Exhibit 4.1 to Insignia Systems, Inc. Form 8-K (05-20-04)







EXHIBIT 4.1  



PURCHASE AGREEMENT  



        THIS
PURCHASE AGREEMENT (“Agreement”) is made as of the 20th day of May, 2004 by and
among Insignia Systems, Inc., a Minnesota corporation (the “Company”), and the
Investors set forth on the signature pages affixed hereto (each an “Investor”
and collectively the “Investors”). 



Recitals 



        A.       
The Company and the Investors are executing and delivering this Agreement in
reliance upon the exemption from securities registration afforded by the
provisions of Regulation D (“Regulation D”), as promulgated by the
U.S. Securities and Exchange Commission (the “SEC”) under the
Securities Act of 1933, as amended; and 



        B.       
On the First Closing Date (as defined below), the Investors wish to purchase
from the Company, and the Company wishes to sell and issue to the Investors,
upon the terms and conditions stated in this Agreement, an aggregate of
2,000,000 shares (the “Initial Shares”) of the Company’s Common
Stock, par value $0.01 per share (together with any securities into which such
shares may be reclassified the “Common Stock”); and 



        C.       
On the First Closing Date, the parties hereto will execute and deliver a
Registration Rights Agreement, in the form attached hereto as Exhibit A (the
“Registration Rights Agreement”), pursuant to which the Company will
agree to provide certain registration rights under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder, and applicable
state securities laws; and 



        D.       
The Company shall have the right, subject to certain circumstances, to cause the
Investors to purchase from the Company, upon the terms and conditions stated in
this Agreement, an additional 1,785,800 shares of Common Stock (appropriately
adjusted for any stock split, reverse stock split, stock dividend or other
reclassification or combination of the Common Stock occurring after the date
hereof) (the “Option Shares”). 



        In
consideration of the mutual promises made herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties
hereto agree as follows: 



        1.   Definitions. In
addition to those terms defined above and elsewhere in this Agreement, for the
purposes of this Agreement, the following terms shall have the meanings set
forth below: 



                “Affiliate”
means, with respect to any Person, any other Person which directly or indirectly through
one or more intermediaries Controls, is controlled by, or is under common control with,
such Person. 






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                “Business
Day” means a day, other than a Saturday or Sunday, on which banks in
New York City are open for the general transaction of business. 



                “Closing
Date” shall mean either the First Closing Date or the Option Closing
Date, as applicable. 



                “Common
Stock Equivalents” means any securities of the Company or any other
Person 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’s
Knowledge” means the actual knowledge of the executive officers
(as defined in Rule 405 under the 1933 Act) of the Company, after due
inquiry.




                “Confidential
Information” means trade secrets, confidential information and know-how
(including but not limited to ideas, formulae, compositions, processes,
procedures and techniques, research and development information, computer
program code, performance specifications, support documentation, drawings,
specifications, designs, business and marketing plans, and customer and supplier
lists and related information). 



                “Control”
(including the terms “controlling”, “controlled by” or
“under common control with”) means the possession, direct or indirect,
of the power to direct or cause the direction of the management and policies of
a Person, whether through the ownership of voting securities, by contract or
otherwise. 



                “Effective
Date” means the date on which the initial Registration Statement (as
defined in the Registration Rights Agreement) is declared effective by the SEC.




                “First
Closing Date” has the meaning set forth in Section 2.2. 


                “Initial
Purchase Price” means Two Million Five Hundred Thousand Dollars ($2,500,000). 



                “Intellectual
Property” means all of the following: (i) patents, patent applications, patent
disclosures and inventions (whether or not patentable and whether or not reduced to
practice); (ii) trademarks, service marks, trade dress, trade names, corporate names,
logos, slogans and Internet domain names, together with all goodwill associated with each
of the foregoing; (iii) copyrights and copyrightable works; (iv) registrations,
applications and renewals for any of the foregoing; and (v) proprietary computer software
(including but not limited to data, data bases and documentation). 



                “Material
Adverse Effect” means a material adverse effect on (i) the assets,
liabilities, results of operations, condition (financial or otherwise), business, or
prospects of the 






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Company or (ii) the ability of the
Company to perform its obligations under the Transaction Documents. 



                “Nasdaq”
means The Nasdaq Stock Market, Inc. 



                “Option
Closing Date” has the meaning set forth in Section 3.4. 



                “Option
Purchase Price” means Two Million Five Hundred Thousand One Hundred
Twenty Dollars ($2,500,120). 



                “Person”
means an individual, corporation, partnership, limited liability company, trust,
business trust, association, joint stock company, joint venture, sole
proprietorship, unincorporated organization, governmental authority or any other
form of entity not specifically listed herein. 



                “Proposal”
has the meaning set forth in Section 7.8. 



                “SEC
Filings” has the meaning set forth in Section 4.6. 



                “Registration
Statement” has the meaning set forth in the Registration Rights Agreement. 



                “Shares” means
the shares of Common Stock being purchased by the Investors hereunder and, unless the
context otherwise requires, includes the Initial Shares and the Option Shares. 



                “Subsidiary”
of any Person means another Person, an amount of the voting securities, other voting
ownership or voting partnership interests of which is sufficient to elect at least a
majority of its Board of Directors or other governing body (or, if there are no such
voting interests, 50% or more of the equity interests of which) is owned directly or
indirectly by such first Person. 



                “Transaction
Documents” means this Agreement and the Registration Rights Agreement. 



                “1933
Act” means the Securities Act of 1933, as amended, or any successor statute,
and the rules and regulations promulgated thereunder. 



                “1934
Act” means the Securities Exchange Act of 1934, as amended, or any successor
statute, and the rules and regulations promulgated thereunder. 



        2.    Purchase and Sale of the Initial Shares; First Closing.  



                2.1   Purchase
and Sale of Initial Shares. Subject to the terms and conditions of this
Agreement, on the First Closing Date (as defined below), each of the Investors
shall severally, and not jointly, purchase, and the Company shall sell and issue
to the Investors, the 






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Initial Shares in the respective
amounts set forth opposite the Investors’ names on the signature pages attached
hereto in exchange for the Initial Purchase Price as specified in Section 3 below. 



                2.2   First
Closing. Upon confirmation that the other conditions to closing
specified herein have been satisfied or duly waived by the Investors, the Company shall
deliver to Lowenstein Sandler PC, in trust, a certificate or certificates, registered in
such name or names as the Investors may designate, representing the Initial Shares, with
instructions that such certificates are to be held for release to the Investors only upon
payment in full of the Initial Purchase Price to the Company by all the Investors. Upon
such receipt by Lowenstein Sandler PC of the certificates, each Investor shall promptly,
but no more than one Business Day thereafter, cause a wire transfer in same day funds to
be sent to the account of the Company as instructed in writing by the Company, in an
amount representing such Investor’s pro rata portion of the Initial Purchase Price as
set forth on the signature pages to this Agreement. On the date the Company receives the
Initial Purchase Price, the certificates evidencing the Initial Shares shall be released
to the Investors. Such date is hereinafter referred to as the “First Closing
Date”. The closing of the purchase and sale of the Initial Shares shall take place at
the offices of Lowenstein Sandler PC, 1330 Avenue of the Americas, 21st Floor, New York,
New York, or at such other location and on such other date as the Company and the
Investors shall mutually agree. 



