EXHIBIT 10.1


 


SECURITIES PURCHASE AGREEMENT


 


This Securities Purchase Agreement (this “Agreement”) is dated
as of December 2, 2005, by and among Intrusion Inc., a Delaware
corporation (the “Company”), and the purchasers identified on the
signature pages hereto (each, including its successors and assigns, a “Purchaser”
and collectively the “Purchasers”).


 


WHEREAS, subject to the terms and conditions set forth in this
Agreement and pursuant to Section 4(2) of the Securities Act of 1933,
as amended (the “Securities Act”) 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,
securities of the Company as more fully described in this Agreement.


 


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: (a) capitalized terms that are not otherwise defined
herein have the meanings given to such terms in the Certificate of Designations
(as defined herein), and (b) 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).


 


“Actual Minimum” means, as of any
date, the maximum aggregate number of shares of Common Stock then issued or potentially
issuable in the future pursuant to the Transaction Documents, including any
Underlying Shares issuable upon exercise or conversion in full of all Warrants
and shares of Preferred Stock, ignoring any conversion or exercise limits set
forth therein, and assuming that any previously unconverted shares of Preferred
Stock are held until the third anniversary of the Closing Date, subject to the
limitation on the number of shares of Common Stock issuable hereunder set forth
in Sections 6(c) and 6(d) of the Certificate of Designations.


 


“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 under the Securities Act.  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.


 


“Certificate of Designations” means
the Certificate of Designations to be filed


 





















 


 prior
to the Closing by the Company with the Secretary of State of Delaware, in the
form of Exhibit A attached hereto.


 


“Closing” means the closing of the
purchase and sale of the Securities pursuant to Section 2.1.


 


“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.


 


“Commission” means the Securities and
Exchange Commission.


 


“Common Stock” means the common stock
of the Company, par value $0.01 per share, and any other class of securities
into which such securities may hereafter have been reclassified or changed
into.


 


“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 Patton Boggs
LLP.


 


“Conversion Price” shall have the
meaning ascribed to such term in the Certificate of Designations.


 


“Disclosure Schedules” shall have the
meaning ascribed to such term in Section 3.1.


 


“Effective Date” means the date that
the initial Registration Statement filed by the Company pursuant to the
Registration Rights Agreement is first declared effective by the Commission.


 


“Escrow Agent” shall have the meaning
set forth in the Escrow Agreement.


 


“Escrow Agreement” shall mean the
Escrow Agreement in substantially the form of Exhibit E hereto
executed and delivered contemporaneously with this Agreement.


 


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


 


“Exempt Issuance” means the issuance
of (a) shares of Common Stock or options to employees, officers or
directors of, or consultants to, 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-


 


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employee directors established for such purpose, (b) securities
upon the exercise of or conversion of (i) any Securities issued hereunder or
(ii), convertible securities, options or warrants issued and outstanding on the
date of this Agreement, provided that in the case of this clause (ii) such
securities have not been amended since the date of this Agreement to increase
the number of such securities or to decrease the exercise or conversion price
of any such securities other than as a result of the operation of the
anti-dilution provisions thereof, (c) securities issued pursuant to
acquisitions or strategic transactions, 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, (d) shares of capital stock, convertible
securities, options or warrants issued in connection with any pro rata stock
split or stock dividend in respect of any series or class of capital stock of
the Company or recapitalization by the Company, (e) warrants issued
pursuant to a commercial borrowing, secured lending or lease financing transaction
approved by the Company’s Board of Directors, (f) securities issued to a
registered broker-dealer engaged by the Company to seek financing on the
Company’s behalf, paid as compensation for actually obtaining any such
financing, (g) shares of capital stock issued in a firm-commitment
underwritten public offering of securities pursuant to a registration statement
filed under the Securities Act with gross proceeds of at least $30,000,000 and (h) securities
issued upon the conversion or exercise of any of the capital stock, convertible
securities, options or warrants described in clauses (a) through (g),
provided that in the case of this clause (h) such securities have not been
amended since the date of this Agreement to increase the number of such securities
or to decrease the exercise or conversion price of any such securities other
than as a result of the operation of the anti-dilution provisions thereof.


