished with all
materials relating to the business, finances and operations of the Company and materials relating
to the offer and sale of the Securities which have been requested by such Buyer. Such Buyer and
its advisors, if any, have been afforded the opportunity to ask questions of the Company. Neither
such inquiries nor any other due diligence investigations conducted by such Buyer or its advisors,
if any, or its representatives shall modify, amend or affect such Buyer’s right to rely on the
Company’s representations and warranties contained herein. Such Buyer understands that its
investment in the Securities involves a high degree of risk. Such Buyer has sought such
accounting, legal and tax advice as it has considered necessary to make an informed investment
decision with respect to its acquisition of the Securities.




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




          (f) Transfer or Resale. Such Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not being registered under
the 1933 Act or any state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Buyer shall have delivered to
the Company an opinion of counsel, in a generally acceptable form, to the effect that such
Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an
exemption from such registration, or (C) such Buyer provides the Company with reasonable assurance
that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A
promulgated under the 1933 Act, as amended, (or a successor rule thereto) (collectively, “Rule
144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance
with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities
under circumstances in which the seller (or the Person (as defined in Section 3(s)) through whom
the sale is made) may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and regulations of the
SEC thereunder; and (iii) neither the Company nor any other Person




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is under any obligation to register the Securities under the 1933 Act or any state securities
laws or to comply with the terms and conditions of any exemption thereunder. The Securities may be
pledged in connection with a bona fide margin account or other loan or financing arrangement
secured by the Securities and such pledge of Securities shall not be deemed to be a transfer, sale
or assignment of the Securities hereunder, and no Buyer effecting a pledge of Securities 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 (as defined in Section 3(b)),
including, without limitation, this Section 2(f).




          (g) Legends. Such Buyer understands that the certificates or other instruments
representing the Notes and the Warrants and, until such time as the resale of the Conversion Shares
and the Warrant Shares have been registered under the 1933 Act as contemplated by the Registration
Rights Agreement, the stock certificates representing the Conversion Shares and the Warrant Shares,
except as set forth below, shall bear any legend as required by the “blue sky” laws of any state
and a restrictive legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):





[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE]
[EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR
SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD
PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE
SECURITIES.


The legend set forth above shall be removed and the Company shall issue a certificate without such
legend to the holder of the Securities upon which it is stamped or issue to such holder by
electronic delivery at the applicable balance account at DTC (as defined below), unless otherwise
required by state securities laws, (i) such Securities are registered for resale under the 1933
Act, (ii) in connection with a sale, assignment or other transfer, such holder provides the Company
with an opinion of counsel, in a generally acceptable form, to the effect that such sale,
assignment or transfer of the Securities may be made without registration under the applicable
requirements of the 1933 Act, or (iii) such holder provides the Company with reasonable assurance
that the Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A.




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          (h) Validity; Enforcement. This Agreement, the Registration Rights Agreement and the
Security Agreement to which such Buyer is a party have been duly and validly authorized, executed
and delivered on behalf of such Buyer and shall constitute the legal, valid and binding obligations
of such Buyer enforceable against such Buyer in accordance with their respective terms, except as
such enforceability may be limited by general principles of equity or to applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors’ rights and remedies.




          (i) No Conflicts. The execution, delivery and performance by such Buyer of this
Agreement, the Registration Rights Agreement and the Security Agreement to which such Buyer is a
party and the consummation by such Buyer of the transactions contemplated hereby and thereby will
not (i) result in a violation of the organizational documents of such Buyer 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 to which such Buyer is a party, or (iii)
result in a violation of any law, rule, regulation, order, judgment or decree (including federal
and state securities laws) applicable to such Buyer, except in the case of clauses (ii) and (iii)
above, for such conflicts, defaults, rights or violations which would not, individually or in the
aggregate, reasonably be expected to have a material adverse effect on the ability of such Buyer to
perform its obligations hereunder.




          (j) Residency. Such Buyer is a resident of that jurisdiction specified below its
address on the Schedule of Buyers.




     3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.



          The Company represents and warrants to each of the Buyers that:




          (a) Organization and Qualification. Each of the Company and its “Subsidiaries” (which
for purposes of this Agreement means any entity in which the Company, directly or indirectly, owns
any of the capital stock or holds an equity or similar interest) are entities duly organized and
validly existing in good standing under the laws of the jurisdiction in which they are formed, and
have the requisite power and authorization to own their properties and to carry on their business
as now being conducted. Each of the Company and its Subsidiaries is duly qualified as a foreign
entity to do business and is in good standing in every jurisdiction in which its ownership of
property or the nature of the business conducted by it makes such qualification necessary, except
to the extent that the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, “Material Adverse Effect” means any material adverse
effect on the business, properties, assets, operations, results of operations, condition (financial
or otherwise) or prospects of the Company and its Subsidiaries, taken as a whole, or on the
transactions contemplated hereby and the other Transaction Documents or by the agreements and
instruments to be entered into in connection herewith or therewith, or on the authority or ability
of the Company to perform its obligations under the Transaction Documents (as defined below). The
Company has no Subsidiaries except as set forth on Schedule 3(a).




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          (b) Authorization; Enforcement; Validity. The Company has the requisite power and
authority to enter into and perform its obligations under this Agreement, the Notes, the
Registration Rights Agreement, the Security Agreement, the Irrevocable Transfer Agent Instructions
(as defined in Section 5(b)), the Warrants, and each of the other agreements entered into by the
parties hereto in connection with the transactions contemplated by this Agreement (collectively,
the “Transaction Documents”) and to issue the Securities in accordance with the terms hereof and
thereof. The execution and delivery of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby, including, without
limitation, the issuance of the Notes and the Warrants, the reservation for issuance and the
issuance of the Conversion Shares issuable upon conversion of the Notes, the reservation for
issuance and issuance of Warrant Shares issuable upon exercise of the Warrants, the reservation for
issuance and issuance of Interest Shares, if any, and the granting of a security interest in the
Collateral (as defined in the Security Agreement) have been duly authorized by the Company’s Board
of Directors and (other than (i) the filing of appropriate UCC financing statements with the
appropriate states and other authorities pursuant to the Security Agreement, and (ii) the filing
with the SEC of one or more Registration Statements in accordance with the requirements of the
Registration Rights Agreement) no further filing, consent, or authorization is required by the
Company, its Board of Directors or its stockholders. This Agreement and the other Transaction
Documents of even date herewith have been duly executed and delivered by the Company, and
constitute the legal, valid and binding obligations of the Company, enforceable against the Company
in accordance with their respective terms, except as such enforceability may be limited by general
principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally, the enforcement of applicable creditors’
rights and remedies.




          (c) Issuance of Securities. The issuance of the Notes and the Warrants are duly
authorized and are free from all taxes, liens and charges with respect to the issue thereof. As of
the applicable Closing, a number of shares of Common Stock shall have been duly authorized and
reserved for issuance which equals at least 130% of the sum of the maximum number of shares Common
Stock issuable (i) as Interest Shares pursuant to the terms of the Notes, (ii) upon conversion of
the Notes issued at such Closing and issued at all prior Closings and (iii) upon exercise of the
Warrants. Upon conversion or payment in accordance with the Notes or exercise in accordance with
the Warrants, as the case may be, the Conversion Shares, the Interest Shares and the Warrant
Shares, respectively, will be validly issued, fully paid and nonassessable and free from all
preemptive or similar rights, taxes, liens and charges with respect to the issue thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock. The offer and issuance
by the Company of the Securities is exempt from registration under the 1933 Act.




          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby (including, without limitation, the issuance of the Notes and the Warrants, the
granting of a security interest in the Collateral and reservation for issuance and issuance of the
Conversion Shares, the Interest Shares and the Warrant Shares) will not (i) result in a violation
of the Articles of Incorporation (as defined in Section 3(r)) of the Company or any of its
Subsidiaries, any capital stock of the Company or Bylaws (as defined in Section 3(r)) of the
Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event
which




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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 to which the Company or any of its Subsidiaries is a party, or (iii) result in a
violation of any law, rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations and the rules and regulations of the OTC Bulletin Board (the
“Principal Market”)) applicable to the Company or any of its Subsidiaries or by which any property
or asset of the Company or any of its Subsidiaries is bound or affected.




          (e) Consents. Neither the Company nor any of its Subsidiaries is required to obtain
any consent, authorization or order of, or make any filing or registration with, any court,
governmental agency or any regulatory or self-regulatory agency or any other Person in order for it
to execute, deliver or perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. All consents,
authorizations, orders, filings and registrations which the Company is required to obtain pursuant
to the preceding sentence have been obtained or effected on or prior to the Closing Date, and the
Company and its Subsidiaries are unaware of any facts or circumstances which might prevent the
Company from obtaining or effecting any of the registration, application or filings pursuant to the
preceding sentence. The Company is not in violation of the listing requirements of the Principal
Market and has no knowledge of any facts which would reasonably lead to delisting or suspension of
the Common Stock in the foreseeable future.




