EXHIBIT
10.1


 


SECURITIES
PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”)
is dated as of March 3, 2005, among Implant Sciences Corporation, a
Massachusetts corporation (the “Company”), and each purchaser identified
on the signature pages hereto (each, including its successors and assigns, a “Purchaser”
and collectively the “Purchasers”); and


 


WHEREAS, subject to the terms and conditions
set forth in this Agreement and pursuant to Section 4(2) of the Securities
Act (as defined below), and Rule 506 promulgated thereunder, the Company
desires to issue and sell to each Purchaser, and each Purchaser, severally and
not jointly, desires to purchase from the Company in the aggregate, $10,000,000
of shares of Common Stock, Warrants in an aggregate amount equal to 25% of the
shares of Common Stock purchased hereunder and certain Additional Investment
Rights on the Closing Date.


 


NOW, THEREFORE, IN CONSIDERATION of the
mutual covenants contained in this Agreement, and for other good and valuable
consideration the receipt and adequacy of which are hereby acknowledged, the
Company and each Purchaser agree as follows:


 


ARTICLE I.

DEFINITIONS


 


1.1                                 Definitions.  In addition to the terms defined elsewhere in
this Agreement, for all purposes of this Agreement, the following terms have
the meanings indicated in this Section 1.1:


 


“Action”
shall have the meaning ascribed to such term in Section 3.1(j).


 


“Additional
Investment Right” means the Additional Investment Rights as described in Section 2.2(a)(iv).


 


“Additional
Investment Right Shares” means the shares of Common Stock issuable upon
exercise of the Additional Investment Rights.


 


 “Affiliate” means any Person that,
directly or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with a Person as such terms are used
in and construed under Rule 144.  With
respect to a Purchaser, any investment fund or managed account that is managed
on a discretionary basis by the same investment manager as such Purchaser will
be deemed to be an Affiliate of such Purchaser.


 


“Closing”
means the closing of the purchase and sale of the Common Stock, the Warrants
and the Additional Investment Rights pursuant to Section 2.1.


 


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 “Closing Date” means the Trading Day
when all of the Transaction Documents have been executed and delivered by the
applicable parties thereto, and all conditions precedent to (i) the Purchasers’
obligations to pay the Subscription Amount and (ii) the Company’s obligations
to deliver the Securities have been satisfied or waived.


 


“Closing
Price” means on any particular date (a) the last reported closing
price per share of Common Stock on such date on the Trading Market (as reported
by Bloomberg L.P. at 4:15 PM (New York time) as the last reported closing price
for regular session trading on such day), or (b) if there is no such price on
such date, then the closing price on the Trading Market on the date nearest
preceding such date (as reported by Bloomberg L.P. at 4:15 PM (New York time)
as the closing price for regular session trading on such day), or (c)  if
the Common Stock is not then listed or quoted on the Trading Market and if
prices for the Common Stock are then reported in the “pink sheets” published by
the National Quotation Bureau Incorporated (or a similar organization or agency
succeeding to its functions of reporting prices), the most recent bid price per
share of the Common Stock so reported, or (d) if the shares of Common
Stock are not then publicly traded the fair market value of a share of Common
Stock as determined by an independent appraiser selected in good faith by the
Company and Purchasers of a majority in interest of the Shares then
outstanding.


 


 “Commission”
means the Securities and Exchange Commission.


 


“Common
Stock” means the common stock of the Company, par value $0.10 per share,
and any securities into which such common stock may hereafter be reclassified.


 


“Common
Stock Equivalents” means any securities of the Company or the Subsidiaries
which would entitle the holder thereof to acquire at any time Common Stock,
including without limitation, any debt, preferred stock, rights, options,
warrants or other instrument that is at any time convertible into or
exchangeable for, or otherwise entitles the holder thereof to receive, Common
Stock.


 


“Company
Counsel” means Ellenoff Grossman & Schole LLP


 


 “Disclosure Schedules” means the
Disclosure Schedules of the Company delivered concurrently herewith.


 


“Effective
Date” means the date that the Registration Statement is first declared
effective by the Commission.


 


“Exchange
Act” means the Securities Exchange Act of 1934, as amended.


 


“Exempt
Issuance” means the issuance of (a) shares of Common Stock or options to
employees, consultants, officers or directors of the Company pursuant to any
stock or option plan or agreement duly adopted by a majority of the non-


 


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employee members of the Board of Directors of
the Company or a majority of the members of a committee of non-employee directors
established for such purpose, (b) shares of Common Stock or options to
employees approved by a majority of the non-employee members of the Board of
Directors of the Company, (c) securities upon the exercise of or conversion of
any securities issued hereunder, convertible securities, options or warrants
issued and outstanding on the date of this Agreement, provided that such
securities have not been amended since the date of this Agreement to increase
the number of such securities or reduce the exercise or conversion price, (d)
securities issued in connection with the acquisition of assets, other than
cash, licenses, sublicenses, intellectual property or proprietary rights, not
to include cash, (e) securities issued pursuant to acquisitions or strategic
transactions, such as, but not limited to, joint ventures partnerships,
licensing arrangements, technology transfers or marketing alliances, provided
any such issuance shall only be to a Person which is, itself or through its
subsidiaries, an operating company in a business synergistic with the business
of the Company and in which the Company receives benefits in addition to the
investment of funds, but shall not include a transaction in which the Company
is issuing securities primarily for the purpose of raising capital or to an
entity whose primary business is investing in securities, and (f) shares of
Common Stock upon exercise of warrants issued in connection with the initial
public offering of the Company, including underwriters’ warrants (as such
warrants may be adjusted with respect to the extension of the exercise period
thereof).


 


“FW”
means Feldman Weinstein LLP with offices located at 420 Lexington Avenue, Suite
2620, New York, New York 10170-0002.


 


“Intellectual
Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).


 


“Liens”
means a lien, charge, security interest, encumbrance, right of first refusal,
preemptive right or other restriction.


 


“Material
Adverse Effect” shall have the meaning ascribed to such term in Section 3.1(b).


 


“Material
Permits” shall have the meaning ascribed to such term in Section 3.1(m).


 


“Per Share
Purchase Price” equals $7.22, subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar
transactions of the Common Stock that occur after the date of this Agreement.


 


“Person”
means an individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint
stock company, government (or an agency or subdivision thereof) or other entity
of any kind.


 


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“Proceeding”
means an action, claim, suit, investigation or proceeding (including, without
limitation, an investigation or partial proceeding, such as a deposition),
actually commenced or as to the threat of which the Company has actual
knowledge.


 


“Registration
Rights Agreement” means the Registration Rights Agreement, dated as of the
date of this Agreement, among the Company and each Purchaser, in the form of Exhibit
A hereto.


 


“Registration
Statement” means a registration statement meeting the requirements set
forth in the Registration Rights Agreement and covering the resale by the
Purchasers of the Shares, the Warrant Shares and the Additional Investment
Right Shares.


 


 “Required Approvals” shall have the
meaning ascribed to such term in Section 3.1(e).


 


“Rule 144”
means Rule 144 promulgated by the Commission pursuant to the Securities Act, as
such Rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission having substantially the same effect as
such Rule.


 


“SEC
Reports” shall have the meaning ascribed to such term in Section 3.1(h).


 


“Securities”
means the Shares, the Warrants, the Warrant Shares, the Additional Investment
Rights and the Additional Investment Right Shares.


 


“Securities
Act” means the Securities Act of 1933, as amended.


 


“Shares”
means the shares of Common Stock issued or issuable to each Purchaser pursuant
to this Agreement.


 


“Short
Sales” shall include, without limitation, all “short sales” as defined in
Rule 3b-3 of the Exchange Act.


 


“Subscription
Amount” means, as to each Purchaser, the amounts set forth below such
Purchaser’s signature block on the signature page hereto, in United States
dollars and in immediately available funds.


 


“Subsidiary”
shall mean the subsidiaries of the Company, if any, set forth on Schedule 3.1(a).


 


“Trading
Day” means a day on which the Common Stock is traded on a Trading Market.


 


“Trading
Market” means the following markets or exchanges on which the Common Stock
is listed or quoted for trading on the date in question: the Nasdaq


 


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SmallCap Market, the American Stock Exchange,
the New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin
Board.


 


“Transaction
Documents” means this Agreement, the Warrants, the Additional Investment
Rights and the Registration Rights Agreement and any other documents or
agreements executed in connection with the transactions contemplated hereunder.


 


 “Warrants” means the Common Stock
Purchase Warrants as described in Section 2.2(a)(iii).


 


“Warrant
Shares” means the shares of Common Stock issuable upon exercise of the
Warrants.


 


ARTICLE II.

PURCHASE AND SALE


 


2.1                                 Closing.  On the Closing Date, each Purchaser shall
purchase from the Company, severally and not jointly with the other Purchasers,
and the Company shall issue and sell to each Purchaser, (a) a number of Shares
equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase
Price, (b) the Warrants as determined pursuant to Section 2.2(a)(iii) and
(c) the Additional Investment Rights as determined pursuant to Section 2.2(a)(iv).  The aggregate Subscription Amounts for Shares
sold hereunder shall be $10,000,000. Upon satisfaction of the conditions set
forth in Section 2.2, the Closing shall occur at the offices of FW or such
other location as the parties shall mutually agree.


 


2.2                                 Deliveries.


 


(a)                                  On
the Closing Date, the Company shall deliver or cause to be delivered to each
Purchaser the following:


 


(i)                                     this Agreement duly executed
by the Company;


 


(ii)                                  a copy of the irrevocable
instructions to the Company’s transfer agent instructing the transfer agent to
deliver, on an expedited basis, a certificate evidencing a number of Shares
equal to such Purchaser’s Subscription Amount divided by the Per Share Purchase
Price, registered in the name of such Purchaser;


 


(iii)                               a copy of a Warrant,
registered in the name of such Purchaser, exercisable after the 6 month
anniversary of the Closing Date and for a term of 5 1⁄2 years after the Closing
Date, pursuant to which such
Purchaser shall have the right to acquire up to the number of shares of Common
Stock equal to 25% of the Shares to be issued to such Purchaser at an exercise
price of $9.35, which Warrant
shall otherwise be in the form of Exhibit C attached hereto;


 


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(iv)                              a copy of an Additional
Investment Right, registered in the name of such Purchaser, pursuant to which
such Purchaser shall have the right to purchase up to such Purchaser’s pro rata
share (based on the number of shares purchased hereunder) of $5,000,000 divided
by $8.50 (the “Market Price”)
and which shall be exercisable beginning after the 6 month anniversary of the
date hereof until the later of (A) the 6 month anniversary of the Effective
Date and (B) the 6 month anniversary of the Initial Exercise Date (as defined
in the Additional Investment Right), at an exercise price equal to the Market
Price (the “Additional
Investment Right Exercise Price”), which Additional Investment Right shall
otherwise in the form of Exhibit D attached hereto;


 


(v)                                 the Registration Rights
Agreement duly executed by the Company; and


 


(vi)                              a legal opinion of Company
Counsel, in the form of Exhibit B attached hereto.


