imxform8k081216_ex10-1.htm


    
      
         


      

      
         


        
          

        

      

      
         


        
          Exhibit
10.1

        

      

    


    


    


    


    NOTE
AND WARRANT PURCHASE

    


    AGREEMENT

    


    


    


    Dated
as of December 10, 2008

    


    


    


    


    by
and between

    


    


    


    


    IMPLANT
SCIENCES CORPORATION

    


    


    


    and

    


    


    


    DMRJ GROUP
LLC

    



    
      
        
           

        

         


      

      
         


        
          

        

      

      
         


        
          TABLE OF
CONTENTS

          


          Page


        

      

    

     

    
      	
              ARTICLE
      I  PURCHASE AND SALE OF NOTE AND WARRANT

            	
               

            	
              1

            


    

    
    

    
      	 	Section
      1.1	Purchase
      and Sale of Note and Warrant.	
               1

            
	
               
      

            	
              Section
      1.2

            	
              Closing. 

            	
              1

            


    

    
      	
               
      

            	
              Section
      1.3

            	
              Warrant
      Shares. 

            	
              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 Investor. 

            	
              13

            


    

     

    
      	
              ARTICLE
      III  COVENANTS

            	
              13

            


    

    
      	
               
      

            	
              Section
      3.1

            	
              Securities
      Compliance. 

            	
              14

            


    

    
      	
               
      

            	
              Section
      3.2

            	
              Registration
      and Listing. 

            	
              14

            


    

    
      	
               
      

            	
              Section
      3.3

            	
              Compliance
      with Laws. 

            	
              14

            


    

    
      	
               
      

            	
              Section
      3.4

            	
              Keeping
      of Records and Books of Account. 

            	
              14

            


    

    
      	
               
      

            	
              Section
      3.5

            	
              Reporting
      Requirements. 

            	
              15

            


    

    
      	
               
      

            	
              Section
      3.6

            	
              Other
      Agreements. 

            	
              16

            


    

    
      	
               
      

            	
              Section
      3.7

            	
              Use
      of Proceeds. 

            	
              16

            


    

    
      	
               
      

            	
              Section
      3.8

            	
              Reporting
      Status. 

            	
              16

            


    

    
      	
               
      

            	
              Section
      3.9

            	
              Reserved. 

            	
              16

            
	 	Section
      3.10	Reserved.	
              16

            
	 	Section
      3.11	

              Reserved.

            	
              16

            
	 	Section
      3.12	

              Amendments.

            	
              16

            
	 	Section
      3.13	

              Distributions.

            	
              16

            
	 	Section
      3.14	

              Reservation
      of Shares.

            	
              17

            
	 	Section
      3.15	

              Prohibition
      on Liens.

            	
              17

            
	 	
              Section
      3.16

            	

              Prohibition
      on Indebtedness.

            	
              17

            
	 	Section
      3.17	

              Compliance
      with Transaction Documents.

            	
              18

            
	 	Section
      3.18	Reserved.	
              18

            
	 	Section
      3.19	Transactions
      with Affiliates.	
              18

            
	 	Section
      3.20	No
      Merger or Sale of Assets; No Formation of Subsidiaries.	
              18

            
	 	Section
      3.21	Payment
      of Taxes, Etc.	
              18

            
	 	Section
      3.22	Corporate
      Existence.	
              19

            
	 	 Section
      3.23	Maintenance
      of Assets.	
              19

            
	 	 Section
      3.24	No
      Investments.	
              19

            
	 	 Section
      3.25	Opinions.	
              19

            
	 	 Section
      3.26	Acquisition
      of Assets.	
              20

            
	 	 Section
      3.27	Registration
      Rights.	
              20

            
	 	 Section
      3.28	Notice
      of Certain Events.	
              21

            
	 	 Section
      3.29	Budget
      Compliance.	
              21

            
	 	 Section
      3.30	Minimum
      Cash Balance.	
              21

            
	 	 Section
      3.31	Inspection.	
              22

            
	 	 Section
      3.32	Accounts
      Payable.	
              22

            
	 	 Section
      3.33	Current
      Ratio.	
              22

            
	 	 Section
      3.34	Board
      of Directors.	
              22

            


    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

    
    

     

    
      	
              ARTICLE V
      CONDITIONS

            	
               

            	
              22

            


    

    
    

    
      	 	Section
      4.1	Conditions
      Precedent to the Obligation of the Company to Close and to Sell the
      Securities at Each Closing.	
              22

            
	
               
      

            	
              Section
      4.2

            	
              Conditions
      Precedent to the Obligation of the Investor to Close at Each
      Closing. 

            	
              23

            


    

     

    
      	
              ARTICLE
      V  CERTIFICATE LEGEND

            	
              25

            


    

    
      	
               
      

            	
              Section
      5.1

            	
              Legend. 

            	
              25

            


    

     

    
      	
              ARTICLE
      VI  INDEMNIFICATION

            	
              26

            


    

    
      	
               
      

            	
              Section
      6.1

            	
              General
      Indemnity. 

            	
              26

            


    

    
      	
               
      

            	
              Section
      6.2

            	
              Indemnification
      Procedure. 

            	
              26

            


    

     

    
      	
              ARTICLE VII 
      MISCELLANEOUS

            	
              27

            


    

    
      	
               
      

            	
              Section
      7.1

            	
              Fees
      and Expenses. 

            	
              27

            


    

    
      	
               
      

            	
              Section
      7.2

            	
              Specific
      Performance; Consent to Jurisdiction; Venue. 

            	
              28

            


    

    
      	
               
      

            	
              Section
      7.3

            	
              Entire
      Agreement; Amendment. 

            	
              28

            


    

    
      	
               
      

            	
              Section
      7.4

            	
              Notices. 

            	
              28

            


    

    
      	
               
      

            	
              Section
      7.5

            	
              Waivers. 

            	
              29

            


    

    
      	
               
      

            	
              Section
      7.6

            	
              Headings. 

            	
              30

            


    

    
      	
               
      

            	
              Section
      7.7

            	
              Successors
      and Assigns. 

            	
              30

            


    

    
      	
               
      

            	
              Section
      7.8

            	
              No
      Third Party Beneficiaries. 

            	
              30

            


    

    
      	
               
      

            	
              Section
      7.9

            	
              Governing
      Law. 

            	
              30

            
	 	Section
      7.10	Survival.	
              30

            
	 	Section
      7.11	Publicity.	
              30

            
	 	Section
      7.12	Counterparts.	
              30

            
	 	Section
      7.13	Severability.	
              31

            
	 	Section
      7.14	Further
      Assurances.	
              31

            
	 	Section
      7.15	Confidentiality.	
              31

            


    

    
    

    
    

    
    

    
    

    
    

    
    

    



    
      
        
           

           

        

         


      

      
         


        
          

        

      

      
         


      

    


    NOTE
AND WARRANT PURCHASE AGREEMENT

     

    This NOTE
AND WARRANT PURCHASE AGREEMENT, dated as of December 10, 2008 (this “Agreement”), is by
and between Implant Sciences Corporation, a Massachusetts corporation (the
“Company”), and
DMRJ Group LLC, a Delaware limited liability company (the “Investor”).

     

    The
parties hereto agree as follows:

     

    ARTICLE
I

     

    PURCHASE
AND SALE OF NOTE AND WARRANT

     

    Section
1.1                                Purchase and Sale of Note
and Warrant.

     

    (a)             Upon
the following terms and conditions, the Company shall issue and sell to the
Investor, and the Investor shall purchase from the Company, (i) one or more
senior secured promissory notes in an aggregate principal amount of up to
$5,600,000 and (ii) a common stock purchase warrant, in substantially the form
attached hereto as Exhibit A (the “Warrant”), to
purchase 1,000,000 shares of Common Stock, par value $0.10 per share, of the
Company (the “Common
Stock”) at the exercise price and upon the terms and conditions set forth
therein.

     

    (b)             At
the Closing (as hereafter defined), upon satisfaction of the terms and
conditions set forth herein, the Company shall issue to the Investor a
promissory note, substantially in the form of Exhibit B hereto (the
“Note”), in the
aggregate principal amount of Five Million Six Hundred Thousand Dollars
($5,600,000), and the Investor shall advance, as payment in full for the Note,
the sum of Five Million Six Hundred Thousand Dollars ($5,600,000), less the
amount of the original issue discount set forth below.  The Investor
is further permitted to deduct and retain from the advance made on the Closing
Date the fees and expenses of the Investor as permitted by Section 7.1
hereto.  The issuance and sale of the Note is referred to herein as
the “Closing”.  At
the Closing, the Company shall deliver to the Investor the Warrant to purchase
1,000,000 shares of Common Stock at the exercise price and upon the terms and
conditions as set forth therein.  The Note shall be on an original
issue discount basis, reflecting an unconditional non-refundable original issue
discount in the amount of $616,000 for the period commencing with the Closing
Date (as defined below) through the scheduled Maturity Date, as set forth in the
Note.

     

    Section
1.2                                Closing.

     

    The
Closing under this Agreement shall take place immediately upon the execution of
this Agreement or on such other date as may be agreed upon in writing by the
parties hereto (the “Closing
Date”).  The Closing shall take place at the offices of the
Investor, 152 West 57th Street,
4th
Floor, New York, NY 10:00 a.m. New York time.  At the Closing, the
Investor shall make the advance described in Section 1.1 above by wire transfer
of immediately available funds to an account designated by the
Company.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Section
1.3                                Warrant
Shares.

