Exhibit
4.1





SERIES D CONVERTIBLE PREFERRED STOCK
PURCHASE
 AGREEMENT
  Dated as of March 16,
2006
  among
  DIRT MOTOR SPORTS,
INC.
  and
  THE PURCHASERS LISTED ON EXHIBIT
A
  
  TABLE OF
CONTENTS
 PAGEARTICLE
      I Purchase and Sale of Preferred Stock
                    
                    
                    1Section 1.1
      Purchase and Sale of Stock
                    
                    
                    1Section 1.2
      The Conversion Shares
                    
                    
                    1Section 1.3
      Purchase Price and Closing
                    
                    
                    2Section 1.4
      Series D Warrants
                    
                    
                    2Section 1.5
      Exchange of Promissory Notes
                    
                    
                    2ARTICLE
      II Representations and Warranties
                    
                    
                    2Section 2.1
      Representations and Warranties of the Company
                    
                    
                    2Section 2.2
      Representations and Warranties of the Purchasers
                    
                    
                    12ARTICLE
      III Covenants
                    
                    
                    13Section 3.1
      Securities Compliance
                    
                    
                    13Section 3.2
      Registration and Listing
                    
                    
                    14Section 3.3
      Inspection Rights
                    
                    
                    14Section 3.4
      Compliance with Laws
                    
                    
                    14Section 3.5
      Keeping of Records and Books of Account
                    
                    
                    14Section 3.6
      Reporting Requirements
                    
                    
                    14Section 3.7
      Amendments
                    
                    
                    14Section 3.8
      Other Agreements
                    
                    
                    15Section 3.9
      Distributions
                    
                    
                    15Section 3.10
      Status of Dividends
                    
                    
                    15Section 3.11
      Intentionally Omitted
                    
                    
                    15Section 3.12
      Future Financings; Right of First Offer and Refusal
                    
                    
                    16Section 3.13
      Reservation of Shares
                    
                    
                    17Section 3.14
      Transfer Agent Instructions
                    
                    
                    17Section 3.15
      Disposition of Assets
                    
                    
                    17Section 3.16
      Reporting Status
                    
                    
                    17Section 3.17
      Disclosure of Transaction
                    
                    
                    18Section 3.18
      Disclosure of Material Information
                    
                    
                    18Section 3.19
      Pledge of Securities
                    
                    
                    18Section 3.20
      Restrictions on Certain Issuances of Securities
                    
                    
                    18Section 3.21
      Independent Board Members
                    
                    
                    18Section 3.22
      Application for Nasdaq Listing
                    
                    
                    18
  
  PAGEARTICLE
      IV Conditions
                                    
                                    19Section 4.1
      Conditions Precedent to the Obligation of the Company to Sell the
      Shares
                                    
                                    
                                    19Section 4.2
      Conditions Precedent to the Obligation of the Purchasers to Purchase the
      Shares
                                    
                                    
                                    19ARTICLE
      V Stock Certificate Legend
                                    
                                    
                                    22Section 5.1
      Legend
                                    
                                    
                                    22ARTICLE
      VI Indemnification
                                    
                                    
                                    23Section 6.1
      General Indemnity
                                    
                                    
                                    23Section 6.2
      Indemnification Procedure
                                    
                                    
                                    23ARTICLE
      VII Miscellaneous
                                    
                                    
                                    24Section 7.1
      Fees and Expenses
                                    
                                    
                                    24Section 7.2
      Specific Enforcement, Consent to Jurisdiction
                                    
                                    
                                    24Section 7.3
      Entire Agreement; Amendment
                                    
                                    
                                    24Section 7.4
      Notices
                                    
                                    
                                    24Section 7.5
      Waivers
                                    
                                    
                                    26Section 7.6
      Headings
                                    
                                    
                                    26Section 7.7
      Successors and Assigns
                                    
                                    
                                    26Section 7.8
      No Third Party Beneficiaries
                                    
                                    
                                    26Section 7.9
      Governing Law
                                    
                                    
                                    26Section 7.10
      Survival
                                    
                                    
                                    26Section 7.11
      Counterparts
                                    
                                    
                                    26Section 7.12
      Publicity
                                    
                                    
                                    26Section 7.13
      Severability
                                    
                                    
                                    26Section 7.14
      Further Assurances
                                    
                                    
                                    27
   SERIES D CONVERTIBLE PREFERRED STOCK
PURCHASE AGREEMENT
 
 This
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”) is
dated as of March 16, 2006 by and among Dirt Motor Sports, Inc., a Delaware
corporation (the “Company”), and each of the Purchasers of shares of
Series D Convertible Preferred Stock of the Company whose names are set
forth on Exhibit A hereto
(individually, a “Purchaser” and collectively, the “Purchasers”).
 
 The
parties hereto agree as follows:
 
 ARTICLE I
 
 Purchase and Sale of Preferred
Stock
 
 Section 1.1
Purchase and Sale of
Stock. Upon the following terms and conditions, the Company shall issue
and sell to the Purchasers and each of the Purchasers shall purchase from the
Company, the number of shares of the Company’s Series D Convertible
Preferred Stock, par value $.01 per share (the “Preferred Shares”), at a
purchase price of Three Thousand Dollars ($3,000) per share, set forth opposite
such Purchaser’s name on Exhibit A
hereto. Upon the following terms and conditions, each of the Purchasers shall be
issued Series D Warrants, in substantially the form attached hereto as
Exhibit B
(the “Warrants”), to purchase the number of shares of the Company’s common
stock, par value $.0001 per share (the “Common Stock”) set forth opposite such
Purchaser’s name on Exhibit A
hereto. The aggregate purchase price for the Preferred Shares and the Warrants
shall be TWELVE MILLION DOLLARS ($12,000,000) (the “Purchase Price”). The
designation, rights, preferences and other terms and provisions of the
Series D Convertible Preferred Stock are set forth in the Certificate of
Designation of the Relative Rights and Preferences of the Series D
Convertible Preferred Stock attached hereto as Exhibit C (the
“Certificate of Designation”). The Company and the Purchasers are executing and
delivering this Agreement in accordance with and in reliance upon the exemption
from securities registration afforded by Rule 506 of Regulation D
(“Regulation D”) as promulgated by the United States Securities and
Exchange Commission (the “Commission”) under the Securities Act of 1933, as
amended (the “Securities Act”) or Section 4(2) of the Securities
Act.
 
 Section 1.2
The Conversion
Shares. The Company has authorized and has reserved and covenants to
continue to reserve, free of preemptive rights and other similar contractual
rights of stockholders, a number of shares of Common Stock equal to at least one
hundred twenty percent (120%) of the number of shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all of the Preferred
Shares and exercise of the Warrants then outstanding, in each case, without
regard for any limitations on conversion or exercise. Any shares of Common Stock
issuable upon conversion of the Preferred Shares and exercise of the Warrants
(and such shares when issued) are herein referred to as the “Conversion Shares”
and the “Warrant Shares”, respectively. The Preferred Shares, the Conversion
Shares and the Warrant Shares are sometimes collectively referred to as the
“Shares”.
  -1-
  
 Section 1.3
Purchase Price and
Closing. The Company agrees to issue and sell to the Purchasers and, in
consideration of and in express reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, the Purchasers, severally but
not jointly, agree to purchase that number of the Preferred Shares and Warrants
set forth opposite their respective names on Exhibit A. The
aggregate Purchase Price of the Preferred Shares and Warrants being acquired by
each Purchaser is set forth opposite such Purchaser’s name on Exhibit A. The
closing of the purchase and sale of the Preferred Shares and Warrants shall take
place at the offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of
the Americas, New York, New York 10036 (the “Closing”) at 1:00 p.m. (eastern
time) or at such other time and place as the Purchasers and the Company may
agree upon, upon the satisfaction of each of the conditions set forth in
Article IV hereof (the “Closing Date”). Funding with respect to the Closing
shall take place by wire transfer of immediately available funds on or prior to
the Closing Date.
 
 Section 1.4
Series D
Warrants. The Company agrees to issue to each of the Purchasers Warrants
to purchase 300 shares of Common Stock for each Preferred Share purchased. The
number of shares of Common Stock issuable upon exercise of each Purchaser’s
Warrants issued pursuant to this Agreement is set forth opposite such
Purchaser’s name on Exhibit A
hereto. The Warrants shall expire five (5) years from the Closing Date and
shall have an exercise price per share equal to $4.50.
  Section 1.5
Exchange of Promissory
Notes. The Company acknowledges and agrees that a portion of the Purchase
Price shall be paid by certain Purchasers exchanging certain promissory notes
issued by the Company to such Purchasers. Prior to or at the Closing, such
Purchasers shall surrender for cancellation to the Company such promissory notes
as more fully set forth on Schedule 1.5
hereto and upon the Closing, such Purchasers shall receive in exchange for the
surrender of its promissory notes a number of Preferred Shares and Warrants as
set forth on Exhibit A
attached hereto. The number of Preferred Shares to be issued to each Purchaser
who is exchanging promissory notes pursuant to this Section 1.5 shall be in
an amount equal to the quotient of (A) one hundred ten percent (110%) of
the principal amount plus all accrued interest outstanding under the promissory
notes divided by (B) the purchase price for each Preferred
Share.
 
 ARTICLE II
 
 Representations and
Warranties
 
 Section 2.1
Representations and
Warranties of the Company. The Company hereby makes the following
representations and warranties to the Purchasers, except as set forth in the
Company’s disclosure schedule delivered with this Agreement as
follows:
 
 (a)
Organization, Good
Standing and Power. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has the requisite corporate power to own, lease and operate its properties
and assets and to conduct its business as it is now being conducted. The Company
does not have any subsidiaries except as set forth in the Company’s Form 10-KSB
for the year ended September 30, 2005 and the Company’s Form 10KSB for the
transition period from October 1, 2005 to December 31, 2005, including
the accompanying financial statements (collectively, the “Form 10-KSB”), or in
the Company’s Form 10-QSB for the fiscal quarters ended June 30, 2005,
March 31, 2005 and December 31, 2004 (collectively, the “Form 10-QSB”), or
on Schedule 2.1(a)
hereto. The Company and each such subsidiary is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which the nature of the business conducted or property owned by it makes such
qualification necessary except for any jurisdiction(s) (alone or in the
aggregate) in which the failure to be so qualified will not have a Material
Adverse Effect (as defined in Section 2.1(c) hereof) on the Company’s financial
condition.
  -2-
  (b)
Authorization;
Enforcement. The Company has the requisite corporate power and authority
to enter into and perform this Agreement, the Registration Rights Agreement
attached hereto as Exhibit D (the
“Registration Rights Agreement”), the Irrevocable Transfer Agent Instructions
(as defined in Section 3.14), the Certificate of Designation, and the
Warrants (collectively, the “Transaction Documents”) and to issue and sell the
Shares and the Warrants in accordance with the terms hereof. The execution,
delivery and performance of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been
duly and validly authorized by all necessary corporate action, and no further
consent or authorization of the Company or its Board of Directors or
stockholders is required. This Agreement has been duly executed and delivered by
the Company. The other Transaction Documents will have been duly executed and
delivered by the Company at the Closing. Each of the Transaction Documents
constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting
generally the enforcement of, creditor’s rights and remedies or by other
equitable principles of general application.
 
 (c)
Capitalization.
The authorized capital stock of the Company and the shares thereof currently
issued and outstanding as of the date hereof are set forth on Schedule 2.1(c)
hereto. All of the outstanding shares of the Company’s Common Stock and
Series D Convertible Preferred Stock and other shares of preferred stock
have been duly and validly authorized. Except as set forth in this Agreement and
the Registration Rights Agreement and as set forth on Schedule 2.1(c)
hereto, no shares of Common Stock are entitled to preemptive rights or
registration rights and there are no outstanding options, warrants, scrip,
rights to subscribe to, call or commitments of any character whatsoever relating
to, or securities or rights convertible into, any shares of capital stock of the
Company. Furthermore, except as set forth in this Agreement and the Registration
Rights Agreement or on Schedule 2.1(c),
there are no contracts, commitments, understandings, or arrangements by which
the Company is or may become bound to issue additional shares of the capital
stock of the Company or options, securities or rights convertible into shares of
capital stock of the Company. Except for customary transfer restrictions
contained in agreements entered into by the Company in order to sell restricted
securities or as set forth on Schedule 2.1(c)
hereto, the Company is not a party to any agreement granting registration or
anti-dilution rights to any person with respect to any of its equity or debt
securities. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock
of the Company. Except as set forth on Schedule 2.1(c)
hereto, the offer and sale of all capital stock, convertible securities, rights,
warrants, or options of the Company issued prior to the Closing complied with
all applicable Federal and state securities laws, and no stockholder has a right
of rescission or claim for damages with respect thereto which would have a
Material Adverse Effect (as defined below) on the Company’s financial condition
or operating results. The Company has furnished or made available to the
Purchasers true and correct copies of the Company’s Certificate of Incorporation
as in effect on the date hereof (the “Certificate”), and the Company’s Bylaws as
in effect on the date hereof (the “Bylaws”). For the purposes of this Agreement,
“Material Adverse Effect” means any material adverse effect on the business,
operations, properties, prospects, or financial condition of the Company and its
subsidiaries and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
perform any of its obligations under this Agreement in any material
respect.
 
