EX-10.1






Exhibit 10.1




EXECUTION VERSION




NOTE AND WARRANT PURCHASE




AGREEMENT




Dated as of August 16, 2005




by and among




VERTICALNET, INC.




and




THE PURCHASERS LISTED ON EXHIBIT A




	 	 	 	 	 	 	 	 	 
	ARTICLE I            Purchas
	 	e and Sale of Notes and Warrants
	 	 	 	 
	Section 1.1Purchase and Sale of Notes and Warrants.
	 	 	 	 
	Section 1.2Purchase Price and Closing
	 	 	 	 	 	 	 	 
	Section 1.3Conversion Shares / Warrant Shares
	 	 	2	 
	ARTICLE II
	 	Representations and Warranties
	 	 	 	 
	Section 2.1Representations and Warranties of the Company
	 	 	 	 
	Section 2.2Representations and Warranties of the Purchasers
	 	 	 	 
	ARTICLE III
	 	Covenants
	 	 	 	 
	Section 3.1Securities Compliance
Section 3.2Registration and Listing
Section 3.3Inspection Rights
Section 3.4Compliance with Laws
	 	 	 	 	 	 	 	 
	Section 3.5Keeping of Records and Books of Account
	 	 	 	 
	Section 3.6Reporting Requirements
Section 3.7Other Agreements
	 	 	 	 	 	 	 	 
	Section 3.8Subsequent Financings; Right of First Refusal
	 	 	 	 
	Section 3.9Use of Proceeds
	 	 	 	 	 	 	17	 
	Section 3.10Reporting Status
	 	 	 	 	 	 	17	 
	Section 3.11Disclosure of Transaction
	 	 	 	 	 	 	17	 
	Section 3.12Disclosure of Material Information
	 	 	17	 
	Section 3.13Pledge of Securities
	 	 	 	 	 	 	18	 
	Section 3.14Amendments
	 	 	 	 	 	 	18	 
	Section 3.15Distributions
	 	 	 	 	 	 	18	 
	Section 3.16Reservation of Shares
	 	 	 	 	 	 	18	 
	Section 3.17Transfer Agent Instructions
	 	 	 	 	 	 	18	 
	Section 3.18Disposition of Assets
	 	 	 	 	 	 	19	 
	Section 3.19Form S-3 Eligibility
	 	 	 	 	 	 	19	 
	Section 3.20Stockholder Approval
	 	 	 	 	 	 	19	 
	Section 3.21Reverse Stock Split
	 	 	 	 	 	 	19	 
	Section 3.22Subsequent Financings; Right of First Offer
	 	 	19	 
	ARTICLE IV
	 	Conditions
	 	 	 	 







	 	 	 	Section 4.1 Conditions Precedent to the Obligation of the Company to Close
and to Sell the Securities	 






	 	 	 	Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Close and to Purchase the Securities	 





	 	 	 	 	 	 	 	 	 
	ARTICLE VCertificate Legend
Section 5.1
	 	Legend
	 	 	21	 
	ARTICLE VIIndemnification
Section 6.1
	 	General Indemnity.
	 	 	 	 
	Section 6.2
	 	Indemnification Procedure
	 	 	 	 
	ARTICLE VIIMiscellaneous
Section 7.1
	 	Fees and Expenses
	 	 	 	 
	Section 7.2
	 	Specific Performance; Consent to Jurisdiction; Venue.
	 	 	 	 
	Section 7.3
	 	Entire Agreement; Amendment
	 	 	 	 
	Section 7.4
	 	Notices
	 	 	 	 
	Section 7.5
	 	Waivers
	 	 	 	 
	Section 7.6
	 	Headings
	 	 	 	 
	Section 7.7
	 	Successors and Assigns
	 	 	 	 
	Section 7.8
	 	No Third Party Beneficiaries
	 	 	 	 
	Section 7.9
	 	Governing Law
	 	 	 	 
	Section 7.10
	 	Survival
	 	 	 	 
	Section 7.11
	 	Counterparts
	 	 	 	 
	Section 7.12
	 	Publicity
	 	 	 	 
	Section 7.13
	 	Severability
	 	 	 	 
	Section 7.14
	 	Further Assurances
	 	 	 	 






1




NOTE AND WARRANT PURCHASE AGREEMENT




This NOTE AND WARRANT PURCHASE AGREEMENT dated as of August 16, 2005 (this
“Agreement”) is made and entered into by and among Verticalnet, Inc., a Pennsylvania
corporation (the “Company”), and each of the purchasers of the convertible promissory notes
of the Company whose names are set forth on Exhibit A attached hereto (each a
"Purchaser” and collectively, the “Purchasers”).



The parties hereto agree as follows:



ARTICLE I




PURCHASE AND SALE OF NOTES AND WARRANTS




Section 1.1 Purchase and Sale of Notes and Warrants.



(a) Upon the following terms and conditions, the Company shall issue and sell to the
Purchasers, and the Purchasers shall purchase from the Company, convertible promissory notes in the
aggregate principal amount of up to Six Million Six Hundred Thousand Dollars ($6,600,000) bearing
interest at the rate of nine percent (9%) per annum, convertible into shares of the Company’s
common stock, par value $0.01 per share (the “Common Stock”), in substantially the form
attached hereto as Exhibit B (the “Notes”). Each Note shall be issued in a
multiple of one Thousand Dollars ($1,000). 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 Section 4(2) of the U.S. Securities Act of 1933, as amended, and the rules
and regulations promulgated thereunder (the “Securities Act”), including Regulation D
(“Regulation D”), and/or upon such other exemption from the registration requirements of
the Securities Act as may be available with respect to any or all of the investments to be made
hereunder.



(b) Upon the following terms and conditions, the Purchasers shall be issued Warrants, in
substantially the form attached hereto as Exhibit C (the “Warrants”), to purchase a
number of shares of Common Stock equal to the amounts set forth opposite such Purchaser’s name on
Exhibit A attached hereto. The Warrants shall expire five (5) years following the Closing
Date and shall have an exercise price per share equal to the Warrant Price (as defined in the
Warrants).