        3.    Purchase
and Sale of the Option Shares; Option Closing. 



                3.1   Put
Option. The Company shall have the nontransferable option (the “Put
Option”) to sell to the Investors and to require the Investors to acquire,
severally and not jointly, all, but not less than all, of the Option Shares for
an aggregate purchase price equal to the Option Purchase Price. Subject to the
terms hereof, the Company may exercise the Put Option at any time from and after
the two (2)-month anniversary of the Effective Date and ending at
5:00 p.m., New York time, on the fifteen (15)-month anniversary of the
First Closing Date (the “Expiration Time”) by providing written notice
of such exercise to the Investors, which notice shall set forth the proposed
closing date on which the Option Shares will be sold, which date shall not be
less than five (5) Business Days after the date of such notice (the
“Notice Date”). The Company shall only have the right to exercise the
Put Option in the event that (i) the closing bid price of a share of Common
Stock as reported on Nasdaq equals or exceeds $2.80 (appropriately adjusted for
any stock split, reverse stock split, stock dividend or other reclassification
or combination of the Common Stock occurring after the date hereof) for a period
of twenty (20) consecutive trading days ending on the trading day
immediately preceding the Notice Date (the “Measurement Period”) and
(ii) at all times during the Measurement Period the Registration Statement
(as defined in the Registration Rights Agreement) has been effective and
available for sales of the Initial Shares by the Investors. In the event that
the Call Option (as defined below) is duly exercised pursuant to the provisions
of Section 3.2, the Put Option shall immediately terminate and be of no
further force and effect. 



                3.2   Call Option. The
Investors shall have the nontransferable option (the “Call Option”) to
acquire from the Company and to require the Company to sell to the Investors,
severally and not jointly, all, but not less than all, of the Option Shares for
an aggregate purchase price equal to the Option Purchase Price. The Investors
may exercise the Call Option at any time 






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from and after the First Closing Date
and ending at the Expiration Time by providing written notice of such exercise to the
Company, which notice shall set forth the proposed closing date on which the Option Shares
will be sold, which date shall not be less than five (5) Business Days after the date of
such notice. In the event that the Put Option is duly exercised pursuant to the provisions
of Section 3.1, the Call Option shall immediately terminate and be of no further force and
effect. 



                3.3   Purchase
and Sale of Option Shares. Upon the due exercise of the Put Option or the
Call Option, as applicable, and subject to the terms and conditions of this
Agreement, on the Option Closing Date (as defined below), each of the Investors
shall severally and not jointly, purchase, and the Company shall sell and issue
to the Investors, the Option Shares in exchange for the Option Purchase Price as
specified in Section 3 below. The Investors shall have the right to allocate the
Option Shares among the Investors as they determine in their sole discretion.




                3.4   Option
Closing. Upon confirmation that the other conditions to closing specified
herein have been satisfied or duly waived by the Investors, the Company shall
deliver to Lowenstein Sandler PC, in trust, a certificate or certificates,
registered in such name or names as the Investors may designate, representing
the Option Shares, with instructions that such certificates are to be held for
release to the Investors only upon payment in full of the Option Purchase Price
to the Company by the Investors. Upon such receipt by Lowenstein Sandler PC of
the certificates, each Investor shall promptly, but no more than one Business
Day thereafter, cause a wire transfer in same day funds to be sent to the
account of the Company as instructed in writing by the Company, in an amount
representing such Investor’s pro rata portion of the Option Purchase Price.
On the date the Company receives the Option Purchase Price, the certificates
evidencing the Option Shares shall be released to the Investors. Such date is
hereinafter referred to as the “Option Closing Date”. The closing of
the purchase and sale of the Option Shares shall take place at the offices of
Lowenstein Sandler PC, 1330 Avenue of the Americas, 21st Floor, New York, New
York, or at such other location and on such other date as the Company and the
Investors shall mutually agree. 



        4.    Representations
and Warranties of the Company. The Company hereby represents and warrants to
the Investors that, except as set forth in the schedules delivered herewith
(collectively, the “Disclosure Schedules”): 



                4.1   Organization,
Good Standing and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota and has all requisite corporate power and authority to carry on its
business as now conducted and to own its properties. The Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the conduct of its business or its ownership or
leasing of property makes such qualification or leasing necessary unless the
failure to so qualify has not and could not reasonably be expected to have a
Material Adverse Effect. The Company has no Subsidiaries. 



                4.2   Authorization. The
Company has full power and authority and, except for approval of the Proposal by
its stockholders as contemplated in Section 7.8, has taken all 






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requisite action on the part of the
Company, its officers, directors and stockholders necessary for (i) the authorization,
execution and delivery of the Transaction Documents, (ii) authorization of the performance
of all obligations of the Company hereunder or thereunder, and (iii) the authorization,
issuance and delivery of the Shares. The Transaction Documents constitute the legal, valid
and binding obligations of the Company, enforceable against the Company in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability, relating to or affecting
creditors’ rights generally. 



                4.3   Capitalization.
Schedule 4.3 sets forth (a) the authorized capital stock of the Company on the date hereof;
(b) the number of shares of capital stock issued and outstanding;
(c) the number of shares of capital stock issuable pursuant to the
Company’s stock plans; and (d) the number of shares of capital stock
issuable and reserved for issuance pursuant to securities (other than the
Shares) exercisable for, or convertible into or exchangeable for any shares of
capital stock of the Company. All of the issued and outstanding shares of the
Company’s capital stock have been duly authorized and validly issued and
are fully paid, nonassessable and free of pre-emptive rights and were issued in
full compliance with applicable state and federal securities law and any rights
of third parties. Except as described on Schedule 4.3, no Person is
entitled to pre-emptive or similar statutory or contractual rights with respect
to any securities of the Company. Except as described on
Schedule 4.3, there are no outstanding warrants, options,
convertible securities or other rights, agreements or arrangements of any
character under which the Company is or may be obligated to issue any equity
securities of any kind and except as contemplated by this Agreement, the Company
is not currently in negotiations for the issuance of any equity securities of
any kind. Except as described on Schedule 4.3 and except for the
Registration Rights Agreement, there are no voting agreements, buy-sell
agreements, option or right of first purchase agreements or other agreements of
any kind among the Company and any of the securityholders of the Company
relating to the securities of the Company held by them. Except as described on
Schedule 4.3 and except as provided in the Registration Rights
Agreement, no Person has the right to require the Company to register any
securities of the Company under the 1933 Act, whether on a demand basis or in
connection with the registration of securities of the Company for its own
account or for the account of any other Person.  



                Except
as described on Schedule 4.3, the issuance and sale of the Shares
hereunder will not obligate the Company to issue shares of Common Stock or other
securities to any other Person (other than the Investors) and will not result in
the adjustment of the exercise, conversion, exchange or reset price of any
outstanding security. 



                Except
as described on Schedule 4.3, the Company does not have outstanding
stockholder purchase rights or “poison pill” or any similar arrangement in
effect giving any Person the right to purchase any equity interest in the Company upon the
occurrence of certain events. 



                4.4   Valid
Issuance. The Shares have been duly and validly authorized and, when issued
and paid for pursuant to this Agreement, will be validly issued, fully paid and
nonassessable, and shall be free and clear of all encumbrances and restrictions
(other than those 






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created by the Investors), except for
restrictions on transfer set forth in the Transaction Documents or imposed by applicable
securities laws. 



                4.5   Consents. Except
for approval of the Proposal by its stockholders as contemplated in
Section 7.8, the execution, delivery and performance by the Company of the
Transaction Documents and the offer, issuance and sale of the Shares require no
consent of, action by or in respect of, or filing with, any Person, governmental
body, agency, or official other than filings that have been made pursuant to
applicable state securities laws and post-sale filings pursuant to applicable
state and federal securities laws which the Company undertakes to file within
the applicable time periods. Subject to the accuracy of the representations and
warranties of each Investor set forth in Section 5 hereof, the Company has
taken all action necessary to exempt (i) the issuance and sale of the
Shares and (ii) the other transactions contemplated by the Transaction
Documents from the provisions of any shareholder rights plan or other
“poison pill” arrangement, any anti-takeover, business combination or
control share law or statute binding on the Company or to which the Company or
any of its assets and properties may be subject and any provision of the
Company’s Articles of Incorporation or By-laws that is or could reasonably
be expected to become applicable to the Investors as a result of the
transactions contemplated hereby, including without limitation, the issuance of
the Shares and the ownership, disposition or voting of the Shares by the
Investors or the exercise of any right granted to the Investors pursuant to this
Agreement or the other Transaction Documents. On or prior to the date hereof,
each of W. Robert Ramsdell and Scott F. Drill have executed and
delivered to the Company agreements, true and complete copies of which have been
provided to the Purchasers, pursuant to which they have agreed to vote their
shares of Common Stock for the approval of the Proposal at the Stockholders
Meeting (as defined in Section 7.8). Such agreements are in full force and
effect and shall not be amended, modified, supplemented or rescinded without the
prior written consent of the Investors. 