          (f) Acknowledgment Regarding Buyer’s Purchase of Securities. The Company acknowledges
and agrees that each Buyer is acting solely in the capacity of arm’s length purchaser with respect
to the Transaction Documents and the transactions contemplated hereby and thereby and that no Buyer
is (i) an officer or director of the Company, (ii) an “affiliate” of the Company (as defined in
Rule 144) or (iii) to the knowledge of the Company, a “beneficial owner” of more than 10% of the
shares of Common Stock (as defined for purposes of Rule 13d-3 of the Securities Exchange Act of
1934, as amended (the “1934 Act”)). The Company further acknowledges that no Buyer is acting as a
financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby, and any advice given by
a Buyer or any of its representatives or agents in connection with the Transaction Documents and
the transactions contemplated hereby and thereby is merely incidental to such Buyer’s purchase of
the Securities. The Company further represents to each Buyer that the Company’s decision to enter
into the Transaction Documents has been based solely on the independent evaluation by the Company
and its representatives.




          (g) No General Solicitation; Placement Agent’s Fees. 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) in connection with the
offer or sale of the Securities. The Company shall be responsible for the payment of any placement
agent’s fees, financial advisory fees, or brokers’ commissions (other than for persons engaged by
any Buyer or its investment advisor) relating to or arising out of the transactions contemplated
hereby. The Company shall pay, and hold each Buyer harmless against, any liability, loss or
expense (including, without limitation, attorney’s fees and out-of-pocket expenses) arising in
connection with any such claim. The Company acknowledges that it has engaged Midtown Partners &
Co. LLC as placement agent (the “Placement Agent”) in




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connection with the sale of the Securities. Other than the Placement Agent, the Company has
not engaged any placement agent or other agent in connection with the sale of the Securities.



          (h) No Integrated Offering. None of the Company, its Subsidiaries, any of their
affiliates, and any Person acting on 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
require registration of any of the Securities under the 1933 Act or cause this offering of the
Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any
applicable stockholder approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the securities of the
Company are listed or designated. None of the Company, its Subsidiaries, their affiliates and any
Person acting on their behalf will take any action or steps referred to in the preceding sentence
that would require registration of any of the Securities under the 1933 Act or cause the offering
of the Securities to be integrated with other offerings.




          (i) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes and its obligation to issue the Warrant Shares upon exercise of the
Warrants in accordance with this Agreement and the Warrants, in each case, is absolute and
unconditional regardless of the dilutive effect that such issuance may have on the ownership
interests of other stockholders of the Company.




          (j) Application of Takeover Protections; Rights Agreement. The Company and its board
of directors have taken all necessary action, if any, in order to render inapplicable any control
share acquisition, business combination, poison pill (including any distribution under a rights
agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws
of the jurisdiction of its formation which is or could become applicable to any Buyer as a result
of the transactions contemplated by this Agreement, including, without limitation, the Company’s
issuance of the Securities and any Buyer’s ownership of the Securities. The Company has not
adopted a stockholder rights plan or similar arrangement relating to accumulations of beneficial
ownership of Common Stock or a change in control of the Company.




          (k) SEC Documents; Financial Statements. Except as disclosed in Schedule
3(k), during the two (2) years prior to the date hereof, the Company has filed all reports,
schedules, forms, statements and other documents required to be filed by it with the SEC pursuant
to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof
and all exhibits included therein and financial statements, notes and schedules thereto and
documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”).
The Company has delivered to the Buyers or their respective representatives true, correct and
complete copies of the SEC Documents not available on the EDGAR system. As of their respective
dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act
and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents,
and none of the SEC Documents, at the time they were filed with the SEC, 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 the light of




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the circumstances under which they were made, not misleading. As of their respective dates,
the financial statements of the Company included in the SEC Documents complied as to form in all
material respects with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, 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 exclude footnotes or may be condensed
or summary statements) and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).
No other information provided by or on behalf of the Company to the Buyers which is not included in
the SEC Documents, including, without limitation, information referred to in Section 2(d) of this
Agreement, contains any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in the light of the circumstance under which
they are or were made, not misleading.




          (l) Absence of Certain Changes. Except as disclosed in Schedule 3(l), since
December 31, 2006, there has been no material adverse change and no material adverse development in
the business, properties, operations, condition (financial or otherwise), results of operations or
prospects of the Company or its Subsidiaries. Except as disclosed in Schedule 3(l), since
December 31, 2006, the Company has not (i) declared or paid any dividends, (ii) sold any assets,
individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business
or (iii) had capital expenditures, individually or in the aggregate, in excess of $100,000. The
Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the
Company have any knowledge or reason to believe that its creditors intend to initiate involuntary
bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor
to do so. The Company is not as of the date hereof, and after giving effect to the transactions
contemplated hereby to occur at the Closing, will not be Insolvent (as defined below). For
purposes of this Section 3(l), “Insolvent” means with respect to any Person, (i) the present fair
saleable value of such Person’s assets is less than the amount required to pay such Person’s total
Indebtedness (as defined in Section 3(s)), (ii) such Person is unable to pay its debts and
liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute
and matured, (iii) the Company intends to incur or believes that it will incur debts that would be
beyond its ability to pay as such debts mature or (iv) such Person has unreasonably small capital
with which to conduct the business in which it is engaged as such business is now conducted and is
proposed to be conducted.




          (m) No Undisclosed Events, Liabilities, Developments or Circumstances. No event,
liability, development or circumstance has occurred or exists, or is contemplated to occur with
respect to the Company, its Subsidiaries or their respective business, properties, prospects,
operations or financial condition, that would be required to be disclosed by the Company under
applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to
an issuance and sale by the Company of its Common Stock and which has not been publicly announced.




          (n) Conduct of Business; Regulatory Permits. Neither the Company nor its Subsidiaries
is in violation of any term of or in default under any certificate of designations of




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any outstanding series of preferred stock of the Company, its Articles of Incorporation or
Bylaws or their organizational charter or certificate of incorporation or bylaws, respectively.
Neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or
any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and
neither the Company nor any of its Subsidiaries will conduct its business in violation of any of
the foregoing, except for possible violations which would not, individually or in the aggregate,
have a Material Adverse Effect. Without limiting the generality of the foregoing, the Company is
not in violation of any of the rules, regulations or requirements of the Principal Market and has
no knowledge of any facts or circumstances which would reasonably lead to delisting or suspension
of the Common Stock by the Principal Market in the foreseeable future. During the two years prior
to the date hereof, the Common Stock has been designated for quotation on the Principal Market.
During the two years prior to the date hereof, (i) trading in the Common Stock has not been
suspended by the SEC or the Principal Market and (ii) the Company has received no communication,
written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the
Common Stock from the Principal Market. The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate regulatory authorities necessary to conduct
their respective businesses, except where the failure to possess such certificates, authorizations
or permits would not have, individually or in the aggregate, a Material Adverse Effect, and neither
the Company nor any such Subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit.




          (o) Foreign Corrupt Practices. Neither the Company, nor any of its Subsidiaries, nor
any director, officer, agent, employee or other Person acting on behalf of the Company or any of
its Subsidiaries has, in the course of its actions for, or on behalf of, the Company or any of its
Subsidiaries (i) used any corporate funds for any unlawful contribution, gift, entertainment or
other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful
payment to any foreign or domestic government official or employee from corporate funds; (iii)
violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as
amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other
unlawful payment to any foreign or domestic government official or employee.




          (p) Sarbanes-Oxley Act. The Company is in compliance with any and all applicable
requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any
and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of
the date hereof.




          (q)  Transactions With Affiliates. Except as set on Schedule 3(q), none of
the officers, directors or employees of the Company is presently a party to any transaction with
the Company or any of its Subsidiaries (other than for ordinary course services as employees,
officers or directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any such officer, director or employee or, to the knowledge
of the Company or any of its Subsidiaries, any corporation, partnership, trust or other entity in
which any such officer, director, or employee has a substantial interest or is an officer,
director, trustee or partner.




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          (r) Equity Capitalization. As of the date hereof, the authorized capital stock of the
Company consists of (i) 50,000,000 shares of Common Stock, of which as of the date hereof,
17,484,171 are issued and outstanding, 2,000,000 shares are reserved for issuance
pursuant to the Company’s stock option and purchase plans and 2,120,001 shares are reserved for
issuance pursuant to securities (other than the aforementioned options, the Notes and the Warrants)
exercisable or exchangeable for, or convertible into, shares of Common Stock. All of such
outstanding shares have been, or upon issuance will be, validly issued and are fully paid and
nonassessable. Except as disclosed in Schedule 3(r): (i) none of the Company’s capital
stock is subject to preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip,
rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities
or rights convertible into, or exercisable or exchangeable for, any capital stock of the Company or
any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to issue additional capital stock of the
Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights convertible into, or
exercisable or exchangeable for, any capital stock of the Company or any of its Subsidiaries; (iii)
there are no outstanding debt securities, notes, credit agreements, credit facilities or other
agreements, documents or instruments evidencing Indebtedness of the Company or any of its
Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there
are no financing statements securing obligations in any material amounts, either singly or in the
aggregate, filed in connection with the Company or any of its Subsidiaries; (v) there are no
agreements or arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except pursuant to the
Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the
Company or any of its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the Company or any of its
Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries;
(vii) there are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance of the Securities; (viii) the Company does not have any stock
appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and
(ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed
in the SEC Documents but not so disclosed in the SEC Documents, other than those incurred in the
ordinary course of the Company’s or its Subsidiaries’ respective businesses and which, individually
or in the aggregate, do not or would not have a Material Adverse Effect. The Company has furnished
to the Buyers true, correct and complete copies of the Company’s Articles of Incorporation, as
amended and as in effect on the date hereof (the “Articles of Incorporation”), and the Company’s
Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all
securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the
material rights of the holders thereof in respect thereto.




