exv4w1



 







EXHIBIT 4.1




SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE




AGREEMENT




Dated as of May ___, 2006




among




DIRT MOTOR SPORTS, INC.




and




THE PURCHASERS LISTED ON EXHIBIT A





 









 








TABLE OF CONTENTS




	 	 	 	 	 
	 	 	PAGE	 
	ARTICLE I Purchase and Sale of Preferred Stock
	 	 	1	 
	 
	 	 	 	 
	Section 1.1 Purchase and Sale of Stock
	 	 	1	 
	Section 1.2 The Conversion Shares
	 	 	1	 
	Section 1.3 Purchase Price and Closing
	 	 	2	 
	Section 1.4 Series D Warrants
	 	 	2	 
	Section 1.5 Exchange of Promissory Notes
	 	 	2	 
	 
	 	 	 	 
	ARTICLE II Representations and Warranties
	 	 	2	 
	 
	 	 	 	 
	Section 2.1 Representations and Warranties of the Company
	 	 	2	 
	Section 2.2 Representations and Warranties of the Purchasers
	 	 	13	 
	 
	 	 	 	 
	ARTICLE III Covenants
	 	 	16	 
	 
	 	 	 	 
	Section 3.1 Securities Compliance
	 	 	16	 
	Section 3.2 Registration and Listing
	 	 	16	 
	Section 3.3 Inspection Rights
	 	 	16	 
	Section 3.4 Compliance with Laws
	 	 	16	 
	Section 3.5 Keeping of Records and Books of Account
	 	 	16	 
	Section 3.6 Reporting Requirements
	 	 	17	 
	Section 3.7 Amendments
	 	 	17	 
	Section 3.8 Other Agreements
	 	 	17	 
	Section 3.9 Distributions
	 	 	17	 
	Section 3.10 Status of Dividends
	 	 	17	 
	Section 3.11 Intentionally Omitted
	 	 	18	 
	Section 3.12 Future Financings; Right of First Offer and Refusal
	 	 	18	 
	Section 3.13 Reservation of Shares
	 	 	19	 
	Section 3.14 Transfer Agent Instructions
	 	 	20	 
	Section 3.15 Disposition of Assets
	 	 	20	 
	Section 3.16 Reporting Status
	 	 	20	 
	Section 3.17 Disclosure of Transaction
	 	 	20	 
	Section 3.18 Disclosure of Material Information
	 	 	21	 
	Section 3.19 Pledge of Securities
	 	 	21	 
	Section 3.20 Restrictions on Certain Issuances of Securities
	 	 	21	 
	Section 3.21 Independent Board Members
	 	 	21	 
	Section 3.22 Application for Nasdaq Listing
	 	 	21	 
	 
	 	 	 	 
	ARTICLE IV Conditions
	 	 	22	 
	Section 4.1 Conditions Precedent to the Obligation of the Company to Sell the Shares
	 	 	22	 






 









 






	 	 	 	 	 
	 	 	PAGE	 
	Section 4.2 Conditions Precedent to the Obligation of the Purchasers to
Purchase the Shares
	 	 	23	 
	 
	 	 	 	 
	ARTICLE V Stock Certificate Legend
	 	 	25	 
	 
	 	 	 	 
	Section 5.1 Legend
	 	 	25	 
	 
	 	 	 	 
	ARTICLE VI Indemnification
	 	 	27	 
	 
	 	 	 	 
	Section 6.1 General Indemnity
	 	 	27	 
	Section 6.2 Indemnification Procedure
	 	 	27	 
	 
	 	 	 	 
	ARTICLE VII Miscellaneous
	 	 	28	 
	 
	 	 	 	 
	Section 7.1 Fees and Expenses
	 	 	28	 
	Section 7.2 Specific Enforcement, Consent to Jurisdiction
	 	 	28	 
	Section 7.3 Entire Agreement; Amendment
	 	 	29	 
	Section 7.4 Notices
	 	 	29	 
	Section 7.5 Waivers
	 	 	30	 
	Section 7.6 Headings
	 	 	31	 
	Section 7.7 Successors and Assigns
	 	 	31	 
	Section 7.8 No Third Party Beneficiaries
	 	 	31	 
	Section 7.9 Governing Law
	 	 	31	 
	Section 7.10 Survival
	 	 	31	 
	Section 7.11 Counterparts
	 	 	31	 
	Section 7.12 Publicity
	 	 	31	 
	Section 7.13 Severability
	 	 	31	 
	Section 7.14 Further Assurances
	 	 	31	 






ii









 






     SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT




     This SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT (the “Agreement”) is dated as of
May ___, 2006 by and among Dirt Motor Sports, Inc., a Delaware corporation (the “Company”), and
each of the Purchasers of shares of Series D Convertible Preferred Stock of the Company whose names
are set forth on Exhibit A hereto (individually, a “Purchaser” and collectively, the
“Purchasers”).



     The parties hereto agree as follows:



ARTICLE I




Purchase and Sale of Preferred Stock




          Section 1.1 Purchase and Sale of Stock. Upon the following terms and conditions, the
Company shall issue and sell to the Purchasers and each of the Purchasers shall purchase from the
Company, the number of shares of the Company’s Series D Convertible Preferred Stock, par value $.01
per share (the “Preferred Shares”), at a purchase price of Three Thousand Dollars ($3,000) per
share, set forth opposite such Purchaser’s name on Exhibit A hereto. Upon the following
terms and conditions, each of the Purchasers shall be issued Series D Warrants, in substantially
the form attached hereto as Exhibit B (the “Warrants”), to purchase the number of shares of
the Company’s common stock, par value $.0001 per share (the “Common Stock”) set forth opposite such
Purchaser’s name on Exhibit A hereto. The aggregate purchase price for the Preferred
Shares and the Warrants shall be
[                                        ]
 Dollars ($                                        ) (the
“Purchase Price”). The designation, rights, preferences and other terms and provisions of the
Series D Convertible Preferred Stock are set forth in the Certificate of Designation of the
Relative Rights and Preferences of the Series D Convertible Preferred Stock attached hereto as
Exhibit C (the “Certificate of Designation”). The Company and the Purchasers are executing
and delivering this Agreement in accordance with and in reliance upon the exemption from securities
registration afforded by Rule 506 of Regulation D (“Regulation D”) as promulgated by the United
States Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as
amended (the “Securities Act”) or Section 4(2) of the Securities Act.




          Section 1.2 The Conversion Shares. The Company has authorized and has reserved and
covenants to continue to reserve, free of preemptive rights and other similar contractual rights of
stockholders, a number of shares of Common Stock equal to at least one hundred twenty percent
(120%) of the number of shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all of the Preferred Shares and exercise of the Warrants then outstanding, in
each case, without regard for any limitations on conversion or exercise. Any shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants (and such
shares when issued) are herein referred to as the “Conversion Shares” and the “Warrant Shares”,
respectively. The Preferred Shares, the Conversion Shares and the Warrant Shares are sometimes
collectively referred to as the “Shares”.




 









 








          Section 1.3 Purchase Price and Closing. The Company agrees to issue and sell to the
Purchasers and, in consideration of and in express reliance upon the representations, warranties,
covenants, terms and conditions of this Agreement, the Purchasers, severally but not jointly, agree
to purchase that number of the Preferred Shares and Warrants set forth opposite their respective
names on Exhibit A. The aggregate Purchase Price of the Preferred Shares and Warrants
being acquired by each Purchaser is set forth opposite such Purchaser’s name on Exhibit A.
The closing of the purchase and sale of the Preferred Shares and Warrants shall take place at the
offices of Kramer Levin Naftalis & Frankel LLP, 1177 Avenue of the Americas, New York, New York
10036 (the “Closing”) at 1:00 p.m. (eastern time) or at such other time and place as the Purchasers
and the Company may agree upon, upon the satisfaction of each of the conditions set forth in
Article IV hereof (the “Closing Date”). Funding with respect to the Closing shall take place by
wire transfer of immediately available funds on or prior to the Closing Date.