     

    The
Company has authorized and has initially reserved and covenants to continue to
reserve, free of preemptive rights and other similar contractual rights of
stockholders, a number of its authorized but unissued shares of Common Stock at
least equal to one hundred fifty percent (150%) of the aggregate number of
shares of Common Stock to effect the exercise of the Warrant in
full.  Any shares of Common Stock issuable upon exercise of the
Warrant (and such shares when issued) are herein referred to as the “Warrant
Shares”.  The Warrant and the Warrant Shares are sometimes
collectively referred to herein as the “Securities”.

     

    ARTICLE
II

     

    REPRESENTATIONS
AND WARRANTIES

     

    Section
2.1                                Representations and
Warranties of the Company.

     

    The
Company hereby represents and warrants to the Investor, as of the date hereof
and the date of the Closing hereunder (except as set forth on the Schedule of
Exceptions attached hereto with each numbered Schedule corresponding to the
section number herein), as follows:

     

    (a)             Organization, Good Standing
and Power.  The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts 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 direct or indirect
Subsidiaries (as defined in Section 2.1(g)) or own securities of any kind in any
other entity except as set forth on Schedule 2.1(g)
hereto.  The Company and each such Subsidiary (as defined in Section
2.1(g)) is duly qualified as a foreign corporation, limited liability company or
limited partnership to do business and is in good standing in every other
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 would not reasonably
be expected to have a Material Adverse Effect.  For the purposes of
this Agreement, “Material Adverse
Effect” means any material adverse effect on the business, operations,
properties or financial condition of the Company and its Subsidiaries (taken
together as a whole) and/or any condition, circumstance, or situation that would
prohibit or otherwise materially interfere with the ability of the Company to
perform any of its obligations under this Agreement or any of the Transaction
Documents in any material respect.

     

    (b)             Authorization;
Enforcement.  The Company and the Subsidiaries (as applicable)
have the requisite corporate power and authority to enter into and perform this
Agreement, the Note, the Warrants, the Security Agreement by and between the
Company and the Investor dated as of the Closing Date, substantially in the form
of Exhibit C
attached hereto (the “Security Agreement”)
the Officer’s Certificate to be delivered by the Company, dated as of the
Closing Date, substantially in the form of Exhibit D attached
hereto (the “Officer’s
Certificate”), the Patent Security Agreement by and among the Company,
the Subsidiaries and the Investor, substantially in the form of Exhibit B,


     

    
      
        
        

      

      
        2

        
          

        

      

      
        
        

      

       

      attached
to the Security Agreement (together with any Copyright Security Agreement or
Trademark Security Agreement subsequently entered into by the Company or any
Subsidiary and the Investor pursuant to the terms of the Security Agreement,
collectively, the “IP
Security Agreements”), the guarantee (“Guarantee”) to be
delivered by each of the Subsidiaries, dated as of the date hereof,
substantially in the form of Exhibit E, the
Irrevocable Transfer Agent Instructions, dated as of the date hereof,
substantially in the form of Exhibit
F  and the Stock Transfer Agreement, between the Company and
the Investor, dated as of the Closing Date, substantially in the form of Exhibit G attached
hereto (the “Stock
Transfer Agreement”) (collectively, together with this Agreement, the
Note and the Warrants the “Transaction
Documents”) and to issue and sell the Securities in accordance with the
terms hereof.  The execution, delivery and performance of the
Transaction Documents by the Company and the consummation by it of the
transactions contemplated thereby have been duly and validly authorized by all
necessary corporate action, and, except as set forth on Schedule 2.1(b), no
further consent or authorization of the Company, its Board of Directors,
stockholders or any other third party is required.  When executed and
delivered by the Company and the Subsidiaries, each of the Transaction Documents
shall constitute a valid and binding obligation of the Company enforceable
against the Company in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, reorganization, moratorium,
liquidation, conservatorship, receivership or similar laws relating to, or
affecting generally the enforcement of, creditor’s rights and remedies or by
other equitable principles of general application.

    

     

    (c)             Capitalization.  The
authorized capital stock and the issued and outstanding shares of capital stock
of the Company as of the Closing Date is set forth on Schedule 2.1(c)(i)
hereto.  All of the outstanding shares of the Common Stock and any
other outstanding security of the Company have been duly and validly
authorized.  Except as set forth in this Agreement, or as set forth on
Schedule
2.1(c)(ii) hereto, no shares of Common Stock or any other security of the
Company are entitled to preemptive rights or registration rights and there are
no outstanding options, warrants, scrip, rights to subscribe to, call or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the
Company.  Furthermore, except as set forth in this Agreement and as
set forth on Schedule
2.1(c)(iii) hereto, there are no contracts, commitments, understandings,
or arrangements by which the Company is or may become bound to issue additional
shares of the capital stock of the Company or options, securities or rights
convertible into shares of capital stock of the Company.  Except as
provided on Schedule
2.1(c)(iv) hereto, the Company is not a party to or bound by any
agreement or understanding granting registration or anti-dilution rights to any
person with respect to any of its equity or debt securities.  Except
as set forth on Schedule 2.1(c)(v),
the Company is not a party to, and it has no knowledge of, any agreement or
understanding restricting the voting or transfer of any shares of the capital
stock of the Company.

     

    (d)             Issuance of
Securities.  The Note and the Warrant have been duly authorized
by all necessary corporate action and, when paid for or issued in accordance
with the terms hereof, the Note shall be validly issued and outstanding, free
and clear of all liens, encumbrances and rights of refusal of any
kind.  When the Warrant Shares are issued

     

    
      
        
        

      

      
        3

        
          

        

      

      
        
        

      

       

      and paid
for in accordance with the terms of this Agreement and as set forth in the
Warrant, such shares will be duly authorized by all necessary corporate action
and validly issued and outstanding, fully paid and nonassessable, free and clear
of all liens, encumbrances and rights of refusal of any kind and the holders
shall be entitled to all rights accorded to a holder of Common
Stock.

    

     

    (e)             No
Conflicts.  The execution, delivery and performance of the
Transaction Documents by the Company, the performance by the Company of its
obligations under the Note and the consummation by the Company and the
Subsidiaries of the transactions contemplated hereby and thereby, and the
issuance of the Securities as contemplated hereby, do not and will not (i)
violate or conflict with any provision of the Company’s Amended and Restated
Articles of Organization (the “Articles of
Organization”) or Bylaws (the “Bylaws”), each as
amended to date, or any Subsidiary’s comparable charter documents, (ii) conflict
with, or constitute a default (or an event which with notice or lapse of time or
both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, mortgage, deed of
trust, indenture, note, bond, license, lease agreement, instrument or obligation
to which the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries’ respective properties or assets are bound,
(iii) result in a violation of any federal, state, local or foreign statute,
rule, regulation, order, judgment or decree (including federal and state
securities laws and regulations) applicable to the Company or any of its
Subsidiaries or by which any property or asset of the Company or any of its
Subsidiaries are bound or affected, or (iv) create or impose a lien, mortgage,
security interest, charge or encumbrance of any nature on any property or asset
of the Company or its Subsidiaries under any agreement or any commitment to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound or by which any of their respective
properties or assets are bound, except, in all cases, for such conflicts,
defaults, terminations, amendments, acceleration, cancellations and violations
as would not, individually or in the aggregate, have a Material Adverse Effect
(other than violations pursuant to clauses (i) or (iii) (with respect to federal
and state securities laws)).  Neither the Company nor any of its
Subsidiaries is required under federal, state, foreign or local law, rule or
regulation to obtain any consent, authorization or order of, or make any filing
or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under the Transaction
Documents or issue and sell the Securities in accordance with the terms hereof
(other than any filings, consents and approvals which may be required to be made
by the Company under applicable state and federal securities laws, rules or
regulations).  The business of the Company and its Subsidiaries is not
being conducted in violation of any laws, ordinances or regulations of any
governmental entity.

     

    (f)             Commission Documents,
Financial Statements.  The Common Stock of the Company is
registered pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), and
the Company has timely filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange Commission
(the “Commission”) pursuant
to the reporting requirements of the Exchange Act (all of the foregoing
including filings incorporated by reference therein being referred to herein as
the “Commission
Documents”).  Each

     

    
      
        
        

      

      
        4

        
          

        

      

      
        
        

      

       

      Commission
Document complied in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission promulgated thereunder and
other federal, state and local laws, rules and regulations applicable to such
documents, and the Commission Documents did not, as of their respective filing
dates, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.  As of their respective dates, the financial
statements of the Company included in the Commission Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the Commission or other applicable rules and
regulations with respect thereto.  Such financial statements have been
prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a
consistent basis during the periods involved (except (i) as may be otherwise
indicated in such financial statements or the notes thereto or (ii) in the case
of unaudited interim statements, to the extent they may not include footnotes or
may be condensed or summary statements), and fairly present in all material
respects the financial position of the Company and its Subsidiaries as of the
dates thereof and the results of operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal year-end audit
adjustments).

    

     

    (g)             Subsidiaries.  Schedule 2.1(g)
hereto sets forth each Subsidiary of the Company, showing the jurisdiction of
its incorporation or organization and showing the percentage of each person’s
ownership of the outstanding stock or other interests of such
Subsidiary.  For the purposes of this Agreement, “Subsidiary” shall
mean any corporation or other entity of which at least 50% of the securities or
other ownership interest having ordinary voting power (absolutely or
contingently) for the election of directors or other persons performing similar
functions are at the time owned directly or indirectly by the Company and/or any
of its other Subsidiaries.  All of the outstanding shares of capital
stock of each Subsidiary have been duly authorized and validly issued, and are
fully paid and nonassessable.  Except as set forth on Schedule 2.1(g)
hereto, 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 except as set forth on Schedule 2.1(g)
hereto.  Neither the Company nor any Subsidiary is party to, nor has
any knowledge of, any agreement restricting the voting or transfer of any shares
of the capital stock of any Subsidiary.  Each subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdictions set forth on Schedule 2.1(g) and
has the requisite corporate or other power to own, lease and operate its
properties and assets and to conduct its business as it is now being
conducted.