                4.6   Delivery
of SEC Filings; Business. The Company has made available to the Investors
through the EDGAR system, true and complete copies of the Company’s most
recent Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 (the “10-K”), and all other reports filed by
the Company pursuant to the 1934 Act since the filing of the 10-K and prior
to the date hereof (collectively, the “SEC Filings”). The SEC Filings
are the only filings required of the Company pursuant to the 1934 Act for such
period. The Company is engaged in all material respects only in the business
described in the SEC Filings and the SEC Filings contain a complete and accurate
description in all material respects of the business of the Company, taken as a
whole.




                4.7   Use
of Proceeds. The net proceeds of the sale of the Shares hereunder shall be
used by the Company for working capital and general corporate purposes. 



                4.8   No
Material Adverse Change. Since December 31, 2003, except as identified and
described in the SEC Filings or as described on Schedule 4.8, there
has not been: 



                        (i)    any
change in the assets, liabilities, financial condition or operating results of
the Company from that reflected in the financial statements included in the
10-K, except as disclosed in Form 10-Q for the quarter ending March 31, 2004,
and except for changes 






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in the ordinary course of business
which have not and could not reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate; 



                        (ii)    any
declaration or payment of any dividend, or any authorization or payment of any
distribution, on any of the capital stock of the Company, or any redemption or
repurchase of any securities of the Company; 



                        (iii)    any
material damage, destruction or loss, whether or not covered by insurance to any
assets or properties of the Company; 



                        (iv)    any
waiver, not in the ordinary course of business, by the Company of a material
right or of a material debt owed to it; 



                        (v)    any
satisfaction or discharge of any lien, claim or encumbrance or payment of
any obligation by the Company, except in the ordinary course of business and
which is not material to the assets, properties, financial condition, operating
results or business of the Company taken as a whole (as such business is
presently conducted and as it is proposed to be conducted); 



                        (vi)    any
change or amendment to the Company’s Articles of Incorporation or by-laws,
or material change to any material contract or arrangement by which the Company
is bound or to which any of its assets or properties is subject; 



                        (vii)    any
material labor difficulties or labor union organizing activities with
respect to employees of the Company; 



                        (viii)    any
material transaction entered into by the Company other than in the ordinary
course of business; 



                        (ix)    the
loss of the services of any key employee, or material change in the
composition or duties of the senior management of the Company; 



                        (x)    the
loss or threatened loss of any customer which has had or could reasonably be
expected to have a Material Adverse Effect; or 



                        (xi)    any
other event or condition of any character that has had or could reasonably
be expected to have a Material Adverse Effect. 


              4.9   SEC Filings; S-3 Eligibility.  



                        (a)    At
the time of filing thereof, the SEC Filings complied as to form in all material
respects with the requirements of the 1934 Act and did 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 the light of the circumstances
under which they were made, not misleading. 






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                        (b)    Each
registration statement and any amendment thereto filed by the Company since
January 1, 2002 pursuant to the 1933 Act and the rules and regulations
thereunder, as of the date such statement or amendment became effective,
complied as to form in all material respects with the 1933 Act and did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein not misleading; and each prospectus filed pursuant to Rule 424(b)
under the 1933 Act, as of its issue date and as of the closing of any sale of
securities pursuant thereto did not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. 



                        (c)    The
Company is eligible to use Form S-3 to register the Registrable Securities (as
such term is defined in the Registration Rights Agreement) for sale by the
Investors as contemplated by the Registration Rights Agreement. 



                4.10   No
Conflict, Breach, Violation or Default. Subject to the approval of the
Proposal by its stockholders as contemplated in Section 7.8, the execution,
delivery and performance of the Transaction Documents by the Company and the
issuance and sale of the Shares will not conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a default under
(i) the Company’s Articles of Incorporation or the Company’s
Bylaws, both as in effect on the date hereof (true and complete copies of which
have been made available to the Investors), or (ii)(a) any statute, rule,
regulation or order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any of its assets or
properties, or (b) any agreement or instrument to which the Company is a
party or by which the Company is bound or to which any of its assets or
properties is subject.




                4.11   Tax
Matters. The Company has timely prepared and filed all tax returns required
to have been filed by the Company with all appropriate governmental agencies and
timely paid all taxes shown thereon or otherwise owed by it. The charges,
accruals and reserves on the books of the Company in respect of taxes for all
fiscal periods are adequate in all material respects, and there are no material
unpaid assessments against the Company nor, to the Company’s Knowledge, any
basis for the assessment of any additional taxes, penalties or interest for any
fiscal period or audits by any federal, state or local taxing authority except
for any assessment which is not material to the Company. All taxes and other
assessments and levies that the Company is required to withhold or to collect
for payment have been duly withheld and collected and paid to the proper
governmental entity or third party when due. There are no tax liens or claims
pending or, to the Company’s Knowledge, threatened against the Company or
any of its assets or property. Except as described on Schedule 4.11, there are
no outstanding tax sharing agreements or other such arrangements between the
Company and any other corporation or entity.  



                4.12   Title
to Properties. Except as disclosed in the SEC Filings, the Company has good
and marketable title to all real properties and all other properties and assets
owned by it, in each case free from liens, encumbrances and defects that would
materially affect the value thereof or materially interfere with the use made or
currently planned to be made thereof by it and except as disclosed in the SEC
Filings, the Company holds any leased real or personal 





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property under valid and enforceable
leases with no exceptions that would materially interfere with the use made or currently
planned to be made thereof by it. 



                4.13   Certificates,
Authorities and Permits. The Company possesses adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by it, and the Company has not
received any notice of proceedings relating to the revocation or modification of
any such certificate, authority or permit that, if determined adversely to the
Company, could reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate. 



                4.14   No
Labor Disputes. No material labor dispute with the employees of the Company
exists or, to the Company’s Knowledge, is imminent. 



                4.15   Intellectual Property. 



                        (a)    To
the Company’s Knowledge, all Intellectual Property of the Company is
currently in compliance with all legal requirements (including timely filings,
proofs and payments of fees) and is valid and enforceable. No Intellectual
Property of the Company which is necessary for the conduct of Company’s
business as currently conducted or as currently proposed to be conducted has
been or is now involved in any cancellation, dispute or litigation, and, to the
Company’s Knowledge, no such action is threatened. No patent of the Company
has been or is now involved in any interference, reissue, re-examination or
opposition proceeding. 



                        (b)    All
of the licenses and sublicenses and consent, royalty or other agreements
concerning Intellectual Property which are necessary for the conduct of the
Company’s business as currently conducted or as currently proposed to be
conducted to which the Company is a party or by which any of its assets are
bound (other than generally commercially available, non-custom, off-the-shelf
software application programs having a retail acquisition price of less than
$10,000 per license) (collectively, “License Agreements”) are valid
and binding obligations of the Company and, to the Company’s Knowledge, the
other parties thereto, enforceable in accordance with their terms, except to the
extent that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting the enforcement of creditors’ rights generally, and there exists
no event or condition which will result in a material violation or breach of or
constitute (with or without due notice or lapse of time or both) a default by
the Company under any such License Agreement. 



                        (c)    To
the Company’s Knowledge, the Company owns or has the valid right to use all
of the Intellectual Property that is necessary for the conduct of the
Company’s business as currently conducted or as currently proposed to be
conducted and for the ownership, maintenance and operation of the Company’s
properties and assets, free and clear of all liens, encumbrances, adverse claims
or obligations to license all such owned Intellectual Property and Confidential
Information, other than licenses entered into in the ordinary course of the
Company’s business. 