 (d)
Issuance of
Shares. The Preferred Shares and the Warrants to be issued at the Closing
have been duly authorized by all necessary corporate action and the Preferred
Shares, when paid for or issued in accordance with the terms hereof, shall be
validly issued and outstanding, fully paid and nonassessable and entitled to the
rights and preferences set forth in the Certificate of Designation. When the
Conversion Shares and the Warrant Shares are issued in accordance with the terms
of the Certificate of Designation and the Warrants, respectively, such shares
will be duly authorized by all necessary corporate action and validly issued and
outstanding, fully paid and nonassessable, and the holders shall be entitled to
all rights accorded to a holder of Common Stock.
  -3-
 (e)
No Conflicts.
Except as set forth on Schedule 2.1(e)
hereto, the execution, delivery and performance of the Transaction Documents by
the Company, the performance by the Company of its obligations under the
Certificate of Designation and the consummation by the Company of the
transactions contemplated herein and therein do not and will not
(i) violate any provision of the Company’s Certificate or Bylaws,
(ii) conflict with, or constitute a default (or an event which with notice
or lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, mortgage, deed of trust, indenture, note, bond, license, lease
agreement, instrument or obligation to which the Company is a party or by which
it or its properties or assets are bound, (iii) create or impose a lien,
mortgage, security interest, charge or encumbrance of any nature on any property
of the Company under any agreement or any commitment to which the Company is a
party or by which the Company is bound or by which any of its respective
properties or assets are bound, or (iv) result in a violation of any federal,
state, local or foreign statute, rule, regulation, order, judgment or decree
(including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries are bound or affected, except, in all cases
other than violations pursuant to clauses (i) and (iv) above, for such
conflicts, defaults, terminations, amendments, accelerations, cancellations and
violations as would not, individually or in the aggregate, have a Material
Adverse Effect. The business of the Company and its subsidiaries is not being
conducted in violation of any laws, ordinances or regulations of any
governmental entity, except for possible violations which singularly or in the
aggregate do not and will not have a Material Adverse Effect. The Company is not
required under Federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under the Transaction Documents, or issue and sell the
Preferred Shares, the Warrants, the Conversion Shares and the Warrant Shares in
accordance with the terms hereof or thereof (other than any filings which may be
required to be made by the Company with the Commission or state securities
administrators subsequent to the Closing, any registration statement which may
be filed pursuant hereto, and the Certificate of Designation); provided that, for
purposes of the representation made in this sentence, the Company is assuming
and relying upon the accuracy of the relevant representations and agreements of
the Purchasers herein.
  -4-
  (f)
Commission Documents,
Financial Statements. The Common Stock is registered pursuant to Section
12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and, since December 31, 2005, the Company has timely filed all
reports, schedules, forms, statements and other documents required to be filed
by it with the Commission pursuant to the reporting requirements of the Exchange
Act, including material filed pursuant to Section 13(a) or 15(d) of the Exchange
Act (all of the foregoing including filings incorporated by reference therein
being referred to herein as the “Commission Documents”). The Company has
delivered or made available to each of the Purchasers true and complete copies
of the Commission Documents filed with the Commission since December 31,
2005. The Company has not provided to the Purchasers any material non-public
information or other information which, according to applicable law, rule or
regulation, was required to have been disclosed publicly by the Company but
which has not been so disclosed, other than with respect to the transactions
contemplated by this Agreement. At the times of their respective filings, the
Form 10-KSB and the Form 10-QSB complied in all material respects with the
requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder and other federal, state and local laws, rules and
regulations applicable to such documents, and, as of their respective dates,
none of the Form 10-KSB and the Form 10-QSB contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial
statements of the Company included in the Commission Documents comply as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto. Such financial statements have been prepared
in accordance with United States generally accepted accounting principles
(“GAAP”) applied on a consistent basis during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto or (ii) in the case of unaudited interim statements, to the extent
they may not include footnotes or may be condensed or summary statements), and
fairly present in all material respects the financial position of the Company
and its subsidiaries as of the dates thereof and the results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
 
 (g)
Subsidiaries.
Schedule 2.1(g)
hereto sets forth each subsidiary of the Company, showing the jurisdiction of
its incorporation or organization and showing the percentage of each person’s
ownership. For the purposes of this Agreement, “subsidiary” shall mean any
corporation or other entity of which at least a majority of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or any
of its other subsidiaries. All of the outstanding shares of  capital
stock of each subsidiary have been duly authorized and validly issued, and are
fully paid and nonassessable. There are no outstanding preemptive, conversion or
other rights, options, warrants or agreements granted or issued by or binding
upon any subsidiary for the purchase or acquisition of any shares of capital
stock of any subsidiary or any other securities convertible into, exchangeable
for or evidencing the rights to subscribe for any shares of such capital stock.
Neither the Company nor any subsidiary is subject to any obligation (contingent
or otherwise) to repurchase or otherwise acquire or retire any shares of the
capital stock of any subsidiary or any convertible securities, rights, warrants
or options of the type described in the preceding sentence. Neither the Company
nor any subsidiary is party to, nor has any knowledge of, any agreement
restricting the voting or transfer of any shares of the capital stock of any
subsidiary.
 
 (h)
No Material Adverse
Change. Since December 31, 2005, the Company has not experienced or
suffered any Material Adverse Effect, except as disclosed on Schedule 2.1(h)
hereto.
 
 (i)
No Undisclosed
Liabilities. Except as set forth on Schedule 2.1(i)
hereto, neither the Company nor any of its subsidiaries has any liabilities,
obligations, claims or losses (whether liquidated or unliquidated, secured or
unsecured, absolute, accrued, contingent or otherwise) other than those incurred
in the ordinary course of the Company’s or its subsidiaries respective
businesses since December 31, 2005 and which, individually or in the
aggregate, do not or would not have a Material Adverse Effect on the Company or
its subsidiaries.
  -5-
  (j)
No Undisclosed Events
or Circumstances. Except as set forth on Schedule 2.1(j)
hereto, no event or circumstance has occurred or exists with respect to the
Company or its subsidiaries or their respective businesses, properties,
prospects, operations or financial condition, which, under applicable law, rule
or regulation, requires public disclosure or announcement by the Company but
which has not been so publicly announced or disclosed.
 
 (k)
Indebtedness.
The Form 10-KSB, Form 10-QSB or Schedule 2.1(k)
hereto sets forth as of a recent date all outstanding secured and unsecured
Indebtedness of the Company or any subsidiary, or for which the Company or any
subsidiary has commitments. For the purposes of this Agreement, “Indebtedness”
shall mean (a) any liabilities for borrowed money or amounts owed in excess
of $100,000 (other than trade accounts payable incurred in the ordinary course
of business), (b) all guaranties, endorsements and other contingent
obligations in respect of Indebtedness of others, whether or not the same are or
should be reflected in the Company’s balance sheet (or the notes thereto),
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and
(c) the present value of any lease payments in excess of $25,000 due under
leases required to be capitalized in accordance with GAAP. Except as set forth
on Schedule 2.1(k),
neither the Company nor any subsidiary is in default with respect to any
Indebtedness.
 
 (l)
Title to
Assets. Each of the Company and the subsidiaries has good and marketable
title to all of its real and
 personal
property reflected in the Form 10-KSB, free and clear of any mortgages, pledges,
charges, liens, security interests or other encumbrances, except for those
disclosed in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(l)
hereto or such that, individually or in the aggregate, do not cause a Material
Adverse Effect on the Company’s financial condition or operating results. All
said leases of the Company and each of its subsidiaries are valid and subsisting
and in full force and effect.
 
 (m)
Actions
Pending. There is no action, suit, claim, investigation, arbitration,
alternate dispute resolution proceeding or any other proceeding pending or, to
the knowledge of the Company, threatened against the Company or any subsidiary
which questions the validity of this Agreement or any of the other Transaction
Documents or the transactions contemplated hereby or thereby or any action taken
or to be taken pursuant hereto or thereto. Except as set forth in the Form
10-KSB, Form 10-QSB or on Schedule 2.1(m)
hereto, there is no action, suit, claim, investigation, arbitration, alternate
dispute resolution proceeding or any other proceeding pending or, to the
knowledge of the Company, threatened, against or involving the Company, any
subsidiary or any of their respective properties or assets. Except as set forth
in the Form 10-KSB, Form 10-QSB or Schedule 2.1(m)
hereto, there are no outstanding orders, judgments, injunctions, awards or
decrees of any court, arbitrator or governmental or regulatory body against the
Company or any subsidiary or any officers or directors of the Company or
subsidiary in their capacities as such.
 
 (n)
Compliance with
Law. The business of the Company and the subsidiaries has been and is
presently being conducted in accordance with all applicable federal, state and
local governmental laws, rules, regulations and ordinances, except as set forth
in the Form 10-KSB, Form 10-QSB, or such that, individually or in the aggregate,
do not cause a Material Adverse Effect. The Company and each of its subsidiaries
have all franchises, permits, licenses, consents and other governmental or
regulatory authorizations and approvals necessary for the conduct of its
business as now being conducted by it unless the failure to possess such
franchises, permits, licenses, consents and other governmental or regulatory
authorizations and approvals, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect.
  -6-
  (o)
Taxes. Except
as set forth in the Form 10-KSB or in the Form 10-QSB, the Company and each of
the subsidiaries has accurately prepared and filed all federal, state and other
tax returns required by law to be filed by it, has paid or made provisions for
the payment of all taxes shown to be due and all additional assessments, and
adequate provisions have been and are reflected in the financial statements of
the Company and the subsidiaries for all current taxes and other charges to
which the Company or any subsidiary is subject and which are not currently due
and payable. None of the federal income tax returns of the Company or any
subsidiary have been audited by the Internal Revenue Service. The Company has no
knowledge of any additional assessments, adjustments or contingent tax liability
(whether federal or state) of any nature whatsoever, whether pending or
threatened against the Company or any subsidiary for any period, nor of any
basis for any such assessment, adjustment or contingency.
 
 (p)
Certain Fees.
Except as set forth in this Agreement or on Schedule 2.1(p)
hereto, no brokers, finders or financial advisory fees or commissions will be
payable by the Company or any subsidiary or any Purchaser with respect to the
transactions contemplated by this Agreement.
 
 (q)
Disclosure. To
the best of the Company’s knowledge, neither this Agreement or the Schedules
hereto nor any other documents, certificates or instruments furnished to the
Purchasers by or on behalf of the Company or any subsidiary in connection with
the transactions contemplated by this Agreement contain any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements made herein or therein, in the light of the circumstances under which
they were made herein or therein, not misleading.
 
 (r)
Operation of
Business. The Company and each of the subsidiaries owns or possesses all
patents, trademarks, domain names (whether or not registered) and any patentable
improvements or copyrightable derivative works thereof, websites and
intellectual property rights relating thereto, service marks, trade names,
copyrights, licenses and authorizations as set forth in the Form 10-KSB, Form
10-QSB and on Schedule 2.1(r)
hereto, and all rights with respect to the foregoing, which are necessary for
the conduct of its business as now conducted without any conflict with the
rights of others.
 
 (s)
Environmental
Compliance. The Company and each of its subsidiaries have obtained all
material approvals, authorization, certificates, consents, licenses, orders and
permits or other similar authorizations of all governmental authorities, or from
any other person, that are required under any Environmental Laws. The Form
10-KSB or Form 10-QSB describes all material permits, licenses and other
authorizations issued under any Environmental Laws to the Company or its
subsidiaries. “Environmental Laws” shall mean all applicable laws relating to
the protection of the environment including, without limitation, all
requirements pertaining to reporting, licensing, permitting, controlling,
investigating or remediating emissions, discharges, releases or threatened
releases of hazardous substances, chemical substances, pollutants, contaminants
or toxic substances, materials or wastes, whether solid, liquid or gaseous in
nature, into the air, surface water, groundwater or land, or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of hazardous substances, chemical substances, pollutants,
contaminants or toxic substances, material or wastes, whether solid, liquid or
gaseous in nature. The Company has all necessary governmental approvals required
under all Environmental Laws and used in its business or in the business of any
of its subsidiaries. The Company and each of its subsidiaries are also in
compliance with all other limitations, restrictions, conditions, standards,
requirements, schedules and timetables required or imposed under all
Environmental Laws. Except for such instances as would not individually or in
the aggregate have a Material Adverse Effect, there are no past or present
events, conditions, circumstances, incidents, actions or omissions relating to
or in any way affecting the Company or its subsidiaries that violate or may
violate any Environmental Law after the Closing Date or that may give rise to
any environmental liability, or otherwise form the basis of any claim, action,
demand, suit, proceeding, hearing, study or investigation (i) under any
Environmental Law, or (ii) based on or related to the manufacture,
processing, distribution, use, treatment, storage (including without limitation
underground storage tanks), disposal, transport or handling, or the emission,
discharge, release or threatened release of any hazardous
substance.
  -7-
  (t)
Books and Record
Internal Accounting Controls. The books and records of the Company and
its subsidiaries accurately reflect in all material respects the information
relating to the business of the Company and the subsidiaries, the location and
collection of their assets, and the nature of all transactions giving rise to
the obligations or accounts receivable of the Company or any subsidiary. The
Company and each of its subsidiaries maintain a system of internal accounting
controls sufficient, in the judgment of the Company, to provide reasonable
assurance that (i) transactions are executed in accordance with
management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management’s general or specific
authorization and (iv) the recorded accountability for assets is compared
with the existing assets at reasonable intervals and appropriate actions is
taken with respect to any differences.
 