     

    (h)             No Material Adverse
Change.  Except as disclosed in the Commission Documents or on
Schedule 2.1(h) hereto, since September 30, 2008, the Company has not
experienced or suffered any Material Adverse Effect.

     

    
      
        
        

      

      
        5

        
          

        

      

      
        
        

      

    

     

    (i)             No Undisclosed
Liabilities.  Except as disclosed on Schedule 2.1(i)
hereto, since September 30, 2008, neither the Company nor any of its
Subsidiaries has incurred any liabilities, obligations, claims or losses
(whether liquidated or unliquidated, secured or unsecured, absolute, accrued,
contingent or otherwise) other than those incurred in the ordinary course of the
Company’s or its Subsidiaries respective businesses or which, individually or in
the aggregate, are not reasonably likely to have a Material Adverse
Effect.

     

    (j)             No Undisclosed Events or
Circumstances.  Since September 30, 2008, except as disclosed
on Schedule
2.1(j) hereto, no event or circumstance has occurred or exists with
respect to the Company or its Subsidiaries or their respective businesses,
properties, prospects, operations or financial condition, which, under
applicable law, rule or regulation, requires public disclosure or announcement
by the Company but which has not been so publicly announced or
disclosed.

     

    (k)             Indebtedness.  Schedule 2.1(k)
hereto sets forth as of the date hereof all outstanding secured and unsecured
Indebtedness of the Company or any Subsidiary, or for which the Company or any
Subsidiary has commitments.  For the purposes of this Agreement,
“Indebtedness”
shall mean, with respect to any Person, (a) all obligations for borrowed money,
(b) all obligations evidenced by bonds, debentures, notes, or other similar
instruments and all reimbursement or other obligations in respect of letters of
credit, bankers acceptances, current swap agreements, interest rate hedging
agreements, interest rate swaps, or other financial products, (c) all capital
lease obligations that exceed $50,000 in the aggregate in any fiscal year, (d)
all obligations or liabilities secured by a lien or encumbrance on any asset of
such Person, irrespective of whether such obligation or liability is assumed,
(e) all obligations for the deferred purchase price of assets, together with
trade debt and other accounts payable that exceed $50,000 in the aggregate in
any fiscal year, (f) all synthetic leases, (g) all obligations with respect to
redeemable stock and redemption or repurchase obligations under any capital
stock or other equity securities issued by such Person, (h) all reimbursement
obligations and other liabilities of such Person with respect to surety bonds
(whether bid, performance or otherwise), letters of credit, banker’s
acceptances, drafts or similar documents or instruments issued for such Person’s
account, (i) indebtedness of any partnership or joint venture in which such
Person is a general partner or a joint venturer to the extent such Person is
liable therefore as a result of such Person’s ownership interest in such entity,
except to the extent that the terms of such indebtedness expressly provide that
such Person is not liable therefore or such Person has no liability therefore as
a matter of law, (j) trade debt and other account payables which remain unpaid
more than one hundred (100) days past the invoice date, and (k) any obligation
guaranteeing or intended to guarantee (whether directly or indirectly
guaranteed, endorsed, co-made, discounted or sold with recourse) any of the
foregoing obligations of any other Person; provided, however, Indebtedness shall
not include (I) usual and customary trade debt and other accounts payable
incurred in the ordinary course of business less than one hundred (100) days
past the invoice date and (II) endorsements for collection or deposit in the
ordinary course of business.  Neither the Company nor any Subsidiary
is in default with respect to any Indebtedness.  “Person” means any
individual, sole proprietorship, joint venture, partnership, corporation,
limited liability company, 

     

    
      
        
        

      

      
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      association,
joint-stock company, unincorporated organization, cooperative, trust, estate,
governmental entity or any other entity of any kind or nature
whatsoever.

    

     

    (l)             Title to
Assets.  Each of the Company  and the Subsidiaries
has good and valid title to all of its real and personal property reflected in
the Commission Documents, free and clear of any mortgages, pledges, charges,
liens, security interests or other encumbrances, except for those indicated on
Schedule 2.1(l)
hereto.  Any leases of the Company and each of its Subsidiaries are
valid and subsisting and in full force and effect.  Pursuant to, and
upon execution and delivery of, the Security Agreement and any applicable IP
Security Agreements, the Company and its Subsidiaries shall have granted to the
Investor a perfected, first priority security interest in substantially all of
the assets of the Company and the Subsidiaries.

     

    (m)             Actions
Pending.  There is no action, suit, claim, investigation,
arbitration, alternate dispute resolution proceeding or other proceeding pending
or, to the knowledge of the Company, threatened against the Company or any
Subsidiary which questions the validity of this Agreement or any of the other
Transaction Documents or any of the transactions contemplated hereby or thereby
or any action taken or to be taken pursuant hereto or thereto.  Except
as set forth on Schedule 2.1(m)
hereto, there is no action, suit, claim, investigation, arbitration, alternate
dispute resolution proceeding or other proceeding pending or, to the knowledge
of the Company, threatened against or involving the Company, any Subsidiary or
any of their respective properties or assets, which individually or in the
aggregate, would reasonably be expected, if adversely determined, to have a
Material Adverse Effect.  There are no outstanding orders, judgments,
injunctions, awards or decrees of any court, arbitrator or governmental or
regulatory body against the Company or any Subsidiary or any officers or
directors of the Company or Subsidiary in their capacities as such, which
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect.

     

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

     

    (o)             Taxes.  The
Company and each of the Subsidiaries has accurately prepared and filed (or
validly extended) all federal, state and other tax returns required by law to be
filed by it, has paid or made provisions for the payment of all taxes shown to
be due and all additional assessments, and adequate provisions have been and are
reflected in the financial statements of the Company and the Subsidiaries for
all current taxes and other charges to which the Company or any Subsidiary is
subject and which are not currently due and payable.  Except as
disclosed on Schedule
2.1(o) hereto, none of the federal

     

    
      
        
        

      

      
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      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)             Disclosure.  Except
for the transactions contemplated by this Agreement, the Company confirms that
neither it nor any other person acting on its behalf has provided the Investor
or its agents or counsel with any information that constitutes or might
constitute material, nonpublic information.  To the Company’s
knowledge, neither this Agreement or the Schedules hereto nor any other
documents, certificates or instruments furnished to the Investor by or on behalf
of the Company or any Subsidiary in connection with the transactions
contemplated by this Agreement, taken together as a whole, 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.

     

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

     

    
      
        
        

      

      
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    (r)             Books and Records; Internal
Accounting Controls.  The records and documents of the Company
and its Subsidiaries accurately reflect in all material respects the information
relating to the business of the Company and its 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 is in material compliance with all provisions of the Sarbanes-Oxley Act
of 2002 which are applicable to it as of the Closing Date. The Company and its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management’s general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with 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 action is taken with
respect to any differences. The Company has established disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
Company and designed such disclosure controls and procedures to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the Commission’s rules and forms. The
Company’s certifying officers have evaluated the effectiveness of the Company’s
disclosure controls and procedures as of the end of the period covered by the
Company’s most recently filed periodic report under the Exchange Act (such date,
the “Evaluation
Date”). The Company presented in its most recently filed periodic report
under the Exchange Act the conclusions of the certifying officers about the
effectiveness of the disclosure controls and procedures based on their
evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as
such term is defined in the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.

     

    (s)             Material
Agreements.  Except as would not reasonably be expected to have
a Material Adverse Effect, the Company and each of its Subsidiaries have
performed all obligations required to be performed by them to date under any
written or oral contract, instrument, agreement, commitment, obligation, plan or
arrangement, filed or required to be filed with the Commission (the “Material
Agreements”).  Except as disclosed on Schedule 2.1(s)
hereto, neither the Company nor any of its Subsidiaries has received any notice
of default under any Material Agreement, which has not been waived or
cured.  Except as disclosed on Schedule 2.1(s)
hereto, neither the Company nor any of its Subsidiaries is currently in default
under any Material Agreement now in effect.

     

    (t)             Transactions with
Affiliates.  Except as set forth on Schedule 2.1(t) hereto or in the
Commission Documents, there are no loans, leases, agreements, contracts, royalty
agreements, management contracts or arrangements or other continuing
transactions between (a) the Company, any Subsidiary or any of their respective
customers or suppliers on the one hand, and (b) on the other hand, any officer,
employee, consultant or director of the Company, or any of its Subsidiaries, or
any person owning at least 5% of the outstanding capital stock of the Company or
any Subsidiary or any member of the

     

    
      
        
        

      

      
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      immediate
family of such officer, employee, consultant, director or stockholder or any
corporation or other entity controlled by such officer, employee, consultant,
director or stockholder, or a member of the immediate family of such officer,
employee, consultant, director or stockholder which, in each case, is required
to be disclosed in the Commission Documents or in the Company’s most recently
filed definitive proxy statement on Schedule 14A, that is not so disclosed in
the Commission Documents or in such proxy statement.