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                        (d)    To
the Company’s Knowledge, the conduct of the Company’s business as
currently conducted does not infringe or otherwise impair or conflict with
(collectively, “Infringe”) any Intellectual Property rights of any
third party or any confidentiality obligation owed to a third party, and, to the
Company’s Knowledge, the Intellectual Property and Confidential Information
of the Company which are necessary for the conduct of Company’s business as
currently conducted or as currently proposed to be conducted are not being
Infringed by any third party. There is no litigation or order pending or
outstanding or, to the Company’s Knowledge, threatened or imminent, that
seeks to limit or challenge or that concerns the ownership, use, validity or
enforceability of any Intellectual Property or Confidential Information of the
Company and the Company’s use of any Intellectual Property or Confidential
Information owned by a third party, and, to the Company’s Knowledge, there
is no valid basis for the same. 



                        (e)    The
consummation of the transactions contemplated hereby and by the other
Transaction Documents will not result in the alteration, loss, impairment of or
restriction on the Company’s ownership or right to use any of the
Intellectual Property or Confidential Information which is necessary for the
conduct of Company’s business as currently conducted or as currently
proposed to be conducted. 



                        (f)    The
Company has taken reasonable steps to protect the Company’s rights in its
Intellectual Property and Confidential Information. Each employee, consultant
and contractor who has had access to Confidential Information which is necessary
for the conduct of Company’s business as currently conducted or as
currently proposed to be conducted has executed an agreement to maintain the
confidentiality of such Confidential Information and has executed appropriate
agreements that are substantially consistent with the Company’s standard
forms thereof, except where the failure to do so has not had and could not
reasonably be expected to have a Material Adverse Effect, individually or in the
aggregate. To the Company’s Knowledge, except under confidentiality
obligations, there has been no material disclosure of any of the Company’s
Confidential Information to any third party. 



                4.16   Environmental
Matters. To the Company’s Knowledge, the Company is not in violation of
any statute, rule, regulation, decision or order of any governmental agency or
body or any court, domestic or foreign, relating to the use, disposal or release
of hazardous or toxic substances or relating to the protection or restoration of
the environment or human exposure to hazardous or toxic substances
(collectively, “Environmental Laws”), does not own or operate any real
property contaminated with any substance that is subject to any Environmental
Laws, is not liable for any off-site disposal or contamination pursuant to any
Environmental Laws, and is not subject to any claim relating to any
Environmental Laws, which violation, contamination, liability or claim has had
or could reasonably be expected to have a Material Adverse Effect, individually
or in the aggregate; and there is no pending or, to the Company’s
Knowledge, threatened investigation that might lead to such a claim. 



                4.17   Litigation.
Except as described on Schedule 4.17, there are no pending
actions, suits or proceedings against or affecting the Company or any of its
properties; and to the Company’s Knowledge, no such actions, suits or
proceedings are threatened or contemplated. 






14 












                4.18   Financial
Statements. The financial statements included in each SEC Filing present
fairly, in all material respects, the financial position of the Company as of
the dates shown and its results of operations and cash flows for the periods
shown, and such financial statements have been prepared in conformity with
United States generally accepted accounting principles applied on a consistent
basis (“GAAP”) (except as may be disclosed therein or in the notes
thereto, and, in the case of quarterly financial statements, as permitted by
Form 10-Q under the 1934 Act). Except as set forth in the financial statements
of the Company included in the SEC Filings filed prior to the date hereof or as
described on Schedule 4.18, the Company has not incurred any liabilities,
contingent or otherwise, except those incurred in the ordinary course of
business, consistent (as to amount and nature) with past practices since the
date of such financial statements, none of which, individually or in the
aggregate, have had or could reasonably be expected to have a Material Adverse
Effect.  



                4.19   Insurance
Coverage. The Company maintains in full force and effect insurance coverage
that is customary for comparably situated companies for the business being
conducted and properties owned or leased by the Company, and the Company
reasonably believes such insurance coverage to be adequate against all
liabilities, claims and risks against which it is customary for comparably
situated companies to insure. 



                4.20   Compliance
with Nasdaq Continued Listing Requirements. The Company is in compliance
with applicable Nasdaq continued listing requirements. There are no proceedings
pending or, to the Company’s Knowledge, threatened against the Company
relating to the continued listing of the Company’s Common Stock on Nasdaq
and the Company has not received any notice of, nor to the Company’s
Knowledge is there any basis for, the delisting of the Common Stock from Nasdaq.




                4.21   Brokers
and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company or an Investor for any commission, fee or other
compensation pursuant to any agreement, arrangement or understanding entered
into by or on behalf of the Company, other than as described in
Schedule 4.21. 



                4.22   No
Directed Selling Efforts or General Solicitation. Neither the Company nor
any Person acting on its behalf has conducted any general solicitation or
general advertising (as those terms are used in Regulation D) in connection with
the offer or sale of any of the Shares. 



                4.23   No
Integrated Offering. Neither the Company nor any of its Affiliates, nor any
Person acting on its or their behalf has, directly or indirectly, made any
offers or sales of any Company security or solicited any offers to buy any
security, under circumstances that would adversely affect reliance by the
Company on Section 4(2) for the exemption from registration for the
transactions contemplated hereby or would require registration of the Shares
under the 1933 Act. 



                4.24   Private
Placement. The offer and sale of the Shares to the Investors as contemplated
hereby is exempt from the registration requirements of the 1933 Act. 






15 












                4.25   Questionable
Payments. Neither the Company nor, to the Company’s Knowledge, any of
its current or former stockholders, directors, officers, employees, agents or
other Persons acting on behalf of the Company, has on behalf of the Company or
in connection with its business:   (a) used any corporate
funds for unlawful contributions, gifts, entertainment or other unlawful
expenses relating to political activity; (b) made any direct or indirect
unlawful payments to any governmental officials or employees from corporate
funds; (c) established or maintained any unlawful or unrecorded fund of
corporate monies or other assets; (d) made any false or fictitious entries
on the books and records of the Company; or (e) made any unlawful bribe,
rebate, payoff, influence payment, kickback or other unlawful payment of any
nature. 



                4.26   Transactions
with Affiliates. Except as disclosed in the SEC Filings or as disclosed on
Schedule 4.26, none of the officers or directors of the Company and,
to the Company’s Knowledge, none of the employees of the Company is
presently a party to any transaction with the Company (other than as holders of
stock options and/or warrants, and 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 Company’s Knowledge, any entity in
which any officer, director, or any such employee has a substantial interest or
is an officer, director, trustee or partner. 



                4.27   Internal
Controls. The Company is in material compliance with the provisions of the
Sarbanes-Oxley Act of 2002 currently applicable to the Company. The Company
maintains 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 generally accepted accounting principles 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 1934
Act Rules 13a-14 and 15d-14) for the Company and designed such disclosure
controls and procedures to ensure that material information relating to the
Company is made known to the certifying officers by others within those
entities, particularly during the period in which the Company’s most
recently filed period report under the 1934 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 a date within
90 days prior to the filing date of the most recently filed periodic report
under the 1934 Act (such date, the “Evaluation Date”). The Company
presented in its most recently filed periodic report under the 1934 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) or, to the Company’s Knowledge, in other factors that
could significantly affect the Company’s internal controls. The Company
maintains and will continue to maintain a standard system of accounting
established and administered in accordance with GAAP and the applicable
requirements of the 1934 Act. 






16 












                4.28   Disclosures. Except
as listed on Schedule 4.28, neither the Company nor any Person acting on
its behalf has provided the Investors or their agents or counsel with any
information that constitutes or might constitute material, non-public
information. The written materials delivered to the Investors in connection with
the transactions contemplated by the Transaction Documents do not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein, in light of the circumstances
under which they were made, not misleading. 