 (u)
Material
Agreements. Except as set forth in the Form 10-KSB, Form 10-QSB or on
Schedule 2.1(u)
hereto, neither the Company nor any subsidiary is a party to any written or oral
contract, instrument, agreement, commitment, obligation, plan or arrangement, a
copy of which would be required to be filed with the Commission as an exhibit to
a registration statement on Form S-3 or applicable form (collectively, “Material
Agreements”) if the Company or any subsidiary were registering securities under
the Securities Act. Except as set forth on Schedule 2.1(u)
or in the Commission Documents, the Company and each of its subsidiaries has in
all material respects performed all the obligations required to be performed by
them to date under the foregoing agreements, have received no notice of default
and, to the best of the Company’s knowledge are not in default under any
Material Agreement now in effect, the result of which could cause a Material
Adverse Effect. Except as set forth on Schedule 2.1(u)
or in the Commission Documents, no written or oral contract, instrument,
agreement, commitment, obligation, plan or arrangement of the Company or of any
subsidiary limits or shall limit the payment of dividends on the Company’s
Preferred Shares, other Preferred Stock, if any, or its Common
Stock.
 
 (v)
Transactions with
Affiliates. Except as set forth in the Form 10-KSB, Form 10-QSB or on
Schedule 2.1(v)
hereto, there are no loans, leases, agreements, contracts, royalty agreements,
management contracts or arrangements or other continuing transactions between
(a) the Company or any subsidiary on the one hand, and (b) on the
other hand, any officer, employee, consultant or director of the Company, or any
of its subsidiaries, or any person owning any capital stock of the Company or
any subsidiary or any member of the immediate family of such officer, employee,
consultant, director or stockholder or any corporation or other entity
controlled by such officer, employee, consultant, director or stockholder, or a
member of the immediate family of such officer, employee, consultant, director
or stockholder.
 
 (w)
Securities Act of
1933. Based in material part upon the representations herein of the
Purchasers, the Company has complied and will comply with all applicable federal
and state securities laws in connection with the offer, issuance and sale of the
Shares and the Warrants hereunder. Neither the Company nor anyone acting on its
behalf, directly or indirectly, has or will sell, offer to sell or solicit
offers to buy any of the Shares, the Warrants or similar securities to, or
solicit offers with respect thereto from, or enter into any preliminary
conversations or negotiations relating thereto with, any person, or has taken or
will take any action so as to bring the issuance and sale of any of the Shares
and the Warrants under the registration provisions of the Securities Act and
applicable state securities laws, and neither the Company nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale
of any of the Shares and the Warrants.
  -8-
  (x)
Governmental
Approvals. Except as set forth in the Form 10-KSB or Form 10-QSB, and
except for the filing of any notice prior or subsequent to the Closing Date that
may be required under applicable state and/or Federal securities laws (which if
required, shall be filed on a timely basis), including the filing of a
Form D and a registration statement or statements pursuant to the
Registration Rights Agreement, and the filing of the Certificate of Designation
with the Secretary of State for the State of Delaware, no authorization,
consent, approval, license, exemption of, filing or registration with any court
or governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with, the execution or delivery of the Preferred Shares and the
Warrants, or for the performance by the Company of its obligations under the
Transaction Documents.
 
 (y)
Employees.
Neither the Company nor any subsidiary has any collective bargaining
arrangements or agreements covering any of its employees, except as set forth in
the Form 10-KSB, Form 10-QSB or on Schedule 2.1(y)
hereto. Except as set forth in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(y)
hereto, neither the Company nor any subsidiary has any employment contract,
agreement regarding proprietary information, non-competition agreement,
non-solicitation agreement, confidentiality agreement, or any other similar
contract or restrictive covenant, relating to the right of any officer, employee
or consultant to be employed or engaged by the Company or such subsidiary. Since
December 31, 2005, no officer, consultant or key employee of the Company or
any subsidiary whose termination, either individually or in the aggregate, could
have a Material Adverse Effect, has terminated or, to the knowledge of the
Company, has any present intention of terminating his or her employment or
engagement with the Company or any subsidiary.
 
 (z)
Absence of Certain
Developments. Except as provided on Schedule 2.1(z)
hereto, since December 31, 2005, neither the Company nor any subsidiary
has:
 
 (i) issued
any stock, bonds or other corporate securities or any rights, options or
warrants with respect thereto;
 (ii) borrowed
any amount or incurred or become subject to any liabilities (absolute or
contingent) except current liabilities incurred in the ordinary course of
business which are comparable in nature and amount to the current liabilities
incurred in the ordinary course of business during the comparable portion of its
prior fiscal year, as adjusted to reflect the current nature and volume of the
Company’s or such subsidiary’s business;
 (iii) discharged
or satisfied any lien or encumbrance or paid any obligation or liability
(absolute or contingent), other than current liabilities paid in the ordinary
course of business;
 (iv) declared
or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements so
to purchase or redeem, any shares of its capital stock;
 (v) sold,
assigned or transferred any other tangible assets, or canceled any debts or
claims, except in the ordinary course of business;
 (vi) sold,
assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights, or
disclosed any proprietary confidential information to any person except to
customers in the ordinary course of business or to the Purchasers or their
representatives;
 (vii) suffered
any substantial losses or waived any rights of material value, whether or not in
the ordinary course of business, or suffered the loss of any material amount of
prospective business;
 (viii) made
any changes in employee compensation except in the ordinary course of business
and consistent with past practices;
 (ix) made
capital expenditures or commitments therefor that aggregate in excess of
$100,000;
 (x) entered
into any other transaction other than in the ordinary course of business, or
entered into any other material transaction, whether or not in the ordinary
course of business;
 (xi) made
charitable contributions or pledges in excess of $25,000;
 (xii) suffered
any material damage, destruction or casualty loss, whether or not covered by
insurance;
  -9-
  (xiii) experienced
any material problems with labor or management in connection with the terms and
conditions of their employment;
 (xiv) effected
any two or more events of the foregoing kind which in the aggregate would be
material to the Company or its subsidiaries; or
 (xv) entered
into an agreement, written or otherwise, to take any of the foregoing
actions.
 
 (aa)
Public Utility Holding
Company Act and Investment Company Act Status. The Company is not a
“holding company” or a “public utility company” as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended. The Company is not, and
as a result of and immediately upon the Closing will not be, an “investment
company” or a company “controlled” by an “investment company,” within the
meaning of the Investment Company Act of 1940, as amended.
 
 (bb)
ERISA. No
liability to the Pension Benefit Guaranty Corporation has been incurred with
respect to any Plan by the Company or any of its subsidiaries which is or would
be materially adverse to the Company and its subsidiaries. The execution and
delivery of this Agreement and the issuance and sale of the Preferred Shares
will not involve any transaction
 which is
subject to the prohibitions of Section 406 of ERISA or in connection with
which a tax could be imposed pursuant to Section 4975 of the Internal
Revenue Code of 1986, as amended, provided that, if any of the Purchasers, or
any person or entity that owns a beneficial interest in any of the Purchasers,
is an “employee pension benefit plan” (within the meaning of Section 3(2)
of ERISA) with respect to which the Company is a “party in interest” (within the
meaning of Section 3(14) of ERISA), the requirements of Sections 407(d)(5)
and 408(e) of ERISA, if applicable, are met. As used in this
Section 2.1(bb), the term “Plan” shall mean an “employee pension benefit
plan” (as defined in Section 3 of ERISA) which is or has been established
or maintained, or to which contributions are or have been made, by the Company
or any subsidiary or by any trade or business, whether or not incorporated,
which, together with the Company or any subsidiary, is under common control, as
described in Section 414(b) or (c) of the Code.
 
 (cc)
Dilutive
Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Preferred Shares 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 Preferred Shares in accordance with
this Agreement and the Certificate of Designation and its obligations to issue
the Warrant Shares upon the exercise of the Warrants in accordance with this
Agreement and the Warrants, is, in each case, absolute and unconditional
regardless of the dilutive effect that such issuance may have on the ownership
interest of other stockholders of the Company.
  -10-
  (dd)
Independent Nature of
Purchasers. The Company acknowledges that the obligations of each
Purchaser under the Transaction Documents are several and not joint with the
obligations of any other Purchaser, and no Purchaser shall be responsible in any
way for the performance of the obligations of any other Purchaser under the
Transaction Documents. The Company acknowledges that the decision of each
Purchaser to purchase Securities pursuant to this Agreement has been made by
such Purchaser independently of any other purchase and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of its Subsidiaries
which may have made or given by any other Purchaser or by any agent or employee
of any other Purchaser, and no Purchaser or any of its agents or employees shall
have any liability to any Purchaser (or any other person) relating to or arising
from any such information, materials, statements or opinions. The Company
acknowledges that nothing contained herein, or in any Transaction Document, and
no action taken by any Purchaser pursuant hereto or thereto, shall be deemed to
constitute the Purchasers as a partnership, an association, a joint venture or
any other kind of entity, or create a presumption that the Purchasers are in any
way acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents. The Company acknowledges
that each Purchaser shall be entitled to independently protect and enforce its
rights, including without limitation, the rights arising out of this Agreement
or out of the other Transaction Documents, and it shall not be necessary for any
other Purchaser to be joined as an additional party in any proceeding for such
purpose. The Company acknowledges that for reasons of administrative convenience
only, the Transaction Documents have been prepared by counsel for the placement
agent and such counsel does not represent the Purchasers and the Purchasers have
retained their own individual counsel with respect to the transactions
contemplated hereby. The Company acknowledges that it has elected to provide all
Purchasers with the same terms and Transaction Documents for the convenience of
the Company and not because it was required or requested to do so by the
Purchasers. The Company acknowledges that such procedure with respect to the
Transaction Documents in no way creates a presumption that the Purchasers are in
any way acting in concert or as a group with respect to the Transaction
Documents or the transactions contemplated hereby or thereby.
 
 (ee)
No Integrated
Offering. Neither the Company, nor any of its affiliates, nor any person
acting on its or their behalf, has directly or indirectly made any offers or
sales of any security or solicited any offers to buy any security under
circumstances that would cause the offering of the Shares pursuant to this
Agreement to be integrated with prior offerings by the Company for purposes of
the Securities Act which would prevent the Company from selling the Shares
pursuant to Rule 506 under the Securities Act, or any applicable
exchange-related stockholder approval provisions, nor will the Company or any of
its affiliates or subsidiaries take any action or steps that would cause the
offering of the Shares to be integrated with other offerings. The Company does
not have any registration statement pending before the Commission or currently
under the Commission’s review and since October 1, 2005, the Company has
not offered or sold any of its equity securities or debt securities convertible
into shares of Common Stock.
 
 (ff)
Sarbanes-Oxley
Act. Except as set forth on Schedule 2.1(ff)
hereto, the Company is in compliance with the applicable provisions of the
Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), and the rules and
regulations promulgated thereunder, that are effective, and intends to comply
with other applicable provisions of the Sarbanes-Oxley Act, and the rules and
regulations promulgated thereunder, upon the effectiveness of such
provisions.
 
 (gg)
Exchange of Shares and
Notes. Upon the completion of the exchanges contemplated by
Sections 4.1 (s) and (t) hereto, no shares of Series B
Convertible Preferred Stock and Series C Convertible Preferred Stock shall
remain issued or outstanding. Upon the completion of the exchange contemplated
by Section 4.1(r) and the transactions contemplated hereby, except as set
forth on Schedule 2.1
(gg), all of the promissory notes payable by the Company shall be
delivered for cancellation and no such promissory notes shall remain
outstanding.
  -11-
  Section 2.2
Representations and
Warranties of the Purchasers. Each of the Purchasers hereby makes the
following representations and warranties to the Company with respect solely to
itself and not with respect to any other Purchaser:
 
 (a)
Organization and
Standing of the Purchasers. If the Purchaser is an entity, such Purchaser
is a corporation or partnership duly incorporated or organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or
organization.
 
 (b)
Authorization and
Power. Each Purchaser has the requisite power and authority to enter into
and perform this Agreement and to purchase the Preferred Shares and Warrants
being sold to it hereunder. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement by such Purchaser and the
consummation by it of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate or partnership action, and no further
consent or authorization of such Purchaser or its Board of Directors,
stockholders, or partners, as the case may be, is required. Each of this
Agreement and the Registration Rights Agreement has been duly authorized,
executed and delivered by such Purchaser and constitutes, or shall constitute
when executed and delivered, a valid and binding obligation of the Purchaser
enforceable against the Purchaser in accordance with the terms
thereof.
 