          (s) Indebtedness and Other Contracts. Except as disclosed in Schedule 3(s),
neither the Company nor any of its Subsidiaries (i) has any outstanding Indebtedness (as defined
below), (ii) is a party to any contract, agreement or instrument, the violation of which, or
default under which, by the other party(ies) to such contract, agreement or instrument would result
in a Material Adverse Effect, (iii) is in violation of any term of or in default under any
contract, agreement or instrument relating to any Indebtedness, except where such violations and
defaults




- 11 -









 







would not result, individually or in the aggregate, in a Material Adverse Effect, or (iv) is a
party to any contract, agreement or instrument relating to any Indebtedness, the performance of
which, in the judgment of the Company’s officers, has or is expected to have a Material Adverse
Effect. Schedule 3(s) provides a detailed description of the material terms of any such
outstanding Indebtedness. For purposes of this Agreement: (x) “Indebtedness” of any Person means,
without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken
or assumed as the deferred purchase price of property or services (other than trade payables
entered into in the ordinary course of business), (C) all reimbursement or payment obligations with
respect to letters of credit, surety bonds and other similar instruments, (D) all obligations
evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced
incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness
created or arising under any conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to any property or assets acquired with the proceeds of such
indebtedness (even though the rights and remedies of the seller or bank under such agreement in the
event of default are limited to repossession or sale of such property), (F) all monetary
obligations under any leasing or similar arrangement which, in connection with generally accepted
accounting principles, consistently applied for the periods covered thereby, is classified as a
capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for
which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured
by) any mortgage, lien, pledge, charge, security interest or other encumbrance upon or in any
property or assets (including accounts and contract rights) owned by any Person, even though the
Person which owns such assets or property has not assumed or become liable for the payment of such
indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of
others of the kinds referred to in clauses (A) through (G) above; (y) “Contingent Obligation”
means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person
with respect to any indebtedness, lease, dividend or other obligation of another Person if the
primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is
to provide assurance to the obligee of such liability that such liability will be paid or
discharged, or that any agreements relating thereto will be complied with, or that the holders of
such liability will be protected (in whole or in part) against loss with respect thereto; and (z)
“Person” means an individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any department or agency
thereof.




          (t) Absence of Litigation. There is no action, suit, proceeding, inquiry or
investigation before or by the Principal Market, any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company, threatened
against or affecting the Company or any of its Subsidiaries, the Common Stock or any of the
Company’s Subsidiaries or any of the Company’s or its Subsidiaries’ officers or directors in their
capacities as such, except as set forth in Schedule 3(t).




          (u) Insurance. The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such amounts as management
of the Company believes to be prudent and customary in the businesses in which the Company and its
Subsidiaries are engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any
reason to believe that it will not be able to renew its existing insurance




- 12 -









 







coverage as and when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a Material Adverse
Effect.




          (v) Employee Relations. (i) Neither the Company nor any of its Subsidiaries is a
party to any collective bargaining agreement or employs any member of a union. The Company and its
Subsidiaries believe that their relations with their employees are good. No executive officer of
the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the
Company or any such Subsidiary that such officer intends to leave the Company or otherwise
terminate such officer’s employment with the Company or any such Subsidiary. No executive officer
of the Company or any of its Subsidiaries, to the knowledge of the Company, is, or is now expected
to be, in violation of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other contract or agreement or
any restrictive covenant, and the continued employment of each such executive officer does not
subject the Company or any of its Subsidiaries to any liability with respect to any of the
foregoing matters.




               (ii) The Company and its Subsidiaries are in compliance with all federal, state, local and
foreign laws and regulations respecting labor, employment and employment practices and benefits,
terms and conditions of employment and wages and hours, except where failure to be in compliance
would not, either individually or in the aggregate, reasonably be expected to result in a Material
Adverse Effect.



          (w) Title. The Company and its Subsidiaries have good and marketable title in fee
simple to all real property and good and marketable title to all personal property owned by them
which is material to the business of the Company and its Subsidiaries, in each case free and clear
of all liens, encumbrances and defects except such as do not materially affect the value of such
property and do not interfere with the use made and proposed to be made of such property by the
Company and any of its Subsidiaries. Any real property and facilities held under lease by the
Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its Subsidiaries.




          (x) Intellectual Property Rights. The Company and its Subsidiaries own or possess
adequate rights or licenses to use all trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and other intellectual property rights (“Intellectual
Property Rights”) necessary to conduct their respective businesses as now conducted. Except as set
forth in Schedule 3(x), none of the Company’s Intellectual Property Rights have expired or
terminated, or are expected to expire or terminate, within three years from the date of this
Agreement. The Company does not have any knowledge of any infringement by the Company or its
Subsidiaries of Intellectual Property Rights of others. There is no claim, action or proceeding
being made or brought, or to the knowledge of the Company, being threatened, against the Company or
its Subsidiaries regarding its Intellectual Property Rights. The Company is unaware of any facts
or circumstances which might give rise to any of the foregoing infringements or claims, actions or
proceedings. The Company and its Subsidiaries




- 13 -









 







have taken reasonable security measures to protect the secrecy, confidentiality and value of
all of their intellectual properties.




          (y) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with
any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) are in compliance with all terms and conditions of any such permit, license or
approval where, in each of the foregoing clauses (i), (ii) and (iii), the failure to so comply
could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.
The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution
or protection of human health or the environment (including, without limitation, ambient air,
surface water, groundwater, land surface or subsurface strata), including, without limitation, laws
relating to emissions, discharges, releases or threatened releases of chemicals, pollutants,
contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into
the environment, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all
authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses,
notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or
approved thereunder.




          (z) Subsidiary Rights. Except as set forth in Schedule 3(z), the Company or
one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by
applicable law) to receive dividends and distributions on, all capital securities of its
Subsidiaries as owned by the Company or such Subsidiary.




          (aa) Investment Company Status. The Company is not, and upon consummation of the sale
of the Securities will not be, an “investment company,” a company controlled by an “investment
company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment
company” as such terms are defined in the Investment Company Act of 1940, as amended.




          (bb) Tax Status. The Company and each of its Subsidiaries (i) has made or filed all
foreign, federal and state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments
and charges that are material in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and (iii) has set aside on its books
provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to
which such returns, reports or declarations apply. There are no unpaid taxes in any material
amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.




          (cc) Internal Accounting and Disclosure Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to maintain asset and
liability accountability, (iii) access to assets or incurrence of liabilities is permitted only in




- 14 -









 







accordance with management’s general or specific authorization and (iv) the recorded
accountability for assets and liabilities is compared with the existing assets and liabilities at
reasonable intervals and appropriate action is taken with respect to any difference. The Company
maintains disclosure controls and procedures (as such term is defined in Rule 13a-14 under the 1934
Act) that are effective in ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the 1934 Act is recorded, processed, summarized and
reported, within the time periods specified in the rules and forms of the SEC, including, without
limitation, controls and procedures designed in to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the 1934 Act is accumulated and
communicated to the Company’s management, including its principal executive officer or officers and
its principal financial officer or officers, as appropriate, to allow timely decisions regarding
required disclosure.




          (dd) Off Balance Sheet Arrangements. There is no transaction, arrangement, or other
relationship between the Company and an unconsolidated or other off balance sheet entity that is
required to be disclosed by the Company in its Exchange Act filings and is not so disclosed or that
otherwise would be reasonably likely to have a Material Adverse Effect.




          (ee) Ranking of Notes. Except as set forth on Schedule (ee), no Indebtedness
of the Company is senior to or ranks pari passu with the Notes in right of payment, whether with
respect of payment of redemptions, interest, damages or upon liquidation or dissolution or
otherwise.




          (ff) Form S-1 Eligibility. The Company is eligible to register the Conversion Shares
and the Warrant Shares for resale by the Buyers using Form S-1 promulgated under the 1933 Act.




          (gg) Transfer Taxes. On the Closing Date, all stock transfer or other taxes (other
than income or similar taxes) which are required to be paid in connection with the sale and
transfer of the Securities to be sold to each Buyer hereunder will be, or will have been, fully
paid or provided for by the Company, and all laws imposing such taxes will be or will have been
complied with.




          (hh) Manipulation of Price. The Company has not, and to its knowledge no one acting
on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in
the stabilization or manipulation of the price of any security of the Company to facilitate the
sale or resale of any of the Securities, (ii) other than the Placement Agent, sold, bid for,
purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii)
other than the Placement Agent, paid or agreed to pay to any person any compensation for soliciting
another to purchase any other securities of the Company.