          Section 1.4 Series D Warrants. The Company agrees to issue to each of the Purchasers
Warrants to purchase 300 shares of Common Stock for each Preferred Share purchased. The number of
shares of Common Stock issuable upon exercise of each Purchaser’s Warrants issued pursuant to this
Agreement is set forth opposite such Purchaser’s name on Exhibit A hereto. The Warrants
shall expire five (5) years from the Closing Date and shall have an exercise price per share equal
to $4.50.




          Section 1.5 Exchange of Promissory Notes. The Company acknowledges and agrees that a
portion of the Purchase Price shall be paid by certain Purchasers exchanging certain promissory
notes issued by the Company to such Purchasers. Prior to or at the Closing, such Purchasers shall
surrender for cancellation to the Company such promissory notes as more fully set forth on
Schedule 1.5 hereto and upon the Closing, such Purchasers shall receive in exchange for the
surrender of its promissory notes a number of Preferred Shares and Warrants as set forth on
Exhibit A attached hereto. The number of Preferred Shares to be issued to each Purchaser
who is exchanging promissory notes pursuant to this Section 1.5 shall be in an amount equal to the
quotient of (A) one hundred ten percent (110%) of the principal amount plus all accrued interest
outstanding under the promissory notes divided by (B) the purchase price for each Preferred Share.




ARTICLE II




Representations and Warranties




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




          (a) Organization, Good Standing and Power. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State of Delaware and has
the requisite corporate power to own, lease and operate its properties and assets and to conduct
its business as it is now being conducted. The Company does not have any subsidiaries except as
set forth in the Company’s Form 10-KSB for the year ended September 30, 2005 and the Company’s Form
10KSB for the transition period from October 1, 2005 to December 31,




2









 







2005, including the accompanying financial statements (collectively, the “Form 10-KSB”), or in
the Company’s Form 10-QSB for the fiscal quarters ended June 30, 2005, March 31, 2005 and December
31, 2004 (collectively, the “Form 10-QSB”), or on Schedule 2.1(a) hereto. The Company and
each such subsidiary is duly qualified as a foreign corporation to do business and is in good
standing in every jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary except for any jurisdiction(s) (alone or in the aggregate) in
which the failure to be so qualified will not have a Material Adverse Effect (as defined in Section
2.1(c) hereof) on the Company’s financial condition.




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




          (c) Capitalization. The authorized capital stock of the Company and the shares
thereof currently issued and outstanding as of the date hereof are set forth on Schedule
2.1(c) hereto. All of the outstanding shares of the Company’s Common Stock and Series D
Convertible Preferred Stock and other shares of preferred stock have been duly and validly
authorized. Except as set forth in this Agreement and the Registration Rights Agreement and as set
forth on Schedule 2.1(c) hereto, no shares of Common Stock are entitled to preemptive
rights or registration rights and there are no outstanding options, warrants, scrip, rights to
subscribe to, call or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company. Furthermore, except as set forth in
this Agreement and the Registration Rights Agreement or on Schedule 2.1(c), there are no
contracts, commitments, understandings, or arrangements by which the Company is or may become bound
to issue additional shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company. Except for customary transfer
restrictions contained in agreements entered into by the Company in order to sell restricted
securities or as set forth on Schedule 2.1(c) hereto, the Company is not a party to any
agreement granting registration or anti-dilution rights to any person with respect to any of its
equity or debt securities. The Company is not a party to, and it has no knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock of the Company.
Except as set forth on Schedule 2.1(c) hereto, the offer and sale of all capital stock,
convertible securities, rights,




3









 







warrants, or options of the Company issued prior to the Closing complied with all applicable
Federal and state securities laws, and no stockholder has a right of rescission or claim for
damages with respect thereto which would have a Material Adverse Effect (as defined below) on the
Company’s financial condition or operating results. The Company has furnished or made available to
the Purchasers true and correct copies of the Company’s Certificate of Incorporation as in effect
on the date hereof (the “Certificate”), and the Company’s Bylaws as in effect on the date hereof
(the “Bylaws”). For the purposes of this Agreement, “Material Adverse Effect” means any material
adverse effect on the business, operations, properties, prospects, or financial condition of the
Company and its subsidiaries and/or any condition, circumstance, or situation that would prohibit
or otherwise materially interfere with the ability of the Company to perform any of its obligations
under this Agreement in any material respect.




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




          (e) No Conflicts. Except as set forth on Schedule 2.1(e) hereto, the
execution, delivery and performance of the Transaction Documents by the Company, the performance by
the Company of its obligations under the Certificate of Designation and the consummation by the
Company of the transactions contemplated herein and therein do not and will not (i) violate any
provision of the Company’s Certificate or Bylaws, (ii) conflict with, or constitute a default (or
an event which with notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of, any agreement,
mortgage, deed of trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company is a party or by which it or its properties or assets are bound, (iii) create
or impose a lien, mortgage, security interest, charge or encumbrance of any nature on any property
of the Company under any agreement or any commitment to which the Company is a party or by which
the Company is bound or by which any of its respective properties or assets are bound, or (iv)
result in a violation of any federal, state, local or foreign statute, rule, regulation, order,
judgment or decree (including Federal and state securities laws and regulations) applicable to the
Company or any of its subsidiaries or by which any property or asset of the Company or any of its
subsidiaries are bound or affected, except, in all cases other than violations pursuant to clauses
(i) and (iv) above, for such conflicts, defaults, terminations, amendments, accelerations,
cancellations and violations as would not, individually or in the aggregate, have a Material
Adverse Effect. The business of the Company and its subsidiaries is not being conducted in
violation of any laws, ordinances or regulations of any governmental entity, except for possible
violations which singularly or in the aggregate do not and will not have a Material Adverse Effect.
The Company is not required under Federal, state or local law, rule or regulation to obtain any
consent, authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its obligations under




4









 







the Transaction Documents, or issue and sell the Preferred Shares, the Warrants, the
Conversion Shares and the Warrant Shares in accordance with the terms hereof or thereof (other than
any filings which may be required to be made by the Company with the Commission or state securities
administrators subsequent to the Closing, any registration statement which may be filed pursuant
hereto, and the Certificate of Designation); provided that, for purposes of the
representation made in this sentence, the Company is assuming and relying upon the accuracy of the
relevant representations and agreements of the Purchasers herein.




          (f) Commission Documents, Financial Statements. The Common Stock is registered
pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), and, since December 31, 2005, the Company has timely filed all reports, schedules,
forms, statements and other documents required to be filed by it with the Commission pursuant to
the reporting requirements of the Exchange Act, including material filed pursuant to Section 13(a)
or 15(d) of the Exchange Act (all of the foregoing including filings incorporated by reference
therein being referred to herein as the “Commission Documents”). The Company has delivered or made
available to each of the Purchasers true and complete copies of the Commission Documents filed with
the Commission since December 31, 2005. The Company has not provided to the Purchasers any
material non-public information or other information which, according to applicable law, rule or
regulation, was required to have been disclosed publicly by the Company but which has not been so
disclosed, other than with respect to the transactions contemplated by this Agreement. At the
times of their respective filings, the Form 10-KSB and the Form 10-QSB complied in all material
respects with the requirements of the Exchange Act and the rules and regulations of the Commission
promulgated thereunder and other federal, state and local laws, rules and regulations applicable to
such documents, and, as of their respective dates, none of the Form 10-KSB and the Form 10-QSB
contained any untrue statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The financial statements of the Company
included in the Commission Documents comply as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the Commission or other
applicable rules and regulations with respect thereto. Such financial statements have been
prepared in accordance with United States generally accepted accounting principles (“GAAP”) applied
on a consistent basis during the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to
the extent they may not include footnotes or may be condensed or summary statements), and fairly
present in all material respects the financial position of the Company and its subsidiaries as of
the dates thereof and the results of operations and cash flows for the periods then ended (subject,
in the case of unaudited statements, to normal year-end audit adjustments).