 (c)
No Conflicts.
The execution, delivery and performance of this Agreement and the Registration
Rights Agreement and the consummation by such Purchaser of the transactions
contemplated hereby and thereby or relating hereto do not and will not
(i) result in a violation of such Purchaser’s charter documents or bylaws
or other organizational documents or (ii) conflict with, or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of any agreement, indenture or instrument or
obligation to which such Purchaser is a party or by which its properties or
assets are bound, or result in a violation of any law, rule, or regulation, or
any order, judgment or decree of any court or governmental agency applicable to
such Purchaser or its properties (except for such conflicts, defaults and
violations as would not, individually or in the aggregate, have a material
adverse effect on such Purchaser). Such Purchaser is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under this Agreement or the Registration Rights Agreement or
to purchase the Preferred Shares or acquire the Warrants in accordance with the
terms hereof, provided that for purposes of the representation made in this
sentence, such Purchaser is assuming and relying upon the accuracy of the
relevant representations and agreements of the Company herein.
 
 (d)
Acquisition for
Investment. Each Purchaser is acquiring the Preferred Shares and the
Warrants solely for its own account for the purpose of investment and not with a
view to or for sale in connection with distribution. Each Purchaser does not
have a present intention to sell the Preferred Shares or the Warrants, nor a
present arrangement (whether or not legally binding) or intention to effect any
distribution of the Preferred Shares or the Warrants to or through any person or
entity; provided, however, that by
making the representations herein and subject to Section 2.2(f) below, such
Purchaser does not agree to hold the Shares or the Warrants for any minimum or
other specific term and reserves the right to dispose of the Shares or the
Warrants at any time in accordance with Federal and state securities laws
applicable to such disposition. Each Purchaser acknowledges that it is able to
bear the financial risks associated with an investment in the Preferred Shares
and the Warrants and that it has been given full access to such records of the
Company and the subsidiaries and to the officers of the Company and the
subsidiaries and received such information as it has deemed necessary or
appropriate to conduct its due diligence investigation and has sufficient
knowledge and experience in investing in companies similar to the Company in
terms of the Company’s stage of development so as to be able to evaluate the
risks and merits of its investment in the Company.
  -12-
 
 (e)
Status of
Purchasers. Such Purchaser is an “accredited investor” as defined in
Regulation D promulgated under the Securities Act. Such Purchaser is not
required to be registered as a broker-dealer under Section 15 of the
Exchange Act and such Purchaser is not a broker-dealer.
 
 (f)
Opportunities for
Additional Information. Each Purchaser acknowledges that such Purchaser
has had the opportunity to ask questions of and receive answers from, or obtain
additional information from, the executive officers of the Company concerning
the financial and other affairs of the Company, and to the extent deemed
necessary in light of such Purchaser’s personal knowledge of the Company’s
affairs, such Purchaser has asked such questions and received answers to the
full satisfaction of such Purchaser, and such Purchaser desires to invest in the
Company.
  (g)
No General
Solicitation. Each Purchaser acknowledges that the Preferred Shares and
the Warrants were not offered to such Purchaser by means of any advertisement,
article, notice or other communication published in any newspaper, magazine, or
similar media, or broadcast over television or radio, or any seminar or meeting
to which such Purchaser was invited by any of the foregoing means of
communications.
 
 (h)
Rule 144.
Such Purchaser understands that the Shares must be held indefinitely unless such
Shares are registered under the Securities Act or an exemption from registration
is available. Such Purchaser acknowledges that such Purchaser is familiar with
Rule 144 of the rules and regulations of the Commission, as amended,
promulgated pursuant to the Securities Act (“Rule 144”), and that such person
has been advised that Rule 144 permits resales only under certain
circumstances. Such Purchaser understands that to the extent that Rule 144
is not available, such Purchaser will be unable to sell any Shares without
either registration under the Securities Act or the existence of another
exemption from such registration requirement.
 
 (i)
General. Such
Purchaser understands that the Shares are being offered and sold in reliance on
a transactional exemption from the registration requirement of Federal and state
securities laws and the Company is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
such Purchaser set forth herein in order to determine the applicability of such
exemptions and the suitability of such Purchaser to acquire the
Shares.
 
 (j)
Independent
Investment. Except as may be disclosed in any filings with the Commission
by the Purchasers under Section 13 and/or Section 16 of the Exchange
Act, no Purchaser has agreed to act with any other Purchaser for the purpose of
acquiring, holding, voting or disposing of the Shares purchased hereunder for
purposes of Section 13(d) under the Exchange Act, and each Purchaser is acting
independently with respect to its investment in the Shares.
  ARTICLE III
 
 Covenants
 
 The
Company covenants with each of the Purchasers as follows, which covenants are
for the benefit of the Purchasers and their permitted assignees (as defined
herein).
 
 Section 3.1
Securities
Compliance. The Company shall notify the Commission in accordance with
their rules and regulations, of the transactions contemplated by any of the
Transaction Documents, including filing a Form D with respect to the
Preferred Shares, Warrants, Conversion Shares and Warrant Shares as required
under Regulation D, and shall take all other necessary action and
proceedings as may be required and permitted by applicable law, rule and
regulation, for the legal and valid issuance of the Preferred Shares, the
Warrants, the Conversion Shares and the Warrant Shares to the Purchasers or
subsequent holders.
  -13-
 
 Section 3.2
Registration and
Listing. The Company will cause its Common Stock to continue to be
registered under Sections 12(b) or 12(g) of the Exchange Act, will comply in all
respects with its reporting and filing obligations under the Exchange Act, will
comply with all requirements related to any registration statement filed
pursuant to this Agreement or the Registration Rights Agreement, and will not
take any action or file any document (whether or not permitted by the Securities
Act or the rules promulgated thereunder) to terminate or suspend such
registration or to terminate or suspend its reporting and filing obligations
under the Exchange Act or Securities Act, except as permitted herein. The
Company will take all action necessary to continue the listing or trading of its
Common Stock on the OTC Bulletin Board, The Nasdaq Capital Market or other
exchange or market on which the Common Stock is trading.
 
 Section 3.3
Inspection
Rights. The Company shall permit, during normal business hours and upon
reasonable request and reasonable notice, each Purchaser or any employees,
agents or representatives thereof, so long as such Purchaser shall be obligated
hereunder to purchase the Preferred Shares or shall beneficially own any
Preferred Shares, or shall own Conversion Shares which, in the aggregate,
represent more than 2% of the total combined voting power of all voting
securities then outstanding, for purposes reasonably related to such Purchaser’s
interests as a stockholder to examine and make reasonable copies of and extracts
from the records and books of account of, and visit and inspect the properties,
assets, operations and business of the Company and any subsidiary, and to
discuss the affairs, finances and accounts of the Company and any subsidiary
with any of its officers, consultants, directors, and key
employees.
 
 Section 3.4
Compliance with
Laws. The Company shall comply, and cause each subsidiary to comply, with
all applicable laws, rules, regulations and orders, noncompliance with which
could have a Material Adverse Effect.
 
 Section 3.5
Keeping of Records and
Books of Account. The Company shall keep and cause each subsidiary to
keep adequate records and books of account, in which complete entries will be
made in accordance with GAAP consistently applied, reflecting all financial
transactions of the Company and its subsidiaries, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence,
amortization, taxes, bad debts and other purposes in connection with its
business shall be made.
 
 Section 3.6
Reporting
Requirements. If the Commission ceases making periodic reports filed
under the Exchange Act available via the Internet, then at a Purchaser’s request
the Company shall furnish the following to such Purchaser so long as such
Purchaser shall be obligated hereunder to purchase the Preferred Shares or shall
beneficially own any Preferred Shares, or shall own Conversion Shares which, in
the aggregate, represent more than 2% of the total combined voting power of all
voting securities then outstanding:
 
 (a) Quarterly
Reports filed with the Commission on Form 10-QSB as soon as practical after the
document is filed with the Commission, and in any event within five
(5) days after the document is filed with the Commission;
 
 (b) Annual
Reports filed with the Commission on Form 10-KSB as soon as practical after the
document is filed with the Commission, and in any event within five
(5) days after the document is filed with the Commission; and
 
 (c) Copies
of all notices and information, including without limitation notices and proxy
statements in connection with any meetings, that are provided to holders of
shares of Common Stock, contemporaneously with the delivery of such notices or
information to such holders of Common Stock.
 
 Section 3.7
Amendments. The
Company shall not amend or waive any provision of the Certificate or Bylaws of
the Company in any way that would adversely affect the liquidation preferences,
dividends rights, conversion rights, voting rights or redemption rights of the
Preferred Shares; provided, however, that any
creation and issuance of another series of Junior Stock (as defined in the
Certificate of Designation) shall not be deemed to materially and adversely
affect such rights, preferences or privileges.
  -14-
  Section 3.8
Other
Agreements. The Company shall not enter into any agreement in which the
terms of such agreement would restrict or impair the right or ability to perform
of the Company or any subsidiary under any Transaction Document.
 
 Section 3.9
Distributions.
So long as any Preferred Shares or Warrants remain outstanding, the Company
agrees that it shall not (i) declare or pay any dividends or make any
distributions to any holder(s) of Common Stock or (ii) purchase or
otherwise acquire for value, directly or indirectly, any Common Stock or other
equity security of the Company.
 
 Section 3.10
Status of
Dividends. The Company covenants and agrees that (i) no Federal
income tax return or claim for refund of Federal income tax or other submission
to the Internal Revenue Service will adversely affect the Preferred Shares, any
other series of its Preferred Stock, or the Common Stock, and no deduction shall
operate to jeopardize the availability to Purchasers of the dividends received
deduction provided by Section 243(a)(1) of the Code or any successor
provision, (ii) in no report to shareholders or to any governmental body
having jurisdiction over the Company or otherwise will it treat the Preferred
Shares other than as equity capital or the dividends paid thereon other than as
dividends paid on equity capital unless required to do so by a governmental body
having jurisdiction over the accounts of the Company or by a change in generally
accepted accounting principles required as a result of action by an
authoritative accounting standards setting body, and (iii) it will take no
action which would result in the dividends paid by the Company on the Preferred
Shares out of the Company’s current or accumulated earnings and profits being
ineligible for the dividends received deduction provided by
Section 243(a)(1) of the Code. The preceding sentence shall not be deemed
to prevent the Company from designating the Preferred Stock as “Convertible
Preferred Stock” in its annual and quarterly financial statements in accordance
with its prior practice concerning other series of preferred stock of the
Company. In the event that the Purchasers have reasonable cause to believe that
dividends paid by the Company on the Preferred Shares out of the Company’s
current or accumulated earnings and profits will not be treated as eligible for
the dividends received deduction provided by Section 243(a)(1) of the Code,
or any successor provision, the Company will, at the reasonable request of the
Purchasers of 51% of the outstanding Preferred Shares, join with the Purchasers
in the submission to the Service of a request for a ruling that dividends paid
on the Shares will be so eligible for Federal income tax purposes, at the
Purchasers expense. In addition, the Company will reasonably cooperate with the
Purchasers (at Purchasers’ expense) in any litigation, appeal or other
proceeding challenging or contesting any ruling, technical advice, finding or
determination that earnings and profits are not eligible for the dividends
received deduction provided by Section 243(a)(1) of the Code, or any
successor provision to the extent that the position to be taken in any such
litigation, appeal, or other proceeding is not contrary to any provision of the
Code. Notwithstanding the foregoing, nothing herein contained shall be deemed to
preclude the Company from claiming a deduction with respect to such dividends if
(i) the Code shall hereafter be amended, or final Treasury regulations
thereunder are issued or modified, to provide that dividends on the Preferred
Shares or Conversion Shares should not be treated as dividends for Federal
income tax purposes or that a deduction with respect to all or a portion of the
dividends on the Shares is allowable for Federal income tax purposes, or
(ii) in the absence of such an amendment, issuance or modification and
after a submission of a request for ruling or technical advice, the Service
shall issue a published ruling that dividends on the shares should not be
treated as dividends for Federal income tax purposes. If the Service
specifically determines that the Preferred Shares or Conversion Shares
constitute debt, the Company may file protective claims for refund.
 