        5.    Representations
and Warranties of the Investors. Each of the Investors hereby severally, and
not jointly, represents and warrants to the Company that: 



                5.1   Organization
and Existence. Such Investor is a validly existing corporation, limited
partnership or limited liability company and has all requisite corporate,
partnership or limited liability company power and authority to invest in the
Shares pursuant to this Agreement. 



                5.2   Authorization. The
execution, delivery and performance by such Investor of the Transaction
Documents to which such Investor is a party have been duly authorized and will
each constitute the valid and legally binding obligation of such Investor,
enforceable against such Investor in accordance with their respective terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability, relating to or affecting
creditors’ rights generally. 



                5.3   Purchase
Entirely for Own Account. The Shares to be received by such Investor
hereunder will be acquired for such Investor’s own account, not as nominee
or agent, and not with a view to the resale or distribution of any part thereof
in violation of the 1933 Act, and such Investor has no present intention of
selling, granting any participation in, or otherwise distributing the same in
violation of the 1933 Act without prejudice, however, to such Investor’s
right at all times to sell or otherwise dispose of all or any part of such
Shares in compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such Investor
to hold the Shares for any period of time. Such Investor is not a broker-dealer
registered with the SEC under the 1934 Act or an entity engaged in a business
that would require it to be so registered and is not affiliated with any such
broker-dealer. 



                5.4   Investment
Experience. Such Investor acknowledges that it can bear the economic risk
and complete loss of its investment in the Shares and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment contemplated hereby. 



                5.5   Disclosure
of Information. Such Investor has had an opportunity to receive all
additional information related to the Company requested by it and to ask
questions of and receive answers from the Company regarding the Company, its
business and the terms and conditions of the offering of the Shares. Such
Investor acknowledges receipt of copies of the SEC Filings. Such Investor also
acknowledges receipt and review of the Risk Factors set forth in 






17 













Schedule 5.5,
and understands that an investment in the Company entails risk, and that such
Investor could lose some or all of its investment in the Company. Neither such
inquiries, nor such Risk Factors nor any other due diligence investigation
conducted by such Investor shall modify, amend or affect such Investor’s
right to rely on the Company’s representations and warranties contained in
this Agreement.  



                5.6   Restricted
Securities. Such Investor understands that the Shares are characterized as
“restricted securities” under the U.S. federal securities laws
inasmuch as they are being acquired from the Company in a transaction not
involving a public offering and that under such laws and applicable regulations
such securities may be resold without registration under the 1933 Act only in
certain limited circumstances. 



                5.7   Legends. It
is understood that, except as provided below, certificates evidencing the Shares
may bear the following or any similar legend: 



                        (a)    “The
securities represented hereby may not be transferred unless (i) such
securities have been registered for sale pursuant to the Securities Act of 1933,
as amended, (ii) such securities may be sold pursuant to Rule 144(k),
or (iii) the Company has received an opinion of counsel reasonably
satisfactory to it that such transfer may lawfully be made without registration
under the Securities Act of 1933 or qualification under applicable state
securities laws.” 



                        (b)    If
required by the authorities of any state in connection with the issuance of sale
of the Shares, the legend required by such state authority. 



                5.8   Accredited
Investor. Such Investor is an accredited investor as defined in Rule 501(a)
of Regulation D, as amended, under the 1933 Act. 



                5.9   No
General Solicitation. Such Investor did not learn of the investment in the
Shares as a result of any public advertising or general solicitation.




                5.10   Brokers
and Finders. No Person will have, as a result of the transactions
contemplated by the Transaction Documents, any valid right, interest or claim
against or upon the Company or an Investor for any commission, fee or other
compensation pursuant to any agreement, arrangement or understanding entered
into by or on behalf of such Investor. 



                5.11   Prohibited
Transactions. During the last thirty (30) days prior to the date
hereof, such Investor has not, directly or indirectly, effected or agreed to
effect any short sale, whether or not against the box, established any “put
equivalent position” (as defined in Rule 16a-1(h) under the 1934 Act)
with respect to the Common Stock, granted any other right (including, without
limitation, any put or call option) with respect to the Common Stock or with
respect to any security that includes, relates to or derived any significant
part of its value from the Common Stock or otherwise sought to hedge its
position in the Shares (each, a “Prohibited Transaction”). Prior to
the earliest to occur of (i) the termination of this Agreement,
(ii) the Effective Date (as defined in the Registration Rights Agreement)
or (iii) the Effectiveness Deadline (as defined in the Registration Rights
Agreement), such Investor shall not engage, directly or indirectly, in a







18 












Prohibited Transaction.
Such Investor acknowledges that the representations and warranties contained in
this Section 5.11 are being made for the benefit of the Investors as well
as the Company and that each of the other Investors shall have an independent
right to assert any claims against such Investor arising out of any breach or
violation of the provisions of this Section 5.11. 



        6.    Conditions to Closing.  



                6.1   Conditions
to the Investors’ Obligations. The obligation of each Investor to
purchase the Shares at each closing is subject to the fulfillment to such
Investor’s satisfaction, on or prior to the relevant Closing Date, of the
following conditions, any of which may be waived by such Investor (as to itself
only):  



                        (a)    The
representations and warranties made by the Company in Section 4 hereof
qualified as to materiality shall be true and correct at all times prior to and
on the Closing Date, except to the extent any such representation or warranty
expressly speaks as of an earlier date, in which case such representation or
warranty shall be true and correct as of such earlier date, and, the
representations and warranties made by the Company in Section 4 hereof not
qualified as to materiality shall be true and correct in all material respects
at all times prior to and on the Closing Date, except to the extent any such
representation or warranty expressly speaks as of an earlier date, in which case
such representation or warranty shall be true and correct in all material
respects as of such earlier date. The Company shall have performed in all
material respects all obligations and conditions herein required to be performed
or observed by it on or prior to the Closing Date. 



                        (b)    The
Company shall have obtained any and all consents, permits, approvals,
registrations and waivers (including, without limitation, approval of the
Proposal by its stockholders in accordance with applicable law and the
applicable requirements of any stock exchange or market on which the Common
Stock is traded or quoted) necessary or appropriate for consummation of the
purchase and sale of the Shares and the consummation of the other transactions
contemplated by the Transaction Documents, all of which shall be in full force
and effect. 



                        (c)    The
Company shall have executed and delivered the Registration Rights Agreement.




                        (d)    The
Company shall have received confirmation from Nasdaq to the effect that that the
Shares being issued on the relevant Closing Date have been approved for
inclusion in The Nasdaq SmallCap Market upon official notice of issuance.




                        (e)    No
judgment, writ, order, injunction, award or decree of or by any court, or judge,
justice or magistrate, including any bankruptcy court or judge, or any order of
or by any governmental authority, shall have been issued, and no action or
proceeding shall have been instituted by any governmental authority, enjoining
or preventing the consummation of the transactions contemplated hereby or in the
other Transaction Documents. 






19 












                        (f)    The
Company shall have delivered a Certificate, executed on behalf of the Company by
its Chief Executive Officer or its Chief Financial Officer, dated as of the
Closing Date, certifying to the fulfillment of the conditions specified in
subsections (a), (b), (d), (e) and (i) of this Section 6.1. 



                        (g)    The
Company shall have delivered a Certificate, executed on behalf of the Company by
its Secretary, dated as of the Closing Date, certifying the resolutions adopted
by the Board of Directors of the Company approving the transactions contemplated
by this Agreement and the other Transaction Documents and the issuance of the
Shares, certifying the current versions of the Certificate of Incorporation and
Bylaws of the Company and certifying as to the signatures and authority of
persons signing the Transaction Documents and related documents on behalf of the
Company. 



                        (h)    The
Investors shall have received an opinion from Best & Flanagan LLP, the
Company’s counsel, dated as of the Closing Date, in form and substance
reasonably acceptable to the Investors and addressing such legal matters as the
Investors may reasonably request. 