 


(b)                                 On
the Closing Date, each Purchaser shall deliver or cause to be delivered to the
Company the following:


 


(i)                                     this Agreement duly executed
by such Purchaser;


 


(ii)                                  such Purchaser’s
Subscription Amount by wire transfer to the account as specified in writing by
the Company; and


 


(iii)                               the Registration Rights
Agreement duly executed by such Purchaser.


 


2.3                                 Closing Conditions. 


 


(a)                                  The
obligations of the Company hereunder in connection with the Closing are subject
to the following conditions being met:


 


(i)                                     the accuracy in all material
respects when made and on the Closing Date of the representations and
warranties of the Purchasers contained herein;


 


(ii)                                  all obligations, covenants
and agreements of the Purchasers required to be performed at or prior to the
Closing Date shall have been performed; and


 


(iii)                               the delivery by the
Purchasers of the items set forth in Section 2.2(b) of this Agreement.


 


(b)                                 The
respective obligations of the Purchasers hereunder in connection with the
Closing are subject to the following conditions being met:


 


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(i)                                     the accuracy in all material
respects on the Closing Date of the representations and warranties of the
Company contained herein;


 


(ii)                                  all obligations, covenants
and agreements of the Company required to be performed at or prior to the
Closing Date shall have been performed;


 


(iii)                               the delivery by the Company
of the items set forth in Section 2.2(a) of this Agreement;


 


(iv)                              there shall have been no
Material Adverse Effect with respect to the Company since the date hereof; and


 


(v)                                 From the date hereof to the
Closing Date, trading in the Common Stock shall not have been suspended by the
Commission (except for any suspension of trading of limited duration agreed to
by the Company, which suspension shall be terminated prior to the Closing),
and, at any time prior to the Closing Date, trading in securities generally as
reported by Bloomberg Financial Markets shall not have been suspended or
limited, or minimum prices shall not have been established on securities whose
trades are reported by such service, or on any Trading Market, 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 of such
magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes
it impracticable or inadvisable to purchase the Shares at the Closing.


 


ARTICLE III.

REPRESENTATIONS AND WARRANTIES


 


3.1                                 Representations and
Warranties of the Company.  Except as
set forth under the corresponding section of the Disclosure Schedules which
Disclosure Schedules shall be deemed a part hereof, the Company hereby makes
the representations and warranties set forth below to each Purchaser:


 


(a)                                  Subsidiaries.  All of the direct and indirect subsidiaries
of the Company are set forth on Schedule 3.1(a).  The Company owns, directly or indirectly, all
of the capital stock or other equity interests of each Subsidiary free and
clear of any Liens, and all the issued and outstanding shares of capital stock
of each Subsidiary are validly issued and are fully paid, non-assessable and
free of preemptive and similar rights to subscribe for or purchase
securities.  If the Company has no
subsidiaries, then references in the Transaction Documents to the Subsidiaries
will be disregarded.


 


(b)                                 Organization
and Qualification.  Each of the
Company and the Subsidiaries is an entity duly incorporated or otherwise
organized, validly existing


 


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and in good standing under the laws of the
jurisdiction of its incorporation or organization (as applicable), with the
requisite authority to own and use its properties and assets and to carry on
its business as currently conducted. 
Neither the Company nor any Subsidiary is in violation or default of any
of the provisions of its respective certificate or articles of incorporation,
bylaws or other organizational or charter documents.  Each of the Company and the Subsidiaries is
duly qualified to conduct business and is in good standing as a foreign
corporation or other entity in each jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary,
except where the failure to be so qualified or in good standing, as the case
may be, could not have or reasonably be expected to result in (i) a material
adverse effect on the legality, validity or enforceability of any Transaction
Document, (ii) a material adverse effect on the results of operations, assets,
business, prospects or financial condition of the Company and the Subsidiaries,
taken as a whole, or (iii) a material adverse effect on the Company’s ability
to perform in any material respect on a timely basis its obligations under any
Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”)
and no Proceeding has been instituted in any such jurisdiction revoking,
limiting or curtailing or seeking to revoke, limit or curtail such authority or
qualification.


 


(c)                                  Authorization;
Enforcement.  The Company has the
requisite corporate authority to enter into and to consummate the transactions
contemplated by each of the Transaction Documents and otherwise to carry out
its obligations thereunder.  The
execution and delivery of each of the Transaction Documents by the Company and
the consummation by it of the transactions contemplated thereby have been duly
authorized by all necessary action on the part of the Company and no further
action is required by the Company in connection therewith other than in
connection with the Required Approvals. 
Each Transaction Document has been (or upon delivery will have been)
duly executed by the Company and, when delivered in accordance with the terms
hereof, will constitute the valid and binding obligation of the Company
enforceable against the Company in accordance with its terms except (i) as
limited by applicable bankruptcy, insolvency, reorganization, moratorium and
other laws of general application affecting enforcement of creditors’ rights
generally, (ii) as limited by laws relating to the availability of specific
performance, injunctive relief or other equitable remedies and (iii) as limited
by federal and state laws or the public policy underlying such laws with
respect to indemnity or contribution.


 


(d)                                 No
Conflicts.  Except as set forth in Schedule 3.1(d),
the execution, delivery and performance of the Transaction Documents by the
Company, the issuance and sale of the Shares and the consummation by the
Company of the other transactions contemplated thereby do not and will not (i)
conflict with or violate any provision of the Company’s or any Subsidiary’s
certificate or articles of incorporation, bylaws or other organizational or
charter documents, or (ii) conflict with, or constitute a default (or an event
that with notice or lapse of time or both would become a default) under, result
in the creation of any Lien upon any of the properties or assets of the Company
or any


 


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Subsidiary, or give to others any rights of
termination, amendment, acceleration or cancellation (with or without notice,
lapse of time or both) of, any agreement, credit facility, debt or other
instrument (evidencing a Company or Subsidiary debt or otherwise) or other
understanding to which the Company or any Subsidiary is a party or by which any
property or asset of the Company or any Subsidiary is bound or affected, or
(iii) subject to the Required Approvals, conflict with or result in a violation
of any law, rule, regulation, order, judgment, injunction, decree or other
restriction of any court or governmental authority to which the Company or a
Subsidiary is subject (including federal and state securities laws and
regulations), or by which any property or asset of the Company or a Subsidiary
is bound or affected, or (iv) conflict with or violate the terms of any
agreement by which the Company or any Subsidiary is bound or to which any
property or asset of the Company or any Subsidiary is bound or affected; except
in the case of each of clauses (ii) and (iii), such as could not have or
reasonably be expected to result in a Material Adverse Effect.


 


(e)                                  Filings,
Consents and Approvals.  Except as
set forth in Schedule 3.1(e), the Company is not required to obtain
any consent, waiver, authorization or order of, give any notice to, or make any
filing or registration with, any court or other federal, state, local or other
governmental authority or other Person in connection with the execution,
delivery and performance by the Company of the Transaction Documents, other
than (i) filings required pursuant to Section 4.4 of this Agreement, (ii)
the filing with the Commission of the Registration Statement, (iii)
application(s) to each applicable Trading Market for the listing of the Shares,
Warrant Shares and the Additional Investment Right Shares for trading thereon
in the time and manner required thereby, and (iv) the filing of Form D with the
Commission and such filings as are required to be made under applicable state
securities laws (collectively, the “Required Approvals”).


 


(f)                                    Issuance
of the Securities.  The Shares,
Warrants and Additional Investment Rights are duly authorized and, when issued
and paid for in accordance with the Transaction Documents, will be duly and
validly issued, fully paid and nonassessable, free and clear of all Liens
imposed by the Company other than restrictions on transfer provided for in the
Transaction Documents.  The Warrant
Shares and Additional Investment Right Shares, when issued in accordance with
the terms of the Transaction Documents, will be validly issued, fully paid and
nonassessable, free and clear of all Liens imposed by the Company (other than
restrictions provided for in the Transaction Documents).  The Company has reserved from its duly
authorized capital stock the maximum number of shares of Common Stock issuable
pursuant to this Agreement, and issuable upon exercise of the Warrants and the
Additional Investment Rights.


 


(g)                                 Capitalization.  The capitalization of the Company is as set
forth on Schedule 3.1(g). 
Except as set forth in Schedule 3.1(g), the Company has not
issued any capital stock since the filing of the Company’s most recent periodic
report other than pursuant to the exercise of employee stock options under the
Company’s stock option plans or agreements, the issuance of shares of Common


 


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Stock or options to purchase Common Stock to
employees pursuant to the Company’s stock option plans or agreements and
pursuant to the conversion or exercise of outstanding Common Stock
Equivalents.  Except as set forth in Schedule 3.1(g),  no Person has any right of first refusal,
preemptive right, right of participation, or any similar right to participate
in the transactions contemplated by the Transaction Documents.  Except as a result of the purchase and sale
of the Securities and as set forth in Schedule 3.1(g), there are no
outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or
obligations convertible into or exchangeable for, or giving any Person any
right to subscribe for or acquire, any shares of Common Stock, or contracts,
commitments, understandings or arrangements by which the Company or any Subsidiary
is or may become bound to issue additional shares of Common Stock, or
securities or rights convertible or exchangeable into shares of Common
Stock.  Except as set forth in Schedule 3.1(g),
the issue and sale of the Securities will not obligate the Company to issue
shares of Common Stock or other securities to any Person (other than the
Purchasers) and will not result in a right of any holder of Company securities
to adjust the exercise, conversion, exchange or reset price under such
securities. All of the outstanding shares of capital stock of the Company are
validly issued, fully paid and nonassessable, have been issued in compliance
with all federal and state securities laws, and none of such outstanding shares
was issued in violation of any preemptive rights or similar rights to subscribe
for or purchase securities.  No further
approval or authorization of any stockholder, the Board of Directors of the
Company or others is required for the issuance and sale of the Shares.  Except as disclosed in the SEC Reports, there
are no stockholders agreements, voting agreements or other similar agreements
with respect to the Company’s capital stock to which the Company is a party or,
to the knowledge of the Company, between or among any of the Company’s
stockholders.