Section 1.2 Purchase Price and Closing. Subject to the terms and conditions hereof,
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 the Notes and Warrants for an
aggregate purchase price of up to Six Million Six Hundred Thousand Dollars ($6,600,000) (the
“Purchase Price”). The closing of the purchase and sale of the Notes and Warrants to be
acquired by the Purchasers from the Company under this Agreement shall take place at the offices of
Proskauer Rose LLP, 1585 Broadway, New York, New York 10036 (the “Closing”) at 10:00 a.m.,
New York time (i) on or before August 16, 2005; provided, that all of the conditions set
forth in Article IV hereof and applicable to the Closing shall have been fulfilled or waived in
accordance herewith, or (ii) at such other time and place or on such date as the Purchasers and the
Company may agree upon (the “Closing Date”). Subject to the terms and conditions of this
Agreement, at the Closing the Company shall deliver or cause to be delivered to each Purchaser (x)
its Note for the principal amount set forth opposite the name of such Purchaser on Exhibit
A hereto and (y) a Warrant to purchase such number of shares of Common Stock as is set forth
opposite the name of such Purchaser on Exhibit A attached hereto. At the Closing, each
Purchaser shall deliver its Purchase Price by wire transfer to an account designated by the
Company.



Section 1.3 Conversion Shares / Warrant 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 its authorized but unissued shares of Common Stock
equal to one hundred twenty percent (120%) of the aggregate number of shares of Common Stock to
effect the conversion of the Notes and any interest accrued and outstanding thereon and exercise of
the Warrants. Any shares of Common Stock issuable upon conversion of the Notes and any interest
accrued and outstanding thereon and exercise of the Warrants (and such shares when issued) are
herein referred to as the “Conversion Shares” and the “Warrant Shares,”
respectively. The Notes, the Warrants, the Conversion Shares and the Warrant Shares are sometimes
collectively referred to herein as the “Securities”.



ARTICLE II




REPRESENTATIONS AND WARRANTIES




Section 2.1 Representations and Warranties of the Company. The Company hereby
represents and warrants to the Purchasers, as of the date hereof and the Closing Date (except as
set forth on the Schedule of Exceptions attached hereto with each numbered Schedule corresponding
to the section number herein), as follows:



(a) Organization, Good Standing and Power. The Company is a corporation duly
incorporated and presently subsisting under the laws of the Commonwealth of Pennsylvania 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 (as defined
in Section 2.1(g)) or own securities of any kind in any other entity except as set forth on
Schedule 2.1(g) hereto. The Company and each such Subsidiary (as defined in Section
2.1(g)) is duly qualified as a foreign entity 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. For the purposes of this
Agreement, “Material Adverse Effect” means any material adverse effect on the business,
operations, properties, or financial condition of the Company and its Subsidiaries, taken as a
whole, 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.



(b) Authorization; Enforcement. The Company has the requisite corporate power and
authority to enter into and perform this Agreement, the Notes, the Warrants, the Registration
Rights Agreement by and among the Company and the Purchasers, dated as of the date hereof,
substantially in the form of Exhibit D attached hereto (the “Registration Rights
Agreement”), the Security Agreement by and among the Company and the Purchasers, dated as of
the date hereof, substantially in the form of Exhibit E attached hereto (the “Security
Agreement”), and the Irrevocable Transfer Agent Instructions (as defined in Section 3.17
hereof) (collectively, the “Transaction Documents”) and to issue and sell the Securities 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 thereby have
been duly and validly authorized by all necessary corporate action, and, except as set forth on
Schedule 2.1(b), no further consent or authorization of the Company, its Board of Directors
or stockholders is required. When executed and delivered by the Company, each of the Transaction
Documents shall constitute 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, 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 and the issued and outstanding
shares of capital stock of the Company as of the Closing Date is set forth on Schedule
2.1(c) hereto. All of the outstanding shares of the Common Stock and any other outstanding
security of the Company have been duly and validly authorized. Except as set forth in this
Agreement, the Commission Documents (as defined in Section 2.1(f)) or as set forth on Schedule
2.1(c) hereto, no shares of Common Stock or any other security of the Company 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 as set forth on Schedule 2.1(c) hereto, 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 provided on
Schedule 2.1(c) hereto, the Company is not a party to or bound by any agreement or
understanding granting registration or anti-dilution rights to any person with respect to any of
its equity or debt securities. Except as set forth on Schedule 2.1(c), the Company is not
a party to, and it has no knowledge of, any agreement or understanding restricting the voting or
transfer of any shares of the capital stock of the Company.



(d) Issuance of Securities. The Notes and the Warrants to be issued at the Closing
have been duly authorized by all necessary corporate action and, when paid for or issued in
accordance with the terms hereof, the Notes shall be validly issued and outstanding, free and clear
of all liens, encumbrances and rights of refusal of any kind other than restrictions on transfer
imposed by applicable securities laws. When the Conversion Shares and Warrant Shares are issued
and paid for in accordance with the terms of this Agreement and as set forth in the Notes and
Warrants, such shares will be duly authorized by all necessary corporate action and validly issued
and outstanding, fully paid and nonassessable, free and clear of all liens, encumbrances and rights
of refusal of any kind, other than restrictions on transfer imposed by applicable securities laws,
and the holders shall be entitled to all rights accorded to a holder of Common Stock.



(e) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the performance by the Company of its obligations under the Notes and the
consummation by the Company of the transactions contemplated hereby and thereby, and the issuance
of the Securities as contemplated hereby, do not and will not (i) violate or conflict with any
provision of the Company’s Articles of Incorporation (the “Articles” ) or Bylaws (the
“Bylaws”), each as amended to date, or any Subsidiary’s comparable charter documents, (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 or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries’ respective properties or assets are bound, or
(iii) 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, for such conflicts, defaults,
terminations, amendments, acceleration, cancellations and violations as would not, individually or
in the aggregate, have a Material Adverse Effect (other than violations pursuant to clauses (i) or
(iii) (with respect to federal and state securities laws)). Neither the Company nor any of its
Subsidiaries is required under federal, state, foreign 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 Securities in accordance with the terms hereof (other
than any filings, consents and approvals which may be required to be made by the Company under
applicable state and federal securities laws, rules or regulations, the applicable rules and
regulations of the Nasdaq Stock Market or any registration provisions provided in the Registration
Rights Agreement).



(f) Commission Documents, Financial Statements. The Common Stock of the Company is
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and the Company has timely filed all reports, schedules, forms,
statements and other documents required to be filed by it with the Securities and Exchange
Commission (the “Commission”) pursuant to the reporting requirements of the Exchange Act (all of
the foregoing including filings incorporated by reference therein being referred to herein as the
"Commission Documents”). At the times of their respective filings, the Form 10-Q for the
fiscal quarter ended March 31, 2005 (the “Form 10-Q”) and the Form 10-K for the fiscal year
ended December 31, 2004 (the “Form 10-K”) 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 the Form 10-Q and Form 10-K did not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made, not misleading. As
of their respective dates, the financial statements of the Company included in the Commission
Documents complied 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 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. 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 that is a corporation 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 equity securities of any
Subsidiary or any other securities convertible into, exchangeable for or evidencing the rights to
subscribe for any such equity securities. Neither the Company nor any Subsidiary is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any equity
securities of any Subsidiary or any convertible securities, rights, warrants or options of the type
described in the preceding sentence except as set forth on Schedule 2.1(g) hereto. Neither
the Company nor any Subsidiary is party to, nor has any knowledge of, any agreement restricting the
voting or transfer of any equity securities of any Subsidiary.