    

     

    (u)             Securities Act of
1933.  The Company has complied and will comply with all
applicable federal and state securities laws in connection with the offer,
issuance and sale of the Securities hereunder.  Neither the Company
nor anyone acting on its behalf, directly or indirectly, has or will sell, offer
to sell or solicit offers to buy any of the Securities or similar securities to,
or solicit offers with respect thereto from, or enter into any negotiations
relating thereto with, any person, or has taken or will take any action so as to
bring the issuance and sale of any of the Securities under the registration
provisions of the Securities Act and applicable state securities laws, and
neither the Company nor any of its affiliates, nor any person acting on its or
their behalf, has engaged in any form of general solicitation or general
advertising (within the meaning of Regulation D under the Securities Act) in
connection with the offer or sale of any of the Securities.  The
Company is not, and has never been, a company described in Rule 144(i)(1) under
the Securities Act, and is a “reporting issuer” as described in Rule 144(c)(1)
under the Securities Act.   Neither the Company, nor any of its
directors, officers or controlling persons, has taken or will, in violation of
applicable law, take, any action designed to or that might reasonably be
expected to cause or result in, or which has constituted, stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the securities issued or issuable in connection with the transactions
contemplated hereunder.

     

    (v)             Employees.  Neither
the Company nor any Subsidiary has any collective bargaining arrangements or
agreements covering any of its employees, except as set forth on Schedule 2.1(v)
hereto.  Except as set forth on Schedule 2.1(v)
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
required to be disclosed in the Commission Documents that is not so
disclosed.  No officer, consultant or key employee of the Company or
any Subsidiary whose termination, either individually or in the aggregate, would
be reasonably likely to have a Material Adverse Effect, has terminated or, to
the knowledge of the Company, has any present intention of terminating his or
her employment or engagement with the Company or any Subsidiary.

     

    (w)             Intellectual
Property.  Except as set forth on Schedule 2.1(w) hereto, the
Company and each of the Subsidiaries owns, or possesses the rights to
use, all patents (and any patentable improvements thereof), trademarks,
service marks, trade names, domain names, copyrights and websites (or
copyrightable derivative works thereof), and intellectual property rights
relating thereto (to any of the foregoing list, whether or not

     

    
      
        
        

      

      
        10

        
          

        

      

      
        
        

      

       

      registered), licenses
and authorizations which are necessary for the conduct of its business as now
conducted without infringement or any conflict with the rights of
others.

    

     

    (x)             Absence of Certain
Developments.  Except as set forth in the Commission Documents
or provided on Schedule 2.1(x) hereto, since
September 30, 2008, neither the Company nor any Subsidiary has:

     

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

     

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

     

    (iii)           discharged
or satisfied any lien or encumbrance in excess of $100,000 or paid any
obligation or liability (absolute or contingent) in excess of $100,000, other
than current liabilities paid in the ordinary course of business;

     

    (iv)           declared
or made any payment or distribution of cash or other property to stockholders
with respect to its stock, or purchased or redeemed, or made any agreements so
to purchase or redeem, any shares of its capital stock, in each case in excess
of $50,000 individually or $100,000 in the aggregate;

     

    (v)           sold,
assigned or transferred any other tangible assets, or canceled any debts or
claims, in each case in excess of $100,000, except in the ordinary course of
business;

     

    (vi)           sold,
assigned or transferred any patent rights, trademarks, trade names, copyrights,
trade secrets or other intangible assets or intellectual property rights in
excess of $100,000, or disclosed any proprietary confidential information to any
person except to customers in the ordinary course of business or pursuant to
nondisclosure agreements;

     

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

     

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

     

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

     

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

     

    (xi)           made
charitable contributions or pledges in excess of $10,000;

     

    
      
        
        

      

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

     

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

     

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

     

    (y)             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.

     

    (z)             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
Securities will not involve any transaction which is subject to the prohibitions
of Section 406 of the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”) or in connection with which a tax could be imposed pursuant to
Section 4975 of the Internal Revenue Code of 1986, as amended.  As
used in this Section 2.1(z), 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.

     

    (aa)             No Integrated
Offering.  Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has directly or indirectly made any
offers or sales of any security or solicited any offers to buy any security
under circumstances that would cause the offering of the Securities pursuant to
this Agreement to be integrated with prior offerings by the Company for purposes
of the Securities Act which would prevent the Company from selling the
Securities pursuant to Regulation D and Rule 506 thereof under the Securities
Act, or any applicable exchange-related stockholder approval provisions, nor
will the Company or any of its affiliates or subsidiaries take any action or
steps that would cause the offering of the Securities to be integrated with
other offerings.  The Company does not have any registration statement
pending before the Commission or currently under the Commission’s review and
except as set forth on Schedule 2.1(aa) hereto, since
January 1, 2008, the Company has not offered or sold any of its equity
securities or debt securities convertible into shares of Common
Stock.

     

    (bb)             Dilutive
Effect.  The Company understands and acknowledges that its
obligation to issue the Warrant Shares upon the exercise of the Warrant in
accordance with this Agreement and the Warrant, is absolute and unconditional
regardless of the dilutive

     

    
      
        
        

      

      
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      effect
that such issuance may have on the ownership interest of other stockholders of
the Company.

    

     

    (cc)             DTC
Status.   Except as set forth on Schedule 2.1(cc) hereto, the
Company’s transfer agent is a participant in and the Common Stock is eligible
for transfer pursuant to the Depository Trust Company Automated Securities
Transfer Program.  The name, address, telephone number, fax number,
contact person and email of the Company transfer agent is set forth on Schedule 2.1(cc)
hereto.

     

    (dd)             Governmental
Approvals.  Except for the filing of any notice prior or
subsequent to the Closing that may be required under applicable state and/or
federal securities laws (which if required, shall be filed on a timely basis),
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 Note and the
Warrant, or for the performance by the Company of its obligations under the
Transaction Documents.

     

    Section
2.2                                Representations and
Warranties of the Investor.

     

    The
Investor hereby represents and warrants to the Company as of the date hereof and
as of the Closing Date that the Investor is purchasing the Note and the Warrant
solely for its own account and not with a view to or for sale in connection with
distribution.  The Investor does not have a present intention to sell
any of the Note, the Warrant, the shares of Common Stock issuable upon
conversion of the Note (the “Conversion Shares”) or the Warrant Shares, nor a
present arrangement (whether or not legally binding) or intention to effect any
distribution of any of such securities to or through any person or entity; provided, however, that by
making the representations herein, the Investor does not agree to hold the
Securities for any minimum or other specific term and reserves the right to
dispose of the Securities at any time in accordance with Federal and state
securities laws applicable to such disposition. The Investor further represents
and warrants to the Company as of the date hereof and as of the Closing Date
that (i) the Investor has such knowledge and experience in financial and
business matters that the Investor is capable of evaluating the merits and risks
of the proposed investment in the Securities; (ii) the Investor understands that
neither the Note, the Warrant, the Conversion Shares nor the Warrant Shares may
be sold, transferred or otherwise disposed of by it without registration under
the Securities Act and any applicable state securities laws, or an exemption
therefrom, and that in the absence of an effective registration statement
covering such securities or an available exemption from registration, such
Investor might be required to hold such securities indefinitely; and (iii) the
Investor is an “accredited investor” within the meaning of Regulation D
promulgated under the Securities Act.

     

    ARTICLE
III

     

    COVENANTS

     

    The
Company covenants with the Investor as follows, which covenants are for the
benefit of the Investor and its assignees.  Unless otherwise set forth
in the covenants in this Article III,

     

    
      
        
        

      

      
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      the
covenants contained in Sections 3.5(e), 3.5(f), 3.13, 3.15, 3.16, 3.19-3.24,
3.26, 3.28, 3.29, 3.30, 3.32 and 3.33 hereof shall survive Closing hereunder
until the Note is paid in full and the Investor has no any obligation
(contingent or otherwise) to advance funds hereunder and the covenants contained
in Sections 3.1-3.4, 3.5(a)-(d), 3.5(g), 3.6 3.7, 3.8, 3.12, 3.14, 3.17, 3.21,
3.25, 3.27, 3.31 and 3.34 hereof shall survive Closing hereunder until the
Warrant has been redeemed and/or exercised in full.

    

     

    Section
3.1                                Securities
Compliance.

     

    The
Company shall notify the Commission in accordance with its rules and
regulations, of the transactions contemplated by any of the Transaction
Documents and shall take all other necessary action and proceedings as may be
required and permitted by applicable law, rule and regulation, for the legal and
valid issuance of the Securities to the Investor or subsequent
holders.

     

    Section
3.2                                Registration and
Listing.

     

    The
Company shall cause its Common Stock to continue to be registered under Sections
12(b) or 12(g) of the Exchange Act, to comply in all respects with its reporting
and filing obligations under the Exchange Act and to not take any action or file
any document (whether or not permitted by the Securities Act or the rules
promulgated thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under the Exchange Act
or Securities Act.  The Company will take all action necessary to
continue the listing or trading of its Common Stock on the OTC Bulletin Board,
the New York Stock Exchange, the NYSE Alternext Exchange, the Nasdaq Capital
Markets, the Nasdaq Global Markets, or the Nasdaq Global Select Market. If
required, the Company will promptly file the “Listing Application” for, or in
connection with, the issuance and delivery of the Warrant
Shares.   Subject to the terms of the Transaction Documents, the
Company further covenants that it will take such further action as the Investor
may reasonably request, all to the extent required from time to time to enable
the Investor to sell the Warrant Shares without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144
promulgated under the Securities Act.  Upon the request of the
Investor, the Company shall deliver to the Investor a written certification of a
duly authorized officer as to whether it has complied with such
requirements.