 Section 3.11
Intentionally
Omitted.
  -15-
  Section 3.12
Future Financings;
Right of First Offer and Refusal. (a) For purposes of this
Agreement, a “Subsequent Financing” shall be defined as any subsequent offer or
sale to, or exchange with (or other type of distribution to), any third party of
Common Stock or any securities convertible, exercisable or exchangeable into
Common Stock, including debt securities so convertible, in a private transaction
(collectively, the “Financing Securities”) other than a Permitted Financing. For
purposes of this Agreement, “Permitted Financing” shall mean any transaction
involving (i) the Company’s issuance of any Financing Securities (other
than for cash) in connection with an acquisition of the Company, (ii) the
Company’s issuance of Financing Securities in connection with strategic license
agreements and other partnering arrangements so long as such issuances are not
for the purpose of raising capital and the Company has received the prior
written consent of the Purchasers, (iii) the Company’s issuance of
Financing Securities in connection with bona fide firm underwritten public
offerings of its securities, (iv) the Company’s issuance of Common Stock or
the issuance or grants of options to purchase Common Stock pursuant to the
Company’s stock option plans and employee stock purchase plans outstanding on
the date hereof and which have been approved by the Board of Directors of the
Company, (v) as a result of the exercise of options or warrants or
conversion of convertible notes or preferred stock which are granted or issued
as of the date of this Agreement or issued pursuant to this Agreement,
(vi) any Warrants issued to the Purchasers and any warrants issued to the
placement agent for the transactions contemplated by this Agreement in
connection with other financial services rendered to the Company, or
(vii) the payment of any dividend on the Preferred Shares.
 
 (b) During
the period commencing on the Closing Date and ending on the date that is twelve
(12) months following the Closing Date, the Company covenants and agrees to
promptly notify (in no event later than five (5) days after making or
receiving an applicable offer) in writing (a “Rights Notice”) each Purchaser of
the terms and conditions of any proposed Subsequent Financing. The Rights Notice
shall describe, in reasonable detail, the proposed Subsequent Financing, the
proposed closing date of the Subsequent Financing, which shall be within thirty
(30) calendar days from the date of the Rights Notice, including, without
limitation, all of the terms and conditions thereof and proposed definitive
documentation to be entered into in connection therewith. The Rights Notice
shall provide each Purchaser an option (the “Rights Option”) during the ten
(10) trading days following delivery of the Rights Notice (the “Option
Period”) to inform the Company whether such Purchaser will purchase up to fifty
percent (50%) of the stated value of the Preferred Shares held by such Purchaser
on the date the Rights Notice was delivered to the Purchaser for the securities
being offered in such Subsequent Financing on the same, absolute terms and
conditions as contemplated by such Subsequent Financing (the “First Refusal
Rights”). If any Purchaser elects not to participate in such Subsequent
Financing, the other Purchasers may participate on a pro-rata basis so long as
such participation in the aggregate does not exceed fifty percent (50%) of the
stated value of all Preferred Shares outstanding as of the date of the Rights
Notice. For purposes of this Section, all references to “pro rata” means, for
any Purchaser electing to participate in such Subsequent Financing, the
percentage obtained by dividing (x) the total number of Preferred Shares
purchased by such Purchaser at the Closing by (y) the total number of
Preferred Shares purchased by all of the participating Purchasers at the
Closing. Delivery of any Rights Notice constitutes a representation and warranty
by the Company that there are no other material terms and conditions,
arrangements, agreements or otherwise except for those disclosed in the Rights
Notice, to provide additional compensation to any party participating in any
proposed Subsequent Financing, including, but not limited to, additional
compensation based on changes in the purchase price or any type of reset or
adjustment of a purchase or conversion price or to issue additional securities
at any time after the closing date of a Subsequent Financing. If the Company
does not receive notice of exercise of the Rights Option from the Purchasers
within the Option Period, the Company shall have the right to close the
Subsequent Financing on the scheduled closing date with a third party; provided that all of
the material terms and conditions of the closing are the same as those provided
to the Purchasers in the Rights Notice. If the closing of the proposed
Subsequent Financing does not occur on that date, any closing of the
contemplated Subsequent Financing or any other Subsequent Financing shall be
subject to all of the provisions of this Section 3.12, including, without
limitation, the delivery of a new Rights Notice. The provisions of this
Section 3.12(b) shall not apply to issuances of Financing Securities in a
Permitted Financing.
  -16-
  Section 3.13
Reservation of
Shares. So long as any of the Preferred Shares or Warrants remain
outstanding, the Company shall take all action necessary to at all times have
authorized, and reserved for the purpose of issuance, an amount equal to at
least one hundred twenty percent (120%) of the number of shares of Common Stock
as shall from time to time be sufficient to provide for the issuance of the
Conversion Shares and the Warrant Shares.
 
 Section 3.14
Transfer Agent
Instructions. The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Purchaser or its respective nominee(s), for the
Conversion Shares and the Warrant Shares in such amounts as specified from time
to time by each Purchaser to the Company upon conversion of the Preferred Shares
or exercise of the Warrants in the form of Exhibit E
attached hereto (the “Irrevocable Transfer Agent Instructions”). Prior to
registration of the Conversion Shares and the Warrant Shares under the
Securities Act, all such certificates shall bear the restrictive legend
specified in Section 5.1 of this Agreement. The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 3.14 will be given by the Company to its transfer agent and
that the Shares shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. If a Purchaser provides the Company with an
opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Shares may be made without registration
under the Securities Act or the Purchaser provides the Company with reasonable
assurances that the Shares can be sold pursuant to Rule 144 without any
restriction as to the number of securities acquired as of a particular date that
can then be immediately sold, the Company shall permit the transfer, and, in the
case of the Conversion Shares and the Warrant Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Purchaser and without any restrictive legend.
The Company acknowledges that a breach by it of its obligations under this
Section 3.14 will cause irreparable harm to the Purchasers by vitiating the
intent and purpose of the transaction contemplated hereby. Accordingly, the
Company acknowledges that the remedy at law for a breach of its obligations
under this Section 3.14 will be inadequate and agrees, in the event of a
breach or threatened breach by the Company of the provisions of this
Section 3.14, that the Purchasers shall be entitled, in addition to all
other available remedies, to an order and/or injunction restraining any breach
and requiring immediate issuance and transfer, without the necessity of showing
economic loss and without any bond or other security being
required.
 
 Section 3.15
Disposition of
Assets. So long as the Preferred Shares remain outstanding, neither the
Company nor any Subsidiary shall sell, transfer or otherwise dispose of any of
its properties, assets and rights including, without limitation, its software
and intellectual property, to any person except for sales to customers in the
ordinary course of business or with the prior written consent of the holders of
a majority of the Preferred Shares then outstanding.
  Section 3.16
Reporting
Status. So long as a Purchaser beneficially owns any of the Securities,
the Company shall timely file all reports required to be filed with the
Commission pursuant to the Exchange Act, and the Company shall not terminate its
status as an issuer required to file reports under the Exchange Act even if the
Exchange Act or the rules and regulations thereunder would permit such
termination.
  -17-
  Section 3.17
Disclosure of
Transaction. The Company shall issue a press release describing the
material terms of the transactions contemplated hereby (the “Press Release”) as
soon as practicable after the Closing but in no event later than one hour after
the Closing; provided, however, that if the
Closing occurs after 4:00 P.M. Eastern Time on any Trading Day, the Company
shall issue the Press Release no later than 9:00 A.M. Eastern Time on the first
Trading Day following the Closing Date. The Company shall also file with the
Commission a Current Report on Form 8-K (the “Form 8-K”) describing the material
terms of the transactions contemplated hereby (and attaching as exhibits thereto
this Agreement, the Registration Rights Agreement, the Certificate of
Designation, the form of Warrant and the Press Release) as soon as practicable
following the Closing Date but in no event more than two (2) Trading Days
following the Closing Date, which Press Release and Form 8-K shall be subject to
prior review and comment by the Purchasers. “Trading Day” means any day during
which the OTC Bulletin Board (or other principal exchange on which the Common
Stock is traded) shall be open for trading.
 
 Section 3.18
Disclosure of Material
Information. The Company covenants and agrees that neither it nor any
other person acting on its behalf has provided or will provide any Purchaser or
its agents or counsel with any information that the Company believes constitutes
material non-public information, unless prior thereto such Purchaser shall have
executed a written agreement regarding the confidentiality and use of such
information. The Company understands and confirms that each Purchaser shall be
relying on the foregoing representations in effecting transactions in securities
of the Company.
 
 Section 3.19
Pledge of
Securities. The Company acknowledges and agrees that the Securities may
be pledged by a Purchaser in connection with a bona fide margin agreement
or other loan or financing arrangement that is secured by the Common Stock. The
pledge of Common Stock shall not be deemed to be a transfer, sale or assignment
of the Common Stock hereunder, and no Purchaser effecting a pledge of Common
Stock shall be required to provide the Company with any notice thereof or
otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; provided that a Purchaser and its pledgee shall be
required to comply with the provisions of Article V hereof in order to
effect a sale, transfer or assignment of Common Stock to such pledgee. At the
Purchasers’ expense, the Company hereby agrees to execute and deliver such
documentation as a pledgee of the Common Stock may reasonably request in
connection with a pledge of the Common Stock to such pledgee by a
Purchaser.
 
 Section 3.20
Restrictions on
Certain Issuances of Securities. So long as any Preferred Shares remain
outstanding, the Company shall not issue any securities that rank pari passu or
senior to the Preferred Shares without the prior written consent of the holders
of at least eighty percent (80%) of the Preferred Shares outstanding at such
time.
  Section 3.21
Independent Board
Members. No later than September 30, 2006, the Company shall provide
evidence that its Board of Directors complies with the listing rules of The
Nasdaq Capital Market and the Sarbanes-Oxley Act and consists of five members
which shall include three current members and two additional members that are
reasonably acceptable to the Purchasers.
 
 Section 3.22
Application for Nasdaq
Listing. The Company shall use its best efforts to file an initial
listing application for its Common Stock to be listed on The Nasdaq Capital
Market no later than June 30, 2006 and the Company shall use its best
efforts to cause its shares of Common Stock to be listed on The Nasdaq Capital
Market as soon as practicable, but in no event later than October 31, 2006.
In the event that the Company does not file the initial listing application by
June 30, 2006 or the Company’s shares of Common Stock, including the
Conversion Shares and the Warrant Shares, are not listed on The Nasdaq Capital
Market by October 31, 2006, the Company shall pay a penalty to each
Purchaser on a monthly basis equal to one percent (1%) of each Purchaser’s
portion of the Purchase Price, but in no event shall such penalties exceed more
than ten percent (10%) of each Purchaser’s portion of the Purchase
Price.
  -18-
  ARTICLE IV
 
 CONDITIONS
 
 Section 4.1
Conditions Precedent
to the Obligation of the Company to Sell the Shares. The obligation
hereunder of the Company to issue and sell the Preferred Shares and the Warrants
to the Purchasers is subject to the satisfaction or waiver, at or before the
Closing, of each of the conditions set forth below. These conditions are for the
Company’s sole benefit and may be waived by the Company at any time in its sole
discretion.
 
 (a)
              Accuracy of Each
      Purchaser’s Representations and Warranties. The representations and
      warranties of each Purchaser shall be true and correct in all material
      respects as of the date when made and as of the Closing Date as though
      made at that time, except for representations and warranties that are
      expressly made as of a particular date, which shall be true and correct in
      all material respects as of such
date.
 
 (b)
              Performance by the
      Purchasers. Each Purchaser shall have performed, satisfied and
      complied in all respects with all covenants, agreements and conditions
      required by this Agreement to be performed, satisfied or complied with by
      such Purchaser at or prior to the
Closing.
 
 (c)
              No Injunction.
      No statute, rule, regulation, executive order, decree, ruling or
      injunction shall have been enacted, entered, promulgated or endorsed by
      any court or governmental authority of competent jurisdiction which
      prohibits the consummation of any of the transactions contemplated by this
      Agreement.
 
 (d)
              Delivery of Purchase
      Price. The Purchase Price for the Preferred Shares and Warrants has
      been delivered to the Company at the Closing
  Date.
 
 (e)
              Delivery of
      Transaction Documents. The Transaction Documents have been duly
      executed and delivered by the Purchasers to the
  Company.
 
  Section 4.2
Conditions Precedent
to the Obligation of the Purchasers to Purchase the Shares. The
obligation hereunder of each Purchaser to acquire and pay for the Preferred
Shares and the Warrants is subject to the satisfaction or waiver, at or before
the Closing, of each of the conditions set forth below. These conditions are for
each Purchaser’s sole benefit and may be waived by such Purchaser at any time in
its sole discretion.
 
 (a)
Accuracy of the
Company’s Representations and Warranties. Each of the representations and
warranties of the Company in this Agreement and the Registration Rights
Agreement shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that are expressly made as of a particular date),
which shall be true and correct in all material respects as of such
date.
 
 (b)
Performance by the
Company. The Company shall have performed, satisfied and complied in all
respects with all covenants, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by the Company at or prior
to the Closing.
  -19-
  (c)
No Suspension,
Etc. Trading in the Company’s Common Stock shall not have been suspended
by the Commission or the OTC Bulletin Board (except for any suspension of
trading of limited duration agreed to by the Company, which suspension shall be
terminated prior to the applicable Closing), and, at any time prior to the
Closing Date, trading in securities generally as reported by Bloomberg Financial
Markets (“Bloomberg”) shall not have been suspended or limited, or minimum
prices shall not have been established on securities whose trades are reported
by Bloomberg, or on the New York Stock Exchange, nor shall a banking moratorium
have been declared either by the United States or New York State authorities,
nor shall there have occurred any material outbreak or escalation of hostilities
or other national or international calamity or crisis of such magnitude in its
effect on, or any material adverse change in any financial market which, in each
case, in the judgment of such Purchaser, makes it impracticable or inadvisable
to purchase the Preferred Shares.
 