          (ii) Acknowledgement Regarding Buyers’ Trading Activity. It is understood and
acknowledged by the Company that, except as provided in Section 4(s), (i) none of the Buyers have
been asked to agree, nor has any Buyer agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on securities issued by the
Company or to hold the Securities for any specified term; (ii) any Buyer, and counter parties in
“derivative” transactions to which any such Buyer is a party, directly or indirectly,




- 15 -









 







presently may have a “short” position in the Common Stock, and (iii) each Buyer shall not be
deemed to have any affiliation with or control over any arm’s length counter-party in any
“derivative” transaction. The Company further understands and acknowledges that (a) one or more
Buyers may engage in hedging and/or trading activities at various times during the period that the
Securities are outstanding, including, without limitation, during the periods that the value of the
Conversion Shares, the Warrant Shares and any Interest Shares deliverable with respect to
Securities are being determined and (b) such hedging and/or trading activities, if any, can reduce
the value of the existing stockholders’ equity interest in the Company both at and after the time
the hedging and/or trading activities are being conducted. The Company acknowledges that such
aforementioned hedging and/or trading activities do not constitute a breach of this Agreement, the
Notes, the Warrants or any of the documents executed in connection herewith.




          (jj) U.S. Real Property Holding Corporation. The Company is not, nor has ever been, a
U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue
Code of 1986, as amended, and the Company shall so certify upon Buyer’s request.




          (kk) Bank Holding Company Act Neither the Company nor any of its Subsidiaries or
affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to
regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).
Neither the Company nor any of its Subsidiaries or affiliates owns or controls, directly or
indirectly, five percent or more of the outstanding shares of any class of voting securities or
twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA
and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or
affiliates exercises a controlling influence over the management or policies of a bank or any
entity that is subject to the BHCA and to regulation by the Federal Reserve.




          (ll) Disclosure. The Company confirms that neither it nor any other Person acting on
its behalf has provided any of the Buyers or their agents or counsel with any information that
constitutes or could reasonably be expected to constitute material, nonpublic information other
than as set forth in the following sentence. The Company understands and confirms that each of the
Buyers will rely on the foregoing representations in effecting transactions in securities of the
Company. All disclosure provided to the Buyers regarding the Company, its business and the
transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on
behalf of the Company is true and correct and does not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the statements made therein, in
the light of the circumstances under which they were made, not misleading. Each press release
issued by the Company during the twelve (12) months preceding the date of this Agreement did not at
the time of release contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. No event or circumstance has
occurred or information exists with respect to the Company or any of its Subsidiaries or its or
their business, properties, prospects, operations or financial conditions, 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.




- 16 -









 








     4. COVENANTS.



          (a) Best Efforts. Each party shall use its best efforts timely to satisfy each of the
conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.




          (b) Form D and Blue Sky. The Company agrees to file a Form D with respect to the
Securities as required under Regulation D and to provide a copy thereof to each Buyer promptly
after such filing. The Company shall, on or before the Closing Date, take such action as the
Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify
the Securities for sale to the Buyers at the Closing pursuant to this Agreement under applicable
securities or “Blue Sky” laws of the states of the United States (or to obtain an exemption from
such qualification), and shall provide evidence of any such action so taken to the Buyers on or
prior to the Closing Date. The Company shall make all filings and reports relating to the offer
and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of
the United States following the Closing Date.




          (c) Reporting Status. Until the date on which the Investors (as defined in the
Registration Rights Agreement) shall have sold all the Conversion Shares, the Interest Shares and
Warrant Shares and none of the Notes or Warrants is outstanding (the “Reporting Period”), the
Company shall file all reports required to be filed with the SEC pursuant to the 1934 Act, and the
Company shall not terminate its status as an issuer required to file reports under the 1934 Act
even if the 1934 Act or the rules and regulations thereunder would otherwise permit such
termination.




          (d) Use of Proceeds. The Company will use the proceeds from the sale of the
Securities for general corporate purposes, including general and administrative expenses, and not
for (i) the repayment of any outstanding Indebtedness of the Company or any of its Subsidiaries,
(ii) the redemption or repurchase of any of its or its Subsidiaries’ equity securities, or (iii)
the settlement of any claims, actions or proceedings against the Company or any of its
Subsidiaries.




          (e) Financial Information. The Company agrees to send the following to each Investor
(as defined in the Registration Rights Agreement) during the Reporting Period (i) unless the
following are filed with the SEC through EDGAR and are available to the public through the EDGAR
system, within one (1) Business Day (as defined below) after the filing thereof with the SEC, a
copy of its Annual Reports on Form 10-K or 10-KSB, any interim reports or any consolidated balance
sheets, income statements, stockholders’ equity statements and/or cash flow statements for any
period other than annual, any Current Reports on Form 8-K and any registration statements (other
than on Form S-8) or amendments filed pursuant to the 1933 Act, (ii) on the same day as the release
thereof, facsimile or e-mailed copies of all press releases issued by the Company or any of its
Subsidiaries, and (iii) copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making available or giving
thereof to the stockholders. As used herein, “Business Day” means any day other than Saturday,
Sunday or other day on which commercial banks in The City of New York are authorized or required by
law to remain closed.




          (f) Listing. The Company shall promptly secure the listing of all of the Registrable
Securities (as defined in the Registration Rights Agreement) upon each national




- 17 -









 







securities exchange and automated quotation system, if any, upon which the Common Stock is
then listed (subject to official notice of issuance) and shall maintain such listing of all
Registrable Securities from time to time issuable under the terms of the Transaction Documents.
The Company shall maintain the Common Stocks’ authorization for quotation on the Principal Market.
Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably
expected to result in the delisting or suspension of the Common Stock on the Principal Market. The
Company shall pay all fees and expenses in connection with satisfying its obligations under this
Section 4(f).




          (g) Fees. The Company shall reimburse Castlerigg Master Investments Ltd.
(“Castlerigg”) (a Buyer) or its designee(s) (in addition to any other expense amounts paid to any
Buyer prior to the date of this Agreement) for all reasonable costs and expenses incurred in
connection with the transactions contemplated by the Transaction Documents (including all
reasonable legal fees and disbursements in connection therewith, documentation and implementation
of the transactions contemplated by the Transaction Documents and due diligence in connection
therewith), which amount shall be withheld by such Buyer from its Purchase Price at the Closing.
The Company shall be responsible for the payment of any placement agent’s fees, financial advisory
fees, or broker’s commissions (other than for Persons engaged by any Buyer) relating to or arising
out of the transactions contemplated hereby, including, without limitation, any fees or commissions
payable to the Placement Agent. The Company shall pay, and hold each Buyer harmless against, any
liability, loss or expense (including, without limitation, reasonable attorney’s fees and
out-of-pocket expenses) arising in connection with any claim relating to any such payment. Except
as otherwise set forth in the Transaction Documents, each party to this Agreement shall bear its
own expenses in connection with the sale of the Securities to the Buyers.




          (h) Pledge of Securities. The Company acknowledges and agrees that the Securities may
be pledged by an Investor (as defined in the Registration Rights Agreement) in connection with a
bona fide margin agreement or other loan or financing arrangement that is secured by the
Securities. The pledge of Securities shall not be deemed to be a transfer, sale or assignment of
the Securities hereunder, and no Investor effecting a pledge of Securities 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, including, without limitation, Section 2(f)
hereof; provided that an Investor and its pledgee shall be required to comply with the provisions
of Section 2(f) hereof in order to effect a sale, transfer or assignment of Securities to such
pledgee. The Company hereby agrees to execute and deliver such documentation as a pledgee of the
Securities may reasonably request in connection with a pledge of the Securities to such pledgee by
an Investor.




          (i) Disclosure of Transactions and Other Material Information. On or before 5:00
p.m., New York City time, on the first Business Day following the date of this Agreement, the
Company shall issue a press release and file a Current Report on Form 8-K describing the terms of
the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and
attaching the material Transaction Documents (including, without limitation, this Agreement (and
all schedules to this Agreement), the form of the Notes, the form of Warrant, the form of the
Registration Rights Agreement and the form of Security Agreement) as exhibits to such filing
(including all attachments, the “8-K Filing”). From and after the filing of the 8-K




- 18 -









 







Filing with the SEC, no Buyer shall be in possession of any material, nonpublic information
received from the Company, any of its Subsidiaries or any of their respective officers, directors,
employees or agents, that is not disclosed in the 8-K Filing. The Company shall not, and shall
cause each of its Subsidiaries and its and each of their respective officers, directors, employees
and agents, not to, provide any Buyer with any material, nonpublic information regarding the
Company or any of its Subsidiaries from and after the filing of the 8-K Filing with the SEC without
the express written consent of such Buyer. If a Buyer has, or believes it has, received any such
material, nonpublic information regarding the Company or any of its Subsidiaries, it shall provide
the Company with written notice thereof. The Company shall, within two (2) Trading Days of receipt
of such notice, make public disclosure of such material, nonpublic information. In the event of a
breach of the foregoing covenant by the Company, any of its Subsidiaries, or any of its or their
respective officers, directors, employees and agents, in addition to any other remedy provided
herein or in the Transaction Documents, a Buyer shall have the right to make a public disclosure,
in the form of a press release, public advertisement or otherwise, of such material, nonpublic
information without the prior approval by the Company, its Subsidiaries, or any of its or their
respective officers, directors, employees or agents. No Buyer shall have any liability to the
Company, its Subsidiaries, or any of its or their respective officers, directors, employees,
stockholders or agents for any such disclosure. Subject to the foregoing, neither the Company, its
Subsidiaries nor any Buyer shall issue any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of any Buyer, to make any press release or other public
disclosure with respect to such transactions (i) in substantial conformity with the 8-K Filings and
contemporaneously therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) each Buyer shall be consulted by the Company in connection with any
such press release or other public disclosure prior to its release). Without the prior written
consent of any applicable Buyer, neither the Company nor any of its Subsidiaries or affiliates
shall disclose the name of such Buyer in any filing, announcement, release or otherwise.