     

    Section
3.3                                Compliance with
Laws.

     

    The
Company shall comply in all material respects, and cause each Subsidiary to
comply in all material respects, with all applicable laws, rules, regulations
and orders of any governmental authority, including without limitation, all
securities law, rules and regulations and timely make all filings required by
any such laws, rules and regulations..

     

    Section
3.4                                Keeping of Records and Books
of Account.

     

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

     

    
      
        
        

      

      
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      of
Investor, the Company shall furnish to Investor any and all books and records or
any other information reasonably requested by Investor relating to the financial
condition to the Company, the technology of the Company or
otherwise.

    

     

    Section
3.5                                Reporting
Requirements.

     

    The
Company shall furnish the following to the Investor so long as the Investor
shall be obligated hereunder to purchase the Securities or shall beneficially
own Securities:

     

    (a)           Electronic
notification of the filing of all Quarterly Reports filed with the Commission on
Form 10-Q as soon as practical after the document is or would have been required
to be filed with the Commission;

     

    (b)           Electronic
notification of the filing of all Annual Reports filed with the Commission on
Form 10-K as soon as practical after the document is or would have been required
to be filed with the Commission;

     

    (c)           Electronic
notification of the filing of all Current Reports filed with the Commission on
Form 8-K as soon as practical after the document is or would have been required
to be filed with the Commission;

     

    (d)           Electronic
notification of the filing of any other filings filed or required to be filed
with the Commission as soon as practical after the document is or would have
been required to be filed with the Commission;

     

    (e)           A
current schedule of accounts payable aging within five (5) days of the end of
each calendar month;

     

    (f)           A
budget prepared on a weekly basis in good faith based upon assumptions which the
Company believes to be reasonable setting forth, inter alia, a thirteen (13)
week cash flow forecast in reasonable detail satisfactory to Investor including
receipts, disbursements and such line item detail as satisfactory to Investor,
in the form attached hereto as Exhibit H, as updated
bi-weekly with Investor’s consent, including a comparison of actual cash funds
and revenues received by the Company and cash disbursements and expenses made by
the Company for the most recent four-week period then ended (or if a four-week
period has not then elapsed from the date of this Agreement, such shorter period
since the date of this Agreement through the Friday of the most recent week then
ended) to the budget previously delivered to Investor (the “Budget”);
and

     

    (g)           Copies
of all notices, information and proxy statements in connection with any meetings
that are, in each case, provided to holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
holders of Common Stock.

     

    
      
        
        

      

      
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    Section
3.6                                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 under
any Transaction Document.

     

    Section
3.7                                Use of
Proceeds.

     

    The
proceeds from the sale of the Note and Warrant hereunder shall be used by the
Company (i) to repay indebtedness to Bridge Bank, N.A. in the principal amount
of $476,807.68, together with all interest accrued thereon; (ii) to redeem the
Series D Preferred Stock held by Laurus Master Fund, Ltd. and its affiliates for
$1,160,728.77, together with all dividends accrued thereon; and (iii) for
working capital and ordinary course general corporate purposes not inconsistent
with or prohibited by any covenant in the Transaction Documents.  In
no event shall the proceeds be used to redeem any Common Stock or securities
convertible, exercisable or exchangeable into Common Stock (except as permitted
pursuant to Section 3.13 hereof) or to settle any outstanding
litigation.

     

    Section
3.8                                Reporting
Status.

     

    So long
as the Investor beneficially owns any of the Securities, the Company shall
timely file all reports required to be filed with the Commission pursuant to the
Exchange Act, and the Company shall not terminate its status as an issuer
required to file reports under the Exchange Act even if the Exchange Act or the
rules and regulations thereunder would permit such termination.  The
Company shall promptly disclose on Form 8-K the occurrence of any Material
Adverse Effect or any event that could reasonably be expected to cause a
Material Adverse Effect.

     

    Section
3.9                                Reserved.

     

    Section
3.10                              Reserved.

     

    Section
3.11                              Reserved.

     

    Section
3.12                              Amendments.

     

    The
Company shall not amend or waive any provision of its Articles of Organization
or Bylaws in any way that would adversely affect exercise or other rights of the
holder of the Note or the Warrant.

     

    Section
3.13                                Distributions.

     

    So long
as the Note remains outstanding or the Investor has any obligation (contingent
or otherwise) to advance funds hereunder, the Company agrees that it shall not,
and shall not permit any Subsidiary to, (i) declare or pay any dividends or make
any distributions (by reduction of capital or otherwise) to any holder(s) of
Common Stock (or security convertible into or exercisable for Common Stock) or
set aside or otherwise deposit or invest any sums for such purpose, or (ii)
redeem, retire, defease, purchase or otherwise acquire for value, directly
or

     

    
      
        
        

      

      
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      indirectly,
any Common Stock or other equity security of the Company or any Subsidiary or
set aside or otherwise deposit or invest any sums for such purpose; provided, however,
that the Company may repurchase shares of Common Stock from former employees
permitted or required by any stock restriction or purchase agreements by and
between the Company and such former employees in an aggregate amount not to
exceed $100,000.

    

     

    Section
3.14                                Reservation of
Shares.

     

    So long
as the Note or Warrants remain outstanding, the Company shall take all action
necessary to at all times have authorized and reserved for the purpose of
issuance, one hundred fifty percent (150%) of the aggregate number of shares of
Common Stock needed to provide for the issuance of the Warrant
Shares.

     

    Section
3.15                                Prohibition on
Liens.

     

    So long
as the Note remains outstanding or the Investor has any obligation (contingent
or otherwise) to advance funds hereunder, the Company shall not, and shall not
permit its Subsidiaries to, enter into, create, incur, assume, suffer or permit
to exist any lien, security interest, mortgage, pledge, charge, claim or other
encumbrance of any kind (collectively, “Liens”) on or with
respect to any of its assets, including the Collateral (as defined in the
Security Agreement), now owned or hereafter acquired or any interest therein or
any income or profits therefrom, or file or permit the filing of, or permit to
remain in effect any financing statement or other similar notice of any Lien
with respect to such assets, other than Permitted
Encumbrances.  “Permitted
Encumbrances” means the individual and collective reference to the
following: (a) Liens for taxes, assessments and other governmental charges or
levies not yet due or Liens for taxes, assessments and other governmental
charges or levies being contested in good faith and by appropriate proceedings
for which adequate reserves (in the good faith judgment of the management of the
Company) have been established in accordance with GAAP; (b) Liens imposed by law
which were incurred in the ordinary course of the Company’s business, such as
carriers’, warehousemen’s and mechanics’ Liens, statutory landlords’ Liens, and
other similar Liens arising in the ordinary course of the Company’s business,
and which (x) do not individually or in the aggregate materially detract from
the value of such property or assets or materially impair the use thereof in the
operation of the business of the Company and its consolidated Subsidiaries or
(y) are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing for the foreseeable future the
forfeiture or sale of the property or asset subject to such Lien; (c) the Liens
set forth in Schedule
3.15 hereto in effect on the date hereof; and (d) the Liens of Investor
set forth in the Security Agreement.

     

    Section
3.16                                Prohibition on
Indebtedness.

     

    So long
as the Note remains outstanding, other than (i) Indebtedness existing on the
date hereof and disclosed in Schedule 2.1(k) to
this Agreement and (ii) Indebtedness in favor of the Investor, the Company shall
not, and shall not permit any Subsidiary to, enter into, create, incur, assume,
suffer, become or be liable for in any manner with respect to, or permit to
exist, any Indebtedness, or guarantee, assume, endorse or otherwise become
responsible for (directly or indirectly), any Indebtedness, performance,
obligations or dividends of any other Person.

     

    
      
        
        

      

      
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    Section
3.17                                Compliance with Transaction
Documents.

     

    The
Company shall, and shall cause its Subsidiaries to, comply with their
respective  obligations under the Note and the other Transaction
Documents.

     

    Section
3.18                                Reserved.

     

    Section
3.19                                Transactions with
Affiliates.

     

    The
Company shall not, and shall not permit its Subsidiaries to, directly or
indirectly, (i) purchase, acquire or lease any property from, or sell, transfer
or lease any property to any officer, director, agent, employee or any Affiliate
of the Company or any Subsidiary, or (ii) make any payments of management,
consulting or other fees for management or similar services, or of any
Indebtedness owing to any officer, director, agent, employee, or other Affiliate
of Company or any Subsidiary, including any contract, agreement or other
arrangement providing for the furnishing of services to or by, providing for
rental of real or personal property to or from, or otherwise requiring payments
to or from any officer, director, agent or such employee or, to the knowledge of
the Company, any entity in which any officer, director, agent or any such
employee has a substantial interest or is an officer, director, trustee or
partner, in each case in excess of $50,000, other than (i) for payment of
reasonable salary for services actually rendered, as approved by the Board of
Directors of the Company as fair and reasonable in all respects to the Company
or the applicable Subsidiary and upon terms no less favorable to the Company or
such Subsidiary that the Company or such Subsidiary would obtain in a comparable
arm’s length transaction with an unaffiliated person, (ii) reimbursement for
expenses incurred on behalf of the Company in the ordinary course of and
pursuant to the reasonable requirements of the business or any Subsidiary and
(iii) as set forth on Schedule 3.19
hereof.

     

    Section
3.20                                No Merger or Sale of Assets;
No Formation of Subsidiaries.