 (d)
No Injunction.
No statute, rule, regulation, executive order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this
Agreement.
 
 (e)
No Proceedings or
Litigation. No action, suit or proceeding before any arbitrator or any
governmental authority shall have been commenced, and no investigation by any
governmental authority shall have been threatened, against the Company or any
subsidiary, or any of the officers, directors or affiliates of the Company or
any subsidiary seeking to restrain, prevent or change the transactions
contemplated by this Agreement, or seeking damages in connection with such
transactions.
 
 (f)
Certificate of
Designation of Rights and Preferences. Prior to the Closing, the
Certificate of Designation in the form of Exhibit C
attached hereto shall have been filed with the Secretary of State of
Delaware.
 
 (g)
Opinion of Counsel,
Etc. At the Closing, the Purchasers shall have received an opinion of
counsel to the Company, dated the date of the Closing, in the form of Exhibit F
hereto, and such other certificates and documents as the Purchasers or its
counsel shall reasonably require incident to the Closing.
 
 (h)
Registration Rights
Agreement. At the Closing, the Company shall have executed and delivered
the Registration Rights Agreement to each Purchaser.
  (i)
Certificates.
The Company shall have executed and delivered to the Purchasers the certificates
(in such denominations as such Purchaser shall request) for the Preferred Shares
and the Warrants (in such denominations as such Purchaser shall request) being
acquired by such Purchaser at the Closing.
 
 (j)
Resolutions.
The Board of Directors of the Company shall have adopted resolutions consistent
with Section 2.1(b) hereof in a form reasonably acceptable to such
Purchaser (the “Resolutions”).
 
 (k)
Reservation of
Shares. As of the Closing Date, the Company shall have reserved out of
its authorized and unissued Common Stock, solely for the purpose of effecting
the conversion of the Preferred Shares and the exercise of the Warrants, a
number of shares of Common Stock equal to at least one hundred twenty percent
(120%) of the number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of the Preferred Shares outstanding on the
Closing Date and the Warrant Shares issuable upon exercise of the Warrants as of
the Closing Date, in each case, without regard to any limitations on conversion
or exercise.
  (l)
Transfer Agent
Instructions. The Irrevocable Transfer Agent Instructions, in the form of
Exhibit E
attached hereto, shall have been delivered to and acknowledged in writing by the
Company’s transfer agent.
  -20-
  (m)
Secretary’s
Certificate. The Company shall have delivered to such Purchaser a
secretary’s certificate, dated as of the Closing Date, as to (i) the
Resolutions, (ii) the Certificate, (iii) the Bylaws, (iv) the
Certificate of Designation, each as in effect at the Closing, and (iv) the
authority and incumbency of the officers of the Company executing the
Transaction Documents and any other documents required to be executed or
delivered in connection therewith.
 
 (n)
Officer’s
Certificate. The Company shall have delivered to the Purchasers a
certificate of an executive officer of the Company, dated as of the Closing
Date, confirming the accuracy of the Company’s representations, warranties and
covenants as of such Closing Date and confirming the compliance by the Company
with the conditions precedent set forth in this Section 4.2 as of the
Closing Date.
 
 (o)
Material Adverse
Effect. No Material Adverse Effect shall have occurred at or before the
Closing Date.
 
 (p)
Lock-Up
Agreements. Prior to or at the Closing, the Lock-Up Agreements entered
into between the Company and certain persons or entities, including Paul Kruger
and/or his affiliates, a form of which is attached hereto as Exhibit G, shall
have been fully executed and delivered to the Purchasers.
 
 (q)
Resignation of Chief
Executive Officer. At or before the Closing Date, Paul Kruger shall have
resigned as the Company’s Chief Executive Officer and Tom Deery shall have
assumed the position as Interim Chief Executive Officer.
 
 (r)
Exchange of Boundless
Investments, LLC Promissory Note. Prior to or at the Closing, Boundless
Investments, LLC shall have converted a promissory note issued in the aggregate
principal amount of $1,000,000 into shares of the Company’s Series B
Convertible Preferred Stock and Boundless Investments, LLC shall have exchanged
such shares of Series B Convertible Preferred Stock into Preferred Shares,
pursuant to the terms and conditions set forth in the Boundless Investments, LLC
Exchange Agreement, a form of which is attached hereto as Exhibit H.
 
 (s)
Exchange of
Series B Convertible Preferred Stock. Prior to or at the Closing,
holders of the Company’s Series B Convertible Preferred Stock, as more
fully set forth in Schedule 4.2(t),
shall have exchanged such shares of Series B Convertible Preferred Stock
for Preferred Shares, pursuant to the terms and conditions set forth in the
Series B Convertible Preferred Stock Exchange Agreement, a form of which is
attached hereto as Exhibit I.
 
 (t)
Exchange of
Series C Convertible Preferred Stock. Prior to or at the Closing,
holders of the Company’s Series C Convertible Preferred Stock, as more
fully set forth in Schedule 4.2(u),
shall have exchanged such shares of Series C Convertible Preferred Stock
for Preferred Shares, pursuant to the terms and conditions set forth in the
Series C Convertible Preferred Stock Exchange Agreement, a form of which is
attached hereto as Exhibit J.
  -21-
  ARTICLE V
 
 Stock Certificate
Legend
 
 Section 5.1
Legend. Each
certificate representing the Preferred Shares and the Warrants, and, if
appropriate, securities issued upon conversion thereof, shall be stamped or
otherwise imprinted with a legend substantially in the following form (in
addition to any legend required by applicable state securities or “blue sky”
laws):
 
 THESE
SECURITIES REPRESENTED BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)
OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE
STATE SECURITIES LAWS OR DIRT MOTOR SPORTS, INC. SHALL HAVE RECEIVED AN OPINION
OF COUNSEL THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND
UNDER THE PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT
REQUIRED.
 
 The
Company agrees to reissue certificates representing any of the Conversion Shares
and the Warrant Shares, without the legend set forth above if at such time,
prior to making any transfer of any such securities, such holder thereof shall
give written notice to the Company describing the manner and terms of such
transfer and removal as the Company may reasonably request. Such proposed
transfer and removal will not be effected until: (a) either (i) the
Company has received an opinion of counsel reasonably satisfactory to the
Company, to the effect that the registration of the Conversion Shares or the
Warrant Shares under the Securities Act is not required in connection with such
proposed transfer, (ii) a registration statement under the Securities Act
covering such proposed disposition has been filed by the Company with the
Commission and has become effective under the Securities Act, (iii) the
Company has received other evidence reasonably satisfactory to the Company that
such registration and qualification under the Securities Act and state
securities laws are not required, or (iv) the holder provides the Company
with reasonable assurances that such security can be sold pursuant to
Rule 144 under the Securities Act; and (b) either (i) the Company
has received an opinion of counsel reasonably satisfactory to the Company, to
the effect that registration or qualification under the securities or “blue sky”
laws of any state is not required in connection with such proposed disposition,
or (ii) compliance with applicable state securities or “blue sky” laws has
been effected or a valid exemption exists with respect thereto. The Company will
respond to any such notice from a holder within three (3) business days. In
the case of any proposed transfer under this Section 5.1, the Company will
use reasonable efforts to comply with any such applicable state securities or
“blue sky” laws, but shall in no event be required, (x) to qualify to do
business in any state where it is not then qualified, (y) to take any
action that would subject it to tax or to the general service of process in any
state where it is not then subject, or (z) to comply with state securities
or “blue sky” laws of any state for which registration by coordination is
unavailable to the Company. The restrictions on transfer contained in this
Section 5.1 shall be in addition to, and not by way of limitation of, any
other restrictions on transfer contained in any other section of this Agreement.
Whenever a certificate representing the Conversion Shares or Warrant Shares is
required to be issued to a Purchaser without a legend, in lieu of delivering
physical certificates representing the Conversion Shares or Warrant Shares
(provided that a registration statement under the Securities Act providing for
the resale of the Warrant Shares and Conversion Shares is then in effect), the
Company shall cause its transfer agent to electronically transmit the Conversion
Shares or Warrant Shares to a Purchaser by crediting the account of such
Purchaser’s Prime Broker with the Depository Trust Company through its Deposit
Withdrawal Agent Commission system (to the extent not inconsistent with any
provisions of this Agreement).
  -22-
  ARTICLE VI
 
 Indemnification
 
 Section 6.1
General
Indemnity. The Company agrees to indemnify and hold harmless the
Purchasers (and their respective directors, officers, affiliates, agents,
successors and assigns) from and against any and all losses, liabilities,
deficiencies, costs, damages and expenses (including, without limitation,
reasonable attorneys’ fees, charges and disbursements) incurred by the
Purchasers as a result of any inaccuracy in or breach of the representations,
warranties or covenants made by the Company herein. Each Purchaser severally but
not jointly agrees to indemnify and hold harmless the Company and its directors,
officers, affiliates, agents, successors and assigns from and against any and
all losses, liabilities, deficiencies, costs, damages and expenses (including,
without limitation, reasonable attorneys’ fees, charges and disbursements)
incurred by the Company as result of any inaccuracy in or breach of the
representations, warranties or covenants made by such Purchaser herein. The
maximum aggregate liability of each Purchaser pursuant to its indemnification
obligations under this Article VI shall not exceed the portion of the
Purchase Price paid by such Purchaser hereunder.
 
 Section 6.2
Indemnification
Procedure. Any party entitled to indemnification under this
Article VI (an “indemnified party”) will give written notice to the
indemnifying party of any matters giving rise to a claim for indemnification;
provided, that the failure of any party entitled to indemnification hereunder to
give notice as provided herein shall not relieve the indemnifying party of its
obligations under this Article VI except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In
case any action, proceeding or claim is brought against an indemnified party in
respect of which indemnification is sought hereunder, the indemnifying party
shall be entitled to participate in and, unless in the reasonable judgment of
the indemnified party a conflict of interest between it and the indemnifying
party may exist with respect of such action, proceeding or claim, to assume the
defense thereof with counsel reasonably satisfactory to the indemnified party.
In the event that the indemnifying party advises an indemnified party that it
will contest such a claim for indemnification hereunder, or fails, within thirty
(30) days of receipt of any indemnification notice to notify, in writing,
such person of its election to defend, settle or compromise, at its sole cost
and expense, any action, proceeding or claim (or discontinues its defense at any
time after it commences such defense), then the indemnified party may, at its
option, defend, settle or otherwise compromise or pay such action or claim. In
any event, unless and until the indemnifying party elects in writing to assume
and does so assume the defense of any such claim, proceeding or action, the
indemnified party’s costs and expenses arising out of the defense, settlement or
compromise of any such action, claim or proceeding shall be losses subject to
indemnification hereunder. The indemnified party shall cooperate fully with the
indemnifying party in connection with any negotiation or defense of any such
action or claim by the indemnifying party and shall furnish to the indemnifying
party all information reasonably available to the indemnified party which
relates to such action or claim. The indemnifying party shall keep the
indemnified party fully apprised at all times as to the status of the defense or
any settlement negotiations with respect thereto. If the indemnifying party
elects to defend any such action or claim, then
the indemnified party shall be entitled to participate in such defense with
counsel of its choice at its sole cost and expense. The indemnifying party shall
not be liable for any settlement of any action, claim or proceeding effected
without its prior written consent. Notwithstanding anything in this
Article VI to the contrary, the indemnifying party shall not, without the
indemnified party’s prior written consent, settle or compromise any claim or
consent to entry of any judgment in respect thereof which imposes any future
obligation on the indemnified party or which does not include, as an
unconditional term thereof, the giving by the claimant or the plaintiff to the
indemnified party of a release from all liability in respect of such claim. The
indemnification required by this Article VI shall be made by periodic
payments of the amount thereof during the course of investigation or defense, as
and when bills are received or expense, loss, damage or liability is incurred,
so long as the indemnified party irrevocably agrees to refund such moneys if it
is ultimately determined by a court of competent jurisdiction that such party
was not entitled to indemnification. The indemnity agreements contained herein
shall be in addition to (a) any cause of action or similar rights of the
indemnified party against the indemnifying party or others, and (b) any
liabilities the indemnifying party may be subject to pursuant to the
law.
  -23-
  ARTICLE VII
  Miscellaneous
  Section 7.1
Fees and
Expenses. Except as otherwise set forth in this Agreement, the
Registration Rights Agreement or the Certificate of Designation, each party
shall pay the fees and expenses of its advisors, counsel, accountants and other
experts, if any, and all other expenses, incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this Agreement,
provided that
the Company shall pay all actual attorneys’ fees and expenses (including
disbursements and out-of-pocket expenses) incurred by the Purchasers in
connection with (i) the preparation, negotiation, execution and delivery of
this Agreement, and the other Transaction Documents and the transactions
contemplated thereunder, which payment shall be made at Closing, (ii) the
filing and declaration of effectiveness by the Commission of the Registration
Statement (as defined in the Registration Rights Agreement) and (iii) any
amendments, modifications or waivers of this Agreement or any of the other
Transaction Documents. In addition, the Company shall pay all reasonable fees
and expenses incurred by the Purchasers in connection with the enforcement of
this Agreement or any of the other Transaction Documents, including, without
limitation, all reasonable attorneys’ fees and expenses. The Company shall pay
all stamp or other similar taxes and duties levied in connection with issuance
of the Preferred Shares pursuant hereto.
 