 


(h)                                 SEC
Reports; Financial Statements.  The
Company has filed all reports required to be filed by it under the Securities
Act and the Exchange Act, including pursuant to Section 13(a) or 15(d)
thereof, for the two years preceding the date hereof (or such shorter period as
the Company was required by law to file such material) (the foregoing
materials, including the exhibits thereto, being collectively referred to
herein as the “SEC Reports”) on a timely basis or has received a valid
extension of such time of filing and has filed any such SEC Reports prior to
the expiration of any such extension.  As
of their respective dates, except as set forth on Schedule 3.1(h),
the SEC Reports, complied in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the
Commission promulgated thereunder, and none of the SEC Reports, except as set
forth on Schedule 3.1(h), when filed, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading.  The financial statements of the Company
included in the SEC Reports comply, except as set forth on Schedule 3.1(h),
in all material respects with applicable accounting requirements and the rules
and regulations of the Commission with respect thereto


 


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as in effect at the time of filing.  Such financial statements, except as set
forth on Schedule 3.1(h), have been prepared in accordance with
United States generally accepted accounting principles applied on a consistent
basis during the periods involved (“GAAP”), except as may be otherwise
specified in such financial statements or the notes thereto and except that
unaudited financial statements may not contain all footnotes required by GAAP,
and fairly present, except as set forth on Schedule 3.1(h), in all
material respects the financial position of the Company and its consolidated
subsidiaries as of and for 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, immaterial, year-end audit adjustments.


 


(i)                                     Material
Changes.  Since the date of the
latest audited financial statements included within the SEC Reports, except as
specifically disclosed in the SEC Reports, (i) there has been no event,
occurrence or development that has had or that could reasonably be expected to
result in a Material Adverse Effect, (ii) the Company has not incurred any
liabilities (contingent or otherwise) other than (A) trade payables and accrued
expenses incurred in the ordinary course of business consistent with past
practice and (B) liabilities not required to be reflected in the Company’s
financial statements pursuant to GAAP or required to be disclosed in filings
made with the Commission, (iii) the Company has not altered its method of
accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased,
redeemed or made any agreements to purchase or redeem any shares of its capital
stock and (v) the Company has not issued any equity securities to any officer,
director or Affiliate, except pursuant to existing Company stock option plans
and agreements.  The Company does not
have pending before the Commission any request for confidential treatment of
information.


 


(j)                                     Litigation.  Except as set forth in Schedule 3.1(j),
there is no action, suit, inquiry, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
or affecting the Company, any Subsidiary or any of their respective properties
before or by any court, arbitrator, governmental or administrative agency or
regulatory authority (federal, state, county, local or foreign) (collectively,
an “Action”) which (i) adversely affects or challenges the legality,
validity or enforceability of any of the Transaction Documents or the
Securities or (ii) could, if there were an unfavorable decision, have or
reasonably be expected to result in a Material Adverse Effect.  Neither the Company nor any Subsidiary, nor
any director or officer thereof, is or has been the subject of any Action
involving a claim of violation of or liability under federal or state
securities laws or a claim of breach of fiduciary duty.  There has not been, and to the knowledge of
the Company, there is not pending or contemplated, any investigation by the
Commission involving the Company or any current or former director or officer
of the Company.  The Commission has not
issued any stop order or other order suspending the effectiveness of any
registration statement filed by the Company or any Subsidiary under the
Exchange Act or the Securities Act.


 


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(k)                                  Labor
Relations.  Except as set forth in Schedule 3.1(k),
no material labor dispute exists or, to the knowledge of the Company, is
imminent with respect to any of the employees of the Company which could
reasonably be expected to result in a Material Adverse Effect.


 


(l)                                     Compliance.  Neither the Company nor any Subsidiary (i) is
in default under or in violation of (and no event has occurred that has not
been waived that, with notice or lapse of time or both, would result in a
default by the Company or any Subsidiary under), nor has the Company or any
Subsidiary received notice of a claim that it is in default under or that it is
in violation of, any indenture, loan or credit agreement or any other agreement
or instrument to which it is a party or by which it or any of its properties is
bound (whether or not such default or violation has been waived), (ii) is in
violation of any order of any court, arbitrator or governmental body, or (iii)
is or has been in violation of any statute, rule or regulation of any
governmental authority, including without limitation all foreign, federal,
state and local laws applicable to its business except in each case as could
not have a Material Adverse Effect.


 


(m)                               Regulatory
Permits.  The Company and the
Subsidiaries possess all certificates, authorizations and permits issued by the
appropriate federal, state, local or foreign regulatory authorities necessary
to conduct their respective businesses as described in the SEC Reports, except
where the failure to possess such permits could not have or reasonably be
expected to result in a Material Adverse Effect (“Material Permits”),
and neither the Company nor any Subsidiary has received any notice of
proceedings relating to the revocation or modification of any Material Permit.


 


(n)                                 Title
to Assets.  The Company and the
Subsidiaries have good and marketable title in fee simple to all real property
owned by them that is material to the business of the Company and the
Subsidiaries and good and marketable title in all personal property owned by
them that is material to the business of the Company and the Subsidiaries, in
each case free and clear of all Liens, except as set forth in Schedule 3.1(n)
and except for Liens as do not materially affect the value of such property and
do not materially interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries and Liens for the payment of federal,
state or other taxes, the payment of which is neither delinquent nor subject to
penalties.  Any real property and
facilities held under lease by the Company and the Subsidiaries are held by
them under valid, subsisting and enforceable leases of which the Company and
the Subsidiaries are in compliance.


 


(o)                                 Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, trade names, copyrights,
licenses and other similar rights necessary or material for use in connection
with their respective businesses as described in the SEC Reports and which the
failure to so have could have a Material Adverse Effect (collectively, the “Intellectual
Property Rights”).  Neither


 


12





















 


the Company nor any Subsidiary has received a
written notice that the Intellectual Property Rights used by the Company or any
Subsidiary violates or infringes upon the rights of any Person.  To the knowledge of the Company, all such
Intellectual Property Rights are enforceable and there is no existing
infringement by another Person of any of the Intellectual Property Rights of
others.


 


(p)                                 Insurance.  The Company and the Subsidiaries are insured
by insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the businesses in
which the Company and the Subsidiaries are engaged.  To the best of Company’s knowledge, such insurance
contracts and policies are accurate and complete.  Neither the Company nor any Subsidiary has
any reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business without a
significant increase in cost.


 


(q)                                 Transactions
With Affiliates and Employees. 
Except as set forth in the SEC Reports, none of the officers or
directors of the Company and, to the knowledge of the Company, none of the
employees of the Company is presently a party to any transaction with the
Company or any Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing
for the furnishing of services to or by, providing for rental of real or
personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
entity in which any officer, director, or any such employee has a substantial
interest or is an officer, director, trustee or partner, in each case in excess
of $60,000 other than (i) for payment of salary or consulting fees for services
rendered, (ii) reimbursement for expenses incurred on behalf of the Company and
(iii) for other employee benefits, including stock option agreements under any
stock option plan of the Company.


 


(r)                                    Sarbanes-Oxley;
Internal Accounting Controls.  Except
as set forth in Schedule 3.1(r), 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 the 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 material information relating
to the Company, including its Subsidiaries, is made known to the certifying
officers by others within those entities, particularly during


 


13





















 


the period in which the Company’s most
recently filed periodic report under the Exchange Act, as the case may be, is
being prepared.  The Company’s certifying
officers have evaluated the effectiveness of the Company’s controls and
procedures as of the date prior to the filing date of the 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
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or, to the Company’s
knowledge, in other factors that could significantly affect the Company’s
internal controls.


 


(s)                                  Certain
Fees.  Except as set forth on Schedule 3.1(s),
no brokerage or finder’s fees or commissions are or will be payable by the
Company to any broker, financial advisor or consultant, finder, placement
agent, investment banker, bank or other Person with respect to the transactions
contemplated by this Agreement.  The
Purchasers shall have no obligation with respect to any fees or with respect to
any claims made by or on behalf of other Persons for fees of a type
contemplated in this Section that may be due in connection with the
transactions contemplated by this Agreement.


 


(t)                                    Private
Placement. Assuming the accuracy of the Purchasers representations and
warranties set forth in Section 3.2, no registration under the Securities
Act is required for the offer and sale of the Securities by the Company to the
Purchasers as contemplated hereby. The issuance and sale of the Securities
hereunder does not contravene the rules and regulations of the Trading Market.


 


(u)                                 Investment
Company. The Company is not, and is not an Affiliate of, and immediately
after receipt of payment for the Shares, will not be or be an Affiliate of, an “investment
company” within the meaning of the Investment Company Act of 1940, as
amended.  The Company shall conduct its
business in a manner so that it will not become subject to the Investment
Company Act.


 


(v)                                 Registration
Rights.  Except as set forth in Schedule 3.1(v),
no Person has any right to cause the Company to effect the registration under
the Securities Act of any securities of the Company.


 


(w)                               Listing
and Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(b) of the
Exchange Act, and the Company has taken no action designed to, or which to its
knowledge is likely to have the effect of, terminating the registration of the
Common Stock under the Exchange Act nor has the Company received any
notification that the Commission is contemplating terminating such registration
(it being understood that a registration under Section 12(g) will not
violate this representation).  The
Company has not, in the 12 months preceding the date hereof, received notice
from any Trading Market on which the Common Stock is or has been listed or


 


14





















 


quoted to the effect that the Company is not
in compliance with the listing or maintenance requirements of such Trading
Market. The Company is, and has no reason to believe that it will not in the
foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.


 


(x)                                   Application
of Takeover Protections.  The Company
and its Board of Directors have taken all necessary action, if any, in order to
render inapplicable any control share acquisition, business combination, poison
pill (including any distribution under a rights agreement) or other similar
anti-takeover provision under the Company’s Certificate of Incorporation (or
similar charter documents) or the laws of its state of incorporation that is or
could become applicable to the Purchasers as a result of the Purchasers and the
Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including without limitation the Company’s issuance of
the Securities and the Purchasers’ ownership of the Securities.