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



(i) No Undisclosed Liabilities. Except as disclosed on Schedule 2.1(i) hereto
or in the Commission Documents, neither the Company nor any of its Subsidiaries has incurred 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 or which, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect.



(j) No Undisclosed Events or Circumstances. Since December 31, 2004, except as
disclosed 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. Schedule 2.1(k) hereto sets forth as of the date hereof 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 $300,000 (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. 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 valid
title to all of its real and personal property reflected in the Commission Documents, free and
clear of any mortgages, pledges, charges, liens, security interests or other encumbrances, except
for those indicated on Schedule 2.1(l) hereto or such that, individually or in the
aggregate, do not cause a Material Adverse Effect. 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 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 any of the transactions contemplated hereby
or thereby or any action taken or to be taken pursuant hereto or thereto. Except as set forth in
the Commission Documents or on Schedule 2.1(m) hereto, there is no action, suit, claim,
investigation, arbitration, alternate dispute resolution proceeding or 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, which individually or in the aggregate, would reasonably
be expected, if adversely determined, to have a Material Adverse Effect. There are no outstanding
orders, judgments, injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any Subsidiary or any officers or directors of the Company
or Subsidiary in their capacities as such, which individually or in the aggregate, could reasonably
be expected to have a Material Adverse Effect.



(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 Commission
Documents or on Schedule 2.1(n) hereto or such that, individually or in the aggregate, the
noncompliance therewith could not reasonably be expected to have 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.



(o) Taxes. Except as set forth on Schedule 2.1(o), 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. Except as disclosed on Schedule 2.1(o) hereto or in the Commission Documents,
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.



(p) Certain Fees. Except as set forth on Schedule 2.1(p) hereto, the Company
has not employed any broker, placement agent or finder or incurred any liability for any brokerage
or investment banking fees, commissions, finders’ structuring fees, financial advisory fees or
other similar fees in connection with the Transaction Documents.



(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. Except as set forth on Schedule
2.1(q), the Company confirms that neither it nor any other Person acting on its behalf has
provided any of the Purchasers or their agents or counsel with any information that constitutes or
might constitute material, non-public information. The Company understands and confirms that the
Purchasers will rely on the foregoing representations in effecting transactions in securities of
the Company. The Company acknowledges and agrees that (i) no Purchaser makes or has made any
representations or warranties with respect to the transactions contemplated hereby other than those
specifically set forth in Section 2.2 or (ii) any statement, commitment or promise to the Company
or, to its knowledge, any of its representatives which is or was an inducement to the Company to
enter into this Agreement or otherwise.



(r) Operation of Business. Except as set forth on Schedule 2.1(r) hereto, the
Company and each of the Subsidiaries owns or possesses the rights to 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 which are necessary for the conduct of
its business as now conducted without any conflict with the rights of others except for such
conflicts as would not reasonably be expected to have a Material Adverse Effect.



(s) Environmental Compliance. Except as set forth on Schedule 2.1(s) hereto
or in the Commission Documents, 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. “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. To the best of the Company’s knowledge, the Company has all
necessary governmental approvals required under all Environmental Laws as necessary for the
Company’s business or the business of any of its subsidiaries. To the best of the Company’s
knowledge, 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 those that the failure of which to comply with
would not reasonably be expected to have a Material Adverse Effect. 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 any Environmental Law or that to the
Company’s knowledge, 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.



(t) Books and Records; Internal Accounting Controls. The records and documents 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’s board of directors, 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 are taken with respect to any differences.



(u) Material Agreements. Except for the Transaction Documents (with respect to clause
(i) only), as disclosed in the Commission Documents or as set forth on Schedule 2.1(u)
hereto, or as would not be reasonably likely to have a Material Adverse Effect, (i) the Company and
each of its Subsidiaries have performed all obligations required to be performed by them to date
under any existing written or oral contract, instrument, agreement, commitment, obligation, plan or
arrangement, filed or required to be filed with the Commission (the “Material Agreements”),
(ii) neither the Company nor any of its Subsidiaries has received any notice of default under any
Material Agreement and, (iii) to the best of the Company’s knowledge, neither the Company nor any
of its Subsidiaries is in default under any Material Agreement now in effect.



(v) Transactions with Affiliates. Except as set forth on Schedule 2.1(v)
hereto and in the Commission Documents, there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing transactions between (a) the
Company, any Subsidiary or any of their respective customers or suppliers on the one hand, and (b)
on the other hand, any officer, employee, consultant or director of the Company, or any of its
Subsidiaries, or any person owning at least 5% of the outstanding 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 which, in each case, is required to be disclosed in the
Commission Documents or in the Company’s most recently filed definitive proxy statement on Schedule
14A, that is not so disclosed in the Commission Documents or in such proxy statement.



(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 Securities 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 Securities or similar securities to, or solicit
offers with respect thereto from, or enter into any 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 Securities
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
Securities.



(x) Employees. Neither the Company nor any Subsidiary has any collective bargaining
arrangements or collective bargaining agreements, except as set forth on Schedule 2.1(x)
hereto. No officer, consultant or key employee of the Company or any Subsidiary whose termination,
either individually or in the aggregate, would be reasonably likely to 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.



(y) Absence of Certain Developments. Except as set forth in the Commission Documents
or provided on Schedule 2.1(y) hereto, since December 31, 2004, neither the Company nor any
Subsidiary has:



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



(ii) borrowed any amount in excess of $300,000 or incurred or become subject to any other
liabilities in excess of $100,000 (absolute or contingent) except current liabilities incurred in
the ordinary course of business;



(iii) discharged or satisfied any lien or encumbrance in excess of $250,000 or paid any
obligation or liability (absolute or contingent) in excess of $250,000, 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, in each case in excess of $50,000 individually or $100,000
in the aggregate;



(v) sold, assigned or transferred any other tangible assets, or canceled any debts or claims,
in each case in excess of $250,000, 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 in excess of $250,000, 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 material 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 $500,000;



(x) entered into any 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;



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



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



(z) 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.



(aa) 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. As used in this Section 2.1(aa), the term
“Plan” shall mean an “employee pension benefit plan” (as defined in Section 3 of the Employee
Retirement Income Security Act of 1974, as amended) 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 Internal Revenue Code of 1986,
as amended.