     

    The
Company shall not, and shall not permit any Subsidiary to, directly or
indirectly, (i) merge into or with or consolidate with any other Person (other
than into the Company or a Subsidiary of the Company) or permit any other Person
(other than the Company or a Subsidiary of the Company) to merge into or with or
consolidate with it, provided, that if any
such consolidation or merger involves the Company, then the Company must be the
survivor of such consolidation or merger; (ii) sell, issue, assign, lease,
license, transfer, abandon or otherwise dispose of any or all of its assets
(other than inventory in the ordinary course of business and the sales described
on Schedule
3.20 hereof, the purchase price for which sales shall be no less than
$400,000 and $300,000 respectively);  (iii) in any way or manner alter
its organizational structure or effect a change of entity (except as expressly
permitted in this Agreement); (iv) form or create any subsidiary or become a
partner in any partnership or joint venture, or make any acquisition of any
interest in any Person or acquire substantially all of the assets of any Person;
(v) wind up, liquidate or, subject to the proviso in Section 3.22 below,
dissolve or (vi) agree to do any of the foregoing.

     

    Section
3.21                                Payment of Taxes,
Etc.

     

    The
Company shall, and shall cause each of its Subsidiaries to, promptly pay and
discharge, or cause to be paid and discharged, when due and payable, all lawful
taxes,

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

       

      assessments
and governmental charges or levies imposed upon the income, profits, property or
business of the Company and the Subsidiaries; provided, however, that any such
tax, assessment, charge or levy need not be paid if the validity thereof shall
currently be contested in good faith by appropriate proceedings and if the
Company or such Subsidiaries shall have set aside on its books adequate reserves
with respect thereto, and provided, further, that the Company and such
Subsidiaries will pay all such taxes, assessments, charges or levies forthwith
upon the commencement of proceedings to foreclose any lien which may have
attached as security therefor.

    

     

    Section
3.22                                Corporate
Existence.

     

    The
Company shall, and shall cause each of its Subsidiaries to, maintain in full
force and effect its corporate existence, rights and franchises and all licenses
and other rights to use property owned or possessed by it and reasonably deemed
to be necessary to the conduct of its business; provided, however,
that the Company may dissolve or cause one or more of its Subsidiaries to merge
or consolidate with the Company or any of its other Subsidiaries, provided, that if any
such consolidation or merger involves the Company, then the Company must be the
survivor of such consolidation or merger.

     

    Section
3.23                                Maintenance of
Assets.

     

    So long
as the Note remains outstanding or the Investor has any obligation (contingent
or otherwise) to advance funds hereunder, the Company shall, and shall cause its
Subsidiaries to, keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
necessary and proper repairs, renewals, replacements, additions and improvements
thereto.

     

    Section
3.24                                No
Investments.

     

    The
Company shall not, and shall not permit any Subsidiary to, make or suffer to
exist any Investments or commitments therefor, other than Investments made in
the ordinary course of business.  “Investment” means,
with respect to any Person, all investments (by capital contribution or
otherwise) in any other Person, or any extension of credit, loan, advance,
purchase or repurchase of stock or other ownership interest, any Indebtedness or
all or a substantial part of the assets or property of any Person, bonds, notes,
debentures or other securities, or otherwise, and whether existing on the date
of this Agreement or thereafter made, but such term shall not include the cash
surrender value of life insurance policies on the lives of officers or
employees, excluding amounts due from customers for services or products
delivered or sold in the ordinary course of business.

     

    Section
3.25                                Opinions.

     

    For so
long as the Investor holds any Securities, the Company will provide, at the
Company’s expense, such legal opinions in the future as are reasonably necessary
for the issuance and resale of the Common Stock issuable upon exercise of the
Warrant pursuant to an effective registration statement, Rule 144 or an
exemption from registration.  In the event that Common Stock is sold
in a manner that complies with an exemption from registration, the Company will
promptly instruct its counsel (at its expense) to issue to the transfer
agent

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

       

      an
opinion permitting removal of the legend (indefinitely, if more than one year
has elapsed from the Closing Date, or to permit sale of the shares if pursuant
to the other provisions of Rule 144).

    

     

    Section
3.26                                Acquisition of
Assets.

     

    In the
event the Company or any Subsidiary acquires any assets or other properties,
without limiting or impairing the limitations set forth in Section 3.24 above,
such assets or properties shall constitute a part of the Collateral (as defined
in the Security Agreement) and the Company shall take all action necessary to
perfect the Investor’s security interest in such assets or
properties.

     

    Section
3.27                                Registration
Rights.

     

    If the
Company shall determine to prepare and file with the Commission a registration
statement (a “Registration
Statement”) relating to an offering for its own account or the account of
others under the Securities Act of any of its equity securities, other than on
Form S-4 or Form S-8 (each as promulgated under the Securities Act), or their
then equivalents, relating to equity securities to be issued solely in
connection with any acquisition of any entity or business or equity securities
issuable in connection with stock option or other employee benefit plans, then
the Company shall send to the Investor a written notice of such determination
and, if within 20 days after the date of such notice, the Investor shall so
request in writing, the Company shall include in such Registration Statement all
or any part of the Warrant Shares as the Investor requests to be registered so
long as such Warrant Shares are proposed to be disposed in the same manner as
those set forth in the Registration Statement.  If the Company is
advised in writing in good faith by any managing underwriter of the securities
being offered pursuant to any Registration Statement under this Section 3.27
that, because of marketing considerations, the number of shares to be sold by
Persons other than the Company is greater than the number of such shares that
can be offered without adversely affecting the offering, the Company may reduce
pro rata the number of shares offered for the accounts of such Persons (based
upon the number of shares requested by each such Person to be included in the
registration) to a number deemed satisfactory by such managing
underwriter.  The Company shall use its best efforts to cause any
Registration Statement to be declared effective by the Commission as promptly as
is possible following it being filed with the Commission (provided, however,
that the Company shall have the right to terminate, postpone or delay any
registration made under this Section 3.27 without any obligation to the
Investor) and to remain effective until all Warrant Shares subject thereto have
been sold or may be sold without limitations as to volume or the availability of
current public information under Rule 144.  All fees and expenses
incident to the performance of or compliance with this Section 3.27 by the
Company shall be borne by the Company whether or not any Warrant Shares are sold
pursuant to the Registration Statement.  The Company shall indemnify
and hold harmless the Investor, the officers, directors, members, partners,
agents, brokers, investment advisors and employees of the Investor, each person
who controls the Investor (within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act), and the officers, directors, members,
shareholders, partners, agents and employees of each such controlling person, to
the fullest extent permitted by applicable law, from and against any and all
losses, claims, damages, liabilities, costs (including, without limitation,
reasonable attorneys’ fees) and expenses (collectively, “Losses”), as
incurred, arising out of or relating to (1) any untrue or alleged untrue
statement of a material fact contained in the Registration

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

       

      Statement,
any prospectus included therein or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading or (2) any violation or
alleged violation by the Company of the Securities Act, the Exchange Act or any
state securities law, or any rule or regulation thereunder, in connection with
the performance of its obligations under this Section 3.27, except to the
extent, but only to the extent, that such untrue statements or omissions
referred to in (1) above are based solely upon information regarding the
Investor furnished in writing to the Company by the Investor expressly for use
therein. The Investor shall indemnify and hold harmless the Company, the
officers, directors, members, partners, agents, brokers, investment advisors and
employees of the Company, each person who controls the Company (within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act),
and the officers, directors, members, shareholders, partners, agents and
employees of each such controlling person, to the fullest extent permitted by
applicable law, from and against any and all Losses, as incurred, arising out of
or relating to (1) any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any prospectus included therein or any
form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, but only to the extent that such untrue or alleged untrue
statements or omissions referred to in (1) above are based solely upon
information regarding the Investor furnished in writing to the Company by the
Investor expressly for use therein, or (2) any violation or alleged violation by
the Investor of the Securities Act, the Exchange Act or any state securities
law, or any rule or regulation thereunder, in connection with the performance of
its obligations under this Section 3.27.

    

     

    Section
3.28                                Notices of Certain
Events.  The Company shall promptly notify the Investor of any
event or events that have had or could reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on the
Company.

     

    Section
3.29                                Budget
Compliance.

     

    (a)             As
of each week, for the four-week period ended as of the end of such week, the
actual cash receipts received by the Company shall not be less than 75% of the
cash receipts for the corresponding period in the Budget.

     

    (b)             As
of each week, for the four-week period ended as of the end of such week, the
actual cash disbursements of the Company shall be no more than 110% of the cash
disbursements for the corresponding period as set forth in the
Budget.

     

    Section
3.30                                Minimum Cash
Balance.  The Company shall at all times maintain a cleared
balance of at least $500,000 (the “Minimum Balance”) in a deposit account held
at a depository institution satisfactory to Investor and pledged to Investor
pursuant to a blocked account agreement with such depository institution in form
and substance satisfactory to Investor, such account to be free and clear of any
Liens other than Liens in favor of Investor (the

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

       

      “Blocked
Account”).  Until the Note and all obligations of the Company
hereunder have been indefeasibly paid and satisfied in full, Investor shall have
sole dominion and control over the Blocked Account and the Company shall have no
right of access to or withdrawal from the Blocked Account.  If,
notwithstanding the prior sentence, Investor shall, in its sole discretion,
permit the Company, following the Company’s request, to have access to the
Blocked Account and maintain less than the Minimum Balance therein, the
Investor, as a condition thereto and in addition to any other conditions that
the Investor may then establish, may require the Company to engage in a sale
process satisfactory to the Investor in its sole discretion, including, without
limitation, conditions, timing and milestones which may be established by the
Investor, including, without limitation, the engagement of a third party
investment banker acceptable to the Investor in its sole and absolute
discretion.