 


(y)                                 Disclosure.  The Company confirms that, neither the
Company nor any other Person acting on its behalf has provided any of the
Purchasers or their agents or counsel with any information that constitutes or
might constitute material, non-public information other than information
contained in the Disclosure Schedules and representations.   The Company understands and confirms that
the Purchasers will rely on the foregoing representations and covenants in
effecting transactions in securities of the Company.  All disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated hereby,
including the Disclosure Schedules to this Agreement, furnished by or on behalf
of the Company with respect to the representations and warranties made herein
are true and correct with respect to such representations and warranties and do
not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. The Company
acknowledges and agrees that no Purchaser makes or has made any representations
or warranties with respect to the transactions contemplated hereby other than
those specifically set forth in Section 3.2 hereof.


 


(z)                                   No
Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, 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
this offering of the Securities to be integrated with prior offerings by the
Company for purposes of the Securities Act or any applicable shareholder
approval provisions, including, without limitation, under the rules and
regulations of any exchange or automated quotation system on which any of the
securities of the Company are listed or designated. 


 


15





















 


(aa)                            Solvency.  Based on the financial condition of the
Company as of the Closing Date after giving effect to the receipt by the
Company of the proceeds from the sale of the Securities hereunder, (i) the
Company’s fair saleable value of its assets exceeds the amount that will be
required to be paid on or in respect of the Company’s existing debts and other
liabilities (including known contingent liabilities) as they mature; and (ii)
the current cash flow of the Company, together with the proceeds the Company
would receive, were it to liquidate all of its assets, after taking into
account all anticipated uses of the cash, would be sufficient to pay all
amounts on or in respect of its debt when such amounts are required to be
paid.  The Company does not intend to
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be payable on or in respect of its
debt).


 


(bb)                          Form
S-3 Eligibility.  The Company is
eligible to register the resale of its Common Stock by the Purchasers under
Form S-3 promulgated under the Securities Act and the Company hereby covenants
and agrees to use its best efforts to maintain its eligibility to use Form S-3
until the Registration Statement covering the resale of the Shares shall have
been filed with, and declared effective by, the Commission.


 


(cc)                            Taxes.  Except for matters that would not,
individually or in the aggregate, have or reasonably be expected to result in a
Material Adverse Effect, the Company and each Subsidiary has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid or accrued all taxes shown as due thereon, and the Company has no
knowledge of a tax deficiency which has been asserted or threatened against the
Company or any Subsidiary.


 


(dd)                          General
Solicitation.  Neither the Company
nor any person acting on behalf of the Company has offered or sold any of the
Shares by any form of general solicitation or general advertising.  The Company has offered the Shares for sale
only to the Purchasers and certain other “accredited investors” within the
meaning of Rule 501 under the Securities Act.


 


(ee)                            Foreign
Corrupt Practices.  Neither the
Company, nor to the knowledge of the Company, any agent or other person acting
on behalf of the Company, has (i) directly or indirectly, used any funds for
unlawful contributions, gifts, entertainment or other unlawful expenses related
to foreign or domestic political activity, (ii) made any unlawful payment to
foreign or domestic government officials or employees or to any foreign or
domestic political parties or campaigns from corporate funds, (iii) failed to
disclose fully any contribution made by the Company (or made by any person
acting on its behalf of which the Company is aware) which is in violation of
law, or (iv) violated in any material respect any provision of the Foreign
Corrupt Practices Act of 1977, as amended.


 


(ff)                                Accountants.  The Company’s accountants are set forth on Schedule 3.1(ff)
of the Disclosure Schedule.  To the
Company’s knowledge, such accountants, who the Company expects will express
their opinion with respect to


 


16





















 


the financial statements to be included in
the Company’s Annual Report on Form 10-KSB for the year ended June 30,
2004 are independent accountants as required by the Securities Act.


 


(gg)                          Acknowledgment
Regarding Purchasers’ Purchase of Shares. 
The Company acknowledges and agrees that each of the Purchasers is
acting solely in the capacity of an arm’s length purchaser with respect to the
Transaction Documents and the transactions contemplated hereby.  The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Shares.  The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement has been based solely on the independent evaluation of the
transactions contemplated hereby by the Company and its representatives.


 


(hh)                          Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.15 hereof), it is understood and
agreed by the Company (i) that none of the Purchasers have been asked to agree,
nor has any Purchaser agreed, to desist from purchasing or selling, long and/or
short, securities of the Company, or “derivative” securities based on
securities issued by the Company or to hold the Securities for any specified
term; (ii) that past or future open market or other transactions by any
Purchaser, including Short Sales, and specifically including, without
limitation, Short Sales or “derivative” transactions, before or after the
closing of this or future private placement transactions, may negatively impact
the market price of the Company’s publicly-traded securities; (iii) that any
Purchaser, and counter parties in “derivative” transactions to which any such
Purchaser is a party, directly or indirectly, presently may have a “short”
position in the Common Stock, and (iv) that each Purchaser shall not be deemed
to have any affiliation with or control over any arm’s length counter-party in
any “derivative” transaction.


 


3.2                                 Representations and
Warranties of the Purchasers.  Each
Purchaser hereby, for itself and for no other Purchaser, represents and
warrants as of the date hereof and as of the Closing Date to the Company as
follows:


 


(a)                                  Organization;
Authority.  Such Purchaser is an
entity duly organized, validly existing and in good standing under the laws of
the jurisdiction of its organization with full right, corporate, limited
liability company or partnership authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry
out its obligations thereunder. The execution, delivery and performance by such
Purchaser of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate or similar action on the part of such


 


17





















 


Purchaser. 
Each Transaction Document to which it is a party has been duly executed
by such Purchaser, and when delivered by such Purchaser in accordance with the
terms hereof, will constitute the valid and legally binding obligation of such
Purchaser, enforceable against it in accordance with its terms, except (i) as
limited by general equitable principles and applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors’ rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies and (iii) insofar as indemnification and contribution provisions may
be limited by applicable law.


 


(b)                                 Own
Account.  Such Purchaser understands
that the Securities are “restricted securities” and have not been registered
under the Securities Act or any applicable state securities law and is
acquiring the Securities as principal for its own account and not with a view
to or for distributing or reselling such Securities or any part thereof, has no
present intention of distributing any of such Securities and has no arrangement
or understanding with any other persons regarding the distribution of such
Securities; provided, however, that by making the representations herein, such
Purchaser does not agree to hold any of the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time
in accordance with or pursuant to a registration statement or an exemption
under the Securities Act.  Such Purchaser
is acquiring the Securities hereunder in the ordinary course of its business.
Such Purchaser does not have any agreement or understanding, directly or
indirectly, with any Person to distribute any of the Securities.


 


(c)                                  Purchaser
Status.  At the time such Purchaser
was offered the Securities, it was, and at the date hereof it is, and on each
date on which it exercises any Warrants or Additional Investment Rights, it
will be either: (i) an “accredited investor” as defined in Rule 501(a)(1),
(a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
institutional buyer” as defined in Rule 144A(a) under the Securities Act.  Such Purchaser is not required to be
registered as a broker-dealer under Section 15 of the Exchange Act.


 


(d)                                 Experience
of Such Purchaser.  Such Purchaser,
either alone or together with its representatives, has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment.  Such Purchaser is able to bear the economic
risk of an investment in the Securities and, at the present time, is able to afford
a complete loss of such investment.


 


(e)                                  General
Solicitation.  Such Purchaser is not
purchasing the Securities as a result of any advertisement, article, notice or
other communication regarding the Securities published in any newspaper,
magazine or similar media or broadcast over television or radio or presented at
any seminar or any other general solicitation or general advertisement.


 


18





















 


(f)                                    Short
Sales.  Such Purchaser has not
directly or indirectly, nor has any Person acting on behalf of or pursuant to
any understanding with such Purchaser, executed any Short Sales in the
securities of the Company (including, without limitations, any Short Sales
involving the Company’s securities but not including the location and/or
reservation of shares of Common Stock) since the time that such Purchaser was
first contacted regarding the transaction contemplated hereunder until the date
hereof (“Discussion Time”).  Each
Purchaser,  severally and not jointly
with the other Purchasers, understands and acknowledges that the SEC currently
takes the position that coverage of short sales of shares of the Common Stock “against
the box” with the Securities purchased hereunder prior to the Effective Date is
a violation of Section 5 of the Securities Act, as set forth in Item 65, Section 5
under Section A, of the Manual of Publicly Available Telephone
Interpretations, dated July 1997, compiled by the Office of Chief Counsel,
Division of Corporate Finance. 
Accordingly, each Purchaser hereby agrees not to use any of the
Securities to cover any short sales that were made prior to the Effective
Date.  Additionally, each Purchaser,
severally and not jointly with the other Purchasers, agrees to comply with
Regulation M under the federal securities laws.


 


The Company acknowledges and agrees that each
Purchaser does not make or has not made any representations or warranties with
respect to the transactions contemplated hereby other than those specifically
set forth in this Section 3.2 and in the other Transaction Documents.


 


ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES


 


4.1                                 Transfer
Restrictions.


 


(a)                                  The
Securities may only be disposed of in compliance with state and federal
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration
statement or Rule 144, to the Company or to an Affiliate of a Purchaser or in
connection with a pledge as contemplated in Section 4.1(b), the Company
may require the transferor thereof to provide to the Company an opinion of
counsel selected by the transferor and reasonably acceptable to the Company,
the form and substance of which opinion and shall be reasonably satisfactory to
the Company, to the effect that such transfer does not require registration of
such transferred Securities under the Securities Act.  As a condition of transfer, any such
transferee shall agree in writing to be bound by the terms of this Agreement
and shall have the rights of a Purchaser under this Agreement and the
Registration Rights Agreement.


 


(b)                                 The
Purchasers agree to the imprinting, so long as is required by this Section 4.1(b),
of a legend on any of the Securities in substantially the following form:


 


19





















 


THESE SECURITIES HAVE NOT BEEN REGISTERED
WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT
AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL
OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH
SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. 
THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL
INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER
THE SECURITIES ACT.