          (g) Subsidiaries. Schedule 2.1(g) hereto sets forth each subsidiary of the
Company, showing the jurisdiction of its incorporation or organization and showing the percentage
of each person’s ownership. For the purposes of this Agreement, “subsidiary” shall mean any
corporation or other entity of which at least a majority of the securities or other ownership
interest having ordinary voting power (absolutely or contingently) for the election of directors or
other persons performing similar functions are at the time owned directly or indirectly by the
Company and/or any of its other subsidiaries. All of the outstanding shares of




5









 







capital stock of each subsidiary have been duly authorized and validly issued, and are fully
paid and nonassessable. There are no outstanding preemptive, conversion or other rights, options,
warrants or agreements granted or issued by or binding upon any subsidiary for the purchase or
acquisition of any shares of capital stock of any subsidiary or any other securities convertible
into, exchangeable for or evidencing the rights to subscribe for any shares of such capital stock.
Neither the Company nor any subsidiary is subject to any obligation (contingent or otherwise) to
repurchase or otherwise acquire or retire any shares of the capital stock of any subsidiary or any
convertible securities, rights, warrants or options of the type described in the preceding
sentence. Neither the Company nor any subsidiary is party to, nor has any knowledge of, any
agreement restricting the voting or transfer of any shares of the capital stock of any subsidiary.




          (h) No Material Adverse Change. Since December 31, 2005, the Company has not
experienced or suffered any Material Adverse Effect, except as disclosed on Schedule 2.1(h)
hereto.




          (i) No Undisclosed Liabilities. Except as set forth on Schedule 2.1(i)
hereto, neither the Company nor any of its subsidiaries has any liabilities, obligations, claims or
losses (whether liquidated or unliquidated, secured or unsecured, absolute, accrued, contingent or
otherwise) other than those incurred in the ordinary course of the Company’s or its subsidiaries
respective businesses since December 31, 2005 and which, individually or in the aggregate, do not
or would not have a Material Adverse Effect on the Company or its subsidiaries.




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




          (k) Indebtedness. The Form 10-KSB, Form 10-QSB or Schedule 2.1(k) hereto sets
forth as of a recent date all outstanding secured and unsecured Indebtedness of the Company or any
subsidiary, or for which the Company or any subsidiary has commitments. For the purposes of this
Agreement, “Indebtedness” shall mean (a) any liabilities for borrowed money or amounts owed in
excess of $100,000 (other than trade accounts payable incurred in the ordinary course of business),
(b) all guaranties, endorsements and other contingent obligations in respect of Indebtedness of
others, whether or not the same are or should be reflected in the Company’s balance sheet (or the
notes thereto), except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business; and (c) the present value of
any lease payments in excess of $25,000 due under leases required to be capitalized in accordance
with GAAP. Except as set forth on Schedule 2.1(k), neither the Company nor any subsidiary
is in default with respect to any Indebtedness.




          (l) Title to Assets. Each of the Company and the subsidiaries has good and marketable
title to all of its real and personal property reflected in the Form 10-KSB, free and clear of any
mortgages, pledges, charges, liens, security interests or other encumbrances, except for those
disclosed in the Form 10-KSB, Form 10-QSB or on Schedule 2.1(l) hereto or such that,
individually or in the aggregate, do not cause a Material Adverse Effect on the Company’s




6









 







financial condition or operating results. All said leases of the Company and each of its
subsidiaries are valid and subsisting and in full force and effect.




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




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




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




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




          (q) Disclosure. To the best of the Company’s knowledge, neither this




7









 







Agreement or the Schedules hereto nor any other documents, certificates or instruments
furnished to the Purchasers by or on behalf of the Company or any subsidiary in connection with the
transactions contemplated by this Agreement contain any untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements made herein or therein, in the
light of the circumstances under which they were made herein or therein, not misleading.




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




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




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




8









 







internal accounting controls sufficient, in the judgment of the Company, to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific
authorizations, (ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is
permitted only in accordance with management’s general or specific authorization and (iv) the
recorded accountability for assets is compared with the existing assets at reasonable intervals and
appropriate actions is taken with respect to any differences.




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




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




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




9









 







Securities Act) in connection with the offer or sale of any of the Shares and the Warrants.




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




          (y) Employees. Neither the Company nor any subsidiary has any collective bargaining
arrangements or agreements covering any of its employees, except as set forth in the Form 10-KSB,
Form 10-QSB or on Schedule 2.1(y) hereto. Except as set forth in the Form 10-KSB, Form
10-QSB or on Schedule 2.1(y) hereto, neither the Company nor any subsidiary has any
employment contract, agreement regarding proprietary information, non-competition agreement,
non-solicitation agreement, confidentiality agreement, or any other similar contract or restrictive
covenant, relating to the right of any officer, employee or consultant to be employed or engaged by
the Company or such subsidiary. Since December 31, 2005, no officer, consultant or key employee of
the Company or any subsidiary whose termination, either individually or in the aggregate, could
have a Material Adverse Effect, has terminated or, to the knowledge of the Company, has any present
intention of terminating his or her employment or engagement with the Company or any subsidiary.




          (z) Absence of Certain Developments. Except as provided on Schedule 2.1(z)
hereto, since December 31, 2005, neither the Company nor any subsidiary has:




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



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



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



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



10









 





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



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



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



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



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



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



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



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



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



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



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



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




          (bb) ERISA. No liability to the Pension Benefit Guaranty Corporation has been
incurred with respect to any Plan by the Company or any of its subsidiaries which is or would be
materially adverse to the Company and its subsidiaries. The execution and delivery of this
Agreement and the issuance and sale of the Preferred Shares will not involve any transaction

11









 








which is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax
could be imposed pursuant to Section 4975 of the Internal Revenue Code of 1986, as amended,
provided that, if any of the Purchasers, or any person or entity that owns a beneficial interest in
any of the Purchasers, is an “employee pension benefit plan” (within the meaning of Section 3(2) of
ERISA) with respect to which the Company is a “party in interest” (within the meaning of Section
3(14) of ERISA), the requirements of Sections 407(d)(5) and 408(e) of ERISA, if applicable, are
met. As used in this Section 2.1(bb), the term “Plan” shall mean an “employee pension benefit
plan” (as defined in Section 3 of ERISA) which is or has been established or maintained, or to
which contributions are or have been made, by the Company or any subsidiary or by any trade or
business, whether or not incorporated, which, together with the Company or any subsidiary, is under
common control, as described in Section 414(b) or (c) of the Code.




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




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




12









 







contemplated hereby. The Company acknowledges that it has elected to provide all Purchasers
with the same terms and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by the Purchasers. The Company acknowledges that such procedure
with respect to the Transaction Documents in no way creates a presumption that the Purchasers are
in any way acting in concert or as a group with respect to the Transaction Documents or the
transactions contemplated hereby or thereby.




          (ee) No Integrated Offering. Neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that would cause the
offering of the Shares pursuant to this Agreement to be integrated with prior offerings by the
Company for purposes of the Securities Act which would prevent the Company from selling the Shares
pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder
approval provisions, nor will the Company or any of its affiliates or subsidiaries take any action
or steps that would cause the offering of the Shares to be integrated with other offerings. The
Company does not have any registration statement pending before the Commission or currently under
the Commission’s review and since October 1, 2005, the Company has not offered or sold any of its
equity securities or debt securities convertible into shares of Common Stock.




          (ff) Sarbanes-Oxley Act. Except as set forth on Schedule 2.1(ff) hereto, the
Company is in compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”), and the rules and regulations promulgated thereunder, that are effective,
and intends to comply with other applicable provisions of the Sarbanes-Oxley Act, and the rules and
regulations promulgated thereunder, upon the effectiveness of such provisions.




          (gg) Exchange of Shares and Notes. Upon the completion of the exchanges contemplated
by Sections 4.1 (s) and (t) hereto, no shares of Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock shall remain issued or outstanding. Upon the completion of the
exchange contemplated by Section 4.1(r) and the transactions contemplated hereby, except as set
forth on Schedule 2.1 (gg), all of the promissory notes payable by the Company shall be
delivered for cancellation and no such promissory notes shall remain outstanding.