    

     

    Section
3.31                                Inspection.   The
Company, upon reasonable notice, shall permit Investor and its duly authorized
representatives or agents to visit any of the Company’s properties and inspect
any of its assets or books and records, to examine and make copies of its books
and records and to discuss its affairs, finances, technology and accounts with,
and to be advised as to the same by, its officers and employees at such
reasonable times and intervals as Investor may designate.

     

    Section
3.32                                Accounts
Payable.  The Company will pay its accounts payable in the
ordinary course, consistent with past practices and not allow the average age,
calculated as (i) the product of (x) the dollar amount of each payable times (y)
the number of days past due of such payable divided by (ii) the aggregate dollar
amount of all accounts payable, of such accounts payable to be more than one
hundred (100) days past due.

     

    Section
3.33                                Current
Ratio.  The Company shall maintain at all times a Current Ratio
of not less than 0.60 to 1.00.  “Current Ratio” shall be defined as
current assets minus current liabilities, all as determined in accordance with
GAAP.

     

    Section
3.34                                Board of
Directors.  By December 31, 2008, the Company shall cause the
resignation of two members from the Board of Directors of the Company and will
subsequently cause the Board of Directors to appoint two directors reasonably
satisfactory to the Investor to fill the resulting vacancies.

     

    ARTICLE
IV

     

    CONDITIONS

     

    Section
4.1                                Conditions Precedent to the
Obligation of the Company to Close and to Sell the Securities at Each
Closing.

     

    The
obligation hereunder of the Company to close and issue and sell the Securities
to the Investor at the Closing is subject to the satisfaction or waiver, at or
before such Closing of the conditions set forth below.  These
conditions are for the Company’s sole benefit and may be waived by the Company
at any time in its sole discretion.


    
      
        
           

        

         


      

      
        22

        
          

        

      

      
         


      

    


    (a)             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.

     

    (b)             Delivery of Note
Amount.  The Investor shall have advanced the funds as payment
for the purchase price of the Note and the Warrant on the date of the
Closing.

     

    (c)             Delivery of Transaction
Documents.  The Transaction Documents to which the Investor is
a party shall have been duly executed and delivered by the Investor to the
Company.

     

    Section
4.2                                Conditions Precedent to the
Obligation of the Investor to Close at Each Closing.

     

    The
obligation hereunder of the Investor to purchase the Securities and consummate
the transactions contemplated by this Agreement is subject to the satisfaction
or waiver, at or before the Closing, of each of the conditions set forth
below.  These conditions are for the Investor’s sole benefit and may
be waived by the Investor 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 other Transaction
Documents shall be true and correct in all material respects as of the date of
the Closing, except for representations and warranties that speak as of a
particular date, which shall be true and correct in all material respects as of
such date.

     

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

     

    (c)             No Suspension,
Etc.  Trading in the Common Stock shall not have been suspended
by the Commission or the American Stock Exchange, 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 the Investor, makes it impracticable or inadvisable to purchase the
Securities.

     

    (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.

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

     

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

     

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

     

    (g)             Note and Warrant;
Transaction Documents.  At or prior to the Closing, the Company
shall have delivered to the Investor the Note and the Warrant; the Company shall
have duly executed and delivered the other Transaction Documents to the
Investor.

     

    (h)             Secretary’s
Certificate.  The Company shall have delivered to the Investor
a secretary’s certificate, dated as of the Closing, as to (i) the resolutions
adopted by the Board of Directors approving the transactions contemplated
hereby, (ii) the Articles of Organization, (iii) the Bylaws, each as in effect
at the Closing, and (iv) the authority and incumbency of the officers of the
Company executing the Transaction Documents and any other documents required to
be executed or delivered in connection therewith.

     

    (i)             Officer’s
Certificate.  On the date of the Closing, the Company shall
have delivered to the Investor a certificate signed by an executive officer on
behalf of the Company, dated as of the date of the Closing, confirming the
accuracy of the Company’s representations, warranties and covenants as of such
date and confirming the compliance by the Company with the conditions precedent
set forth in paragraphs (a)-(e) and (j) of this Section 4.2 as of the date of
such Closing.

     

    (j)             Material Adverse
Effect.  Except as disclosed on Schedule 2.1(h) hereto, no
Material Adverse Effect shall have occurred since September 30,
2008.

     

    (k)             Due
Diligence.  The Company shall have permitted Investor to make
such audits and inspections as the Investor deems reasonably appropriate and the
Investor is satisfied, in its reasonable discretion, with the results
thereof.  Such audits and inspections by the Investor shall not affect
any of the representations and warranties made by the Company in this Agreement
and shall not, under any circumstances constitute a waiver of the Investor’s
indemnification rights under Article 6 hereof, or otherwise relieve the Company
of any liability thereunder.

     

    (l)             Payment of Investor’s
Expenses.  The Company shall have paid the fees and expenses
described in Section 7.1 of this Agreement.

     

    (m)             UCC Financing
Statements.  On or prior to the date of the Closing, the
Company shall have filed (or authorized the filing of) all UCC and similar
financing statements in form and substance satisfactory to the Investor at the
appropriate offices to

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

       

      create a
valid and perfected security interest in the Collateral (as defined in the
Security Agreement).

    

     

    (n)             Consents.  The
Company shall have obtained all consents, approvals, or waivers from all
governmental authorities, third parties and Company security holders necessary
(i) for the execution, delivery and performance of this Agreement and the
Transaction Documents and the transactions contemplated hereby and thereby and
(ii) to not, except as set forth on Schedule 4.2(n), trigger any
preemptive rights, rights of first refusal, put or call rights or obligations,
anti-dilution rights or similar rights that any holder of the Company’s
securities may have with respect to the execution, delivery and performance of
this Agreement and each of the Transaction Documents and all transactions
contemplated hereby and thereby, all without material cost or other adverse
consequences to the Company.

     

    (o)             Payoff
Letter.  A letter, in form and substance satisfactory to the
Investor, from Bridge Bank, N.A. respecting the amount necessary to repay in
full all of the obligations of the Company owing to Bridge Bank, N.A. and obtain
a release of all of the Liens existing in favor of Bridge Bank, N.A. in and to
the assets of the Company, together with termination statements and other
documentation evidencing the termination by Bridge Bank, N.A. of its Liens in
and to the properties and assets of the Company.

     

    (p)             Evidence of Series D
Redemption.  Evidence, in form and substance satisfactory to
the Investor, of the redemption of the Series D Preferred Stock held by Laurus
Master Fund, Ltd. and its affiliates (collectively, “Laurus”) and a release of
all of the Liens existing in favor of Laurus in and to the assets of the
Company, together with termination statements and other documentation evidencing
the termination by Laurus of its Liens in and to the properties and assets of
the Company.

     

    (q)             Transfer of Interest in
Cornova, Inc.  All right, title and interest of the Company in
Cornova, Inc., a Delaware corporation, shall be transferred to Investor, free
and clear of any Liens or other restrictions pursuant to transfer agreements
acceptable to Investor in lieu of Investor receiving any commitment fee, closing
fee or other fees in connection with the transactions contemplated by this
Agreement.

     

    ARTICLE
V

     

    CERTIFICATE
LEGEND

     

    Section
5.1                                Legend.

     

    Each
certificate representing the Securities shall be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any legend
required by applicable state securities or “blue sky” laws):

     

    THE
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,

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

     

    TRANSFERRED
OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER
APPLICABLE STATE SECURITIES LAWS OR IMPLANT SCIENCES CORPORATION 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 issue or reissue certificates representing any of the Warrant
Shares, without the legend set forth above if at such time, prior to making any
transfer of the Warrant Shares, the holder thereof shall give written notice to
the Company describing the manner and terms of such transfer and removal as the
Company may reasonably request, and (x) such Warrant Shares have been registered
for sale under the Securities Act and the holder is selling such shares and is
complying with its prospectus delivery requirement under the Securities Act, (y)
the holder is selling such Warrant Shares in compliance with the provisions of
Rule 144 or other exemption from registration or (z) the provisions of paragraph
(b)(1)(i) of Rule 144 apply to such Shares.

     

    ARTICLE
VI

     

    INDEMNIFICATION

     

    Section
6.1                                General
Indemnity.

     

    The
Company agrees to indemnify and hold harmless the Investor (and its directors,
officers, members, partners, 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 Investor as a result of any inaccuracy in or
breach of the representations, warranties or covenants made by the Company
herein.

     

    Section
6.2                                Indemnification
Procedure.