(bb) 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 Purchaser 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 for reasons of administrative convenience only, the
Transaction Documents have been prepared by Proskauer Rose LLP for Iroquois Master Fund Ltd. and
such counsel does not represent all of the Purchasers but only such Purchaser and the other
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.



(cc) 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 Securities 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
Securities pursuant to Regulation D and Rule 506 thereof 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 Securities
to be integrated with other offerings. The Company does not have any registration statement
pending registration before the Commission or currently under the Commission’s review.



(dd) Sarbanes-Oxley Act. The Company is in material 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.



(ee) Dilutive Effect. The Company understands and acknowledges that the number of
Conversion Shares issuable upon conversion of the Notes and the Warrant Shares issuable upon
exercise of the Warrants will increase in certain circumstances. The Company further acknowledges
that its obligation to issue Conversion Shares upon conversion of the Notes in accordance with this
Agreement and the Notes and its 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 except to the extent that the Company’s obligations
conflict with the rules and regulations of the Nasdaq Stock Market.




(ff) Delisting Notification. Except as disclosed on Schedule 2.1(ff) hereto,
the Company has not received notice (written or oral) from The Nasdaq SmallCap Market to the
effect that the Company is not in compliance with the listing or maintenance requirements of such
exchange.




(gg) Solvency. Based on the financial condition of the Company as of the Closing
Date (after giving effect to the transactions contemplated herein and in the other Transaction
Documents), (i) the Company’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other liabilities
(including known contingent liabilities) as they mature; (ii) the Company’s assets do not
constitute unreasonably small capital to carry on its business for the current fiscal year as now
conducted and as proposed to be conducted including its capital needs taking into account the
particular capital requirements of the business conducted by the Company, and projected capital
requirements and capital availability thereof; and (iii) the current cash flow of the Company,
together with the proceeds the Company would receive, were it to liquidate all of its assets,
after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts
on or in respect of its debt when such amounts are required to be paid. The Company does not
intend to incur debts beyond its ability to pay such debts as they mature (taking into account the
timing and amounts of cash to be payable on or in respect of its debt).



(hh) Ranking. Except as described on Schedule 2.1(k), as of the date of this
Agreement, no indebtedness of the Company is senior to or pari passu with the Notes in right of
payment, whether with respect to principal, interest or upon liquidation or dissolution, or
otherwise.



Section 2.2 Representations and Warranties of the Purchasers. Each of the Purchasers
hereby represents and warrants to the Company with respect solely to itself and not with respect to
any other Purchaser as follows as of the date hereof and as of the Closing Date:



(a) Organization and Standing of the Purchasers. If the Purchaser is an entity, such
Purchaser is a corporation, limited liability company 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 the Transaction Documents and to purchase the Securities being sold to it
hereunder. The execution, delivery and performance of the Transaction Documents by each Purchaser
and the consummation by it of the transactions contemplated hereby have been duly authorized by all
necessary corporate, limited liability company or partnership action, and no further consent or
authorization of such Purchaser or its Board of Directors, stockholders, members or partners, as
the case may be, is required. When executed and delivered by the Purchasers, each of the
Transaction Documents shall constitute valid and binding obligations of each Purchaser enforceable
against such Purchaser in accordance with their 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) Acquisition for Investment. Each Purchaser is purchasing the Securities solely
for its own account and not with a view to or for sale in connection with any distribution. Each
Purchaser acknowledges that it (i) has such knowledge and experience in financial and business
matters such that such Purchaser is capable of evaluating the merits and risks of such Purchaser’s
investment in the Company, (ii) is able to bear the financial risks associated with an investment
in the Securities and (iii) has been given full access to such records of the Company and the
Subsidiaries and to the officers of the Company and the Subsidiaries as it has deemed necessary or
appropriate to conduct its due diligence investigation.



(d) Rule 144. Each Purchaser understands that the Securities are restricted
securities and must be held indefinitely unless such Securities are registered under the Securities
Act or an exemption from registration is available. Each Purchaser acknowledges that such person
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 Purchaser has been advised that
Rule 144 permits resales only under certain circumstances. Each Purchaser understands that to the
extent that Rule 144 is not available, such Purchaser will be unable to sell any Securities without
either registration under the Securities Act or the existence of another exemption from such
registration requirement.



(e) General. Each Purchaser understands that the Securities are being offered and
sold in reliance on a transactional exemption from the registration requirements 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 Securities. Each Purchaser understands that no United States federal or
state agency or any government or governmental agency has passed upon or made any recommendation or
endorsement of the Securities. Commencing on the date that the Purchasers were initially contacted
regarding an investment in the Securities, none of the Purchasers has engaged in any short sale of
the Common Stock and will not engage in any short sale of the Common Stock prior to the
consummation of the transactions contemplated by this Agreement.



(f) No General Solicitation. Each Purchaser acknowledges that the Securities were not
offered to such Purchaser by means of any form of general or public solicitation or general
advertising, or publicly disseminated advertisements or sales literature, including (i) any
advertisement, article, notice or other communication published in any newspaper, magazine, or
similar media, or broadcast over television or radio, or (ii) any seminar or meeting to which such
Purchaser was invited by any of the foregoing means of communications. Each Purchaser, in making
the decision to purchase the Securities, has relied upon independent investigation made by it and
has not relied on any information or representations made by third parties.



(g) Accredited Investor. Each Purchaser is an “accredited investor” (as defined in
Rule 501 of Regulation D of the Securities Act), and such Purchaser has such experience in business
and financial matters that it is capable of evaluating the merits and risks of an investment in the
Securities. 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. Each Purchaser acknowledges that an
investment in the Securities is speculative and involves a high degree of risk. Each Purchaser has
executed and delivered to the Company the Accredited Investor Questionnaire attached hereto as
Exhibit F (the “Questionnaire”) and represents and warrants that the information contained
therein is true, correct and complete.



(h) Certain Fees. Except as set forth on Schedule 2.1(p), the Purchasers have
not employed any broker or finder or incurred any liability for any brokerage or investment banking
fees, commissions, finders’ structuring fees, financial advisory fees or other similar fees in
connection with the Transaction Documents.



(i) Independent Investment. No Purchaser has agreed to act with any other Purchaser
for the purpose of acquiring, holding, voting or disposing of the Securities 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 Securities.



ARTICLE III




COVENANTS




The Company covenants with each Purchaser as follows, which covenants are for the benefit of
each Purchaser and their respective permitted assignees.



Section 3.1 Securities Compliance. The Company shall notify the Commission in
accordance with its rules and regulations, of the transactions contemplated by any of the
Transaction Documents 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
Securities to the Purchasers, or their respective subsequent holders.