          Section 2.2 Representations and Warranties of the Purchasers. Each of the Purchasers
hereby makes the following representations and warranties to the Company with respect solely to
itself and not with respect to any other Purchaser:




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




          (b) Authorization and Power. Each Purchaser has the requisite power and authority to
enter into and perform this Agreement and to purchase the Preferred Shares and Warrants being sold
to it hereunder. The execution, delivery and performance of this Agreement and the Registration
Rights Agreement by such Purchaser and the consummation by it of the




13









 







transactions contemplated hereby and thereby have been duly authorized by all necessary
corporate or partnership action, and no further consent or authorization of such Purchaser or its
Board of Directors, stockholders, or partners, as the case may be, is required. Each of this
Agreement and the Registration Rights Agreement has been duly authorized, executed and delivered by
such Purchaser and constitutes, or shall constitute when executed and delivered, a valid and
binding obligation of the Purchaser enforceable against the Purchaser in accordance with the terms
thereof.




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




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




          (e) Status of Purchasers. Such Purchaser is an “accredited investor” as defined in
Regulation D promulgated under the Securities Act. Such Purchaser is not required to




14









 







be registered as a broker-dealer under Section 15 of the Exchange Act and such Purchaser is
not a broker-dealer.




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




          (g) No General Solicitation. Each Purchaser acknowledges that the Preferred Shares
and the Warrants were not offered to such Purchaser by means of any advertisement, article, notice
or other communication published in any newspaper, magazine, or similar media, or broadcast over
television or radio, or any seminar or meeting to which such Purchaser was invited by any of the
foregoing means of communications.




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




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




          (j) Independent Investment. Except as may be disclosed in any filings with the
Commission by the Purchasers under Section 13 and/or Section 16 of the Exchange Act, no Purchaser
has agreed to act with any other Purchaser for the purpose of acquiring, holding, voting or
disposing of the Shares purchased hereunder for purposes of Section 13(d) under the Exchange Act,
and each Purchaser is acting independently with respect to its investment in the Shares.




15









 








ARTICLE III




Covenants




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



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




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




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




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




          Section 3.5 Keeping of Records and Books of Account. The Company shall keep and cause
each subsidiary to keep adequate records and books of account, in which complete entries will be
made in accordance with GAAP consistently applied, reflecting all




16









 







financial transactions of the Company and its subsidiaries, and in which, for each fiscal
year, all proper reserves for depreciation, depletion, obsolescence, amortization, taxes, bad debts
and other purposes in connection with its business shall be made.




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




          (a) Quarterly Reports filed with the Commission on Form 10-QSB as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission;




          (b) Annual Reports filed with the Commission on Form 10-KSB as soon as practical after the
document is filed with the Commission, and in any event within five (5) days after the document is
filed with the Commission; and




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




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




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




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




          Section 3.10 Status of Dividends. The Company covenants and agrees that (i) no
Federal income tax return or claim for refund of Federal income tax or other submission to the
Internal Revenue Service will adversely affect the Preferred Shares, any other series of its
Preferred Stock, or the Common Stock, and no deduction shall operate to jeopardize the availability
to Purchasers of the dividends received deduction provided by Section 243(a)(1) of the Code or any
successor provision, (ii) in no report to shareholders or to any governmental




17









 







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




          Section 3.11 Intentionally Omitted.




          Section 3.12 Future Financings; Right of First Offer and Refusal. (a) For purposes of
this Agreement, a “Subsequent Financing” shall be defined as any subsequent offer or sale to, or
exchange with (or other type of distribution to), any third party of Common Stock or any securities
convertible, exercisable or exchangeable into Common Stock, including debt securities so
convertible, in a private transaction (collectively, the “Financing Securities”) other than a
Permitted Financing. For purposes of this Agreement, “Permitted Financing” shall mean any
transaction involving (i) the Company’s issuance of any Financing Securities (other than for cash)
in connection with an acquisition of the Company, (ii) the Company’s issuance of Financing
Securities in connection with strategic license agreements and other partnering arrangements so
long as such issuances are not for the purpose of raising capital and the




18









 







Company has received the prior written consent of the Purchasers, (iii) the Company’s issuance
of Financing Securities in connection with bona fide firm underwritten public offerings of its
securities, (iv) the Company’s issuance of Common Stock or the issuance or grants of options to
purchase Common Stock pursuant to the Company’s stock option plans and employee stock purchase
plans outstanding on the date hereof and which have been approved by the Board of Directors of the
Company, (v) as a result of the exercise of options or warrants or conversion of convertible notes
or preferred stock which are granted or issued as of the date of this Agreement or issued pursuant
to this Agreement, (vi) any Warrants issued to the Purchasers and any warrants issued to the
placement agent for the transactions contemplated by this Agreement in connection with other
financial services rendered to the Company, or (vii) the payment of any dividend on the Preferred
Shares.




          (b) During the period commencing on the Closing Date and ending on the date that is twelve
(12) months following the Closing Date, the Company covenants and agrees to promptly notify (in no
event later than five (5) days after making or receiving an applicable offer) in writing (a “Rights
Notice”) each Purchaser of the terms and conditions of any proposed Subsequent Financing. The
Rights Notice shall describe, in reasonable detail, the proposed Subsequent Financing, the proposed
closing date of the Subsequent Financing, which shall be within thirty (30) calendar days from the
date of the Rights Notice, including, without limitation, all of the terms and conditions thereof
and proposed definitive documentation to be entered into in connection therewith. The Rights
Notice shall provide each Purchaser an option (the “Rights Option”) during the ten (10) trading
days following delivery of the Rights Notice (the “Option Period”) to inform the Company whether
such Purchaser will purchase up to fifty percent (50%) of the stated value of the Preferred Shares
held by such Purchaser on the date the Rights Notice was delivered to the Purchaser for the
securities being offered in such Subsequent Financing on the same, absolute terms and conditions as
contemplated by such Subsequent Financing (the “First Refusal Rights”). If any Purchaser elects
not to participate in such Subsequent Financing, the other Purchasers may participate on a pro-rata
basis so long as such participation in the aggregate does not exceed fifty percent (50%) of the
stated value of all Preferred Shares outstanding as of the date of the Rights Notice. For purposes
of this Section, all references to “pro rata” means, for any Purchaser electing to participate in
such Subsequent Financing, the percentage obtained by dividing (x) the total number of Preferred
Shares purchased by such Purchaser at the Closing by (y) the total number of Preferred Shares
purchased by all of the participating Purchasers at the Closing. Delivery of any Rights Notice
constitutes a representation and warranty by the Company that there are no other material terms and
conditions, arrangements, agreements or otherwise except for those disclosed in the Rights Notice,
to provide additional compensation to any party participating in any proposed Subsequent Financing,
including, but not limited to, additional compensation based on changes in the purchase price or
any type of reset or adjustment of a purchase or conversion price or to issue additional securities
at any time after the closing date of a Subsequent Financing. If the Company does not receive
notice of exercise of the Rights Option from the Purchasers within the Option Period, the Company
shall have the right to close the Subsequent Financing on the scheduled closing date with a third
party; provided that all of the material terms and conditions of the closing are the same
as those provided to the Purchasers in the Rights Notice. If the closing of the proposed
Subsequent Financing does not occur on that date, any closing of the contemplated Subsequent
Financing or any other Subsequent Financing shall be subject to all of




19









 







the provisions of this Section 3.12, including, without limitation, the delivery of a new
Rights Notice. The provisions of this Section 3.12(b) shall not apply to issuances of Financing
Securities in a Permitted Financing.




          Section 3.13 Reservation of Shares. So long as any of the Preferred Shares or
Warrants remain outstanding, the Company shall take all action necessary to at all times have
authorized, and reserved for the purpose of issuance, an amount equal to at least one hundred
twenty percent (120%) of the number of shares of Common Stock as shall from time to time be
sufficient to provide for the issuance of the Conversion Shares and the Warrant Shares.