          (j) Restriction on Redemption and Cash Dividends. So long as any Notes are
outstanding, the Company shall not, directly or indirectly, redeem, or declare or pay any cash
dividend or distribution on, the Common Stock without the prior express written consent of the
holders of Notes representing not less than a majority of the aggregate principal amount of the
then outstanding Notes.




          (k) Additional Notes; Variable Securities; Dilutive Issuances. So long as any Buyer
beneficially owns any Securities, the Company will not issue any Notes other than to the Buyers as
contemplated hereby and the Company shall not issue any other securities that would cause a breach
or default under the Notes. For long as any Notes or Warrants remain outstanding, the Company
shall not, in any manner, issue or sell any rights, warrants or options to subscribe for or
purchase Common Stock or directly or indirectly convertible into or exchangeable or exercisable for
Common Stock at a price which varies or may vary with the market price of the Common Stock,
including by way of one or more reset(s) to any fixed price unless the conversion, exchange or
exercise price of any such security cannot be less than the then applicable Conversion Price (as
defined in the Notes) with respect to the Common Stock into which any Note is convertible or the
then applicable Exercise Price (as defined in the Warrants) with respect to the Common Stock into
which any Warrant is exercisable. For long as




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any Notes or Warrants remain outstanding, the Company shall not, in any manner, enter into or
affect any Dilutive Issuance (as defined in the Notes) if the effect of such Dilutive Issuance is
to cause the Company to be required to issue upon conversion of any Note or exercise of any Warrant
any shares of Common Stock in excess of that number of shares of Common Stock which the Company may
issue upon conversion of the Notes and exercise of the Warrants without breaching the Company’s
obligations under the rules or regulations of the Principal Market or any applicable Eligible
Market (as defined in the Registration Rights Agreement).




          (l) Corporate Existence. So long as any Buyer beneficially owns any Securities, the
Company shall not be party to any Fundamental Transaction (as defined in the Notes) unless the
Company is in compliance with the applicable provisions governing Fundamental Transactions set
forth in the Notes and the Warrants.




          (m) Reservation of Shares. So long as any Buyer owns any Securities, the Company
shall take all action necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 130% of the sum of the number of shares of Common Stock issuable (i) as
Interest Shares pursuant to the terms of the Notes, (ii) upon conversion of the Notes and (iii)
upon exercise of the Warrants then outstanding (without taking into account any limitations on the
conversion of the Notes or exercise of the Warrants set forth in the Notes and Warrants,
respectively).




          (n) Conduct of Business. The business of the Company and its Subsidiaries shall not
be conducted in violation of any law, ordinance or regulation of any governmental entity, except
where such violations would not result, either individually or in the aggregate, in a Material
Adverse Effect.




          (o) Additional Issuances of Securities.




               (i) For purposes of this Section 4(o), the following definitions shall apply.




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




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




               (3) “Common Stock Equivalents” means, collectively, Options and Convertible Securities.



               (ii) From the date hereof until the date that is 30 Business Days following the Effective Date
upon which all Registrable Securities (as such terms are defined in the Registration Rights
Agreement) have been registered (the “Trigger Date”), the Company will not, (i) directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any
offer, sale, grant or any option to purchase or other disposition of) any of its or its
Subsidiaries’ debt, equity or equity equivalent securities, including without limitation any debt,
preferred stock or other instrument or security that is, at any time during its life and under



- 20 -









 




any circumstances, convertible into or exchangeable or exercisable for shares of Common Stock
or Common Stock Equivalents (any such offer, sale, grant, disposition or announcement being
referred to as a “Subsequent Placement”) or (ii) be party to any solicitations, negotiations or
discussions with regard to the foregoing.




               (iii) From the Trigger Date until the second anniversary of the Trigger Date, the Company will
not, directly or indirectly, effect any Subsequent Placement unless the Company shall have first
complied with this Section 4(o)(iii).




               (1) The Company shall deliver to each Buyer written notice (the “Offer Notice”) of any
proposed or intended issuance or sale or exchange (the “Offer”) of the securities being
offered (the “Offered Securities”) in a Subsequent Placement, which Offer Notice shall (w)
identify and describe the Offered Securities, (x) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the Offered
Securities to be issued, sold or exchanged, (y) identify the persons or entities (if known)
to which or with which the Offered Securities are to be offered, issued, sold or exchanged
and (z) offer to issue and sell to or exchange with such Buyers all of the Offered
Securities, allocated among such Buyers (a) based on such Buyer’s pro rata portion of the
aggregate principal amount of Notes purchased hereunder (the “Basic Amount”), and (b) with
respect to each Buyer that elects to purchase its Basic Amount, any additional portion of
the Offered Securities attributable to the Basic Amounts of other Buyers as such Buyer shall
indicate it will purchase or acquire should the other Buyers subscribe for less than their
Basic Amounts (the “Undersubscription Amount”).




               (2) To accept an Offer, in whole or in part, such Buyer must deliver a written notice
to the Company prior to the end of the tenth (10th) Business Day after such
Buyer’s receipt of the Offer Notice (the “Offer Period”), setting forth the portion of such
Buyer’s Basic Amount that such Buyer elects to purchase and, if such Buyer shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that such Buyer
elects to purchase (in either case, the “Notice of Acceptance”). If the Basic Amounts
subscribed for by all Buyers are less than the total of all of the Basic Amounts, then each
Buyer who has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the Undersubscription
Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total of all the
Basic Amounts and the Basic Amounts subscribed for (the “Available Undersubscription
Amount”), each Buyer who has subscribed for any Undersubscription Amount shall be entitled
to purchase only that portion of the Available Undersubscription Amount as the Basic Amount
of such Buyer bears to the total Basic Amounts of all Buyers that have subscribed for
Undersubscription Amounts, subject to rounding by the Company to the extent its deems
reasonably necessary.




               (3) The Company shall have five (5) Business Days from the expiration of the Offer
Period above to offer, issue, sell or exchange all or any part of such Offered Securities as
to which a Notice of Acceptance has not been given by the Buyers (the “Refused Securities”),
but only to the offerees described in the Offer Notice



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(if so described therein) and only upon terms and conditions (including, without
limitation, unit prices and interest rates) that are not more favorable to the acquiring
person or persons or less favorable to the Company than those set forth in the Offer Notice.




               (4) In the event the Company shall propose to sell less than all the Refused Securities
(any such sale to be in the manner and on the terms specified in Section 4(o)(iii)(3)
above), then each Buyer may, at its sole option and in its sole discretion, reduce the
number or amount of the Offered Securities specified in its Notice of Acceptance to an
amount that shall be not less than the number or amount of the Offered Securities that such
Buyer elected to purchase pursuant to Section 4(o)(iii)(2) above multiplied by a fraction,
(i) the numerator of which shall be the number or amount of Offered Securities the Company
actually proposes to issue, sell or exchange (including Offered Securities to be issued or
sold to Buyers pursuant to Section 4(o)(iii)(3) above prior to such reduction) and (ii) the
denominator of which shall be the original amount of the Offered Securities. In the event
that any Buyer so elects to reduce the number or amount of Offered Securities specified in
its Notice of Acceptance, the Company may not issue, sell or exchange more than the reduced
number or amount of the Offered Securities unless and until such securities have again been
offered to the Buyers in accordance with Section 4(o)(iii)(1) above.




               (5) Upon the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, the Buyers shall acquire from the Company, and the Company shall issue
to the Buyers, the number or amount of Offered Securities specified in the Notices of
Acceptance, as reduced pursuant to Section 4(o)(iii)(3) above if the Buyers have so elected,
upon the terms and conditions specified in the Offer. The purchase by the Buyers of any
Offered Securities is subject in all cases to the preparation, execution and delivery by the
Company and the Buyers of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to the Buyers and their respective counsel.




               (6) Any Offered Securities not acquired by the Buyers or other persons in accordance
with Section 4(o)(iii)(3) above may not be issued, sold or exchanged until they are again
offered to the Buyers under the procedures specified in this Agreement.



               (iv) The restrictions contained in subsections (ii) and (iii) of this Section 4(o) shall not
apply in connection with the issuance of any Excluded Securities (as defined in the Notes).