Section 3.2 Registration and Listing. The Company shall use its reasonable best
efforts to cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the
Exchange Act, to comply in all respects with its reporting and filing obligations under the
Exchange Act, to comply with all requirements related to any registration statement filed pursuant
to this Agreement, and to 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 or in the other Transaction Documents. The Company shall use its
reasonable best efforts to continue the listing or trading of its Common Stock on The Nasdaq
SmallCap Market or any successor market.



Section 3.3 Inspection Rights. Subject to the execution of a confidentiality
agreement reasonably acceptable to the Company, 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
Notes or shall beneficially own any Conversion Shares or Warrant Shares, for purposes reasonably
related to such Purchaser’s interests as a stockholder to examine and make reasonable copies of 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 would
be reasonably likely to 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 Company ceases to file its periodic
reports with the Commission, or if the Commission ceases making these periodic reports available
via the Internet without charge, then the Company shall furnish the following to each Purchaser so
long as such Purchaser shall be obligated hereunder to purchase the Securities or shall
beneficially own Securities:



(a) Quarterly Reports filed with the Commission on Form 10-Q 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-K 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, information and proxy statements in connection with any meetings,
that are, in each case, 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 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 3.8 Stockholder Approval. The Company covenants and agrees to use its
reasonable best efforts to obtain the approval of its stockholders (“Stockholder Approval”)
at its next annual meeting of stockholders to authorize the issuance of shares of Common Stock upon
conversion of the Notes in excess of 19.99% of the number of shares of Common Stock outstanding
immediately prior to the Closing Date, which is 9,468,758 shares of Common Stock (the “Issuable
Maximum”). The Company shall not issue any shares of Common Stock or any securities
exercisable, convertible or exchangeable for shares of Common Stock at a price per share below the
Conversion Price (as defined in the Notes) until the date of the first stockholder’s meeting in
which the Company shall seek the approval of the stockholders to issue shares of Common Stock in
connection with a conversion of the Notes in excess of 19.99% except for shares of Common Stock or
options to purchase shares of Common Stock granted or issued pursuant to the Company’s stock option
plans and employee stock purchase plans as they now exist. Upon the Company’s receipt of
Stockholder Approval, the Company shall only be obligated to issue shares of Common Stock in excess
of the Issuable Maximum upon the approval of the Nasdaq SmallCap Market. The Company agrees that
all of the officers and directors of the Company that hold shares of Common Stock shall vote in
favor of the issuance of shares of Common Stock in excess of the Issuable Maximum. In the event
that Stockholder Approval is not obtained by the Company’s next annual meeting of stockholders, the
Purchasers shall have the right on a Conversion Date (as such term is defined in the Note) to have
the Company prepay in cash such portion of the outstanding principal amount of the Notes plus all
accrued but unpaid interest that would have been issued in shares of Common Stock upon conversion
but for such number of shares being in excess of the Issuable Maximum. In the event that any
Purchaser exercises the prepayment right, such Purchaser shall provide written notice to the
Company and the Company shall pay in cash the prepayment price within five (5) business days
following receipt of such written request by such Purchaser.



Section 3.9 Use of Proceeds. The Company shall use the net proceeds from the sale of
the Securities hereunder for working capital in the ordinary course of business and not to redeem
any Common Stock or securities convertible, exercisable or exchangeable into Common Stock or to
settle any outstanding litigation.



Section 3.10 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.



Section 3.11 Disclosure of Transaction. The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the “Press Release”)
on or prior to August 17, 2005 by 8:30 a.m. 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 form of
Note, the Registration Rights Agreement, 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 principal exchange on which the
Common Stock is traded shall be open for trading.



Section 3.12 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 3.13 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 Securities. The pledge of
Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder,
and no Purchaser effecting a pledge of the Securities shall be required to provide the Company with
any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any
other Transaction Document; 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
Securities to such pledgee. At the Purchasers’ expense, the Company hereby agrees to execute and
deliver such documentation as a pledgee of the Securities may reasonably request in connection with
a pledge of the Securities to such pledgee by a Purchaser.



Section 3.14 Amendments. The Company shall not amend or waive any provision of the
Articles or Bylaws of the Company in any way that would adversely affect exercise rights, voting
rights, conversion rights, prepayment rights or redemption rights of the holder of the Notes.



Section 3.15 Distributions. So long as any Notes 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 3.16 Reservation of Shares. So long as any of the Notes or Warrants remain
outstanding, the Company shall take all action necessary to at all times have authorized and
reserved for the purpose of issuance, one hundred twenty percent (120%) of the aggregate number of
shares of Common Stock needed to provide for the issuance of the Conversion Shares and the Warrant
Shares.



Section 3.17 Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, in the form attached hereto as Exhibit G, 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 Notes or
exercise of the Warrants in the form of Exhibit G attached hereto (the “Irrevocable
Transfer Agent Instructions”). Prior to registration of the Conversion Shares and the Warrant
Shares under the Securities Act or prior to such Securities being eligible to be sold under Rule
144(k), 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 3.17 will be given by the Company to its transfer agent
and that the Conversion Shares and Warrant Shares shall otherwise be freely transferable on the
books and records of the Company as and to the extent provided in this Agreement, the Registration
Rights Agreement and the Note. Nothing in this Section 3.17 shall affect in any way each
Purchaser’s obligations and agreements set forth in Section 5.1 to comply with all applicable
prospectus delivery requirements, if any, upon resale of the Conversion Shares and the Warrant
Shares. If a Purchaser provides the Company with an opinion of counsel, in form and substance
reasonably satisfactory to the Company, to the effect that a public sale, assignment or transfer of
the Conversion Shares or Warrant Shares may be made without registration under the Securities Act
or the Purchaser provides the Company with reasonable assurances that the Conversion Shares or
Warrant Shares can be sold pursuant to paragraph (k) of 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 3.17 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 3.17 will be inadequate and agrees, in the event of a breach or threatened breach by
the Company of the provisions of this Section 3.17, that the Purchasers shall be entitled, in
addition to all other available remedies, to seek 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 3.18 Intentionally Omitted.



Section 3.19 Form S-3 Eligibility. The Company currently meets, and will take all
necessary action to continue to meet, the “registrant eligibility” requirements set forth in the
general instructions to Form S-3 applicable to “resale” registrations on Form S-3 during the
Effectiveness Period (as defined in the Registration Rights Agreement).



Section 3.20 Cash Balance. Until the earlier of (a) the date on which the principal
and any and all interest due and payable on the Notes shall be paid in full and (b) the date on
which the Notes and any interest due and payable thereon shall have been converted in their
entirety, the Company shall maintain an aggregate freely available cash balance in demand accounts
of the Company with commercial banks of at least $1,500,000.