          Section 3.14 Transfer Agent Instructions. The Company shall issue irrevocable
instructions to its transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Purchaser or its respective nominee(s), for the Conversion Shares
and the Warrant Shares in such amounts as specified from time to time by each Purchaser to the
Company upon conversion of the Preferred Shares or exercise of the Warrants in the form of
Exhibit E attached hereto (the “Irrevocable Transfer Agent Instructions”). Prior to
registration of the Conversion Shares and the Warrant Shares under the Securities Act, all such
certificates shall bear the restrictive legend specified in Section 5.1 of this Agreement. The
Company warrants that no instruction other than the Irrevocable Transfer Agent Instructions
referred to in this Section 3.14 will be given by the Company to its transfer agent and that the
Shares shall otherwise be freely transferable on the books and records of the Company as and to the
extent provided in this Agreement and the Registration Rights Agreement. If a Purchaser provides
the Company with an opinion of counsel, in a generally acceptable form, to the effect that a public
sale, assignment or transfer of the Shares may be made without registration under the Securities
Act or the Purchaser provides the Company with reasonable assurances that the Shares can be sold
pursuant to Rule 144 without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the transfer, and, in
the case of the Conversion Shares and the Warrant Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denominations as specified by such
Purchaser and without any restrictive legend. The Company acknowledges that a breach by it of its
obligations under this Section 3.14 will cause irreparable harm to the Purchasers by vitiating the
intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges
that the remedy at law for a breach of its obligations under this Section 3.14 will be inadequate
and agrees, in the event of a breach or threatened breach by the Company of the provisions of this
Section 3.14, that the Purchasers shall be entitled, in addition to all other available remedies,
to an order and/or injunction restraining any breach and requiring immediate issuance and transfer,
without the necessity of showing economic loss and without any bond or other security being
required.




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




20









 








          Section 3.16 Reporting Status. So long as a Purchaser beneficially owns any of the
Securities, the Company shall timely file all reports required to be filed with the Commission
pursuant to the Exchange Act, and the Company shall not terminate its status as an issuer required
to file reports under the Exchange Act even if the Exchange Act or the rules and regulations
thereunder would permit such termination.




          Section 3.17 Disclosure of Transaction. The Company shall issue a press release
describing the material terms of the transactions contemplated hereby (the “Press Release”) as soon
as practicable after the Closing but in no event later than one hour after the Closing;
provided, however, that if the Closing occurs after 4:00 P.M. Eastern Time on any
Trading Day, the Company shall issue the Press Release no later than 9:00 A.M. Eastern Time on the
first Trading Day following the Closing Date. The Company shall also file with the Commission a
Current Report on Form 8-K (the “Form 8-K”) describing the material terms of the transactions
contemplated hereby (and attaching as exhibits thereto this Agreement, the Registration Rights
Agreement, the Certificate of Designation, the form of Warrant and the Press Release) as soon as
practicable following the Closing Date but in no event more than two (2) Trading Days following the
Closing Date, which Press Release and Form 8-K shall be subject to prior review and comment by the
Purchasers. “Trading Day” means any day during which the OTC Bulletin Board (or other principal
exchange on which the Common Stock is traded) shall be open for trading.




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




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




          Section 3.20 Restrictions on Certain Issuances of Securities. So long as any
Preferred Shares remain outstanding, the Company shall not issue any securities that rank pari
passu or senior to the Preferred Shares without the prior written consent of the holders of at
least eighty percent (80%) of the Preferred Shares outstanding at such time.




21









 








          Section 3.21 Independent Board Members. No later than September 30, 2006, the Company
shall provide evidence that its Board of Directors complies with the listing rules of The Nasdaq
Capital Market and the Sarbanes-Oxley Act and consists of five members which shall include three
current members and two additional members that are reasonably acceptable to the Purchasers.




          Section 3.22 Application for Nasdaq Listing. The Company shall use its best efforts
to file an initial listing application for its Common Stock to be listed on The Nasdaq Capital
Market no later than June 30, 2006 and the Company shall use its best efforts to cause its shares
of Common Stock to be listed on The Nasdaq Capital Market as soon as practicable, but in no event
later than October 31, 2006. In the event that the Company does not file the initial listing
application by June 30, 2006 or the Company’s shares of Common Stock, including the Conversion
Shares and the Warrant Shares, are not listed on The Nasdaq Capital Market by October 31, 2006, the
Company shall pay a penalty to each Purchaser on a monthly basis equal to one percent (1%) of each
Purchaser’s portion of the Purchase Price, but in no event shall such penalties exceed more than
ten percent (10%) of each Purchaser’s portion of the Purchase Price.




ARTICLE IV




CONDITIONS




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




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




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




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




          (d) Delivery of Purchase Price. The Purchase Price for the Preferred Shares




22









 




and Warrants has been delivered to the Company at the Closing Date.



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



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



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



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



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



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



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




23









 




connection with such transactions.




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




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




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




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




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




          (k) Reservation of Shares. As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion
of the Preferred Shares and the exercise of the Warrants, a number of shares of Common Stock equal
to at least one hundred twenty percent (120%) of the number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of the Preferred Shares outstanding on the
Closing Date and the Warrant Shares issuable upon exercise of the Warrants as of the Closing Date,
in each case, without regard to any limitations on conversion or exercise.




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




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




          (n) Officer’s Certificate. The Company shall have delivered to the Purchasers a
certificate of an executive officer of the Company, dated as of the Closing Date, confirming the




24









 







accuracy of the Company’s representations, warranties and covenants as of such Closing Date
and confirming the compliance by the Company with the conditions precedent set forth in this
Section 4.2 as of the Closing Date.




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




          (p) Lock-Up Agreements. Prior to or at the Closing, the Lock-Up Agreements entered
into between the Company and certain persons or entities, including Paul Kruger and/or his
affiliates, a form of which is attached hereto as Exhibit G, shall have been fully executed
and delivered to the Purchasers.




          (q) Resignation of Chief Executive Officer. At or before the Closing Date, Paul
Kruger shall have resigned as the Company’s Chief Executive Officer and Tom Deery shall have
assumed the position as Interim Chief Executive Officer.




          (r) Exchange of Boundless Investments, LLC Promissory Note. Prior to or at the
Closing, Boundless Investments, LLC shall have converted a promissory note issued in the aggregate
principal amount of $1,000,000 into shares of the Company’s Series B Convertible Preferred Stock
and Boundless Investments, LLC shall have exchanged such shares of Series B Convertible Preferred
Stock into Preferred Shares, pursuant to the terms and conditions set forth in the Boundless
Investments, LLC Exchange Agreement, a form of which is attached hereto as Exhibit H.




          (s) Exchange of Series B Convertible Preferred Stock. Prior to or at the Closing,
holders of the Company’s Series B Convertible Preferred Stock, as more fully set forth in
Schedule 4.2(t), shall have exchanged such shares of Series B Convertible Preferred Stock
for Preferred Shares, pursuant to the terms and conditions set forth in the Series B Convertible
Preferred Stock Exchange Agreement, a form of which is attached hereto as Exhibit I.




          (t) Exchange of Series C Convertible Preferred Stock. Prior to or at the Closing,
holders of the Company’s Series C Convertible Preferred Stock, as more fully set forth in
Schedule 4.2(u), shall have exchanged such shares of Series C Convertible Preferred Stock
for Preferred Shares, pursuant to the terms and conditions set forth in the Series C Convertible
Preferred Stock Exchange Agreement, a form of which is attached hereto as Exhibit J.