          (p) Additional Registration Statements. Until the Trigger Date, the Company will not
file a registration statement under the 1933 Act relating to securities that are not the
Securities, without the prior written consent of the Buyer.




- 22 -









 








          (q) Collateral Agent.




               (i) Each Buyer hereby (a) appoints Castlerigg, as the collateral agent hereunder and under the
other Security Agreement (in such capacity, the “Collateral Agent”), and (b) authorizes the
Collateral Agent (and its officers, directors, employees and agents) to take such action on such
Buyer’s behalf in accordance with the terms hereof and thereof. The Collateral Agent shall not
have, by reason hereof or the Security Agreement, a fiduciary relationship in respect of any Buyer.
Neither the Collateral Agent nor any of its officers, directors, employees and agents shall have
any liability to any Buyer for any action taken or omitted to be taken in connection hereof or the
Security Agreement except to the extent caused by its own gross negligence or willful misconduct,
and each Buyer agrees to defend, protect, indemnify and hold harmless the Collateral Agent and all
of its officers, directors, employees and agents (collectively, the “Indemnitees”) from and against
any losses, damages, liabilities, obligations, penalties, actions, judgments, suits, fees, costs
and expenses (including, without limitation, reasonable attorneys’ fees, costs and expenses)
incurred by such Indemnitee, whether direct, indirect or consequential, arising from or in
connection with the performance by such Indemnitee of the duties and obligations of Collateral
Agent pursuant hereto or the Security Agreement.



               (ii) The Collateral Agent shall be entitled to rely upon any written notices, statements,
certificates, orders or other documents or any telephone message believed by it in good faith to be
genuine and correct and to have been signed, sent or made by the proper Person, and with respect to
all matters pertaining to this Agreement or any of the other Transaction Documents and its duties
hereunder or thereunder, upon advice of counsel selected by it.



               (iii) The Collateral Agent may resign from the performance of all its functions and duties
hereunder and under the Notes and the Agreement at any time by giving at least ten (10) Business
Days prior written notice to the Company and each holder of the Notes. Such resignation shall take
effect upon the acceptance by a successor Collateral Agent of appointment as provided below. Upon
any such notice of resignation, the holders of a majority of the outstanding principal under the
Notes shall appoint a successor Collateral Agent. Upon the acceptance of the appointment as
Collateral Agent, such successor Collateral Agent shall succeed to and become vested with all the
rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral
Agent shall be discharged from its duties and obligations under this Agreement, the Notes and the
Security Agreement. After any Collateral Agent’s resignation hereunder, the provisions of this
Section 4(q) shall inure to its benefit. If a successor Collateral Agent shall not have been so
appointed within said ten (10) Business Day period, the retiring Collateral Agent shall then
appoint a successor Collateral Agent who shall serve until such time, if any, as the holders of a
majority of the outstanding principal under the Notes appoint a successor Collateral Agent as
provided above.



          (r) Stockholder Approval. If the Common Stock is listed on an Eligible Market (as
defined in the Registration Rights Agreement) other than the Principal Market (the “New Principal
Market”) and the issuance of the Conversion Shares, the Interest Shares and Warrant Shares as
contemplated under the Transaction Documents would exceed that number of shares of Common Stock
which the Company may issue without breaching the Company’s




- 23 -









 







obligations under the rules or regulations of the New Principal Market, then the Company shall
obtain the approval of its stockholders as required by the applicable rules of the New Principal
Market for issuances of the Conversion Shares, Warrant Shares and any Interest Shares in excess of
such amount. At such time, the Company shall provide each stockholder entitled to vote at a
special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which shall
be promptly called and held not later than 75 days after the earlier of (i) the New Principal
Market indication of and (ii) the Company becoming aware of, any limitation imposed by the New
Principal Market on the issuance of Conversion Shares, Interest Shares or Warrant Shares (the
“Stockholder Meeting Deadline”), a proxy statement, substantially in the form which has been
previously reviewed by the Buyers and Schulte Roth & Zabel LLP at the expense of the Company,
soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of
resolutions providing for the Company’s issuance of all of the Securities as described in the
Transaction Documents in accordance with applicable law and the rules and regulations of the New
Principal Market and such affirmative approval being referred to herein as the “Stockholder
Approval”), and the Company shall use its reasonable best efforts to solicit its stockholders’
approval of such resolutions and to cause the Board of Directors of the Company to recommend to
the stockholders that they approve such resolutions. The Company shall be obligated to use its
reasonable best efforts to obtain the Stockholder Approval by the Stockholder Meeting Deadline.
If, despite the Company’s reasonable best efforts the Stockholder Approval is not obtained on or
prior to the Stockholder Meeting Deadline, the Company shall cause an additional Stockholder
Meeting to be held every six (6) months thereafter until such Stockholder Approval is obtained or
the Notes are no longer outstanding.




          (s) Trading in Common Stock. For the period commencing on the date hereof and ending
on the Initial Effective Date, each Buyer, severally and not jointly with the other Buyers,
covenants that neither it nor any affiliate acting on its behalf or pursuant to any understanding
with it will execute any “short sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act), whether or not against the box, establish any “put equivalent position” (as defined in Rule
16a-l(h) under the 1934 Act) with respect to the Common Stock, or grant any other right (including
any put or call option) with respect to the Common Stock or with respect to any security that
includes, relates to or derived any significant part of its value from the Common Stock. For so
long as each Buyer owns any Notes, such Buyer shall not maintain a Net Short Position. For
purposes of this Section, a “Net Short Position” by a person means a position whereby such person
has executed one or more sales of Common Stock that is marked as a short sale and that is executed
at a time when such Buyer has no equivalent offsetting long position in the Common Stock or
contract for the foregoing. For purposes of determining whether a Buyer has an equivalent
offsetting long position in the Common Stock, all Common Stock (i) that is owned by such Buyer,
(ii) that may be issued as Interest Shares pursuant to the terms of the Notes to the Buyer or (iii)
that would be issuable upon conversion or exercise in full of all Securities then held by such
Buyer (assuming that such Securities were then fully convertible or exercisable, notwithstanding
any provisions to the contrary, and giving effect to any conversion or exercise price adjustments
that would take effect given only the passage of time) shall be deemed to be held long by such
Buyer.




          (t) Closing Documents. On or prior to fourteen (14) calendar days after the Closing
Date, the Company agrees to deliver, or cause to be delivered, to each Buyer and Schulte




- 24 -









 







Roth & Zabel LLP executed copies of the Transaction Documents, Securities and any other
document required to be delivered to any party pursuant to Section 7 hereof.




          (u) Repayment of Indebtedness. No later than one (1) Business Day after the Closing
Date, the Company shall (i) repay in full the note referred to on Schedule 3(s) issued to
Douglas J. Hannah and James A. Glase and (ii) deliver to each Buyer written proof, such proof to be
reasonably satisfactory to each Buyer, that such note has been repaid in full and that all
obligations under such note has terminated.




     5. REGISTER; TRANSFER AGENT INSTRUCTIONS.



          (a) Register. The Company shall maintain at its principal executive offices (or such
other office or agency of the Company as it may designate by notice to each holder of Securities),
a register for the Notes and the Warrants in which the Company shall record the name and address of
the Person in whose name the Notes and the Warrants have been issued (including the name and
address of each transferee), the principal amount of Notes held by such Person, the number of
Conversion Shares issuable upon conversion of the Notes and Warrant Shares issuable upon exercise
of the Warrants held by such Person. The Company shall keep the register open and available at all
times during business hours for inspection of any Buyer or its legal representatives.




          (b) Transfer Agent Instructions. The Company shall issue irrevocable instructions to
its transfer agent, and any subsequent transfer agent, to issue certificates or credit shares to
the applicable balance accounts at The Depository Trust Company (“DTC”), registered in the name of
each Buyer or its respective nominee(s), for the Conversion Shares, the Interest Shares and the
Warrant Shares issued at the Closing or upon conversion of the Notes or exercise of the Warrants in
such amounts as specified from time to time by each Buyer to the Company upon conversion of the
Notes or exercise of the Warrants in the form of Exhibit E attached hereto (the
“Irrevocable Transfer Agent Instructions”). The Company warrants that no instruction other than
the Irrevocable Transfer Agent Instructions referred to in this Section 5(b), and stop transfer
instructions to give effect to Section 2(g) hereof, will be given by the Company to its transfer
agent, and that the Securities shall otherwise be freely transferable on the books and records of
the Company as and to the extent provided in this Agreement and the other Transaction Documents.
If a Buyer effects a sale, assignment or transfer of the Securities in accordance with Section
2(f), the Company shall permit the transfer and shall promptly instruct its transfer agent to issue
one or more certificates or credit shares to the applicable balance accounts at DTC in such name
and in such denominations as specified by such Buyer to effect such sale, transfer or assignment.
In the event that such sale, assignment or transfer involves Conversion Shares, Interest Shares or
Warrant Shares sold, assigned or transferred pursuant to an effective registration statement or
pursuant to Rule 144, the transfer agent shall issue such Securities to the Buyer, assignee or
transferee, as the case may be, without any restrictive legend. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a Buyer. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations under this Section 5(b)
will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Section 5(b), that a Buyer shall be entitled, in addition to all other available
remedies, to an order and/or injunction




- 25 -









 







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.