 


“Existing Preferred Stock” means the
Company’s 1,000,000 shares of 5% Convertible Preferred Stock, par value $0.01
per share, designated pursuant the Certificate of Designation filed with the
Delaware Secretary of State on March 25, 2004; and the Company’s 1,200,000
shares of 5% Series 2 Convertible Preferred Stock par value $0.01 per
share, designated pursuant the Certificate of Designation filed with the
Delaware Secretary of State on March 24, 2005.


 


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


 


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


 


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


 


“Legend Removal Date” shall have the
meaning ascribed to such term in Section 4.1(c).


 


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


 


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


 


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


 


“Maximum Rate” shall have the meaning
ascribed to such term in Section 5.17.


 


“Participation Maximum” shall have the
meaning ascribed to such term in Section 4.13.


 


“Permitted Lien” means (i) any
Lien for Taxes not yet due; (ii) any statutory Lien or contractual
landlord’s Lien or other Lien created by operation of law arising in the
ordinary course of business with respect to a Liability that is not yet due; (iii) retention
of title agreements with suppliers entered into in the ordinary course of
business; (iv) non-exclusive licenses of intellectual property granted by
the Company to third parties in the ordinary course of business; (v) licenses
and restrictions on use of third party intellectual property licensed to or
used by the Company in the ordinary course of business; (vi) source code
escrow arrangements; (vii) restrictions on transfer under federal or state
securities laws; and (viii) such imperfections of title and non-monetary Liens
as do not and will not materially detract from or interfere with the use of the
properties subject thereto or affected thereby or otherwise materially impair
business operations involving such properties.


 


 “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.


 


“Preferred Stock” means the up to
565,000 shares of the Company’s Series 3 5% Convertible Preferred Stock
issued hereunder having the rights, preferences and privileges set forth in the
Certificate of Designations.


 


“Pre-Notice” shall have the meaning
ascribed to such term in Section 4.13.


 


“Proceeding” means an action, claim,
suit, investigation or proceeding (including, without limitation, an
investigation or partial proceeding, such as a deposition), whether commenced
or threatened.


 


“Purchaser Party” shall have the
meaning ascribed to such term in Section 4.11.


 


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“Registration Rights Agreement” means
the Registration Rights Agreement, dated the date hereof, among the Company and
the Purchasers, in the form of Exhibit B attached hereto.


 


“Registration Statement” means a
registration statement meeting the requirements set forth in the Registration
Rights Agreement and covering the resale of the Underlying Shares by each
Purchaser as provided for in the Registration Rights Agreement.


 


“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 Preferred
Stock, the Warrants and the Underlying Shares.


 


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


 


“Shareholder Approval” means such
approval as may be required by the applicable rules and regulations of the
Trading Market (or any successor entity) from the shareholders of the Company
with respect to the transactions contemplated by the Transaction Documents,
including the issuance of all of the Underlying Shares and shares of Common
Stock issuable upon exercise of the Warrants in excess of 19.99% of the issued
and outstanding Common Stock on the Closing Date.


 


“Short Sales” shall include all “short
sales” as defined in Rule 200 of Regulation SHO under the Exchange
Act. 


 


 “Stated
Value” means $2.18 per share of Preferred Stock.


 


“Subscription Amount” shall mean, as to each Purchaser, the amount to
be paid for the Preferred Stock purchased hereunder as specified below such
Purchaser’s name on the signature page of this Agreement and next to the
heading “Subscription Amount”, in United States Dollars and in immediately
available funds.


 


“Subsequent Financing” shall have the meaning
ascribed to such term in Section 4.13.


 


“Subsequent Financing Notice” shall
have the meaning ascribed to such term in Section 4.13.


 


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“Subsidiary” means any subsidiary of
the Company as set forth on Schedule 3.1(a) or identified in
an Exhibit included or incorporated in the SEC Reports pursuant to Item
601(b)(21) of Regulation S-B.