ARTICLE V




Stock Certificate Legend




          Section 5.1 Legend. Each certificate representing the Preferred Shares and the
Warrants, and, if appropriate, securities issued upon conversion thereof, shall be stamped or
otherwise imprinted with a legend substantially in the following form (in addition to any legend
required by applicable state securities or “blue sky” laws):




25









 









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



          The Company agrees to reissue certificates representing any of the Conversion Shares and the
Warrant Shares, without the legend set forth above if at such time, prior to making any transfer of
any such securities, such holder thereof shall give written notice to the Company describing the
manner and terms of such transfer and removal as the Company may reasonably request. Such proposed
transfer and removal will not be effected until: (a) either (i) the Company has received an opinion
of counsel reasonably satisfactory to the Company, to the effect that the registration of the
Conversion Shares or the Warrant Shares under the Securities Act is not required in connection with
such proposed transfer, (ii) a registration statement under the Securities Act covering such
proposed disposition has been filed by the Company with the Commission and has become effective
under the Securities Act, (iii) the Company has received other evidence reasonably satisfactory to
the Company that such registration and qualification under the Securities Act and state securities
laws are not required, or (iv) the holder provides the Company with reasonable assurances that such
security can be sold pursuant to Rule 144 under the Securities Act; and (b) either (i) the Company
has received an opinion of counsel reasonably satisfactory to the Company, to the effect that
registration or qualification under the securities or “blue sky” laws of any state is not required
in connection with such proposed disposition, or (ii) compliance with applicable state securities
or “blue sky” laws has been effected or a valid exemption exists with respect thereto. The Company
will respond to any such notice from a holder within three (3) business days. In the case of any
proposed transfer under this Section 5.1, the Company will use reasonable efforts to comply with
any such applicable state securities or “blue sky” laws, but shall in no event be required, (x) to
qualify to do business in any state where it is not then qualified, (y) to take any action that
would subject it to tax or to the general service of process in any state where it is not then
subject, or (z) to comply with state securities or “blue sky” laws of any state for which
registration by coordination is unavailable to the Company. The restrictions on transfer contained
in this Section 5.1 shall be in addition to, and not by way of limitation of, any other
restrictions on transfer contained in any other section of this Agreement. Whenever a certificate
representing the Conversion Shares or Warrant Shares is required to be issued to a Purchaser
without a legend, in lieu of delivering physical certificates representing the Conversion Shares or
Warrant Shares (provided that a registration statement under the Securities Act providing for the
resale of the Warrant Shares and Conversion Shares is then in effect), the Company shall cause its
transfer agent to electronically transmit the Conversion Shares or Warrant Shares to a Purchaser by
crediting the account of such Purchaser’s Prime Broker with the Depository Trust Company through
its Deposit Withdrawal Agent Commission system (to the extent not inconsistent with any provisions
of this Agreement).




26









 








ARTICLE VI




Indemnification




          Section 6.1 General Indemnity. The Company agrees to indemnify and hold harmless the
Purchasers (and their respective directors, officers, affiliates, agents, successors and assigns)
from and against any and all losses, liabilities, deficiencies, costs, damages and expenses
(including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Purchasers as a result of any inaccuracy in or breach of the representations, warranties or
covenants made by the Company herein. Each Purchaser severally but not jointly agrees to indemnify
and hold harmless the Company and its directors, officers, affiliates, agents, successors and
assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses
(including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by
the Company as result of any inaccuracy in or breach of the representations, warranties or
covenants made by such Purchaser herein. The maximum aggregate liability of each Purchaser
pursuant to its indemnification obligations under this Article VI shall not exceed the portion of
the Purchase Price paid by such Purchaser hereunder.




          Section 6.2 Indemnification Procedure. Any party entitled to indemnification under
this Article VI (an “indemnified party”) will give written notice to the indemnifying party of any
matters giving rise to a claim for indemnification; provided, that the failure of any party
entitled to indemnification hereunder to give notice as provided herein shall not relieve the
indemnifying party of its obligations under this Article VI except to the extent that the
indemnifying party is actually prejudiced by such failure to give notice. In case any action,
proceeding or claim is brought against an indemnified party in respect of which indemnification is
sought hereunder, the indemnifying party shall be entitled to participate in and, unless in the
reasonable judgment of the indemnified party a conflict of interest between it and the indemnifying
party may exist with respect of such action, proceeding or claim, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. In the event that the indemnifying
party advises an indemnified party that it will contest such a claim for indemnification hereunder,
or fails, within thirty (30) days of receipt of any indemnification notice to notify, in writing,
such person of its election to defend, settle or compromise, at its sole cost and expense, any
action, proceeding or claim (or discontinues its defense at any time after it commences such
defense), then the indemnified party may, at its option, defend, settle or otherwise compromise or
pay such action or claim. In any event, unless and until the indemnifying party elects in writing
to assume and does so assume the defense of any such claim, proceeding or action, the indemnified
party’s costs and expenses arising out of the defense, settlement or compromise of any such action,
claim or proceeding shall be losses subject to indemnification hereunder. The indemnified party
shall cooperate fully with the indemnifying party in connection with any negotiation or defense of
any such action or claim by the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the indemnified party which relates to such action or claim.
The indemnifying party shall keep the indemnified party fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto. If the indemnifying
party elects to defend any such




27









 







action or claim, then the indemnified party shall be entitled to participate in such defense
with counsel of its choice at its sole cost and expense. The indemnifying party shall not be
liable for any settlement of any action, claim or proceeding effected without its prior written
consent. Notwithstanding anything in this Article VI to the contrary, the indemnifying party shall
not, without the indemnified party’s prior written consent, settle or compromise any claim or
consent to entry of any judgment in respect thereof which imposes any future obligation on the
indemnified party or which does not include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the indemnified party of a release from all liability in respect of
such claim. The indemnification required by this Article VI shall be made by periodic payments of
the amount thereof during the course of investigation or defense, as and when bills are received or
expense, loss, damage or liability is incurred, so long as the indemnified party irrevocably agrees
to refund such moneys if it is ultimately determined by a court of competent jurisdiction that such
party was not entitled to indemnification. The indemnity agreements contained herein shall be in
addition to (a) any cause of action or similar rights of the indemnified party against the
indemnifying party or others, and (b) any liabilities the indemnifying party may be subject to
pursuant to the law.




ARTICLE VII




Miscellaneous




          Section 7.1 Fees and Expenses. Except as otherwise set forth in this Agreement, the
Registration Rights Agreement or the Certificate of Designation, each party shall pay the fees and
expenses of its advisors, counsel, accountants and other experts, if any, and all other expenses,
incurred by such party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement, provided that the Company shall pay all actual attorneys’
fees and expenses (including disbursements and out-of-pocket expenses) incurred by the Purchasers
in connection with (i) the preparation, negotiation, execution and delivery of this Agreement, and
the other Transaction Documents and the transactions contemplated thereunder, which payment shall
be made at Closing, (ii) the filing and declaration of effectiveness by the Commission of the
Registration Statement (as defined in the Registration Rights Agreement) and (iii) any amendments,
modifications or waivers of this Agreement or any of the other Transaction Documents. In addition,
the Company shall pay all reasonable fees and expenses incurred by the Purchasers in connection
with the enforcement of this Agreement or any of the other Transaction Documents, including,
without limitation, all reasonable attorneys’ fees and expenses. The Company shall pay all stamp
or other similar taxes and duties levied in connection with issuance of the Preferred Shares
pursuant hereto.




          Section 7.2 Specific Enforcement, Consent to Jurisdiction. 




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




28









 







may be entitled by law or equity.




          (b) Each of the Company and the Purchasers (i) hereby irrevocably submits to the jurisdiction
of the United States District Court sitting in the Southern District of New York and the courts of
the State of New York located in New York county for the purposes of any suit, action or proceeding
arising out of or relating to this Agreement or any of the other Transaction Documents or the
transactions contemplated hereby or thereby and (ii) hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of
such court, that the suit, action or proceeding is brought in an inconvenient forum or that the
venue of the suit, action or proceeding is improper. Each of the Company and the Purchasers
consents to process being served in any such suit, action or proceeding by mailing a copy thereof
to such party at the address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice thereof. Nothing in
this Section 7.2 shall affect or limit any right to serve process in any other manner permitted by
law.




          Section 7.3 Entire Agreement; Amendment. This Agreement and the Transaction Documents
contains the entire understanding and agreement of the parties with respect to the matters covered
hereby and, except as specifically set forth herein or in the Transaction Documents or the
Certificate of Designation, neither the Company nor any of the Purchasers makes any
representations, warranty, covenant or undertaking with respect to such matters and they supersede
all prior understandings and agreements with respect to said subject matter, all of which are
merged herein. No provision of this Agreement may be waived or amended other than by a written
instrument signed by the Company and the holders of at least seventy-five percent (75%) of the
Preferred Shares then outstanding, and no provision hereof may be waived other than by an a written
instrument signed by the party against whom enforcement of any such amendment or waiver is sought.
No such amendment shall be effective to the extent that it applies to less than all of the holders
of the Preferred Shares then outstanding. No consideration shall be offered or paid to any person
to amend or consent to a waiver or modification of any provision of any of the Transaction
Documents or the Certificate of Designation unless the same consideration is also offered to all of
the parties to the Transaction Documents or holders of Preferred Shares, as the case may be.