 


The Company
acknowledges and agrees that a Purchaser may from time to time pledge pursuant
to a bona fide margin agreement with a registered broker-dealer or grant a
security interest in some or all of the Securities to a financial institution
that is an “accredited investor” as defined in Rule 501(a) under the Securities
Act and who agrees to be bound by the provisions of this Agreement and the
Registration Rights Agreement and, if required under the terms of such
arrangement, such Purchaser may transfer pledged or secured Securities to the
pledgees or secured parties.  Such a
pledge or transfer would not be subject to approval of the Company and no legal
opinion of legal counsel of the pledgee, secured party or pledgor shall be
required in connection therewith. 
Further, no notice shall be required of such pledge.  At the appropriate Purchaser’s expense, the
Company will execute and deliver such reasonable documentation as a pledgee or
secured party of Securities may reasonably request in connection with a pledge
or transfer of the Securities, including, if the Securities are subject to
registration pursuant to the Registration Rights Agreement, the preparation and
filing of any required prospectus supplement under Rule 424(b)(3) under the
Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.


 


(c)                                  Certificates
evidencing the Shares, Warrant Shares and Additional Investment Right Shares
shall not contain, and the Company hereby agrees to cause the removal of, any
legend (including the legend set forth in Section 4.1(b)), (i) while a
registration statement (including the Registration Statement) covering the
resale of such security is effective under the Securities Act, or (ii)
following any sale of such Shares, Warrant Shares or Additional Investment
Right Shares pursuant to Rule 144, or (iii) if such Shares, Warrant Shares or
Additional


 


20





















 


Investment Right Shares are eligible for sale
under Rule 144(k), or (iv) if such legend is not required under applicable
requirements of the Securities Act (including judicial interpretations and
pronouncements issued by the Staff of the Commission).  The Company shall cause its counsel to issue
a legal opinion to the Company’s transfer agent promptly after the Effective
Date if required by the Company’s transfer agent to effect the removal of the
legend hereunder.  If all or any portion
of a Warrant or Additional Investment Right is exercised at a time when there
is an effective registration statement to cover the resale of the Warrant
Shares or Additional Investment Right Shares, such Warrant Shares or Additional
Investment Right Shares, as the case may be, shall be issued free of all
legends.  The Company agrees that
following the Effective Date or at such time as such legend is no longer
required under this Section 4.1(c) (unless the Company bona fide disputes
any assertion by the Purchaser that such legend removal is proper under Section 4.1(c)(iv)),
it will, no later than three Trading Days following the delivery by a Purchaser
to the Company or the Company’s transfer agent of a certificate representing
Shares, Warrant Shares or Additional Investment Right Shares, as the case may
be, issued with a restrictive legend (such date, the “Legend Removal Date”),
deliver or cause to be delivered to such Purchaser a certificate representing
such Securities that is free from all restrictive and other legends.  The Company may not make any notation on its
records or give instructions to any transfer agent of the Company that enlarge
the restrictions on transfer set forth in this Section.  Certificates for Securities subject to legend
removal hereunder shall be transmitted by the transfer agent of the Company to
the Purchasers by crediting the account of the Purchaser’s prime broker with
the Depository Trust Company System.


 


(d)                                 In
addition to such Purchaser’s other available remedies, the Company shall pay to
a Purchaser, in cash, as partial liquidated damages and not as a penalty, for
each $1,000 of Shares, Warrant Shares or Additional Investment Right Shares
(based on the Closing Price of the Common Stock on the date such Securities are
submitted to the Company’s transfer agent) subject to Section 4.1(c), $10
per Trading Day (increasing to $20 per Trading Day five (5) Trading Days after
such damages have begun to accrue) for each Trading Day after the 2nd
Trading Day following the Legend Removal Date until such certificate is
delivered. Nothing herein shall limit such Purchaser’s right to pursue actual
damages for the Company’s failure to deliver certificates representing any
Securities as required by the Transaction Documents, and such Purchaser shall
have the right to pursue all remedies available to it at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.


 


(e)                                  Each
Purchaser, severally and not jointly with the other Purchasers, (i) agrees that
the removal of the restrictive legend from certificates representing Securities
as set forth in this Section 4.1 is predicated upon the Company’s reliance
that the Purchaser will sell any Securities pursuant to either the registration
requirements of the Securities Act, including any applicable prospectus
delivery requirements, or an exemption therefrom and (ii) undertakes to comply
with applicable prospectus delivery requirements.


 


21





















 


4.2                                 Furnishing of
Information.  As long as any
Purchaser owns Securities, the Company covenants to timely file (or obtain
extensions in respect thereof and file within the applicable grace period) all
reports required to be filed by the Company after the date hereof pursuant to
the Exchange Act.  As long as any
Purchaser owns Securities, if the Company is not required to file reports
pursuant to the Exchange Act, it will prepare and furnish to the Purchasers and
make publicly available in accordance with Rule 144(c) such information as is
required for the Purchasers to sell the Securities under Rule 144. The Company
further covenants that it will take such further action as any holder of
Securities may reasonably request, all to the extent required from time to time
to enable such Person to sell such Securities without registration under the
Securities Act within the limitation of the exemptions provided by Rule 144.


 


4.3                                 Integration.  The Company shall not sell, offer for sale or
solicit offers to buy or otherwise negotiate in respect of any security (as
defined in Section 2 of the Securities Act) that would be integrated with
the offer or sale of the Securities in a manner that would require the
registration under the Securities Act of the sale of the Securities to the
Purchasers or that would be integrated with the offer or sale of the Securities
for purposes of the rules and regulations of any Trading Market such that it
would require shareholder approval prior to the closing of such other
transaction unless shareholder approval is obtained before the closing of such
subsequent transaction.


 


4.4                                 Securities Laws
Disclosure; Publicity.  The Company
shall, by 5:30 p.m. Eastern time on the Trading Day following the date hereof,
file a Current Report on Form 8-K, reasonably acceptable to each Purchaser
disclosing the material terms of the transactions contemplated hereby, and
shall attach the Transaction Documents thereto, including the Disclosure
Schedules.  The Company and each Purchaser
shall consult with each other in issuing any other press releases with respect
to the transactions contemplated hereby, and neither the Company nor any
Purchaser shall issue any such press release or otherwise make any such public
statement without the prior consent of the Company, with respect to any press
release of any Purchaser, or without the prior consent of each Purchaser, with
respect to any press release of the Company, which consent shall not
unreasonably be withheld, except if such disclosure is required by law, in
which case the disclosing party shall promptly provide the other party with
prior notice of such public statement or communication.  Notwithstanding the foregoing, the Company
shall not publicly disclose the name of any Purchaser, or include the name of
any Purchaser in any filing with the Commission or any regulatory agency or
Trading Market, without the prior written consent of such Purchaser, except (i)
as required by federal securities law in connection with the registration statement
contemplated by the Registration Rights Agreement and (ii) to the extent such
disclosure is required by law or Trading Market regulations, in which case the
Company shall provide the Purchasers with prior notice of such disclosure
permitted under subclause (i) or (ii).


 


4.5                                 Shareholders Rights
Plan.  No claim will be made or
enforced by the Company or, to the knowledge of the Company, any other Person
that any Purchaser is an “Acquiring Person” under any shareholders rights plan
or similar plan or arrangement in effect or hereafter adopted by the Company,
or that any Purchaser could be deemed to trigger the provisions of any such
plan or arrangement, by virtue of receiving Securities


 


22





















 


under the Transaction Documents or under any other agreement between
the Company and the Purchasers.  The
Company shall conduct its business in a manner so that it will not become
subject to the Investment Company Act.


 


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


 


4.7                                 Use of Proceeds.  The Company shall use the net proceeds from
the sale of the Securities hereunder for the acquisition of businesses and
assets and working capital purposes and not for the satisfaction of any portion
of the Company’s debt (other than payment of trade payables in the ordinary
course of the Company’s business and prior practices), to redeem any Company
equity or Common Stock Equivalents or to settle any outstanding litigation.


 


4.8                                 Reimbursement.  If any Purchaser becomes involved in any
capacity in any Proceeding by or against any Person who is a stockholder of the
Company (except as a result of sales, pledges, margin sales and similar
transactions by such Purchaser to or with any current stockholder, or unless
such Proceeding is based upon a breach of such Purchaser’s representations,
warranties or covenants under the Transaction Documents or any agreements or
understandings such Purchaser may have with any such stockholder or any
violations by such Purchaser of state or federal securities laws or any conduct
by such Purchaser which constitutes fraud, gross negligence, willful misconduct
or malfeasance), solely as a result of such Purchaser’s acquisition of the
Securities under this Agreement, the Company will reimburse such Purchaser for
its reasonable legal and other expenses (including the cost of any
investigation preparation and travel in connection therewith) incurred in
connection therewith, as such expenses are incurred.  The reimbursement obligations of the Company
under this paragraph shall be in addition to any liability which the Company
may otherwise have, shall extend upon the same terms and conditions to any
Affiliates of the Purchasers who are actually named in such action, proceeding
or investigation, and partners, directors, agents, employees and controlling
persons (if any), as the case may be, of the Purchasers and any such Affiliate,
and shall be binding upon and inure to the benefit of any successors, assigns,
heirs and personal representatives of the Company, the Purchasers and any such
Affiliate and any such Person.  The
Company also agrees that neither the Purchasers nor any such Affiliates,
partners, directors, agents, employees or controlling persons shall have any
liability to the Company or any Person asserting claims on behalf of or in
right of the Company solely as a result of acquiring the Securities under this
Agreement.