Section 3.21 Additional Registration Statement. The Company shall not file any
registration statement (other than pursuant to the Registration Rights Agreement) until a date that
is six (6) months after the Registration Statement (as defined in the Registration Rights
Agreement) is declared effective by the Commission, except for a registration statement registering
securities issued or issuable in connection with any employee benefit plan of the Company or any
acquisition by the Company.



Section 3.22 Subsequent Financings.



(a) During the period commencing on the Closing Date and ending on the date that is sixty (60)
days following the effective date of the Registration Statement (the “Blackout Period”)
providing for the resale of the Conversion Shares and the Warrant Shares, the Company covenants and
agrees that it will not enter into any subsequent offer or sale to, or exchange with (or other type
of distribution to), any third party (a “Subsequent Financing”), of Common Stock or any
securities convertible, exercisable or exchangeable into Common Stock, including convertible debt
securities. For purposes of this Agreement, a Permitted Financing (as defined hereinafter) shall
not be considered a Subsequent Financing. A “Permitted Financing” shall mean any
transaction involving (i) securities issued (other than for cash) in connection with a merger,
acquisition, or consolidation, (ii) securities issued pursuant to a bona fide firm underwritten
public offering with a nationally recognized underwriter of the Company’s securities in excess of
$15,000,000, (iii) securities issued pursuant to the conversion or exercise of convertible or
exercisable securities issued or outstanding on or prior to the date hereof or issued pursuant to
this Agreement, (iv) the shares of Common Stock issuable upon the exercise of Warrants, (v)
securities issued in connection with strategic license agreements or other partnering arrangements
so long as such issuances are not for the purpose of raising capital, (vi) Common Stock issued or
options to purchase Common Stock granted or issued pursuant to the Company’s stock option plans and
employee stock purchase plans as they now exist, (vii) any warrants issued to the placement agent
and its designees for the transactions contemplated by this Agreement, and (viii) the payment of
any principal and accrued interest in shares of Common Stock pursuant to the Notes.



(b) So long as the Notes remain outstanding, during the period commencing on the Closing Date
and ending on the date that is twelve (12) months following the end of the Blackout Period
providing for the resale of the Conversion Shares and the Warrant Shares, 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 its pro rata portion 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 the total Purchase Price hereunder. The Company has no obligation to allow the
Purchasers to participate in any Subsequent Financing in excess of the Purchase Price. 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 principal
amount of the Notes purchased by such Purchaser at Closing by (y) the total principal amount of all
of the Notes purchased by all of the participating Purchasers at 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 3.22, including, without limitation, the delivery of a new Rights Notice. The
provisions of this Section 3.22(b) shall not apply to issuances of securities in a Permitted
Financing.



(c) So long as the Notes remain outstanding, the Company shall be prohibited from effecting or
entering into an agreement to effect any Subsequent Financing involving a “Variable Rate
Transaction”. The term “Variable Rate Transaction” shall mean a transaction in which the
Company issues or sells (i) any debt or equity securities that are convertible into, exchangeable
or exercisable for, or include the right to receive additional shares of Common Stock either (A) at
a conversion, exercise or exchange rate or other price that is based upon and/or varies with the
trading prices of or quotations for the shares of Common Stock at any time after the initial
issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price
that is subject to being reset at some future date after the initial issuance of such debt or
equity security upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock or (ii) enters into any
agreement, including, but not limited to, an equity line of credit, whereby the Company may sell
securities at a future determined price. A Variable Rate Transaction shall not include any
accounts receivables financings.



Section 3.23 Indebtedness.



(a) At any time after the date of this Agreement, neither the Company nor any Subsidiary of
the Company shall incur any indebtedness, liability or obligation that is senior to or pari passu
with the Notes in right of payment, whether with respect to principal, interest or upon liquidation
or dissolution, or otherwise; provided, however, that notwithstanding the
foregoing, the Company may, in the ordinary course of business, incur indebtedness secured by
purchase money security interests (which will be senior only as to the underlying assets covered
thereby) and indebtedness under capital lease obligations (which will be senior only as to the
underlying assets covered thereby).



(b) The Company hereby covenants that, except for the indebtedness set forth on Schedule
2.1(k), it shall not permit or cause any of its Subsidiaries to create, incur, assume, guarantee or
suffer to exist any indebtedness, liability or obligation, except, that such Subsidiaries may, in
the ordinary course of business, (i) maintain trade payables and accrued expenses and (ii) incur
indebtedness secured by purchase money security interests, and indebtedness under capital lease
obligations.



(c) The provisions of this Section 3.23 shall terminate and be of no further force or effect
upon the conversion or indefeasible repayment of at least 90% of the initial principal amount of
the Notes on the Closing Date and all accrued interest thereon.



Section 3.24 Repayment of Notes. Each of the parties hereto agrees that all
repayments of the Notes (including any accrued interest thereon) by the Company (other than by
conversion of the Notes) will be paid pro rata to the holders thereof based upon the principal
amount then outstanding to each of such holders.



Section 3.25 No Impairment. At all times after the date hereof, the Company will not
take or permit any action, or cause or permit any subsidiary to take or permit any action that
impairs or adversely affects the rights of the Purchasers under this Agreement or the Notes.



Section 3.26 Fundamental Changes. In addition to any other rights provided by law or
set forth herein, from and after the date of this Agreement and for so long as any Notes remain
outstanding, the Company shall not without first obtaining the approval (by vote or written
consent, as provided by law) of the holders of a majority of the outstanding principal face amount
of the Notes:



(a) purchase, redeem (other than pursuant to equity incentive agreements with non-officer
employees giving the Company the right to repurchase shares upon the termination of services) or
set aside any sums for the purchase or redemption of, or declare or pay any dividend (including a
dividend payable in stock of the Company) or make any other distribution with respect to, any
shares of capital stock or any other securities that are convertible into or exercisable for such
stock;



(b) change the nature of the Company’s business to any business which is fundamentally
distinct and separate from the business currently conducted by the Company; or



(c) cause or permit any subsidiary of the Company directly or indirectly to take any actions
described in clauses (a) through (b) above, other than issuing securities to the Company.



ARTICLE IV




CONDITIONS




Section 4.1 Conditions Precedent to the Obligation of the Company to Close and to Sell the
Securities. The obligation hereunder of the Company to close and issue and sell the Securities
to the Purchasers at the Closing is subject to the satisfaction or waiver, at or before the Closing
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 the Purchasers’ Representations and Warranties. The representations
and warranties of each Purchaser shall be true and correct in all material respects as of the date
when made and as of the Closing Date as though made at that time, except for representations and
warranties that are expressly made as of a particular date, which shall be true and correct in all
material respects as of such date.



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



(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 Securities shall have been
delivered to the Company on the Closing Date.