          Section 7.4 Notices. Any notice, demand, request, waiver or other communication
required or permitted to be given hereunder shall be in writing and shall be effective (a) upon
hand delivery by telex (with correct answer back received), telecopy or facsimile at the address or
number designated below (if delivered on a business day during normal business hours where such
notice is to be received), or the first business day following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be received) or (b) on
the second business day following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever shall first occur.
The addresses for such communications shall be:




	 	 	 	 	 
	 

	 	If to the Company:
	 	Dirt Motor Sports, Inc.
	 

	 	 	 	2500 McGee Drive, Suite 147
	 

	 	 	 	Norman, Oklahoma 73072






29









 






	 	 	 	 	 
	 

	 	 	 	Attention: Chief Executive Officer
	 

	 	 	 	Tel. No.: (405) 360-5047
	 

	 	 	 	Fax No.: (405) 360-5354
	 
	 	 	 	 
	 

	 	with copies to:
	 	Jackson Walker L.L.P.
	 

	 	 	 	2435 N. Central Expressway
	 

	 	 	 	Suite 600
	 

	 	 	 	Richardson, Texas, 75080
	 

	 	 	 	Attention: Richard F. Dahlson
	 

	 	 	 	Tel No.: (972) 744-2996
	 

	 	 	 	Fax No.: (972) 744-2990
	 
	 	 	 	 
	 

	 	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:
	 
	 	 	 	 
	 

	 	 	 	Kramer Levin Naftalis & Frankel LLP
	 

	 	 	 	1177 Avenue of the Americas
	 

	 	 	 	New York, New York 10036
	 

	 	 	 	Attention: Christopher S. Auguste
	 

	 	 	 	Tel No.: (212) 715-9100
	 

	 	 	 	Fax No.: (212) 715-8000
	 
	 	 	 	 
	 

	 	 	 	and, with respect to any notice to Magnetar Capital
Master Fund, Ltd., a copy to:
	 
	 	 	 	 
	 

	 	 	 	Schulte Roth & Zabel LLP
	 

	 	 	 	919 Third Avenue
	 

	 	 	 	New York, New York 10022
	 

	 	 	 	Attention: Eleazer N. Klein
	 

	 	 	 	Tel No.: (212) 756-2000
	 

	 	 	 	Fax No.: (212) 593-5955






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



          Section 7.5 Waivers. No waiver by either party of any default with respect to any
provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in
the future or a waiver of any other provisions, condition or requirement hereof, nor shall any
delay or omission of any party to exercise any right hereunder in any manner impair the exercise of
any such right accruing to it thereafter.




30









 








          Section 7.6 Headings. The article, section and subsection headings in this Agreement
are for convenience only and shall not constitute a part of this Agreement for any other purpose
and shall not be deemed to limit or affect any of the provisions hereof.




          Section 7.7 Successors and Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties and their successors and assigns.




          Section 7.8 No Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns and is not for the
benefit of, nor may any provision hereof be enforced by, any other person.




          Section 7.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving effect to any of the
conflicts of law principles which would result in the application of the substantive law of another
jurisdiction. This Agreement shall not be interpreted or construed with any presumption against
the party causing this Agreement to be drafted.




          Section 7.10 Survival. The representations, warranties, agreements and covenants of
the Company and the Purchasers shall survive the execution and delivery hereof and the Closing.




          Section 7.11 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same instrument and shall
become effective when counterparts have been signed by each party and delivered to the other
parties hereto, it being understood that all parties need not sign the same counterpart. In the
event any signature is delivered by facsimile transmission, the party using such means of delivery
shall cause four additional executed signature pages to be physically delivered to the other
parties within five days of the execution and delivery hereof.




          Section 7.12 Publicity. The Company agrees that it will not disclose, and will not
include in any public announcement, the name of the Purchasers without the consent of the
Purchasers unless and until such disclosure is required by law or applicable regulation, and then
only to the extent of such requirement.




          Section 7.13 Severability. The provisions of this Agreement, the Certificate of
Designation and the Registration Rights Agreement are severable and, in the event that any court of
competent jurisdiction shall determine that any one or more of the provisions or part of the
provisions contained in this Agreement, the Certificate of Designation or the Registration Rights
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect,
such invalidity, illegality or unenforceability shall not affect any other provision or part of a
provision of this Agreement, the Certificate of Designation or the Registration Rights Agreement
shall be reformed and construed as if such invalid or illegal or unenforceable provision, or part
of such provision, had never been contained herein, so that such provisions would be valid, legal
and enforceable to the maximum extent possible.




          Section 7.14 Further Assurances. From and after the date of this Agreement, upon the
request of any Purchaser or the Company, each of the Company and the Purchasers




31









 







shall execute and deliver such instrument, documents and other writings as may be reasonably
necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of
this Agreement, the Preferred Shares, the Conversion Shares, the Warrants, the Warrant Shares, the
Certificate of Designation, and the Registration Rights Agreement.




[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]




32









 





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



	 	 	 	 	 
	 	DIRT MOTOR SPORTS, INC.

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 
	 	PURCHASER

 	 
	 	By:  	 	 
	 	 	Name:  	 	 
	 	 	Title:  	 	 
	 




 









 








EXHIBIT A to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




	 	 	 	 	 
	 	 	 	 	Number of $.01
	Names and Addresses	 	Number of Preferred Shares	 	Warrants Exchanged /
	of Purchasers	 	& Warrants Purchased	 	Series D Face Value
	 

	 	 
	 	 





 









 






EXHIBIT B to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF SERIES D WARRANT




 









 





EXHIBIT C to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF CERTIFICATE OF DESIGNATION




 









 





EXHIBIT D to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF REGISTRATION RIGHTS AGREEMENT




 









 





EXHIBIT E to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS




DIRT MOTOR SPORTS, INC.




as of May ____, 2006




[Name and address of Transfer Agent]

Attn:                                         




Ladies and Gentlemen:




     Reference is made to that certain Series D Convertible Preferred Stock Purchase Agreement (the
“Purchase Agreement”), dated as of May ___, 2006, by and among Dirt Motor Sports, Inc., a Delaware
corporation (the “Company”), and the purchasers named therein (collectively, the “Purchasers”)
pursuant to which the Company is issuing to the Purchasers shares of its Series D Convertible
Preferred Stock, par value $.01 per share, (the “Preferred Shares”) and warrants (the “Warrants”)
to purchase shares of the Company’s common stock, par value $.0001 per share (the “Common Stock”).
This letter shall serve as our irrevocable authorization and direction to you (subject to Section
3.1(a) of the Purchase Agreement and provided that you are the transfer agent of the Company at
such time) to issue shares of Common Stock upon conversion of the Preferred Shares (the “Conversion
Shares”) and exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Purchaser
from time to time. So long as you have previously received (i) written confirmation from counsel
to the Company that a registration statement covering resales of the Conversion Shares or Warrant
Shares, as applicable, has been declared effective by the Securities and Exchange Commission (the
“SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), and no subsequent notice by
the Company or its counsel of the suspension or termination of its effectiveness and (ii) a copy of
such registration statement (if such registration statement is not otherwise available on the SEC’s
EDGAR system), then certificates representing the Conversion Shares and the Warrant Shares, as the
case may be, shall not bear any legend restricting transfer of the Conversion Shares and the
Warrant Shares, as the case may be, thereby and should not be subject to any stop-transfer
restriction. Provided, however, that if you have not previously received those items, then the
certificates for the Conversion Shares and the Warrant Shares shall bear the following legend:




     “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE
SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS, OR DIRT MOTOR
SPORTS, INC. SHALL HAVE RECEIVED AN OPINION OF ITS COUNSEL THAT
REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER
THE



 









 







PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED.”