 


4.9                                 Indemnification of
Purchasers.   Subject to the
provisions of this Section 4.9, the Company will indemnify and hold the
Purchasers and their directors, officers, shareholders, partners, employees and
agents (each, a “Purchaser Party”) harmless from any and all losses,
liabilities, obligations, claims, contingencies, damages, costs and


 


23





















 


expenses, including all judgments, amounts paid in settlements, court
costs and reasonable attorneys’ fees and costs of investigation that any such
Purchaser Party may suffer or incur as a result of or relating to (a) any
breach of any of the representations, warranties, covenants or agreements made
by the Company in this Agreement or in the other Transaction Documents or (b)
any action instituted against a Purchaser, or any of them or their respective
Affiliates, by any stockholder of the Company who is not an Affiliate of such
Purchaser, with respect to any of the transactions contemplated by the
Transaction Documents (unless such action is based upon a breach of such
Purchaser’s representation, warranties or covenants under the Transaction
Documents or any agreements or understandings such Purchaser may have with any
such stockholder or any violations by the Purchaser of state or federal
securities laws or any conduct by such Purchaser which constitutes fraud, gross
negligence, willful misconduct or malfeasance). 
If any action shall be brought against any Purchaser Party in respect of
which indemnity may be sought pursuant to this Agreement, such Purchaser Party
shall promptly notify the Company in writing, and the Company shall have the
right to assume the defense thereof with counsel of its own choosing.  Any Purchaser Party shall have the right to
employ separate counsel in any such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
such Purchaser Party except to the extent that (i) the employment thereof has
been specifically authorized by the Company in writing, (ii) the Company has
failed after a reasonable period of time to assume such defense and to employ
counsel or (iii) in such action there is, in the reasonable opinion of such
separate counsel, a material conflict on any material issue between the
position of the Company and the position of such Purchaser Party.  The Company will not be liable to any
Purchaser Party under this Agreement (i) for any settlement by an Purchaser
Party effected without the Company’s prior written consent, which shall not be
unreasonably withheld or delayed; or (ii) to the extent, but only to the extent
that a loss, claim, damage or liability is attributable to any Purchaser Party’s
breach of any of the representations, warranties, covenants or agreements made
by the Purchasers in this Agreement or in the other Transaction Documents.


 


4.10                           Reservation of Common
Stock. As of the date hereof, the Company has reserved and the Company
shall continue to reserve and keep available at all times, free of preemptive
rights, a sufficient number of shares of Common Stock for the purpose of
enabling the Company to issue Shares pursuant to this Agreement, Warrant Shares
pursuant to any exercise of the Warrants and Additional Investment Right Shares
pursuant to any exercise of the Additional Investment Rights.   


 


4.11                           Listing of Common Stock.
 The Company hereby agrees to use best
efforts to maintain the listing of the Common Stock on a Trading Market, and as
soon as reasonably practicable following the Closing (but not later than the
earlier of the Effective Date) to list all of the Shares, Warrant Shares and
Additional Investment Right Shares on such Trading Market. The Company further
agrees, if the Company applies to have the Common Stock traded on any other
Trading Market, it will include in such application all of the Shares, Warrant
Shares and Additional Investment Right Shares and will take such other action
as is necessary to cause all of the Shares, Warrant Shares and Additional
Investment Right Shares to be listed on such other Trading Market as promptly
as possible.  The Company will take all
action reasonably necessary to continue


 


24





















 


the listing and trading of its Common Stock on a Trading Market and
will comply in all respects with the Company’s reporting, filing and other
obligations under the bylaws or rules of the Trading Market.


 


4.12                           Equal Treatment of
Purchasers.  No consideration shall
be offered or paid to any person to amend or consent to a waiver or
modification of any provision of any of the Transaction Documents unless the
same consideration is also offered to all of the parties to the Transaction
Documents.  For clarification purposes,
this provision constitutes a separate right granted to each Purchaser by the
Company and negotiated separately by each Purchaser, and is intended to treat
for the Company the Purchasers as a class and shall not in any way be construed
as the Purchasers acting in concert or as a group with respect to the purchase,
disposition or voting of Securities or otherwise.


 


4.13                           Participation in Future
Financing.  Subject to prior existing
rights of Laurus Funds and the purchasers party to that certain Securities
Purchase Agreement, Dated June 17, 2005, with the Company, from the date
hereof until 14 months after the Closing Date, upon any financing by the
Company of its Common Stock or Common Stock Equivalents (a “Subsequent
Financing”), each Purchaser shall have the right to participate in up to
50% of such Subsequent Financing (the “Participation Maximum”); provided,
however, if the lead investor in the Pre-Notice (as defined below)
object to any of the Purchaser’s participation in the Subsequent Financing, the
Purchasers’ rights hereunder, in the aggregate, shall be on an all (to the
extent limited by the aforementioned rights of participation) or nothing
basis.  At least 5 Trading Days prior to the closing of the Subsequent
Financing, the Company shall deliver to each Purchaser a written notice of its
intention to effect a Subsequent Financing (“Pre-Notice”), which
Pre-Notice shall ask such Purchaser if it wants to review the details of such
financing (such additional notice, a “Subsequent Financing Notice”). 
Upon the request of a Purchaser, and only upon a request by such Purchaser, for
a Subsequent Financing Notice, the Company shall promptly, but no later than 1
Trading Day after such request, deliver a Subsequent Financing Notice to such
Purchaser.  The Subsequent Financing Notice shall describe in reasonable
detail the proposed terms of such Subsequent Financing, the amount of proceeds
intended to be raised thereunder, the Person with whom such Subsequent
Financing is proposed to be effected, and attached to which shall be a term
sheet or similar document relating thereto.    If by 6:30 p.m.
(New York City time) on the fifth Trading Day after all of the Purchasers have
received the Pre-Notice, notifications by the Purchasers of their willingness
to participate in the Subsequent Financing (or to cause their designees to
participate) is, in the aggregate, less than the total amount of the
Participation Maximum, then the Company may effect the remaining portion of
such Subsequent Financing on the terms and to the Persons set forth in the
Subsequent Financing Notice.  If the Company receives no notice from a
Purchaser as of such 5th Trading Day, such Purchaser shall be deemed
to have notified the Company that it does not elect to participate.  The
Company must provide the Purchasers with a second Subsequent Financing Notice,
and the Purchasers will again have the right of participation set forth above
in this Section 4.13, if the Subsequent Financing subject to the initial
Subsequent Financing Notice is not consummated for any reason on the terms set
forth in such Subsequent Financing Notice within 60 Trading Days after the date
of the initial Subsequent Financing Notice. In the event the Company receives
responses to


 


25





















 


a Subsequent Financing Notice from Purchasers seeking to purchase more
than the aggregate amount of the Participation Maximum, each such Purchaser
shall have the right to purchase the greater of (a) their Pro Rata Portion (as
defined below) of the Participation Maximum and (b) the difference between the
Participation Maximum and the aggregate amount of participation by all other
Purchasers.  “Pro Rata Portion” is the ratio of (x) the
Subscription Amount of Securities purchased by a participating Purchaser and
(y) the sum of the aggregate Subscription Amount of all participating
Purchasers.  Notwithstanding the foregoing, this Section 4.13 shall
not apply in respect of an Exempt Issuance.


 


4.14                           Subsequent Equity Sales.  From the date hereof until 30 days after the
Effective Date, neither the Company nor any Subsidiary shall issue shares of
Common Stock or Common Stock Equivalents; provided, however, the 30 day period
set forth in this Section 4.14 shall be extended for the number of Trading
Days during such period in which (y) trading in the Common Stock is suspended
by any Trading Market, or (z) following the Effective Date, the Registration
Statement is not effective or the prospectus included in the Registration
Statement may not be used by the Purchasers for the resale of the Shares,
Warrant Shares and Additional Investment Right Shares.  Notwithstanding the foregoing, this Section 4.14
shall not apply in respect of an Exempt Issuance.  In addition to the limitations set forth
herein, from the date hereof until 24 months from the Closing Date, the Company
shall be prohibited from effecting or enter into an agreement to effect any
Subsequent Financing involving a “Variable Rate Transaction”.  The term “Variable Rate Transaction”
shall mean a transaction (other than an Exempt Issuance) in which the Company
issues or sells (i) any debt or equity securities that are convertible into,
exchangeable or exercisable for, or include the right to receive additional
shares of Common Stock either (A) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or
quotations for the shares of Common Stock at any time after the initial
issuance of such debt or equity securities, or (B) with a conversion, exercise
or exchange price that is subject to being reset at some future date after the
initial issuance of such debt or equity security or upon the occurrence of
specified or contingent events directly or indirectly related to the business
of the Company or the market for the Common Stock.  


 


4.15                           Short Sales.  Each Purchaser covenants that neither it nor
any affiliates acting on its behalf or pursuant to any understanding with it
will execute any Short Sales during the period from the Discussion Time until
prior to the time that the transactions contemplated by this Agreement are
first publicly announced as described in Section 4.4.  Notwithstanding the foregoing, no Purchaser
makes any representation, warranty or covenant hereby that it will not engage
in Short Sales in the securities of the Company after the time that the
transactions contemplated by this Agreement are first publicly announced as
described in Section 4.4.


 


4.16                           Delivery of Securities
After Closing.  The Company shall
deliver, or cause to be delivered, the respective Shares, Warrants and
Additional Investment Right purchased by each Purchaser to such Purchaser
within 3 Trading Days of the Closing Date.


 


26





















 


ARTICLE V.

MISCELLANEOUS


 


5.1                                 Termination.  This Agreement may be terminated by any
Purchaser, as to such Purchaser’s obligations hereunder only and without any
effect whatsoever on the obligations between the Company and the other
Purchasers, by written notice to the other parties, if the Closing has not been
consummated on or before March     , 2005; provided
that no such termination will affect the right of any party to sue for any
breach by the other party (or parties).


 


5.2                                 Fees and Expenses.  The Company shall reimburse RAM Capital
Resources LLC (“RAM”) up to the sum of $15,000 for its legal fees.  Accordingly, RAM is hereby authorized to
reduce its Subscription Amount by $15,000 as payment in full of such
amount.  The Company shall deliver, prior
to the Closing, a completed and executed copy of the Closing Statement,
attached hereto as Annex A. Except as otherwise set forth in this
Agreement, each party shall pay the fees and expenses of its advisers, counsel,
accountants and other experts, if any, and all other expenses incurred by such
party incident to the negotiation, preparation, execution, delivery and
performance of this Agreement.  The
Company shall pay all stamp and other taxes and duties levied in connection
with the delivery of the Securities.


 


5.3                                 Entire Agreement.  The Transaction Documents, together with the
exhibits and schedules thereto, contain the entire understanding of the parties
with respect to the subject matter hereof and supersede all prior agreements
and understandings, oral or written, with respect to such matters, which the
parties acknowledge have been merged into such documents, exhibits and
schedules.


 


5.4                                 Notices.  Any and all notices or other communications
or deliveries required or permitted to be provided hereunder shall be in
writing and shall be deemed given and effective on the earliest of (a) the date
of transmission, if such notice or communication is delivered via facsimile at
the facsimile number set forth on the signature pages attached hereto prior to
6:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile number set forth on the signature pages attached
hereto on a day that is not a Trading Day or later than 6:30 p.m. (New York
City time) on any Trading Day, (c) the second Trading Day following the date of
mailing, if sent by U.S. nationally recognized overnight courier service, or
(d) upon actual receipt by the party to whom such notice is required to be given.  The address for such notices and
communications shall be as set forth on the signature pages attached hereto.