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



Section 4.2 Conditions Precedent to the Obligation of the Purchasers to Close and to
Purchase the Securities. The obligation hereunder of the Purchasers to purchase the Securities
and consummate the transactions contemplated by this Agreement 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 Purchasers’ sole benefit and may be waived by the Purchasers at any time in their 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 other Transaction Documents
shall be true and correct in all material respects as of the Closing Date, except for
representations and warranties that speak 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 material 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
Date.



(c) No Suspension, Etc. Trading in the Common Stock shall not have been suspended by
the Commission or The Nasdaq smallCap Market (except for any suspension of trading of limited
duration agreed to by the Company, which suspension shall be terminated prior to the 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.



(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) Opinion of Counsel. The Purchasers shall have received an opinion of counsel to
the Company, dated the date of such Closing, substantially in the form of Exhibit H hereto,
with such exceptions and limitations as shall be reasonably acceptable to counsel to the
Purchasers.



(g) Notes and Warrants. At or prior to the Closing, the Company shall have delivered
to the Purchasers the Notes (in such denominations as each Purchaser may request) and the Warrants
(in such denominations as each Purchaser may request).



(h) Secretary’s Certificate. The Company shall have delivered to the Purchasers a
secretary’s certificate, dated as of the Closing Date, as to (i) the resolutions adopted by the
Board of Directors approving the transactions contemplated hereby, (ii) the Articles, (iii) the
Bylaws, 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.



(i) Officer’s Certificate. On the Closing Date, the Company shall have delivered to
the Purchasers a certificate signed by an executive officer on behalf of the Company, dated as of
the Closing Date, confirming the compliance by the Company with the conditions precedent set forth
in paragraphs (a) and (b) of this Section 4.2 as of the Closing Date.



(j) Registration Rights Agreement. As of the Closing Date, the Company shall have
executed and delivered the Registration Rights Agreement to each Purchaser.



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



(l) Transfer Agent Instructions. The Irrevocable Transfer Agent Instructions, in the
form of Exhibit G attached hereto, shall have been delivered to the Company’s transfer
agent.



(m) Security Agreement. At the Closing, the Company shall have executed and delivered
the Security Agreement to each Purchaser.



(n) UCC Financing Statements. All UCC financing statements in form and substance
satisfactory to the Purchasers shall have been filed with the appropriate offices with respect to
the Collateral (as defined in the Security Agreement).



ARTICLE V




CERTIFICATE LEGEND




Section 5.1 Legend. Each certificate representing the Securities 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):



[NEITHER] THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[CONVERTIBLE][EXERCISABLE]] HAVE [NOT] BEEN REGISTERED WITH THE SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE
SECURITIES LAWS OR BLUE SKY LAWS. NOTWITHSTANDING THE FOREGOING, THESE SECURITIES
AND THE SECURITIES ISSUABLE UPON [EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT SECURED BY SUCH SECURITIES.



The Company agrees to issue or 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 Conversion Shares or Warrant Shares, such holder thereof shall give written
notice to the Company describing the manner and terms of such transfer and removal as the Company
may reasonably request. 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 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, (iv) the holder provides the Company
with reasonable assurances that such security can be sold pursuant to Rule 144 under the Securities
Act or (v) the holder certifies in writing to the Company that the Securities may be sold under
Rule 144(k) of 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, (ii) compliance with applicable state securities or “blue sky” laws has been
effected, or (iii) the holder provides the Company with reasonable assurances that 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. Each Purchaser, severally and not jointly, agrees that the removal of the
restrictive legend from certificates representing the Warrant Shares or the Conversion Shares as
set forth in this Section 5.1 is predicated upon the Company’s reliance that the Purchaser will
sell such Warrant Shares or Conversion Shares pursuant to the registration requirements of the
Securities Act, including any applicable prospectus delivery requirements, or an exemption
therefrom. 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 the Company’s transfer agent is
participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer
program, the Company shall use its reasonable best efforts to cause its transfer agent to
electronically transmit the Conversion Shares or Warrant Shares to a Purchaser by crediting the
account of such Purchaser’s Prime Broker with DTC through its Deposit Withdrawal Agent Commission
(“DWAC”) system (to the extent not inconsistent with any provisions of this Agreement).



ARTICLE 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. 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
matter 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 such 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 indemnifying party a conflict of interest between it and the indemnified party exists with
respect to such action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for the indemnified
parties), 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 not
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, identified by name or category of persons, of a release
from all liability in respect of such claim. 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. No indemnifying party will be liable to the indemnified party under this
Agreement to the extent, but only to the extent that a loss, claim, damage or liability is
attributable to the indemnified party’s breach of any of the representations, warranties or
covenants made by such party in this Agreement or in the other Transaction Documents.



ARTICLE VII




MISCELLANEOUS




Section 7.1 Fees and Expenses. At the Closing, the Company shall pay to Iroquois
Master Fund Ltd. an aggregate of $40,000 for their legal fees and expenses incurred in connection
with the preparation and negotiation of this Agreement. In lieu of the foregoing remaining
payment, Iroquois Master Fund Ltd. may retain such amount at the Closing. Except as expressly set
forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of
its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by
such party incident to the negotiation, preparation, execution, delivery and performance of this
Agreement. The Company shall pay all transfer agent fees, stamp taxes and other taxes and duties
levied in connection with the issuance of any Securities.



Section 7.2 Specific Performance; Consent to Jurisdiction; Venue.



(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 or the other Transaction Documents 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 other Transaction Documents 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) The parties agree that venue for any dispute arising under this Agreement will lie
exclusively in the state or federal courts located in New York County, New York, and the parties
irrevocably waive any right to raise forum non conveniens or any other argument that New York is
not the proper venue. The parties irrevocably consent to personal jurisdiction in the state and
federal courts of the state of New York. The Company and each Purchaser consent 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. The Company
and the Purchasers hereby agree that the prevailing party in any suit, action or proceeding arising
out of or relating to the Securities, this Agreement or the other Transaction Documents, shall be
entitled to reimbursement for reasonable legal fees from the non-prevailing party. The parties
hereby waive all rights to a trial by jury.



Section 7.3 Entire Agreement; Amendment. This Agreement and the Transaction Documents
contain 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 other Transaction Documents, neither
the Company nor any Purchaser make any representation, 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 Purchasers holding at
least a majority of the principal amount of the Notes then held by the Purchasers. Any amendment
or waiver effected in accordance with this Section 7.3 shall be binding upon each Purchaser (and
their permitted assigns) and the Company.



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 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:
	 	Verticalnet, Inc.