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




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



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



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



	 	 	 	 	 	 	 	 	 
	 	 	Very truly yours,	 	 
	 
	 	 	 	 	 	 	 	 
	 	 	DIRT MOTOR SPORTS, INC.	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	By:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 	 	 
	 

	 	 	 	Title:
	 	 

	 	 
	 

	 	 	 	 	 	 

	 	 






ACKNOWLEDGED AND AGREED:




[TRANSFER AGENT]




	 	 	 	 	 
	By:
	 	 	 	 
	Name:

	 	 

	 	 
	Title:

	 	 

	 	 
	Date:

	 	 

	 	 
	 

	 	 

	 	 






 









 






EXHIBIT I




DIRT MOTOR SPORTS, INC.

CONVERSION NOTICE



Reference is made to the Certificate of Designation of the Relative Rights and Preferences of the
Series D Preferred Stock of Dirt Motor Sports, Inc. (the “Certificate of Designation”). In
accordance with and pursuant to the Certificate of Designation, the undersigned hereby elects to
convert the number of shares of Series D Preferred Stock, par value $.01 per share (the “Preferred
Shares”), of Dirt Motor Sports, Inc., a Delaware corporation (the “Company”), indicated below into
shares of Common Stock, par value $.0001 per share (the “Common Stock”), of the Company, by
tendering the stock certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below.




	 	 	 	 	 	 	 
	 

	 	Date of Conversion:	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 

	 	Number of Preferred Shares to be converted:	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 

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

	 	 	 	 

	 	 






     The Common Stock has been or will be sold pursuant to the Registration Statement (as defined
in the Registration Rights Agreement): YES                       NO                    


Please confirm the following information:




	 	 	 	 	 	 	 
	 

	 	Conversion Price:	 	 	 	 
	 

	 	 	 	 

	 	 
	 
	 	 	 	 	 	 
	 

	 	Number of shares of Common Stock
to be issued:	 	 	 	 
	 

	 	 	 	 

	 	 






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



	 	 	 	 	 	 	 	 	 
	 

	 	Issue to:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Facsimile Number:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Authorization:	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	 	 	 
	 

	 	 	 	Title:
	 	 

	 	 
	 

	 	 	 	 	 	 

	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	Dated:	 	 	 	 	 	 






 









 






EXHIBIT II




FORM OF EXERCISE NOTICE




EXERCISE FORM




DIRT MOTOR SPORTS, INC.




     The undersigned                                         , pursuant to the provisions of the within Warrant, hereby elects to
purchase
                     shares of Common Stock of Dirt Motor Sports, Inc. covered by the within Warrant.



	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature	 	 	 	 
	 

	 	 

	 	 
	 	 	 	 

	 	 
	 
	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 
	 	 

	 	 
	 

	 	 	 	 	 	 	 	 

	 	 






ASSIGNMENT




     FOR
VALUE RECEIVED, ___ hereby sells, assigns and transfers unto ___
the within Warrant and all rights evidenced thereby and does irrevocably constitute and appoint
___, attorney, to transfer the said Warrant on the books of the within named corporation.



	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature	 	 	 	 
	 

	 	 

	 	 
	 	 	 	 

	 	 
	 
	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 
	 	 

	 	 
	 

	 	 	 	 	 	 	 	 

	 	 






PARTIAL ASSIGNMENT




     FOR VALUE RECEIVED,                                          hereby sells, assigns and transfers unto                                         
the right to purchase
                     shares of Warrant Stock evidenced by the within Warrant together
with all rights therein, and does irrevocably constitute and appoint                                         , attorney,
to transfer that part of the said Warrant on the books of the within named corporation.



	 	 	 	 	 	 	 	 	 	 	 
	Dated:

	 	 	 	 	 	Signature	 	 	 	 
	 

	 	 

	 	 
	 	 	 	 

	 	 
	 
	 	 	 	 	 	Address	 	 	 	 
	 

	 	 	 	 	 	 	 	 

	 	 
	 

	 	 	 	 	 	 	 	 

	 	 






FOR USE BY THE ISSUER ONLY:



This Warrant No. W-                     canceled (or transferred or exchanged) this                      day of                                         ,
                    , shares of Common Stock issued therefor in the name of                                         , Warrant No. W-                    
issued for
                     shares of Common Stock in the name of                                         .




 









 








EXHIBIT III




FORM OF NOTICE OF EFFECTIVENESS

OF REGISTRATION STATEMENT




[Name and address of Transfer Agent]

Attn: ___




          Re: Dirt Motor Sports, Inc. 



Ladies and Gentlemen:




     We are counsel to Dirt Motor Sports, Inc., a Delaware corporation (the “Company”), and have
represented the Company in connection with that certain Series D Convertible Preferred Stock
Purchase Agreement (the “Purchase Agreement”), dated as of May ___, 2006, by and among the Company
and the purchasers named therein (collectively, the “Purchasers”) pursuant to which the Company
issued to the Purchasers shares of its Series D Convertible Preferred Stock, par value $.01 per
share, (the “Preferred Shares”) and warrants (the “Warrants”) to purchase shares of the Company’s
common stock, par value $.0001 per share (the “Common Stock”). Pursuant to the Purchase Agreement,
the Company has also entered into a Registration Rights Agreement with the Purchasers (the
“Registration Rights Agreement”), dated as of May ___, 2006, pursuant to which the Company agreed,
among other things, to register the Registrable Securities (as defined in the Registration Rights
Agreement), including the shares of Common Stock issuable upon conversion of the Preferred Shares
and exercise of the Warrants, under the Securities Act of 1933, as amended (the “1933 Act”). In
connection with the Company’s obligations under the Registration Rights Agreement, on
                                    , 2006, the Company filed a Registration Statement on Form SB-2 (File No.
333-___) (the “Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) relating to the resale of the Registrable Securities which names each of the present
Purchasers as a selling stockholder thereunder.



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



	 	 	 	 	 
	 	Very truly yours,





[COMPANY COUNSEL]

 	 
	 	By:  	 	 
	 	 	 	 
	 	 	 	 
	 


cc: [LIST NAMES OF PURCHASERS]




 









 








EXHIBIT F to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF OPINION OF COUNSEL




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




          2. The Company has the requisite corporate power and authority to enter into and perform its
obligations under the Transaction Documents and to issue the Preferred Stock, the Warrants and the
Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants. The
execution, delivery and performance of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated thereby have been duly and validly authorized
by all necessary corporate action and no further consent or authorization of the Company or its
Board of Directors or stockholders is required. Each of the Transaction Documents have been duly
executed and delivered, and the Preferred Stock and the Warrants have been duly executed, issued
and delivered by the Company and each of the Transaction Documents constitutes a legal, valid and
binding obligation of the Company enforceable against the Company in accordance with its respective
terms. The Common Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants are not subject to any preemptive rights under the Certificate of Incorporation or the
Bylaws.




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




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




          5. No consent, approval or authorization of or designation, declaration or filing with any
governmental authority on the part of the Company is required under Federal, state or local law,
rule





 









 




or regulation in connection with the valid execution and delivery of the Transaction
Documents, or the offer, sale or issuance of the Preferred Stock, the Warrants or the Common Stock
issuable upon conversion of the Preferred Stock and exercise of the Warrants other than the
Certificate of Designation and the Registration Statement.



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



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



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




	 	 	 	 	 
	 	Very truly yours,

 	 
	 	 	 
	 	 	 
	 	 	 



 









 






	 	 	 	 	 



EXHIBIT G to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF LOCK-UP AGREEMENTS




 









 





EXHIBIT H to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF BOUNDLESS INVESTMENTS, LLC EXCHANGE AGREEMENT




 









 





EXHIBIT I to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF SERIES B CONVERTIBLE PREFERRED STOCK EXCHANGE AGREEMENT




 









 





EXHIBIT J to the

SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT FOR

DIRT MOTOR SPORTS, INC.




FORM OF SERIES C CONVERTIBLE PREFERRED STOCK EXCHANGE AGREEMENT