 Section 7.2
Specific Enforcement,
Consent to Jurisdiction.
 
 (a) The
Company and the Purchasers acknowledge and agree that irreparable damage would
occur in the event that any of the provisions of this Agreement, the Certificate
of Designation or the Registration Rights Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Agreement or
the Registration Rights Agreement and to enforce specifically the terms and
provisions hereof or thereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
 
 (b) Each
of the Company and the Purchasers (i) hereby irrevocably submits to the
jurisdiction of the United States District Court sitting in the Southern
District of New York and the courts of the State of New York located in New York
county for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and
agrees not to assert in any such suit, action or proceeding, any claim that it
is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the
Purchasers consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall constitute
good and sufficient service of process and notice thereof. Nothing in this
Section 7.2 shall affect or limit any right to serve process in any other
manner permitted by law.
 
 Section 7.3
Entire Agreement;
Amendment. This Agreement and the Transaction Documents contains the
entire understanding and agreement of the parties with respect to the matters
covered hereby and, except as specifically set forth herein or in the
Transaction Documents or the Certificate of Designation, neither the Company nor
any of the Purchasers makes any representations, warranty, covenant or
undertaking with respect to such matters and they supersede all prior
understandings and agreements with respect to said subject matter, all of which
are merged herein. No provision of this Agreement may be waived or amended other
than by a written instrument signed by the Company and the holders of at least
seventy-five percent (75%) of the Preferred Shares then outstanding, and no
provision hereof may be waived other than by an a written instrument signed by
the party against whom enforcement of any such amendment or waiver is sought. No
such amendment shall be effective to the extent that it applies to less than all
of the holders of the Preferred Shares then outstanding. No consideration shall
be offered or paid to any person to amend or consent to a waiver or modification
of any provision of any of the Transaction Documents or the Certificate of
Designation unless the same consideration is also offered to all of the parties
to the Transaction Documents or holders of Preferred Shares, as the case may
be.
 -24-
  Section 7.4
Notices. Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery by telex (with correct answer back received), telecopy or facsimile at
the address or number designated below (if delivered on a business day during
normal business hours where such notice is to be received), or the first
business day following such delivery (if delivered other than on a business day
during normal business hours where such notice is to be received) or (b) on
the second business day following the date of mailing by express courier
service, fully prepaid, addressed to such address, or upon actual receipt of
such mailing, whichever shall first occur. The addresses for such communications
shall be:
 If
      to the Company:
                
                Dirt
      Motor Sports, Inc.2500
      McGee Drive, Suite 147Norman,
      Oklahoma 73072Attention:
      Chief Executive OfficerTel.
      No.: (405) 360-5047Fax
      No.: (405) 360-5354with
      copies to:
                
                Jackson
      Walker L.L.P.2435
      N. Central ExpresswaySuite 600Richardson,
      Texas, 75080Attention:
      Richard F. DahlsonTel
      No.: (972) 744-2996Fax
      No.: (972) 744-2990If
      to any Purchaser:
                
                At
      the address of such Purchaser set forth on Exhibit A to this Agreement, with
      copies to Purchaser’s counsel as set forth on Exhibit A or as specified in writing
      by such Purchaser with copies to:Kramer
      Levin Naftalis & Frankel LLP1177
      Avenue of the AmericasNew
      York, New York 10036Attention:
      Christopher S. AugusteTel
      No.: (212) 715-9100Fax
      No.: (212) 715-8000and,
      with respect to any notice to Magnetar Capital Master Fund, Ltd., a copy
      to:Schulte
      Roth & Zabel LLP919
      Third AvenueNew
      York, New York 10022Attention:
      Eleazer N. KleinTel
      No.: (212) 756-2000Fax
      No.: (212) 593-5955
  -25-
  Any
party hereto may from time to time change its address for notices by giving at
least ten (10) days written notice of such changed address to the other
party hereto.
 
 Section 7.5
Waivers. No
waiver by either party of any default with respect to any provision, condition
or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provisions, condition or requirement hereof,
nor shall any delay or omission of any party to exercise any right hereunder in
any manner impair the exercise of any such right accruing to it
thereafter.
  Section 7.6
Headings. The
article, section and subsection headings in this Agreement are for convenience
only and shall not constitute a part of this Agreement for any other purpose and
shall not be deemed to limit or affect any of the provisions
hereof.
 
 Section 7.7
Successors and
Assigns. This Agreement shall be binding upon and inure to the benefit of
the parties and their successors and assigns.
 
 Section 7.8
No Third Party
Beneficiaries. This Agreement is intended for the benefit of the parties
hereto and their respective permitted successors and assigns and is not for the
benefit of, nor may any provision hereof be enforced by, any other
person.
 
 Section 7.9
Governing Law.
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York, without giving effect to any of the
conflicts of law principles which would result in the application of the
substantive law of another jurisdiction. This Agreement shall not be interpreted
or construed with any presumption against the party causing this Agreement to be
drafted.
 
 Section 7.10
Survival. The
representations, warranties, agreements and covenants of the Company and the
Purchasers shall survive the execution and delivery hereof and the
Closing.
  Section 7.11
Counterparts.
This Agreement may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument and shall become effective
when counterparts have been signed by each party and delivered to the other
parties hereto, it being understood that all parties need not sign the same
counterpart. In the event any signature is delivered by facsimile transmission,
the party using such means of delivery shall cause four additional executed
signature pages to be physically delivered to the other parties within five days
of the execution and delivery hereof.
  Section 7.12
Publicity. The
Company agrees that it will not disclose, and will not include in any public
announcement, the name of the Purchasers without the consent of the Purchasers
unless and until such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement.
 
 Section 7.13
Severability.
The provisions of this Agreement, the Certificate of Designation and the
Registration Rights Agreement are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or
part of the provisions contained in this Agreement, the Certificate of
Designation or the Registration Rights Agreement shall, for any reason, be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision or part of a
provision of this Agreement, the Certificate of Designation or the Registration
Rights Agreement shall be reformed and construed as if such invalid or illegal
or unenforceable provision, or part of such provision, had never been contained
herein, so that such provisions would be valid, legal and enforceable to the
maximum extent possible.
  -26-
  Section 7.14
Further
Assurances. From and after the date of this Agreement, upon the request
of any Purchaser or the Company, each of the Company and the Purchasers shall
execute and deliver such instrument, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement, the Preferred Shares, the
Conversion Shares, the Warrants, the Warrant Shares, the Certificate of
Designation, and the Registration Rights Agreement.
 
 [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]
  -27-




/s/ Brian
Carter
         /s/ Thomas E.
McCauley
   /s/ Thomas E.
McCauley
  /s/ Keith W.
Hughes
    /s/ Robert A.
Berlecher
  /s/ Robert A.
Berlecher
    -28-
 /s/ Robert A.
Berlecher
 /s/ Robert A.
Berlecher
 /s/ Thomas I.
Unterberg
   /s/ Adam
Ben
   /s/ Cherie
Trost
   /s/ Jeffrey M.
Gallups
    /s/ Howard
Smuckler
   -29-
 /s/ Evan
Schemmer
     /s/ A. J.
Storch
     /s/ Joshua
Silverman
       /s/ Andrew
Arno
   /s/
     /s/
    /s/


-30-


DISCLOSURE
SCHEDULE
 TO
 SERIES
D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT


SCHEDULE 2.1(a)





Subsidiaries:


All
wholly owned





Boundless
Track Operations, Inc. – Nevada


Boundless
Motor Sports Racing, Inc. – Texas (Dormant subsidiary, not in good
standing)


GPX
Partners, LLC – Texas (Dormant subsidiary, not in good standing)


GPX
Acquisition, LLC – Texas


Carter
& Miracle Concessions, LLC – Florida


Volusia
Operations, LLC – Florida


Volusia
Speedway Park Entertainment, LLC – Florida


Volusia
Speedway Park, Inc. - Florida


Boundless
Racing, Inc. – Texas


World of
Outlaws, Inc. – Texas (Dormant subsidiary, not in good standing)


Federation
Dirt International, Inc. - Delaware


Dirt
Motorsports, Inc. – New York


United
Midwestern Promoters Motorsports, LLC - Ohio







-31-





SCHEDULE 2.1(c)





Authorized
Shares:





100,000,000
Common Stock, $.001 par value per share


10,000,000
Preferred Stock, $.01 par value per share of which 7,500 are designated
Series A Convertible Preferred Stock; 8,000 are designated as Series B
Convertible Preferred Stock and 2,500 are designated as Series C Convertible
Preferred





Issued
and Outstanding


Common:                                                                11,720,555
shares


Series B Convertible
Preferred:                           6,883*
shares


Series C Convertible
Preferred:                           2,500*
shares





Shares
issued with registration rights:





6,882,819*
            shares
      to be issued upon conversion of the Series B Convertible Preferred Stock.
      (Exchanged for Series D Convertible
Preferred)


2,500,000*
            shares
      to be issued upon conversion of the Series C Convertible Preferred Stock
      (Exchanged for Series D Convertible
Preferred)


992,486
            common
      shares to be issued upon exercise of the Series A Warrants to purchase
      common stock.


833,334    common
      shares to be issued upon exercise of the Series B Warrants to purchase
      common stock. (Exchanged for 208,334 common
  shares)


100,000
            common
      shares to be issued upon exercise of the Series B Warrants to purchase
      common stock


1,500,000
            common
      shares to be issued upon exercise of the Series C Warrants to purchase
      common stock. (Exchanged for 375,000 common
  shares)


700,000   common
      shares to be issued upon exercise of the Series C Warrants to purchase
      common stock


833,334
            common
      shares to be issued upon exercise of the Series B Warrants to purchase
      common stock. (Exchanged for 208,336 common
  shares)


352,932   common
      shares to be issued upon exercise of the Series B Warrants to purchase
      common stock


2,761,106
            common
      shares to be issued upon exercise of the Promissory Note
      Warrants


* -
      Such shares shall be exchanged for Series D Securities subject to the
      Series D Registration Rights Agreement as required under Section 3.2 of
      the Agreement





Anticipated
reserves for potential option pools:


300,000 for racing teams under contract
to the Company.


3,200,000 for Company
employees.





-32-





SCHEDULE
2.1(e)





- None
-





-33-





SCHEDULE
2.1(g)





Subsidiaries:


All
wholly owned





Boundless
Track Operations, Inc. – Nevada


Boundless
Motor Sports Racing, Inc. – Texas (Dormant subsidiary, not in good
standing)


GPX
Partners, LLC – Texas (Dormant subsidiary, not in good standing)


GPX
Acquisition, LLC – Texas


Carter
& Miracle Concessions, LLC – Florida


Volusia
Operations, LLC – Florida


Volusia
Speedway Park Entertainment, LLC – Florida


Volusia
Speedway Park, Inc. - Florida


Boundless
Racing, Inc. – Texas


World of
Outlaws, Inc. – Texas (Dormant subsidiary, not in good standing)


Federation
Dirt International, Inc. - Delaware


Dirt
Motorsports, Inc. – New York


United
Midwestern Promoters Motorsports, LLC - Ohio




-34-





SCHEDULE
2.1(h)





- None
-







SCHEDULE
2.1(i)








- None
-









SCHEDULE
2.1(j)





- None
-









-35-





SCHEDULE
2.1(k)





Promissory
Notes secured by two 2005 model Ford F-350 Supercrew trucks.





$220,000
note payable issued in connection with the purchase of Lernerville Speedway,
which is due in $110,000 installments on May 30, 2006 and May 30,
2007.  This note is secured by a mortgage on the Lernerville Speedway
Facility.





$2,310,000
notes payable issued in connection with the purchase of Lernerville Speedway,
bearing interest at 7% payable annually. The balance is due upon maturity on
March 15, 2009.  This note is secured by a mortgage on the Lernerville
Speedway Facility.





$2,000,000
note payable issued in connection with the purchase of Volusia Speedway, bearing
interest at one percent over prime and payable in fifty-nine equal monthly
installments commencing at $24,000 per month and adjusted quarterly for changes
in interest rates with the balance of the outstanding principal and accrued
interest due on June 30, 2010.  The outstanding principle balance on
this note was $1,882,847 as of March 31, 2006.  This note is secured
by a mortgage on the real property, and security agreement covering the other
assets acquired from Volusia Speedway.





$450,000
note payable to an individual bearing interest at 8% and due on March 31,
2007





Defaults
with respect to Indebtedness:





None.