     6. CONDITIONS TO THE COMPANY’S OBLIGATION TO SELL.



          (a) Closing Date. The obligation of the Company hereunder to issue and sell the Notes
and the related Warrants to each Buyer at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole discretion by
providing each Buyer with prior written notice thereof:




               (i) Such Buyer shall have executed each of the Transaction Documents to which it is a party
and delivered the same to the Company.



               (ii) Such Buyer and each other Buyer shall have delivered to the Company the Purchase Price
(less, in the case of Castlerigg, the amounts withheld pursuant to Section 4(g)) for the Notes and
the related Warrants being purchased by such Buyer at the Closing by wire transfer of immediately
available funds pursuant to the wire instructions provided by the Company.



               (iii) The representations and warranties of such Buyer 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 speak as of a specific date), and such Buyer shall
have performed, satisfied and complied in all material respects with the covenants, agreements and
conditions required by this Agreement to be performed, satisfied or complied with by such Buyer at
or prior to the Closing Date.



     7. CONDITIONS TO EACH BUYER’S OBLIGATION TO PURCHASE.



          Closing Date. The obligation of each Buyer hereunder to purchase the Notes and the
related Warrants at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for each Buyer’s sole benefit
and may be waived by such Buyer at any time in its sole discretion by providing the Company with
prior written notice thereof:




               (i) The Company shall have executed and delivered to such Buyer (A) each of the Transaction
Documents, (B) the Notes (in such principal amounts as such Buyer shall request) being purchased by
such Buyer at the Closing pursuant to this Agreement, and (C) the Warrants (in such amounts as such
Buyer shall request) being purchased by such Buyer at the Closing pursuant to this Agreement.



               (ii) Such Buyer shall have received the opinion of DLA Piper US LLP, the Company’s outside
counsel, dated as of the Closing Date, in substantially the form of Exhibit F attached
hereto.



               (iii) The Company shall have delivered to such Buyer a copy of the Irrevocable Transfer Agent
Instructions, in the form of Exhibit E attached hereto, which



- 26 -









 




instructions shall have been delivered to and acknowledged in writing by the Company’s
transfer agent.




               (iv) The Company shall have delivered to such Buyer a certificate evidencing the formation and
good standing of the Company and each of its Subsidiaries in such entity’s jurisdiction of
formation issued by the Secretary of State (or comparable office) of such jurisdiction, as of a
date within 10 days of the Closing Date.



               (v) The Company shall have delivered to such Buyer a certificate evidencing the Company’s
qualification as a foreign corporation and good standing issued by the Secretary of State (or
comparable office) of each jurisdiction in which the Company conducts business, as of a date within
10 days of the Closing Date.



               (vi) The Company shall have delivered to such Buyer a certified copy of the Articles of
Incorporation as certified by the Secretary of State of the State (or comparable office of Nevada
within ten (10) days of the Closing Date.



               (vii) The Company shall have delivered to such Buyer a certificate, executed by the Secretary
of the Company and dated as of the Closing Date, as to (i) the resolutions consistent with Section
3(b) as adopted by the Company’s Board of Directors in a form reasonably acceptable to such Buyer,
(ii) the Articles of Incorporation and (iii) the Bylaws, each as in effect at the Closing, in the
form attached hereto as Exhibit G.



               (viii) The representations and warranties of the Company shall be true and correct as of the
date when made and as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date) and the Company shall have performed, satisfied
and complied in all respects with the covenants, agreements and conditions required by the
Transaction Documents to be performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Buyer shall have received a certificate, executed by the Chief Executive
Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other
matters as may be reasonably requested by such Buyer in the form attached hereto as Exhibit
H.



               (ix) The Company shall have delivered to such Buyer a letter from the Company’s transfer agent
certifying the number of shares of Common Stock outstanding as of a date within five days of the
Closing Date.



               (x) The Common Stock (I) shall be designated for quotation or listed on the Principal Market
and (II) shall not have been suspended, as of the Closing Date, by the SEC or the Principal Market
from trading on the Principal Market nor shall suspension by the SEC or the Principal Market have
been threatened, as of the Closing Date, either (A) in writing by the SEC or the Principal Market
or (B) by falling below the minimum listing maintenance requirements of the Principal Market.



               (xi) The Company shall have obtained all governmental, regulatory or third party consents and
approvals, if any, necessary for the sale of the Securities.



- 27 -









 





               (xii) In accordance with the terms of the Security Agreement, the Company shall have delivered
to the Collateral Agent appropriate financing statements on Form UCC-1 to be duly filed in such
office or offices as may be necessary or, in the opinion of the Collateral Agent, desirable to
perfect the security interests purported to be created by each Security Agreement.



               (xiii) Within six (6) Business Days prior to the Closing, the Company shall have delivered or
caused to be delivered to each Buyer (A) certified copies of UCC search results, listing all
effective financing statements which name as debtor the Company or any of its Subsidiaries filed in
the prior five years to perfect an interest in any assets thereof, together with copies of such
financing statements, none of which, except as otherwise agreed in writing by the Buyers, shall
cover any of the Collateral (as defined in the Security Agreement) and the results of searches for
any tax lien and judgment lien filed against such Person or its property, which results, except as
otherwise agreed to in writing by the Buyers shall not show any such Liens (as defined in the
Security Agreement); and (B) a perfection certificate, duly completed and executed by the Company
and each of its Subsidiaries, in form and substance satisfactory to the Buyers.



               (xiv) The Company shall have delivered to such Buyer such other documents relating to the
transactions contemplated by this Agreement as such Buyer or its counsel may reasonably request.



     8. TERMINATION. In the event that the Closing shall not have occurred with respect to
a Buyer on or before five (5) Business Days from the date hereof due to the Company’s or such
Buyer’s failure to satisfy the conditions set forth in Sections 6 and 7 above (and the nonbreaching
party’s failure to waive such unsatisfied condition(s)), the nonbreaching party shall have the
option to terminate this Agreement with respect to such breaching party at the close of business on
such date without liability of any party to any other party; provided, however,
this if this Agreement is terminated pursuant to this Section 8, the Company shall remain obligated
to reimburse the non-breaching Buyers for the expenses described in Section 4(g) above.



     9. MISCELLANEOUS.



          (a) Governing Law; Jurisdiction; Jury Trial. All questions concerning the
construction, validity, enforcement and interpretation of this Agreement shall be governed by the
internal laws of the State of New York, without giving effect to any choice of law or conflict of
law provision or rule (whether of the State of New York or any other jurisdictions) that would
cause the application of the laws of any jurisdictions other than the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts
sitting in The City of New York, Borough of Manhattan, for the adjudication of any dispute
hereunder or in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding,
any claim that it is not personally subject to the jurisdiction of any such court, that such suit,
action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or
proceeding is improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by mailing a copy thereof




- 28 -









 







to such party at the address for such notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing
contained herein shall be deemed to limit in any way any right to serve process in any manner
permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.




          (b) Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each party and delivered to the other party;
provided that a facsimile signature shall be considered due execution and shall be binding upon the
signatory thereto with the same force and effect as if the signature were an original, not a
facsimile signature.




          (c) Headings. The headings of this Agreement are for convenience of reference and
shall not form part of, or affect the interpretation of, this Agreement.




          (d) Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the
validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity
or enforceability of any provision of this Agreement in any other jurisdiction.




          (e) Entire Agreement; Amendments. This Agreement and the other Transaction Documents
supersede all other prior oral or written agreements between the Buyers, the Company, their
affiliates and Persons acting on their behalf with respect to the matters discussed herein, and
this Agreement, the other Transaction Documents and the instruments referenced herein and therein
contain the entire understanding of the parties with respect to the matters covered herein and
therein and, except as specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such matters. No
provision of this Agreement may be amended other than by an instrument in writing signed by the
Company and the holders of at least a majority of the aggregate number of Registrable Securities
issued and issuable hereunder, and any amendment to this Agreement made in conformity with the
provisions of this Section 9(e) shall be binding on all Buyers and holders of Securities, as
applicable. No provision hereof may be waived other than by an instrument in writing signed by the
party against whom enforcement is sought. No such amendment shall be effective to the extent that
it applies to less than all of the holders of the applicable Securities 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 unless the same consideration
also is offered to all of the parties to the Transaction Documents, holders of Notes or holders of
the Warrants, as the case may be. The Company has not, directly or indirectly, made any agreements
with any Buyers relating to the terms or conditions of the transactions contemplated by the
Transaction Documents except as set forth in the Transaction Documents. Without limiting the
foregoing, the Company confirms that, except as set forth in this Agreement, no Buyer has made any
commitment or promise or has any other obligation to provide any financing to the Company or
otherwise.




- 29 -









 








          (f) Notices. Any notices, consents, waivers or other communications required or
permitted to be given under the terms of this Agreement must be in writing and will be deemed to
have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by
facsimile (provided confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one Business Day after deposit with an overnight
courier service, in each case properly addressed to the party to receive the same. The addresses
and facsimile numbers for such communications shall be:



If to the Company:



Stinger Systems, Inc.