                        (i)    No
stop order or suspension of trading shall have been imposed by Nasdaq, the SEC
or any other governmental or regulatory body with respect to public trading in
the Common Stock. 



                6.2   Conditions
to Obligations of the Company. The Company’s obligation to sell and
issue the Shares at each closing is subject to the fulfillment to the
satisfaction of the Company on or prior to the relevant Closing Date of the
following conditions, any of which may be waived by the Company: 



                        (a)    The
representations and warranties made by the Investors in Section 5 hereof shall
be true and correct in all material respects when made, and shall be true and
correct in all material respects on the Closing Date with the same force and
effect as if they had been made on and as of said date. The Investors shall have
performed in all material respects all obligations and conditions herein
required to be performed or observed by them on or prior to the Closing Date.




                        (b)    The
Investors shall have executed and delivered the Registration Rights Agreement.




                        (c)    The
Investors shall have delivered the Initial Purchase Price or the Option Purchase
Price, as applicable, to the Company. 



                        (d)    The
Company’s stockholders shall have obtained the approval of the Proposal by
its stockholders in accordance with applicable law and the applicable
requirements of any stock exchange or market on which the Common Stock is traded
or quoted. 


              6.3   Termination
of Obligations to Effect Closing; Effects.  






20 












                (a)    The
obligations of the Company, on the one hand, and the Investors, on the other
hand, to effect any closing shall terminate as follows: 



                        (i)    Upon
the mutual written consent of the Company and the Investors; 



                        (ii)    By
the Company if any of the conditions set forth in Section 6.2 shall have become
incapable of fulfillment, and shall not have been waived by the Company;




                        (iii)    By
an Investor (with respect to itself only) if any of the conditions set forth in
Section 6.1 shall have become incapable of fulfillment, and shall not have been
waived by the Investor; or 



                        (iv)    By
either the Company or any Investor (with respect to itself only) if the First
Closing Date has not occurred on or prior to August 31, 2004; 



provided, however, that, except in
the case of clause (i) above, the party seeking to terminate its obligation to effect the
relevant closing shall not then be in breach of any of its representations, warranties,
covenants or agreements contained in this Agreement or the other Transaction Documents if
such breach has resulted in the circumstances giving rise to such party’s seeking to
terminate its obligation to effect such closing. 



                (b)    In
the event of termination by the Company or any Investor of its obligations to
effect a closing pursuant to this Section 6.3, written notice thereof shall
forthwith be given to the other Investors and the other Investors shall have the
right to terminate their obligations to effect such closing upon written notice
to the Company and the other Investors. Nothing in this Section 6.3 shall be
deemed to release any party from any liability for any breach by such party of
the terms and provisions of this Agreement or the other Transaction Documents or
to impair the right of any party to compel specific performance by any other
party of its obligations under this Agreement or the other Transaction
Documents. 



        7.    Covenants
and Agreements of the Company.  



                7.1   Reports. The
Company will furnish to such Investors and/or their assignees such information
relating to the Company and its Subsidiaries as from time to time may reasonably
be requested by such Investors and/or their assignees; provided, however, that
the Company shall not disclose material nonpublic information to the Investors,
or to advisors to or representatives of the Investors, unless prior to
disclosure of such information the Company identifies such information as being
material nonpublic information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such material
nonpublic information for review and any Investor wishing to obtain such
information enters into an appropriate confidentiality agreement with the
Company with respect thereto. 






21 












                7.2   No
Conflicting Agreements. The Company will not take any action, enter into any
agreement or make any commitment that would conflict or interfere in any
material respect with the Company’s obligations to the Investors under the
Transaction Documents. 



                7.3   Insurance. The
Company shall not materially reduce the insurance coverages described in Section 4.19. 



                7.4   Compliance
with Laws. The Company will comply in all material respects with all
applicable laws, rules, regulations, orders and decrees of all governmental
authorities. 



                7.5   Listing
of Underlying Shares and Related Matters. Promptly following the date
hereof, the Company shall take all necessary action to cause the Shares issued
on each Closing Date to be listed on the Nasdaq SmallCap Market no later than
the relevant Closing Date. Further, if the Company applies to have its Common
Stock or other securities traded on any other principal stock exchange or
market, it shall include in such application the Shares and will take such other
action as is necessary to cause such Common Stock to be so listed. The Company
will use commercially reasonable efforts to continue the listing and trading of
its Common Stock on the Nasdaq SmallCap Market and, in accordance, therewith,
will use commercially reasonable efforts to comply in all respects with the
Company’s reporting, filing and other obligations under the bylaws or rules
of such market or exchange, as applicable. 



                7.6   Termination
of Covenants. The provisions of Sections 7.1 through 7.4 shall
terminate and be of no further force and effect on the date on which the
Company’s obligations under the Registration Rights Agreement to register
or maintain the effectiveness of any registration covering the Registrable
Securities (as such term is defined in the Registration Rights Agreement) shall
terminate. 



                7.7   Removal
of Legends. Upon the earlier of (i) registration for resale pursuant to
the Registration Rights Agreement and receipt by the Company of the
Investor’s written confirmation that such Shares will not be disposed of
except in one of the states listed in Schedule 7.7 and in compliance with
the prospectus delivery requirements of the 1933 Act or
(ii) Rule 144(k) becoming available the Company shall, upon an
Investor’s written request, promptly cause certificates evidencing the
Investor’s Shares to be replaced with certificates which do not bear such
restrictive legends. When the Company is required to cause unlegended
certificates to replace previously issued legended certificates, if unlegended
certificates are not delivered to an Investor within five (5) Business Days
of submission by that Investor of legended certificate(s) to the Company’s
transfer agent together with a representation letter in customary form, the
Company shall be liable to the Investor for liquidated damages in an amount
equal to 1% of the aggregate purchase price of the Shares evidenced by such
certificate(s) for each thirty (30) day period (or portion thereof) beyond
such three (3) Business Day that the unlegended certificates have not been
so delivered.  



                7.8   Proxy
Statement; Stockholders Meeting. (a)   Promptly following the execution
and delivery of this Agreement the Company shall take all action necessary to
call a meeting of its stockholders (the “Stockholders Meeting”) for
the purpose of seeking approval of 





22 










the Company’s stockholders for
(i) the issuance and sale to the Investors of the Shares (the “Proposal”). In
connection therewith, the Company will promptly prepare and file with the SEC proxy
materials (including a proxy statement and form of proxy) for use at the Stockholders
Meeting and, after receiving and promptly responding to any comments of the SEC thereon,
shall promptly mail such proxy materials to the stockholders of the Company. Each Investor
shall promptly furnish in writing to the Company such information relating to such
Investor and its investment in the Company as the Company may reasonably request for
inclusion in the Proxy Statement. The Company will comply with Section 14(a) of the 1934
Act and the rules promulgated thereunder in relation to any proxy statement (as amended or
supplemented, the “Proxy Statement”) and any form of proxy to be sent to the
stockholders of the Company in connection with the Stockholders Meeting, and the Proxy
Statement shall not, on the date that the Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to stockholders or at the time of the Stockholders
Meeting, contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein not false or misleading, or
omit to state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies or the Stockholders Meeting
which has become false or misleading. If the Company should discover at any time prior to
the Stockholders Meeting, any event relating to the Company or any of its affiliates,
officers or directors that is required to be set forth in a supplement or amendment to the
Proxy Statement, in addition to the Company’s obligations under the 1934 Act, the
Company will promptly inform the Investors thereof. 