-36-





SCHEDULE
2.1(l)





- None
-







-37-


SCHEDULE
2.1(m)





On
October 12, 2005, Advancestar Communications, Inc. filed a Complaint for
Declaratory Judgment against DIRT Motor Sports, Inc. stemming from a cease and
desist letter sent by DIRT to Advanstar for its use of certain marks owned by
DIRT.  DIRT and Advancestar have reached a settlement regarding all
claims and are in the process of finalizing a Settlement, Mutual Release of
Claims, and Co-Existence Agreement.  The material terms of the
Settlement, Mutual Release of Claims, and Co-Existence provide: (1) Advancestar
will cease use of its present “DIRTSPORTS” logo, agree to include a space
between “DIRT” and “SPORTS”, and will to use all caps in the logo where type
size of the letter “D” in DIRT will be at least 18.1 whereas “IRT” in DIRT will
be no greater than 13.5; (2) Any text use by Advancestar of “DIRT SPORTS” will
be used as “Dirt” in lower case letters for the “irt” portion of “Dirt”; (3) the
parties will include mutual disclaimers on their respective websites for a
period of 18 months advising the viewers of the non-affiliation of the parties;
(4) provided that the terms of the Agreement are satisfied, neither party will
object to the other’s filings of marks with the United States Patent &
Trademark Office; (5) the parties shall will execute a Joint Stipulation of
Dismissal with Prejudice for the current litigation; and (6) the parties
mutually release each other from any and all claims arising out of, or in any
related to, the current litigation.




-38-


SCHEDULE
2.1(p)





Per
Engagement Letter attached hereto.





-39-


SCHEDULE
2.1(r)





“World of
Outlaws”


“WoO”


“DIRT
MotorSports”


“DMS”


“DIRT”


“DIRT
MotorSports Atlantic Coast Championships”


“DIRT
MotorSports Nor’Easter”


“DIRTCar”


“DIRT
Radio Network”


“DIRTVision”


“Elite
11”


“Mean
15”


“World of
Outlaws Dirty Dozen”


“Get off
your Assphalt”


“Super
DIRT Week”


“Think
DIRT”


“This
Week on DIRT”


“United
Midwestern Promoters”


“UMP”


“Summer
Nationals”





-40-





SCHEDULE
2.1(u)


- None
-







-41-


SCHEDULE
2.1(v)





1. Lease
Agreement for concessions with Carter & Miracle Concessions, LLP for Volusia
Speedway Park: Volusia Operations, LLC entered into a Lease Agreement with
Carter & Miracle Concessions, LLP expiring on December 31, 2007 with
subsequent one year renewal terms whereby Miracle & Carter Concessions will
provide for and operate the beer booth stand at Volusia Speedway for the term of
this Agreement.





Employment
agreements with officers of the Company:


DIRT
MotorSports has entered into the following Employment Agreements:


(1)
            Rob
      Butcher: Effective February 20, 2006 for a three year term, Mr. Butcher
      shall serve as the Company’s Executive Vice President and Chief Marketing
      Officer whereby he shall receive an annual salary of $180,000, formulaic
      incentive compensation, discretionary incentive compensation, 300,000
      options of the Company’s common stock at at exercise price of $3.75 per
      share, and 150,000 shares of restricted common stock. All terms and
      conditions of the Employment Agreement can be viewed in the Company’s 8k
      filing on 3/2/06.


(2)
            Ben
      Geisler: Effective February 20, 2006 for a three year term, Mr. Geisler
      shall serve as the Company’s Executive Vice President of Operations
      whereby he shall receive an annual salary of $180,000, formulaic incentive
      compensation, discretionary incentive compensation, 300,000 options of the
      Company’s common stock at at exercise price of $3.75 per share, and
      150,000 shares of restricted common stock. All terms and conditions of the
      Employment Agreement can be viewed in the Company’s 8k filing on
      3/2/06.


(3)
            Brian
      Carter: Effective February 1, 2005 for a term of three years, Mr. Carter
      shall serve as the Company’s Chief Financial Officer whereby he shall
      receive an annual salary of  $180,000, and 300,000 options of
      the Company’s common stock. All terms and conditions of the Employment
      Agreement can be viewed in the Company’s 8k filing on
    7/28/05.


(4)
            Joe
      Dickey: Effective February 1, 2005 for a term of three years, Mr. Dickey
      shall serve as the Company’s Chief Administrative Officer whereby he shall
      receive an annual salary of  $150,000, and 300,000 options of
      the Company’s common stock. All terms and conditions of the Employment
      Agreement can be viewed in the Company’s 8k filing on
    7/28/05.


(5)
            Daniel
      Malasky: Effective October 18, 2004 for a term of two years, Mr. Malasky
      shall receive an annual salary of $120,000, and 10,000 shares of common
      stock.




Consultant
Agreement with Tom Deery





The Company entered into a Consulting
Agreement with Tom Deery, effective February 20, 2006 for a six month period
with subsequent three month renewal periods, to serve as the Company’s Interim
President, at a monthly rate of $15,000, 50,000 options of the Company’s common
stock at a price of $4.00 per share, and 50,000 common shares of the Company’s
restricted common stock.





-42-


SCHEDULE
2.1(y)





Employment
agreements with Officers of the Company





Refer to
Schedule 2.1(v).










-43-


SCHEDULE
2.1(z)





Common
Stock Issued:


Restricted shares issued to officers of
the Company in connection with Employment and Consulting agreements as disclosed
in the Company’s current report on Form 8k dated March 2, 2006.





Options
Issued:


Options to purchase common stock to
officers and directors of the Company in connection with Employment and
Consulting agreements as disclosed in the Company’s current report on Form 8k
dated March 2, 2006.





Borrowings:


None except for promissory notes
payable which shall be exchanged under Section 2.1 (gg) of the Purchase
Agreement.







-44-





SCHEDULE
2.1(ff)





Sarbanes
Oxley Disclosures





Not
applicable.





-45-








SCHEDULE
2.1(gg)





Promissory
Notes Payable Which Shall Remain Outstanding








$220,000
note payable issued in connection with the purchase of Lernerville Speedway,
which is due in $110,000 installments on May 30, 2006 and May 30,
2007.  This note is secured by a mortgage on the Lernerville Speedway
Facility.





$2,310,000
notes payable issued in connection with the purchase of Lernerville Speedway,
bearing interest at 7% payable annually. The balance is due upon maturity on
March 15, 2009.  This note is secured by a mortgage on the Lernerville
Speedway Facility.





$2,000,000
note payable issued in connection with the purchase of Volusia Speedway, bearing
interest at one percent over prime and payable in fifty-nine equal monthly
installments commencing at $24,000 per month and adjusted quarterly for changes
in interest rates with the balance of the outstanding principal and accrued
interest due on June 30, 2010.  The outstanding principle balance on
this note was $1,882,847 as of March 31, 2006.  This note is secured
by a mortgage on the real property, and security agreement covering the other
assets acquired from Volusia Speedway.





$450,000
note payable to an individual bearing interest at 8% and due on March 31,
2007.




-46-


EXHIBIT
A to the


SERIES
D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR


DIRT
MOTOR SPORTS, INC.





Number
      of Preferred Shares & Warrants PurchasedName
      and Address of Purchasers
                              
                              Preferred
      Shares
                              
                              
                              Warrants
                              
                              
                              Number
      of $.01 Warrants Exchanged/Series D Face ValueBasso
      Fund Ltd. c/o Basso Capital Management
                                1266
      East Main St.
                                Stamford,
      CT 06902
                              
                              
                              57.628
                              
                              
                              
                              17,288
                              
                              
                              
                              -Basso
      Multi-Strategy Holding Fund Ltd. c/o Basso Capital Management
                                1266
      East Main St.
                                Stamford,
      CT 06902
                              
                              
                              43.979
                              
                              
                              
                              13,194
                              
                              
                              
                              -Basso
      Private Opportunities Holding Fund Ltd. c/o Basso Capital
      Management
                                1266
      East Main St.
                                Stamford,
      CT 06902
                              
                              
                              50.046
                              
                              
                              
                              15,014
                              
                              
                              
                              -C.E.
      Unterberg, Towbin Capital
                                Partners
      I, LP
                                350
      Madison Ave
                                New
      York, NY 10017
                              
                              
                              59.829
                              
                              
                              
                              17,949
                              
                              
                              
                              -Cabernet
      Partners, LP c/oNorthwood Capital Partners, L.P
                                1150
      First Avenue, Suite 600
                                King
      of Prussia, PA 19406
                              
                              
                              35.538
                              
                              
                              
                              10,661
                              
                              
                              
                              -Chardonnay
      Partners, LP c/oNorthwood Capital Partners, L.P
                                1150
      First Avenue, Suite 600
                                King
      of Prussia, PA 19406
                              
                              
                              23.692
                              
                              
                              
                              7,108
                              
                              
                              
                              -Graham
      Partners, LP
                                666
      Fifth Ave., 37th Floor
                                New
      York, NY 10103
                              
                              
                              119.658
                              
                              
                              
                              35,898
                              
                              
                              
                              -Insignia
      Partners, LP c/oNorthwood Capital Partners, L.P
                                1150
      First Avenue, Suite 600
                                King
      of Prussia, PA 19406
                              
                              
                              197.434
                              
                              
                              
                              59,230
                              
                              
                              
                              -Iroquois
      Master Fund Ltd.
                                641
      Lexington Ave, 26th Floor
                                New
      York, NY 10022
                              
                              
                              119.658
                              
                              
                              
                              35,898
                              
                              
                              
                              -Jeffrey
      M. Gallups
                                2365
      Old Milton Pkwy, Ste 200
                                Alaharetta,
      GA 30004
                              
                              
                              23.932
                              
                              
                              
                              7,180
                              
                              
                              
                              -Comtech
      Global Investment Ltd
                                C1001,
      Skyworth Building
                                High-Tech
      Industrial Park
                                Nanshan,
      Shenzhen, P.R.C. 518057
                              
                              
                              23.932
                              
                              
                              
                              7,180
                              
                              
                              
                              -Magnetar
      Capital Master Fund, Ltd. c/oMagnetar Capital LLC
                                1603
      Orrington Avenue
                                Evanston,
      IL 60201
                              
                              
                              1,196.872
                              
                              
                              
                              359,062
                              
                              
                              
                              -  -47-
 North
      Sound Legacy Institutional LLC c/oNorth Sound Capital LLC
                                20
      Horseneck Lane
                                Greenwich,
      CT  06830
                              
                              
                              168.000
                              
                              
                              
                              50,400
                              
                              
                              
                              -North
      Sound Legacy International LLC c/oNorth Sound Capital LLC
                                20
      Horseneck Lane
                                Greenwich,
      CT  06830
                              
                              
                              432.000
                              
                              
                              
                              129,600
                              
                              
                              
                              -Northwood
      Capital Partners, L.P
                                1150
      First Avenue, Suite 600
                                King
      of Prussia, PA 19406
                              
                              
                              138.204
                              
                              
                              
                              41,461
                              
                              
                              
                              -Smithfield
      Fiduciary LLC Anchorage Center
                                2nd
      Floor
                                Harbor
      Drive
                                Grand
      Cayman, Cayman Islands
                              
                              
                              239.317
                              
                              
                              
                              71,795
                              
                              
                              
                              -Thomas
      I. Unterberg
                                c/o
      C.E. Unterberg Towbin
                                350
      Madison Avenue
                                New
      York, NY 10017
                              
                              
                              35.898
                              
                              
                              
                              10,769
                              
                              
                              
                              -Toibb
      Investment LLC
                                6355
      Topanga Cyn Blvd #335
                                Woodland
      Hills, CA 91367
                              
                              
                              603.464
                              
                              
                              
                              181,039
                              
                              
                              
                              -Vicis
      Capital Master Fund
                                c/o
      Vicis Capital LLC
                                126
      E 56th Street, 7th Floor
                                New
      York, NY 10022
                              
                              
                              275.364
                              
                              
                              
                              82,609
                              
                              
                              
                              -Vision
      Opportunity Master Fund, Ltd.
                                317
      Madison Ave, Ste 1220
                                New
      York, NY 10017
                              
                              
                              59.829
                              
                              
                              
                              17,949
                              
                              
                              
                              -Whalehaven
      Capital Fund Limited
                                3rd
      Floor, 14 Par-La-Ville Road
                                P.O.
      Box HM1027
                                Hamilton,
      Bermuda HMDX
                              
                              
                              95.727
                              
                              
                              
                              28,718
                              
                              
                              
                              -





-48-





DIRT
      Motor Sports, IncSelling Stockholders' Shares Being
      SoldBuyers
                  Restricted
      Shares
                  Unrestricted
      SharesPaul Kruger
                  Dombroski &
    ViewTrade
                  J. & K. Barksdale
                  Total UnrestrictedBasso
      Fund Ltd.
                  49,839
                  11,311
                  9,500
                  20,811Basso
      Multi-Strategy Holding Fund Ltd.
                  38,035
                  8,632
                  7,250
                  15,882Basso
      Private Opportunities Holding Fund Ltd.
                  43,281
                  9,823
                  8,250
                  18,073Basso
      Total
                  131,155
                  29,766
                  25,000
                  25,000