2701 N. Rocky Point Drive

Suite 1130

Tampa, Florida 33607

Telephone: (410) 281-1061

Facsimile: (813) 288-9148

Attention: Chief Financial Officer



With a copy to:



DLA Piper US LLP

6225 Smith Avenue

Baltimore, Maryland 21209-3600

Telephone: (410) 580-4170

Facsimile: (410) 580-3170

Attention: Jason Harmon, Esq.



If to the Transfer Agent:



Colonial Stock Transfer

66 Exchange Place

Salt Lake City, UT 84111

Telephone: (801) 355-5740

Facsimile: (801) 355-6505



If to a Buyer, to its address and facsimile number set forth on the Schedule of Buyers, with copies
to such Buyer’s representatives as set forth on the Schedule of Buyers,



with a copy (for informational purposes only) to:



Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone: (212) 756-2000

Facsimile: (212) 593-5955

Attention: Eleazer N. Klein, Esq.




- 30 -









 







or to such other address and/or facsimile number and/or to the attention of such other Person as
the recipient party has specified by written notice given to each other party five (5) days prior
to the effectiveness of such change. Written confirmation of receipt (A) given by the recipient of
such notice, consent, waiver or other communication, (B) mechanically or electronically generated
by the sender’s facsimile machine containing the time, date, recipient facsimile number and an
image of the first page of such transmission or (C) provided by an overnight courier service shall
be rebuttable evidence of personal service, receipt by facsimile or receipt from an overnight
courier service in accordance with clause (i), (ii) or (iii) above, respectively.




          (g) Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their respective successors and assigns, including any purchasers of the
Notes or the Warrants. The Company shall not assign this Agreement or any rights or obligations
hereunder without the prior written consent of the holders of at least a majority of the aggregate
number of Registrable Securities issued and issuable hereunder, including by way of a Fundamental
Transaction (unless the Company is in compliance with the applicable provisions governing
Fundamental Transactions set forth in the Notes and the Warrants). A Buyer may assign some or all
of its rights hereunder without the consent of the Company, in which event such assignee shall be
deemed to be a Buyer hereunder with respect to such assigned rights.




          (h) 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.




          (i) Survival. Unless this Agreement is terminated under Section 8, the
representations and warranties of the Company and the Buyers contained in Sections 2 and 3 and the
agreements and covenants set forth in Sections 4, 5 and 9 shall survive the Closing. Each Buyer
shall be responsible only for its own representations, warranties, agreements and covenants
hereunder.




          (j) Further Assurances. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as any other party may reasonably request in
order to carry out the intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.




          (k) Indemnification. In consideration of each Buyer’s execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to all of the
Company’s other obligations under the Transaction Documents, the Company shall defend, protect,
indemnify and hold harmless each Buyer and each other holder of the Securities and all of their
stockholders, partners, members, officers, directors, employees and direct or indirect investors
and any of the foregoing Persons’ agents or other representatives (including, without limitation,
those retained in connection with the transactions contemplated by this Agreement) (collectively,
the “Indemnitees”) from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective
of whether any such Indemnitee is a party to the action for which indemnification hereunder is
sought), and including reasonable attorneys’ fees and disbursements (the “Indemnified
Liabilities”), incurred by any Indemnitee as a result of, or arising out of, or




- 31 -









 







relating to (a) any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or document contemplated
hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained
in the Transaction Documents or any other certificate, instrument or document contemplated hereby
or thereby or (c) any cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from (i) the execution, delivery, performance or enforcement of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby, (ii) any transaction financed or to be financed in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities, (iii) any disclosure made by such
Buyer pursuant to Section 4(i), or (iv) the status of such Buyer or holder of the Securities as an
investor in the Company pursuant to the transactions contemplated by the Transaction Documents. To
the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law. Except as otherwise set forth
herein, the mechanics and procedures with respect to the rights and obligations under this Section
9(k) shall be the same as those set forth in Section 6 of the Registration Rights Agreement.




          (l) No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent, and no rules of strict
construction will be applied against any party.




          (m) Remedies. Each Buyer and each holder of the Securities shall have all rights and
remedies set forth in the Transaction Documents and all rights and remedies which such holders have
been granted at any time under any other agreement or contract and all of the rights which such
holders have under any law. Any Person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or other security),
to recover damages by reason of any breach of any provision of this Agreement and to exercise all
other rights granted by law. Furthermore, the Company recognizes that in the event that it fails
to perform, observe, or discharge any or all of its obligations under the Transaction Documents,
any remedy at law may prove to be inadequate relief to the Buyers. The Company therefore agrees
that the Buyers shall be entitled to seek temporary and permanent injunctive relief in any such
case without the necessity of proving actual damages and without posting a bond or other security.




          (n) Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) the Transaction Documents, whenever
any Buyer exercises a right, election, demand or option under a Transaction Document and the
Company does not timely perform its related obligations within the periods therein provided, then
such Buyer may rescind or withdraw, in its sole discretion from time to time upon written notice to
the Company, any relevant notice, demand or election in whole or in part without prejudice to its
future actions and rights.




          (o) Payment Set Aside. To the extent that the Company makes a payment or payments to
the Buyers hereunder or pursuant to any of the other Transaction Documents or the Buyers enforce or
exercise their rights hereunder or thereunder, and such payment or payments




- 32 -









 







or the proceeds of such enforcement or exercise or any part thereof are subsequently
invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or
are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or
any other Person under any law (including, without limitation, any bankruptcy law, foreign, state
or federal law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied shall be revived and
continued in full force and effect as if such payment had not been made or such enforcement or
setoff had not occurred.




          (p) Individual Buyer. Notwithstanding anything in this agreement to the contrary, or
any references to “Buyers” herein, Castlerigg Master Investments Ltd. acknowledges and the Company
confirms that Castlerigg Master Investments Ltd. is the only Buyer party to the transactions
contemplated by this Agreement.




[Signature Page Follows]




- 33 -









 








     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.



	 	 	 	 	 
	 	COMPANY:



STINGER SYSTEMS, INC.

 	 
	 	By:  	/s/ David J. Meador
 	 
	 	 	Name:  	David J. Meador 	 
	 	 	Title:  	Chief Financial Officer 	 



 









 






	 	 	 	 	 




     IN WITNESS WHEREOF, each Buyer and the Company have caused their respective signature page to
this Securities Purchase Agreement to be duly executed as of the date first written above.



	 	 	 	 	 
	 	BUYERS:



CASTLERIGG MASTER INVESTMENTS LTD.

By: Sandell Asset Management Corp.

 	 
	 	By:  	/s/ Timothy O’Brien
 	 
	 	 	Name:  	Timothy O’Brien 	 
	 	 	Title:  	Chief Financial Officer 	 
	 




 









 








SCHEDULE OF BUYERS




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
		 		 	(3)	 		 		 	
	 	 	 	 	Aggregate	 	 	 	 	 	 	 	 
	 	 	(2)	 	Principal	 	(4)	 	 	 	 	 	(6)
	(1)	 	Address and	 	Amount of	 	Number of	 	(5)	 	Legal Representative’s Address
	Buyer	 	Facsimile Number	 	Notes	 	Warrant Shares	 	Purchase Price	 	and Facsimile Number
	Castlerigg Master Investments Ltd.

	 	c/o Sandell Asset Management

40 West 57th St 

26th Floor 

New York, NY 10019

Attention: Cem Hacioglu/Matthew

Pliskin 

Fax: 212-603-5710 

Telephone: 212-603-5700

Residence: British Virgin Islands
	 	$	3,000,000	 	 	 	5,912,961	 	 	$	3,000,000	 	 	Schulte Roth & Zabel LLP 

919 Third Avenue 

New York, New York 10022

Attention: Eleazer Klein, Esq.

Facsimile: (212) 593-5955 

Telephone: (212) 756-2376






 









 






EXHIBITS




	 	 	 
	Exhibit A

	 	Form of Notes
	Exhibit B

	 	Form of Warrants
	Exhibit C

	 	Registration Rights Agreement
	Exhibit D

	 	Form of Security Agreement
	Exhibit E

	 	Irrevocable Transfer Agent Instructions
	Exhibit F

	 	Form of Outside Company Counsel Opinion
	Exhibit G

	 	Form of Secretary’s Certificate
	Exhibit H

	 	Form of Officer’s Certificate






SCHEDULES




	 	 	 
	Schedule 3(a)

	 	Subsidiaries
	Schedule 3(k)

	 	SEC Documents; Financial Statements
	Schedule 3(l)

	 	Absence of Certain Changes
	Schedule 3(q)

	 	Transactions with Affiliates
	Schedule 3(r)

	 	Capitalization
	Schedule 3(s)

	 	Indebtedness and Other Contracts
	Schedule 3(t)

	 	Litigation
	Schedule 3(x)

	 	Intellectual Property
	Schedule 3(z)

	 	Subsidiary Rights
	Schedule 3(ee)

	 	Ranking of Notes