	 
	 	400 Chester Field Parkway
	 
	 	Malvern, PA 19355

	 
	 	Attention:  Legal

	 
	 	Tel. No.:  (610) 640-8030

	 
	 	Fax No.:  (610) 240-9470

	with copies (which copies
shall not constitute notice
to the Company) to:
	 	Morgan, Lewis & Bockius LLP

	1701 Market Street
Philadelphia, PA 19103

	 	Attention:  James W. McKenzie, Jr.

	 
	 	Tel. No.:  (215) 963-5134

	 
	 	Fax No.:  (215) 963-5001

	If to any Purchaser:
	 	At the address of such Purchaser set

	 
	 	forth on Exhibit A to this Agreement,

	 
	 	with copies to Purchaser’s counsel as

	 
	 	set forth on Exhibit A or as specified

	 
	 	in writing by such Purchaser with copies

	 
	 	to:








Proskauer Rose LLP




1585 Broadway




New York, New York 10036




Attention: Adam Kansler




Tel. No.: (212) 969-3000




Fax No.: (212) 969-2900



Any party hereto may from time to time change its address for notices by giving 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 provision, 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. No consideration shall be offered or paid to any Purchaser
to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents unless the same consideration is also offered to all of the parties to the Transaction
Documents. This provision constitutes a separate right granted to each Purchaser by the Company
and shall not in any way be construed as the Purchasers acting in concert or as a group with
respect to the purchase, disposition or voting of Securities or otherwise.



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. After the Closing, the assignment by
a party to this Agreement of any rights hereunder shall not affect the obligations of such party
under this Agreement. Subject to Section 5.1 hereof, the Purchasers may assign the Securities and
its rights under this Agreement and the other Transaction Documents and any other rights hereto and
thereto without the consent of the Company.



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 and warranties of the Company and the
Purchasers shall survive the execution and delivery hereof and the Closing until the second
anniversary of the Closing Date, except the agreements and covenants set forth in Articles I, III,
V, VI and VII of this Agreement shall survive the execution and delivery hereof and the Closing
hereunder.



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.



Section 7.12 Publicity. The Company agrees that it will not disclose, and will not
include in any public announcement, the names of the Purchasers without the consent of the
Purchasers, which consent shall not be unreasonably withheld or delayed, or unless and until such
disclosure is required by law, rule or applicable regulation, including without limitation any
disclosure pursuant to a registration statement registering the Conversion Shares and the Warrant
Shares, and then only to the extent of such requirement.



Section 7.13 Severability. The provisions of this 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 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 and
this Agreement shall be reformed and construed as if such invalid or illegal or unenforceable
provision, or part of such provision, had never been contained herein, so that such provisions
would be valid, legal and enforceable to the maximum extent possible.



Section 7.14 Further Assurances. From and after the date of this Agreement, upon the
request of the Purchasers or the Company, the Company and each Purchaser shall execute and deliver
such instruments, documents and other writings as may be reasonably necessary or desirable to
confirm and carry out and to effectuate fully the intent and purposes of this Agreement and the
other Transaction Documents.



[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




2




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



VERTICALNET, INC.



By: /s/ Gene S. Godick     

Name: Gene S. Godick

Title: Executive Vice President and Chief Financial Officer




3



PURCHASER: Alpha Capital AG     



Please print purchaser name




By: /s/ Konrad Ackerman     



Name: Konrad Ackermann

Title: Director



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



4



PURCHASER: JGB Capital LP     



Please print purchaser name



By:     /s/ Brett Cohen      Name: Brett Cohen

Title: President, JGB Management Inc., as General Partner




Purchase Price: _$300,000.00          



Warrant Shares: _214,500     



5



PURCHASER: Harborview Master Fund LP     



Please print purchaser name



By:     /s/ Jonno Elliott      Name: Navigator Management Ltd.



Title: Authorized Signatory



Purchase Price: _$400,000.00          



Warrant Shares: _286,000     



6



PURCHASER: Portside Growth and Opportunity Fund_



Please print purchaser name



By:     /s/ Jeffrey Smith      Name: Jeffrey Smith



Title: Authorized Signatory



Purchase Price: _$250,000.00          



Warrant Shares: _178,750     



7



PURCHASER: Iroquois Master Fund, Ltd._



Please print purchaser name



By:     /s/ Richard Abbe      Name: Richard Abbe



Title: Authorized Signatory



Purchase Price: _$1,150,000.00          



Warrant Shares: _822,250      



8



PURCHASER: Smithfield Fiduciary LLC_



Please print purchaser name



By:     /s/ Adam J. Chill       Name: Adam J. Chill



Title: Authorized Signatory



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



9



PURCHASER: Bristol Investment Fund, Ltd.



Please print purchaser name



By:     /s/ Paul Kessler       Name: Paul Kessler



Title: Director



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



10



PURCHASER: Nite Capital LP_



Please print purchaser name



By:     /s/ Keith A. Goodman      Name: Keith A. Goodman



Title: Manager of the General Partner



Purchase Price: _$250,000.00          



Warrant Shares: _178,750     



11



PURCHASER: Castle Creek Technology Partners LLC_



Please print purchaser name



By:     /s/ Stephen D. Friend      Name: Stephen D. Friend



Title: Managing Director of the Investment Manager



Purchase Price: _$1,000,000.00          



Warrant Shares: _715,000      



12



PURCHASER:DKR Soundshore Oasis Holding Fund Ltd. Please print purchaser name



By:     /s/ Brad Caswell      Name: Brad Caswell



Title: Director



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



13



PURCHASER: CAMOFI Master LDC      Please print purchaser name



By:     /s/ Richard Smithline      Name: Richard Smithline



Title: Director



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



14



PURCHASER: Whalehaven Capital Fund Limited      Please print purchaser name



By:     /s/ Evan Schemenauer      Name: Evan Schemenauer



Title: Director



Purchase Price: _$500,000.00          



Warrant Shares: _357,500     



15



PURCHASER: Platinum Long term Growth I, LLC      Please print purchaser name



By:     /s/ Mark Nordlicht     Name: Mark Nordlicht



Title: Managing Member



Purchase Price: _$250,000.00     



Warrant Shares: _178,750     



16




EXHIBIT A

LIST OF PURCHASERS





	 	 	 	Names and Addresses Number of





of Purchasers Investment Amount Warrants Purchased 



17



EXHIBIT B

FORM OF NOTE





18






EXHIBIT C

FORM WARRANT





19






EXHIBIT D

FORM OF REGISTRATION RIGHTS AGREEMENT







20






EXHIBIT E

FORM OF SECURITY AGREEMENT






21






EXHIBIT F




ACCREDITED INVESTOR QUESTIONNAIRE








22






EXHIBIT G

FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS





23






EXHIBIT H

FORM OF OPINION





24