 


5.5                                 Amendments; Waivers.  Subject to Section 4.12 of this
Agreement, no provision of this Agreement may be waived or amended except in a
written instrument signed, in the case of an amendment, by the Company and each
Purchaser or, in the case of a waiver, by the party against whom enforcement of
any such waiver is sought.  No waiver 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


 


27





















 


subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission of either party to exercise
any right hereunder in any manner impair the exercise of any such right.


 


5.6                                 Headings.  The headings herein are for convenience only,
do not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.  The
language used in this Agreement will be deemed to be the language chosen by the
parties to express their mutual intent, and no rules of strict construction
will be applied against any party.


 


5.6                                 Successors and
Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their successors and
permitted assigns.  The Company may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of each Purchaser.  Any
Purchaser may assign any or all of its rights under this Agreement to any
Person to whom such Purchaser assigns or transfers any Securities, provided
such transferee agrees in writing to be bound, with respect to the transferred
Securities, by the provisions hereof that apply to the “Purchasers”.


 


5.7                                 No Third-Party
Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective successors
and permitted assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other Person, except as otherwise set forth in Section 4.9.


 


5.8                                 Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of the Transaction Documents shall be
governed by and construed and enforced in accordance with the internal laws of
the State of New York, without regard to the principles of conflicts of law
thereof.  Each party hereby irrevocably
submits to the exclusive jurisdiction of the state and federal courts sitting
in the City of New York, borough of Manhattan for the adjudication of any
dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper or inconvenient venue for such
proceeding.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
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
contained herein shall be deemed to limit in any way any right to serve process
in any manner permitted by law.  The
parties hereby waive all rights to a trial by jury.  If either party shall commence an action or
proceeding to enforce any provisions of the Transaction Documents, then the
prevailing party in such action or proceeding shall be reimbursed by the other
party for its attorneys’ fees and other costs and expenses incurred with the
investigation, preparation and prosecution of such action or proceeding.


 


28





















 


5.9                                 Survival.  Except as otherwise set forth herein or in
the Transaction Documents, the representations and warranties herein shall
survive the Closing and delivery of the Shares, Warrant Shares and Additional
Investment Right Shares.


 


5.10                           Execution.  This Agreement may be executed in two or more
counterparts, all of which when taken together shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. 
In the event that any signature is delivered by facsimile transmission,
such signature shall create a valid and binding obligation of the party
executing (or on whose behalf such signature is executed) with the same force
and effect as if such facsimile signature page were an original thereof.


 


5.11                           Severability.  If any provision of this Agreement is held to
be invalid or unenforceable in any respect, the validity and enforceability of
the remaining terms and provisions of this Agreement shall not in any way be
affected or impaired thereby and the parties will attempt to agree upon a valid
and enforceable provision that is a reasonable substitute therefor, and upon so
agreeing, shall incorporate such substitute provision in this Agreement.


 


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


 


5.13                           Replacement of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, the Company shall issue
or cause to be issued in exchange and substitution for and upon cancellation
thereof, or in lieu of and substitution therefor, a new certificate or
instrument, but only upon receipt of evidence reasonably satisfactory to the
Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested.  The applicants
for a new certificate or instrument under such circumstances shall also pay any
reasonable third-party costs associated with the issuance of such replacement
Securities.


 


5.14                           Remedies.  In addition to being entitled to exercise all
rights provided herein or granted by law, including recovery of damages, each
of the Purchasers and the Company will be entitled to specific performance
under the Transaction Documents.  The
parties agree that monetary damages may not be adequate compensation for any
loss incurred by reason of any breach of obligations described in the foregoing
sentence and hereby agrees to waive in any action for specific performance of
any such obligation the defense that a remedy at law would be adequate.


 


29





















 


5.15                           Payment Set Aside.  To the extent that the Company makes a
payment or payments to any Purchaser pursuant to any Transaction Document or a
Purchaser enforces or exercises its rights thereunder, and such payment or
payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person
under any law (including, without limitation, any bankruptcy law, state or
federal law, common law or equitable cause of action), then to the extent of
any such restoration the obligation or part thereof originally intended to be
satisfied shall be revived and continued in full force and effect as if such
payment had not been made or such enforcement or setoff had not occurred.


 


5.16                           Independent Nature of
Purchasers’ Obligations and Rights. 
The obligations of each Purchaser under any Transaction Document are
several and not joint with the obligations of any other Purchaser, and no
Purchaser shall be responsible in any way for the performance of the
obligations of any other Purchaser under any Transaction Document.  Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association,
a joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert or as a group with respect to such
obligations or the transactions contemplated by the Transaction Document.  Each Purchaser shall be entitled to
independently protect and enforce its rights, including without limitation, the
rights arising out of this Agreement or out of the other Transaction Documents,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.  Each Purchaser has been represented by its
own separate legal counsel in their review and negotiation of the Transaction
Documents.  For reasons of administrative
convenience only, Purchasers and their respective counsel have chosen to
communicate with the Company through FW. 
FW does not represent all of the Purchasers but only RAM, who has acted
as placement agent to the transaction. 
The Company has elected to provide all Purchasers with the same terms
and Transaction Documents for the convenience of the Company and not because it
was required or requested to do so by the Purchasers.


 


5.17                           Liquidated Damages.  The Company’s obligations to pay any partial
liquidated damages or other amounts owing under the Transaction Documents is a
continuing obligation of the Company and shall not terminate until all unpaid
partial liquidated damages and other amounts have been paid notwithstanding the
fact that the instrument or security pursuant to which such partial liquidated
damages or other amounts are due and payable shall have been canceled.


 


5.18                           Construction. The
parties agree that each of them and/or their respective counsel has reviewed
and had an opportunity to revise the Transaction Documents and, therefore, the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the interpretation
of the Transaction Documents or any amendments hereto.


 


(Signature Page Follows)


 


30





















 


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


 


 


	
  IMPLANT SCIENCES CORPORATION

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  With a copy to (which shall not constitute
  notice):

  	
   

  	
   

  
					



 


 


[REMAINDER OF PAGE
INTENTIONALLY LEFT BLANK


SIGNATURE PAGES FOR PURCHASERS
FOLLOW]


 


31





















 


[PURCHASER SIGNATURE PAGES TO
IMX SECURITIES PURCHASE AGREEMENT]


 


IN WITNESS WHEREOF, the undersigned have
caused this Securities Purchase Agreement to be duly executed by their
respective authorized signatories as of the date first indicated above.


 


	
  Name of Purchaser:

  	
   

  	
   

  
	
  Signature of Authorized Signatory of
  Purchaser:

  	
   

  	
   

  
	
  Name of Authorized Signatory:

  	
   

  	
   

  
	
  Title of Authorized Signatory:

  	
   

  	
   

  
	
  Email Address of Purchaser:

  	
   

  	
   

  
							



 


Address for Notice of Purchaser:


 


 


Address for Delivery of Securities for Purchaser (if not same as
above):


 


 


Subscription Amount:


Shares:


Warrant Shares:


Additional Investment Right Shares:


EIN Number:  [PROVIDE THIS UNDER SEPARATE COVER]


 


[SIGNATURE PAGES CONTINUE]


 


32





















 


Annex
A


 


CLOSING
STATEMENT


 


Pursuant to the attached Securities Purchase Agreement, dated as of the
date hereto, the purchasers shall purchase $10,000,000 of Common Stock,
Warrants and Additional Investment Right from Implant Sciences Corporation (the
“Company”).  All funds will be
wired into a trust account maintained by Ellenoff Grossman & Schole,
counsel to the Company.  All funds will
be disbursed in accordance with this Closing Statement.


 


Disbursement
Date:           March     ,
2005


 


 


	
  I.   PURCHASE
  PRICE

  	
   

  
	
   

  	
   

  
	
   

  	
  Gross Proceeds to be Received in Trust

  	
  $

  
	
   

  	
   

  	
   

  
	
  II.  DISBURSEMENTS

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Implant Sciences Corporation

  	
  $

  
	
   

  	
  Feldman Weinstein LLP 

  	
  $

  
	
   

  	
  Ellenoff Grossman Schole & Cyruli, LLP

  	
  $

  
	
   

  	
   

  	
   

  
	
  Total Amount Disbursed:

  	
  $

  



 


 


WIRE INSTRUCTIONS:


 


 


To: Implant Sciences Corporation


Citizens Providence


1 Citizens Bank


Riverside, RI 02915


ABA ROUTING NO:  011500120


ACCT NO: 113033-133-1


FOR FURTHER CREDIT TO: Implant Sciences Corporation


SWIFT CODE:  CTZIUS33   (For international transfers)


PHONE #: 800-343-2258


 


 


To: Feldman Weinstein LLP


STERLING NATIONAL BANK


622 THIRD AVENUE


NEW YORK, NY 10017


ABA ROUTING NO:  026007773


 


33





















 


ACCT NO: 08-141-85201


Acct Name: Feldman Weinstein LLP Operating Account “C”


Ref: RAM/IMX


 


 


To: Ellenoff Grossman Schole & Cyruli,
LLP


The Citibank Private Bank


120 Broadway, 2nd Floor


New York, NY 10271


ABA Routing No.: 021000089


Account No.: 96613062


Contact: William Nastasi, 212-804-5512


 


 


[To: Pacificwave Partners Limited]


	
  Bank:

  	
  Chase Manhattan Bank

  
	
   

  	
  One Chase Manhattan Plaza

  
	
   

  	
  New York, NY 10004

  
	
  ABA Routing No:

  	
  021000021

  
	
  Account Name:

  	
  National Financial Services LLC

  
	
  Account No:

  	
  066196-221

  
	
  For Benefit Of:

  	
  PacificWave Partners Limited

  
	
  Account No:

  	
  Z75-661155

  



 


[To: UGroup]


 


 


ABA Routing No.:


Account No.:


Contact:


 


 


34





















 


SECURITIES PURCHASE AGREEMENT


 


DISCLOSURE SCHEDULES


 


 


All
capitalized terms used but not defined herein shall have the meanings ascribed
to such terms in the Securities Purchase Agreement by and among Implant
Sciences Corporation (the “Company”) and the Purchasers thereunder dated March
3, 2005 (the “Agreement”). These schedules do not include information disclosed
in the Company’s filings with the SEC and publicly available press releases. By
acceptance of these schedules, the Purchaser agrees that it has specific
knowledge of the contents of the filings and press releases.