                (b)    Subject
to their fiduciary obligations under applicable law (as determined in good faith
by the Company’s Board of Directors after consultation with the
Company’s outside counsel), the Company’s Board of Directors shall
recommend to the Company’s stockholders (and, subject to their fiduciary
obligations, not revoke or amend such recommendation) that the stockholders vote
in favor of the Proposal and shall cause the Company to take all commercially
reasonable action (including, without limitation, the hiring of a proxy
solicitation firm of nationally recognized standing) to solicit the approval of
the stockholders for the Proposal. Whether or not the Company’s Board of
Directors determines at any time after the date hereof that, due to its
fiduciary duties, it must revoke or amend its recommendation to the
Company’s stockholders, the Company shall be required to, and will take, in
accordance with applicable law and its Articles of Incorporation and Bylaws, all
action necessary to convene the Stockholders Meeting as promptly as practicable
to consider and vote upon the approval of the Proposal. 



                7.9   Right
of Option Refusal on Future Financings. From the date hereof until the later
of (i) one year after the First Closing Date or (ii) six months after
the Option Closing Date, if any, upon any financing by the Company of its Common
Stock or Common Stock Equivalents (a “Subsequent Financing”), each
Investor shall have the right to participate in up to 100% of such Subsequent
Financing. At least five (5) Business Days prior to the closing of the
Subsequent Financing, the Company shall deliver to each Investor a written
notice of its intention to effect a Subsequent Financing
(“Pre-Notice”), which Pre-Notice shall ask such Investor if it wants
to review the details of such financing (such additional notice, a
“Subsequent Financing Notice”). Upon the request of an Investor, and
only upon a request by such Investor, for a Subsequent Financing Notice, the
Company shall promptly, but no later than one Business 






23 











Day after such request, deliver a
Subsequent Financing Notice to such Investor. 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. Each Investor
shall notify the Company by 6:30 p.m. (New York City time) on the fifth
(5th) Business Day after their receipt of the Subsequent Financing Notice of its
willingness to provide the Subsequent Financing on the terms described in the
Subsequent Financing Notice, subject to completion of mutually acceptable
documentation. If one or more Investors shall fail to so notify the Company of
their willingness to participate in the Subsequent Financing, the Investors
agreeing to participate in the Subsequent Financing (the “Participating
Investors”) shall have the right to provide all of the Subsequent
Financing. If one or more Investors fail to notify the Company of their
willingness to provide all of the Subsequent Financing and the Participating
Investors do not agree to provide all of the Subsequent Financing, 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; provided that the
Company must provide the Investors with a second Subsequent Financing Notice,
and the Investors will again have the right of first refusal set forth above in
this Section 7.9, 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 Business Days after the date
of the initial Subsequent Financing Notice with the Person identified in the
Subsequent Financing Notice. In the event the Company receives responses to
Subsequent Financing Notices from Investors seeking to purchase more than the
financing sought by the Company in the Subsequent Financing such Investors shall
have the right to purchase their Pro Rata Portion (as defined below) of the
Common Stock or Common Stock Equivalents to be issued in such Subsequent
Financing. “Pro Rata Portion” is the ratio of (x) the amount
invested by such Investor pursuant to this Agreement (the “Subscription
Amount”) and (y) the aggregate sum of all of the Subscription Amounts.
Notwithstanding the foregoing, this Section 7.9 shall not apply in respect
of 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 duly adopted by a majority of the non-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 and (b) securities upon
the exercise of or conversion of any 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. 



        8.    Survival and Indemnification.  



                8.1   Survival. The representations, warranties, covenants and agreements contained in
this Agreement shall survive the closing of the transactions contemplated by this
Agreement for a period of three years from the First Closing Date or the Option Closing
Date, if any. 



                8.2   Indemnification. The Company agrees to indemnify and hold harmless each Investor
and its Affiliates and their respective directors, officers, employees and agents from and
against any and all losses, claims, damages, liabilities and expenses (including without
limitation reasonable attorney fees and disbursements and other expenses incurred in 






24 











connection with investigating,
preparing or defending any action, claim or proceeding, pending or threatened and the
costs of enforcement thereof) (collectively, “Losses”) to which such Person may
become subject as a result of any breach of representation, warranty, covenant or
agreement made by or to be performed on the part of the Company under the Transaction
Documents, and will reimburse any such Person for all such amounts as they are incurred by
such Person. 



                8.3   Conduct
of Indemnification Proceedings. Promptly after receipt by any Person (the
“Indemnified Person”) of notice of any demand, claim or circumstances
which would or might give rise to a claim or the commencement of any action,
proceeding or investigation in respect of which indemnity may be sought pursuant
to Section 8.2, such Indemnified Person shall promptly notify the Company
in writing and the Company shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to such Indemnified Person, and
shall assume the payment of all fees and expenses; provided,
however, that the failure of any Indemnified Person so to notify the
Company shall not relieve the Company of its obligations hereunder except to the
extent that the Company is materially prejudiced by such failure to notify. In
any such proceeding, any Indemnified Person shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such Indemnified Person unless: (i) the Company and the Indemnified
Person shall have mutually agreed to the retention of such counsel; or
(ii) in the reasonable judgment of counsel to such Indemnified Person
representation of both parties by the same counsel would be inappropriate due to
actual or potential differing interests between them. The Company shall not be
liable for any settlement of any proceeding effected without its written
consent, which consent shall not be unreasonably withheld, but if settled with
such consent, or if there be a final judgment for the plaintiff, the Company
shall indemnify and hold harmless such Indemnified Person from and against any
loss or liability (to the extent stated above) by reason of such settlement or
judgment. Without the prior written consent of the Indemnified Person, which
consent shall not be unreasonably withheld, the Company shall not effect any
settlement of any pending or threatened proceeding in respect of which any
Indemnified Person is or could have been a party and indemnity could have been
sought hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Person from all liability arising out
of such proceeding.  



        9.    Miscellaneous. 



                9.1   Successors
and Assigns. This Agreement may not be assigned by a party hereto without
the prior written consent of the Company or the Investors, as applicable,
provided, however, that subject to applicable state and federal securities laws,
an Investor may assign its rights and delegate its duties hereunder in whole or
in part to an Affiliate or to a third party acquiring some or all of its Shares
in a private transaction without the prior written consent of the Company or the
other Investors, after notice duly given by such Investor to the Company and the
other Investors, provided, that no such assignment or obligation shall affect
the obligations of such Investor hereunder. The provisions of this Agreement
shall inure to the benefit of and be binding upon the respective permitted
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.  






25 











                9.2   Counterparts;
Faxes. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. This Agreement may also be executed via facsimile,
which shall be deemed an original. 



                9.3   Titles
and Subtitles. The titles and subtitles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement. 



                9.4   Notices. Unless
otherwise provided, any notice required or permitted under this Agreement shall
be given in writing and shall be deemed effectively given as hereinafter
described (i) if given by personal delivery, then such notice shall be
deemed given upon such delivery, (ii) if given by telex or telecopier, then
such notice shall be deemed given upon receipt of confirmation of complete
transmittal, (iii) if given by mail, then such notice shall be deemed given
upon the earlier of (A) receipt of such notice by the recipient or
(B) three days after such notice is deposited in first class mail, postage
prepaid, and (iv) if given by an internationally recognized overnight air
courier, then such notice shall be deemed given one business day after delivery
to such carrier. All notices shall be addressed to the party to be notified at
the address as follows, or at such other address as such party may designate by
ten days’ advance written notice to the other party: 



	  	If to the Company:  







	  	Insignia Systems, Inc.

6470 Sycamore Court North

Maple Grove, Minnesota 55369

Attention: Scott F. Drill, CEO

Fax: (763) 392-6222 







	  	With a copy to: 







	  	
Best & Flanagan LLP

Suite 4000

225 South Sixth Street

Minneapolis, Minnesota 55402

Attention: James C. Diracles

Fax: (612) 339-5897 







	  	If to the Investors: 






to the addresses set forth on the signature pages hereto. 