     

    Any party
entitled to indemnification under this Article VI (an “indemnified party”) will
give written notice to the indemnifying party of any matter giving rise to a
claim for indemnification; provided, that the failure of any party entitled to
indemnification hereunder to give notice as provided herein shall not relieve
the indemnifying party of its obligations under this Article VI except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice.  In case any such action, proceeding or claim is brought
against an indemnified party in respect of which indemnification is sought
hereunder, the indemnifying party shall be entitled to participate in and,
unless in the reasonable judgment of the indemnifying party a conflict of
interest between it and the indemnified party exists with respect to such
action, proceeding or claim (in which case the indemnifying party shall be
responsible for the reasonable fees and expenses of one separate counsel for the
indemnified parties), to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party.  In the event that the
indemnifying party advises an indemnified party that it will contest such a
claim for indemnification hereunder, or fails, within thirty (30) days of
receipt of any indemnification

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

       

      notice to
notify, in writing, such person of its election to defend, settle or compromise,
at its sole cost and expense, any action, proceeding or claim (or discontinues
its defense at any time after it commences such defense), then the indemnified
party may, at its option, defend, settle or otherwise compromise or pay such
action or claim.  In any event, unless and until the indemnifying
party elects in writing to assume and does so assume the defense of any such
claim, proceeding or action, the indemnified party’s costs and expenses arising
out of the defense, settlement or compromise of any such action, claim or
proceeding shall be losses subject to indemnification hereunder.  The
indemnified party shall cooperate fully with the indemnifying party in
connection with any negotiation or defense of any such action or claim by the
indemnifying party and shall furnish to the indemnifying party all information
reasonably available to the indemnified party which relates to such action or
claim.  The indemnifying party shall keep the indemnified party fully
apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto.  If the indemnifying party elects
to defend any such action or claim, then the indemnified party shall be entitled
to participate in such defense with counsel of its choice at its sole cost and
expense.  The indemnifying party shall not be liable for any
settlement of any action, claim or proceeding effected without its prior written
consent.  Notwithstanding anything in this Article VI to the contrary,
the indemnifying party shall not, without the indemnified party’s prior written
consent, settle or compromise any claim or consent to entry of any judgment in
respect thereof which imposes any future obligation on the indemnified party or
which does not include, as an unconditional term thereof, the giving by the
claimant or the plaintiff to the indemnified party of a release from all
liability in respect of such claim.  The indemnification obligations
to defend the indemnified party 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 shall 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.

     

    The
Company shall pay the costs, fees and expenses of the Investor incurred in
connection with the transactions contemplated by the Transaction Documents,
including reasonable diligence and legal fees and expenses; such expenses are
reasonably estimated by the Investor not to exceed $75,000 in the
aggregate.  In addition, the Company shall pay all reasonable fees and
expenses incurred by the Investor in connection with the enforcement of this
Agreement or any of the other Transaction Documents, including, without
limitation, all reasonable attorneys’ fees and expenses.

     

    
      
        
        

      

      
        27

        
          

        

      

      
        
        

      

    

     

    Section
7.2                                Specific Performance;
Consent to Jurisdiction; Venue.

     

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

     

    (b)             The
parties agree that venue for any dispute arising under this Agreement will lie
exclusively in the state or federal courts located in New York County, New York,
and the parties irrevocably waive any right to raise forum non conveniens or any
other argument that New York is not the proper venue.  The parties
irrevocably consent to personal jurisdiction in the state and federal courts of
the state of New York.  The Company and the Investor consent to
process being served in any such suit, action or proceeding by mailing a copy
thereof to such party at the address in effect for notices to it under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  Nothing in this Section 7.2
shall affect or limit any right to serve process in any other manner permitted
by law.  The Company and the Investor hereby agree that the prevailing
party in any suit, action or proceeding arising out of or relating to the
Securities, this Agreement or the other Transaction Documents, shall be entitled
to reimbursement for reasonable legal fees from the non-prevailing
party.  The parties hereby waive all rights to a trial by
jury.

     

    Section
7.3                                Entire Agreement;
Amendment.

     

    This
Agreement and the Transaction Documents contain the entire understanding and
agreement of the parties with respect to the matters covered hereby and, except
as specifically set forth herein or in the other Transaction Documents, neither
the Company nor the Investor make any representation, warranty, covenant or
undertaking with respect to such matters, and they supersede all prior
understandings and agreements with respect to said subject matter, all of which
are merged herein.  No provision of this Agreement may be waived or
amended other than by a written instrument signed by the Company and the
Investor.  Any amendment or waiver effected in accordance with this
Section 7.3 shall be binding upon the Investor (and its assigns) and the
Company.

     

    Section
7.4                                Notices.

     

    Any
notice, demand, request, waiver or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery by telecopy or facsimile at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of
mailing

     

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

       

      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:

            	
              Implant
      Sciences Corporation

              107
      Audubon Road

              Wakefield,
      Massachusetts

              Tel:
      (781) 246-0700

              Fax:
      (781) 246-3561

              Attn:
      Phillip C. Thomas, President

            
	 
      	 
      
	
              with
      copies (which copies

              shall
      not constitute notice

              to
      the Company) to:

            	
              Morse,
      Barnes-Brown & Pendleton, P.C.

              Reservoir
      Place

              1601
      Trapelo Road

              Waltham,
      Massachusetts 02451

              Tel:  (781)
      622-5930

              Fax:  (781)
      622-5933

              Attn:  Carl
      F. Barnes, Esq.

               

            
	 
      	 
      
	
              If
      to the Investor:

            	
              DMRJ
      Group, LLC

              c/o
      Platinum Partners Value Arbitrage Fund L.P.

              152
      West 57th
      Street, 4th
      Floor

              New
      York, NY 10019

              Tel:
      (212) 582-0500

              Fax:
      (212) 582-2424

              Attention:
      Daniel I. Small

            
	 
      	 
      
	
              with
      copies (which copies

              shall
      not constitute notice

              to
      the Investor) to:

            	
              Blank
      Rome LLP

              405
      Lexington Avenue

              New
      York, NY 10174

              Tel:
      (212) 885-5431

              Fax:
      (917) 332-3065

              Attention:
      Eliezer M. Helfgott, Esq.

            
	 
      	 
      


    

    Any party
hereto may from time to time change its address for notices by giving written
notice of such changed address to the other party hereto.

     

    Section
7.5                                Waivers.

     

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

     

    
      
        
        

      

      
        29

        
          

        

      

      
        
        

      

    

     

    Section
7.6                                Headings.

     

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

     

    Section
7.7                                Successors and
Assigns.

     

    This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns.  After the Closing, the assignment by a
party to this Agreement of any rights hereunder shall not affect the obligations
of such party under this Agreement.  The Investor may assign the
Securities and its rights under this Agreement and the other Transaction
Documents and any other rights hereto and thereto without the consent of the
Company.

     

    Section
7.8                                No Third Party
Beneficiaries.

     

    This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.

     

    Section
7.9                                Governing
Law.

     

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

     

    Section
7.10                                Survival.

     

    The
representations and warranties of the Company and the Investor shall survive the
execution and delivery hereof and the Closing until the third anniversary of the
Closing Date; the agreements and covenants set forth in Articles I, III, V, VI
and VII of this Agreement shall survive the execution and delivery hereof and
Closing hereunder.

     

    Section
7.11                                Publicity.

     

    The
Company agrees that it will not disclose, and will not include in any public
announcement, the names of the Investor without the consent of the Investor,
which consent shall not be unreasonably withheld or delayed, or unless and until
such disclosure is required by law, rule or applicable regulation and then only
to the extent of such requirement.

     

    Section
7.12                                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.

     

    
      
        
        

      

      
        30

        
          

        

      

      
        
        

      

    

     

    Section
7.13                                Severability.

     

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

     

    Section
7.14                                Further
Assurances.

     

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

     

    Section
7.15                                Confidentiality.

     

    Without
the prior written consent of the Company, neither the Investor nor any of its
affiliates shall disclose any confidential information of the Company or any of
its Subsidiaries, which any of its officers, directors, employees, counsel,
agents, investment bankers, or accountants, may now possess or may hereafter
create or obtain relating to, without limitation, know-how, trade secrets,
customer lists, supplier lists, referral source lists, costs, profits or margin
information, markets, sales, pricing policies, operational methods, plans for
future development, processes, products, software, the financial condition,
results of operations, business, properties, assets, liabilities, or future
prospects and such information shall not be published, disclosed, or made
accessible by any of them to any other person or entity or used by any of them;
provided, however, that such party may disclose or use any such information (i)
as has become generally available to the public other than through a breach of
this Agreement by such party or any of its affiliates and representatives, (ii)
as becomes available to the Investor on a non-confidential basis from a source
other than the Company or the Company’s affiliates or representatives, provided
that such source is not known or reasonably believed by such party to be bound
by a confidentiality agreement or other obligations of secrecy, (iii) as may be
required in any report, statement or testimony required to be submitted to any
governmental entity having or claiming to have jurisdiction over it, or as may
be otherwise required by applicable law, or as may be required in response to
any summons or subpoena or in connection with any litigation, (iv) as may be
required to obtain any governmental entity approval or consent required in order
to consummate the transactions contemplated by this Agreement or (v) as may be
necessary to establish or enforce the Investor’s rights and/or to exercise the
Investor’s remedies under this Agreement and the Transaction Documents,
including, without limitation, to third parties in order to facilitate a sale or
other disposition of the Company or its assets subject to the execution and
delivery of a Non-Disclosure Agreement containing restrictions and limitations
substantially similar to those contained in this Section 7.15; provided,
further, that in the case of clauses (i), (ii), (iii), and (iv), the Investor
will promptly notify the Company and, to the extent practicable, provide the
Company a reasonable opportunity to prevent public disclosure of such
information.

    
      
        
        

      

      
        31

        
          

        

      

      
        
        

      

       

      The
Investor acknowledges responsibility for disclosures caused by the Investor and
any of its affiliates and representatives.

    

     

    [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

     

     

     


    
      
        
           

           

        

         


      

      
        32

        
          

        

      

      
         


      

    


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

     

    
      	 
      
	
              IMPLANT
      SCIENCES CORPORATION

            
	 
      
	
              By:

            	
              /s/
      Phillip C. Thomas

            
	 
      	
              Name:
      Phillip C. Thomas

            
	 
      	
              Title:
      President

            
	 
      
	
              DMRJ GROUP
      LLC

            
	 
      
	
              By:

            	
              /s/
      D. I. Small

            
	 
      	
              Name:
      Daniel I. Small

            
	 
      	
              Title:
      MD