 


It is
understood and agreed that any disclosure in these schedules shall qualify the
disclosure under the specific section number referred to in these schedules, as
well as all other sections in the Agreement when it is apparent from a reading
of such disclosure that it also qualifies or applies to such other sections.


 


 


 





















 


Schedule 3.1 (a) - SUBSIDIARIES


 


 


 


	
  One
  Subsidiary:

  	
   

  	
  C
  -Acquisition Corp.

  
	
   

  	
   

  	
  dba Core
  Systems

  
	
   

  	
   

  	
  1050 Kifer
  Road

  
	
   

  	
   

  	
  Sunnyvale,
  CA

  



 


 


 





















 


Schedule 3.1(d) - CONFLICTS


 


                No conflicts


 


 


 





















 


Schedule 3.1 (e) - FILINGS, CONSENTS AND APPROVALS


 


                No other consents


 


 





















 


                Schedule 3.1 (g) -
CAPITALIZATION


 


 


	
  Right of first refusal - waived or
  participating

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Shares Issued and outstanding at 12/31/04

  	
   

  	
  9,053,645

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Activity 1/1/ 05 — 02/24/05

  	
   

  	
   

  	
   

  
	
  Warrant exercise

  	
   

  	
  3,000

  	
   

  
	
  CorNova

  	
   

  	
  76,687

  	
   

  
	
  Employee Stock Purchase Plan

  	
   

  	
  1,632

  	
   

  
	
  1992 stock option plan

  	
   

  	
  500

  	
   

  
	
  1998 stock option plan

  	
   

  	
  0

  	
   

  
	
  2000 stock option plan

  	
   

  	
  3,460

  	
   

  
	
  Series C conversion

  	
   

  	
  25,000

  	
   

  
	
  Total

  	
   

  	
  110,279

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Remaining :

  	
   

  	
   

  	
   

  
	
  IPO Warrants

  	
   

  	
  1,064,700

  	
   

  
	
  1992 stock option plan

  	
   

  	
  59,800

  	
   

  
	
  1998 stock option plan

  	
   

  	
  125,500

  	
   

  
	
  2000 stock option plan

  	
   

  	
  1,175,805

  	
   

  
	
  2005 stock option plan

  	
   

  	
  30,000

  	
   

  
	
  Employee Stock Purchase Plan

  	
   

  	
  119,485

  	
   

  
	
  Laurus Series A Warrant

  	
   

  	
  55,000

  	
   

  
	
  Laurus Series B Warrant

  	
   

  	
  70,000

  	
   

  
	
  Laurus Series C Warrant *

  	
   

  	
  100,000

  	
   

  
	
  R. Jerry Falkner

  	
   

  	
  7,500

  	
   

  
	
  Richard West

  	
   

  	
  7,500

  	
   

  
	
  Generation Capital

  	
   

  	
  94,675

  	
   

  
	
  James Aldo

  	
   

  	
  10,000

  	
   

  
	
  Dr. David Wazer

  	
   

  	
  2,000

  	
   

  
	
  Ellenoff, Grossman, Schole

  	
   

  	
  10,000

  	
   

  
	
  Vladimir Belyakov

  	
   

  	
  17,000

  	
   

  
	
  Russians consultants

  	
   

  	
  65,310

  	
   

  
	
  P.M.M. Inc.

  	
   

  	
  10,000

  	
   

  
	
  Dr. James Bennett

  	
   

  	
  5,000

  	
   

  
	
  Dr. Erich Randolph

  	
   

  	
  5,000

  	
   

  
	
  Aurelius Consulting

  	
   

  	
  150,000

  	
   

  
	
  Warrants relating to Ram financing #1

  	
   

  	
  117,152

  	
   

  
	
  Pacific Wave

  	
   

  	
  15,936

  	
   

  
	
  Consultant

  	
   

  	
  3,000

  	
   

  
	
  Medical Advisory Board

  	
   

  	
  20,000

  	
   

  
	
  The Ugroup

  	
   

  	
  200,000

  	
   

  



 


                                                                                                Laurus
Series C Convertible Preferred Stock:  principal
balance as of 2/24/05:  $88,866;
convertible at $6.75 per share. 
$2,411,113 and 357,205 shares converted to 2/24/05


 


 


 





















 


 


Schedule 3.1(h) — SEC REPORTS; FINANCIAL STATEMENTS


 


The SEC Reports complied in all
material respects to requirements of the Securities Act and the Exchange Act
and the rules and regulations of the Commission promulgated thereunder, and
none of the SEC Reports, when filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.


 


The financial statements of the
Company included in the SEC Reports comply in all material respects with
applicable accounting requirements and the rules and regulations of the
Commission with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with United States GAAP applied on a consistent basis during the
periods involved except as may be otherwise specified in such financial
statements or the notes thereto and except that unaudited financial statements
may not contain all footnotes required by GAAP, and fairly present in all
material respects the financial position of the Company and its consolidated
subsidiaries as of and for 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, immaterial, year-end audit adjustments


 


 





















 


Schedule 3.1 (j) — LITIGATION


 


 


 


Claim filed with MDAC by former
employee for discriminatory dismissal


 


 


 





















 


Schedule 3.1 (k) - LABOR RELATIONS


 


                See 3.1 (j)


 


 





















 


Schedule 3.1 (n) — TITLE TO ASSETS


 


Implant
Sciences Corporation


 


	
   

  	
  Massachussetts

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  State

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  UCC-1

  	
   

  	
  11/6/01

  	
   

  	
  Citizens
  Bank of Mass.

  	
   

  	
  CD on
  deposit

  
	
   

  	
   

  	
   

  	
  10/10/02

  	
   

  	
  Laurus
  Master Fund, Ltd.

  	
   

  	
  All property
  etc.

  
	
   

  	
   

  	
   

  	
  12/11/03

  	
   

  	
  Laurus
  Master Fund, Ltd.

  	
   

  	
  All property
  etc.

  
	
   

  	
   

  	
   

  	
  10/14/04

  	
   

  	
  CitiCapital
  Tech Finance

  	
   

  	
  Office
  equip.

  



 


C Acquisition
Corp.


 


	
   

  	
  Delaware

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  State

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  UCC-1

  	
   

  	
  10/15/04

  	
   

  	
  Bridge Bank,
  NA

  	
   

  	
  All assets

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


Core
Systems Incorporated


 


	
   

  	
  California

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  State

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  UCC-1

  	
   

  	
  2/13/02

  	
   

  	
  Wells Fargo
  Equip. Finan.

  	
   

  	
  Ion
  implanter

  
	
   

  	
   

  	
   

  	
  2/13/02

  	
   

  	
  Wells Fargo
  Equip. Finan.

  	
   

  	
  Ion
  implanter

  
	
   

  	
   

  	
   

  	
  2/21/02

  	
   

  	
  Balboa
  Capital

  	
   

  	
  Equipment

  
	
   

  	
   

  	
   

  	
  3/19/02

  	
   

  	
  Wells Fargo
  Equip. Finan.

  	
   

  	
  Equipment

  
	
   

  	
   

  	
   

  	
  3/29/02

  	
   

  	
  Lafco, Inc.

  	
   

  	
  Equipment

  
	
   

  	
   

  	
   

  	
  5/28/03

  	
   

  	
  Bridge Bank,
  NA

  	
   

  	
  All assets

  
	
   

  	
   

  	
   

  	
  6/4/03

  	
   

  	
  Bridge Bank,
  NA

  	
   

  	
  All assets

  



 


	
   

  	
  Santa Clara

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  County

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  UCC-1

  	
   

  	
  4/4/02

  	
   

  	
  Balboa
  Capital

  	
   

  	
  Fixtures

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  



 


 


 





















 


Schedule 3.1 (r) - SARBANES-OXLEY; INTERNAL ACCOUNTING CONTROLS


 


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 the 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 material information relating
to the Company, including its Subsidiaries, is made known to the certifying officers
by others within those entities, particularly during the period in which the
Company’s most recently filed periodic report under the Exchange Act, as the
case may be, is being prepared.  The
Company’s certifying officers have evaluated the effectiveness of the Company’s
controls and procedures as of the date prior to the filing date of the 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
significant changes in the Company’s internal controls (as such term is defined
in Item 307(b) of Regulation S-K under the Exchange Act) or in other factors
that could significantly affect the Company’s internal controls.


 


 


 





















 


Schedule 3.1(s) — CERTAIN FEES


 


Except for a warrant for the
purchase of common stock of the Company issuable to PacificWave Partners
Limited and a 1% fee payable to the UGroup, to the knowledge of the Company, no
other brokerage or finder’s fees or commissions are or will be payable by the
Company to any broker, financial advisor or consultant, finder, placement
agent, investment banker, bank or other Person with respect to the transactions
contemplated by this Agreement.


 


 


 





















 


Schedule 3.1 (v) - REGISTRATION RIGHTS


 


Unexercised warrants subject to current registration statement


 


 


 




	
  Aurelius Consulting

  	
   

  	
  150,000

  	
   

  
	
  Consultant

  	
   

  	
  3,000

  	
   

  
	
  Medical Advisory Board

  	
   

  	
  20,000

  	
   

  
	
  The Ugroup

  	
   

  	
  200,000

  	
   

  
	
  David Volpe

  	
   

  	
  2,500

  	
   

  
	
  Shares relating to Core Systems

  acquisition

  	
   

  	
  360,312

  	
   

  






 


 


 





















 


Schedule 3.1 (ff) - ACCOUNTANTS


 


 


	
   

  	
   

  	
  BDO Seidman

  	
   

  	
  —

  	
   

  	
  current
  auditors as of April 2003

  
	
   

  	
   

  	
  Ernst &
  Young

  	
   

  	
  —

  	
   

  	
  prior
  auditors

  



 


 


 





















 


REGISTRATION RIGHTS AGREEMENT


 




	
  Aurelius
  Consulting

  	
   

  	
  150,000

  	
   

  
	
  Consultant

  	
   

  	
  3,000

  	
   

  
	
  Medical
  Advisory Board

  	
   

  	
  20,000

  	
   

  
	
  The Ugroup

  	
   

  	
  200,000

  	
   

  
	
  Shares relating to Core Systems acquisition

  	
   

  	
  360,312