                9.5   Expenses. The
parties hereto shall pay their own costs and expenses in connection herewith,
except that the Company shall pay the reasonable fees and expenses of counsel to
the Investors under this Agreement and the Registration Rights Agreement, not to







26 











exceed $25,000. Such expenses shall
be paid not later than the First Closing Date, or if incurred thereafter, upon demand. In
addition to such fees, the Company shall reimburse the Investors upon demand for all
reasonable out-of-pocket expenses incurred by the Investors, including without limitation
reimbursement of attorneys’ fees and disbursements, in connection with any amendment,
modification or waiver of this Agreement or the other Transaction Documents requested by
the Company. In the event that legal proceedings are commenced by any party to this
Agreement against another party to this Agreement in connection with this Agreement or the
other Transaction Documents, the party or parties which do not prevail in such proceedings
shall severally, but not jointly, pay their pro rata share of the reasonable
attorneys’ fees and other reasonable out-of-pocket costs and expenses incurred by the
prevailing party in such proceedings. 



                9.6   Amendments
and Waivers. Any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the Investors. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any Shares
purchased under this Agreement at the time outstanding, each future holder of
all such Shares, and the Company. 



                9.7   Publicity. Except
as set forth below, no public release or announcement concerning the
transactions contemplated hereby shall be issued by the Company or the Investors
without the prior consent of the Company (in the case of a release or
announcement by the Investors) or the Investors (in the case of a release or
announcement by the Company) (which consents shall not be unreasonably
withheld), except as such release or announcement may be required by law or the
applicable rules or regulations of any securities exchange or securities market,
in which case the Company or the Investors, as the case may be, shall allow the
Investors or the Company, as applicable, to the extent reasonably practicable in
the circumstances, reasonable time to comment on such release or announcement in
advance of such issuance. By 8:30 a.m. (New York City time) on the trading
day immediately following the execution of this Agreement and the relevant
Closing Date, the Company shall issue a press release disclosing the execution
of this Agreement or the consummation of the transactions occurring on such
Closing Date, respectively. No later than the third trading day following the
relevant Closing Date, the Company will file a Current Report on Form 8-K
attaching the press release described in the foregoing sentence as well as
copies of the Transaction Documents. In addition, the Company will make such
other filings and notices in the manner and time required by the SEC and Nasdaq.
Notwithstanding the foregoing, the Company shall not publicly disclose the name
of any Investor, or include the name of any Investor in any filing with the SEC
(other than the Registration Statement and any exhibits to filings made in
respect of this transaction in accordance with periodic filing requirements
under the 1934 Act) or any regulatory agency or Nasdaq, without the prior
written consent of such Investor, except to the extent such disclosure is
required by law or trading market regulations, in which case the Company shall
provide the Investors with prior notice of such disclosure. 



                9.8   Severability. Any
provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof but shall be 






27 











interpreted as if it were written so
as to be enforceable to the maximum extent permitted by applicable law, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted by
applicable law, the parties hereby waive any provision of law which renders any provision
hereof prohibited or unenforceable in any respect. 



                9.9   Entire Agreement. This
Agreement, including the Exhibits and the Disclosure Schedules, and the other
Transaction Documents constitute the entire agreement among the parties hereof
with respect to the subject matter hereof and thereof and supersede all prior
agreements and understandings, both oral and written, between the parties with
respect to the subject matter hereof and thereof. 



                9.10   Further
Assurances. The parties shall execute and deliver all such further
instruments and documents and take all such other actions as may reasonably be
required to carry out the transactions contemplated hereby and to evidence the
fulfillment of the agreements herein contained. 



                9.11   Governing
Law; Consent to Jurisdiction; Waiver of Jury Trial. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State of
New York without regard to the choice of law principles thereof. Each of the
parties hereto irrevocably submits to the exclusive jurisdiction of the courts
of the State of New York located in New York County and the United States
District Court for the Southern District of New York for the purpose of any
suit, action, proceeding or judgment relating to or arising out of this
Agreement and the transactions contemplated hereby. Service of process in
connection with any such suit, action or proceeding may be served on each party
hereto anywhere in the world by the same methods as are specified for the giving
of notices under this Agreement. Each of the parties hereto irrevocably consents
to the jurisdiction of any such court in any such suit, action or proceeding and
to the laying of venue in such court. Each party hereto irrevocably waives any
objection to the laying of venue of any such suit, action or proceeding brought
in such courts and irrevocably waives any claim that any such suit, action or
proceeding brought in any such court has been brought in an inconvenient forum.
EACH OF THE PARTIES HERETO WAIVES ANY RIGHT TO REQUEST A TRIAL BY JURY IN ANY LITIGATION
WITH RESPECT TO THIS AGREEMENT AND REPRESENTS THAT COUNSEL HAS BEEN CONSULTED SPECIFICALLY
AS TO THIS WAIVER. 



                9.12   Independent
Nature of Investors’ Obligations and Rights. The obligations of each
Investor under any Transaction Document are several and not joint with the
obligations of any other Investor, and no Investor shall be responsible in any
way for the performance of the obligations of any other Investor under any
Transaction Document. The decision of each Investor to purchase Shares pursuant
to the Transaction Documents has been made by such Investor independently of any
other Investor. Nothing contained herein or in any Transaction Document, and no
action taken by any Investor pursuant thereto, shall be deemed to constitute the
Investors as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Investors are in any way acting in
concert or as a group with respect to such obligations or the transactions
contemplated by the Transaction Documents. Each Investor acknowledges that no
other Investor has acted as agent for such Investor in connection with 







28 











making its investment hereunder and
that no Investor will be acting as agent of such Investor in connection with monitoring
its investment in the Shares or enforcing its rights under the Transaction Documents. Each
Investor 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 Investor to be joined
as an additional party in any proceeding for such purpose. The Company acknowledges that
each of the Investors has been provided with the same Transaction Documents for the
purpose of closing a transaction with multiple Investors and not because it was required
or requested to do so by any Investor. 



[signature page follows] 



















29 











        IN
WITNESS WHEREOF, the parties have executed this Agreement or caused their duly authorized
officers to execute this Agreement as of the date first above written. 


	 	 	 	 	 	 
	The Company:	 	INSIGNIA SYSTEMS, INC.
	

   		

By:  	 	

   	 
	 	

	   		Name:  	 	   	 
	   		Title:  	 	   	 

























30 










	  	  	  	  	  	  
	The Investors: 	  	SPECIAL SITUATIONS FUND III, L.P. 
	

    		

By:   	 	

    	 
	 	

	   		Name:   	David M. Greenhouse 
	    		Title:   	General Partner 
	

Aggregate Initial Purchase Price:   $1,350,000
Number of Initial Shares:   1,080,000 
	

Address for Notice: 
	   		   	153 E. 53rd Street
55th Floor
New York, NY  10022 
	   		   	
with a copy to: 
	   		   	
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attn:   John D. Hogoboom, Esq.
Telephone:   973.597.2500
Facsimile:   973.597.2400 
	  	  	

SPECIAL SITUATIONS CAYMAN FUND, L.P. 
	

    		

By:   	 	

    	 
	 	

	   		Name:   	David M. Greenhouse 
	    		Title:   	General Partner 
	

Aggregate Initial Purchase Price:   $450,000
Number of Initial Shares:   360,000 
	

Address for Notice: 
	   		   	153 E. 53rd Street
55th Floor
New York, NY  10022 










31 








	  	  	  	  	  	  
	   		   	
with a copy to: 
	   		   	
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attn:   John D. Hogoboom, Esq.
Telephone:   973.597.2500
Facsimile:   973.597.2400 
	  	  	

SPECIAL SITUATIONS PRIVATE EQUITY FUND, L.P. 
	

    		

By:   	 	

    	 
	 	

	   		Name:   	David M. Greenhouse 
	    		Title:   	General Partner 
	

Aggregate Initial Purchase Price:   $700,000
Number of Initial Shares:   560,000 
	

Address for Notice: 
	   		   	153 E. 53rd Street
55th Floor
New York, NY  10022 
	   		   	
with a copy to: 
	   		   	
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, NJ 07068
Attn:   John D. Hogoboom, Esq.
Telephone:   973.597.2500
Facsimile:   973.597.2400 















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