 


“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 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 Certificate of Designations, the Warrants, the Escrow Agreement,
the Registration Rights Agreement and any other documents or agreements
executed in connection with the transactions contemplated hereunder.


 


“Underlying Shares” means the shares
of Common Stock issuable upon conversion of the Preferred Stock, upon exercise
of the Warrants and issued and issuable in lieu of the cash payment of
dividends on the Preferred Stock.


 


 “VWAP”
means, for any date, the price determined by the first of the following clauses
that applies: (a) if the Common Stock is then listed or quoted on a
Trading Market, the daily volume weighted average price of the Common Stock for
such date (or the nearest preceding date) on the Trading Market on which the
Common Stock is then listed or quoted as reported by Bloomberg Financial L.P.
(based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m.
Eastern Time); (b) if the Common Stock is not then listed or quoted on a
Trading Market and if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the volume weighted average price of the Common Stock for such
date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the
Common Stock is not then listed or quoted on the OTC Bulletin Board and if
prices for the Common Stock are then reported in the “Pink Sheets” published by
the Pink Sheets, LLC (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 (c) in all other cases, the fair market value of a
share of Common Stock as determined by an independent appraiser selected in
good faith by the Purchasers and reasonably acceptable to the Company.


 


“Warrants” means collectively the
Common Stock purchase warrants, in the form of Exhibit C delivered
to the Purchasers at the Closing in accordance with Section 2.2(a) hereof,
which Warrants shall be exercisable beginning 6 months following the issuance
thereof and have a term of exercise equal to 5 years.


 


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


 


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ARTICLE II


PURCHASE AND SALE


 


2.1                                 Closing.  On the Closing Date, upon the terms and subject
to the conditions set forth herein, concurrent with the execution and delivery
of this Agreement by the parties hereto, the Company agrees to sell, and each
Purchaser agrees to purchase in the aggregate, severally and not jointly, up to
565,000 shares of Preferred Stock with an aggregated Stated Value equal to such
Purchaser’s Subscription Amount and Warrants as determined by pursuant to Section 2.2(a)(iii).  The aggregate number of shares of Preferred
Stock sold hereunder shall be up to 565,000. 
Each Purchaser shall deliver to the Company via wire transfer or a
certified check of immediately available funds equal to their Subscription
Amount and the Company shall deliver to each Purchaser their respective shares
of Preferred Stock and Warrants as determined pursuant to Section 2.2(a) and
the other items set forth in Section 2.2 issuable at the Closing.  Upon satisfaction of the conditions set forth
in Sections 2.2 and 2.3, the Closing shall occur via facsimile and electronic
transmission at the offices of the Escrow Agent, 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 the Escrow Agent
with respect to each Purchaser the following:


 


(i)                                     this Agreement
duly executed by the Company;


 


(ii)                                  a certificate
evidencing a number of shares of Preferred Stock equal to such Purchaser’s
Subscription Amount divided by the Stated Value, registered in the name of such
Purchaser;


 


(iii)                               a Warrant registered in
the name of such Purchaser to purchase up to a number of shares of Common Stock
equal to 50% of such Purchaser’s Subscription Amount divided by $2.18, with an
exercise price equal to $2.58, subject to adjustment therein;


 


(iv)                              the Registration Rights
Agreement duly executed by the Company;


 


(v)                                 the Escrow Agreement
duly executed by the Company;


 


(vi)                              the written voting
agreement, in the form of Exhibit F attached hereto, of all of the
officers, directors and shareholders holding more than 10% of the issued and outstanding
shares of Common Stock on the date hereof to vote all Common Stock owned by
each of such officers, directors and shareholders as of the record date for the
annual meeting of shareholders of the Company in favor of Shareholder Approval;
and


 


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


 


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


 


(i)                                     this Agreement
duly executed by such Purchaser;


 


(ii)                                  such Purchaser’s
Subscription Amount by wire transfer to the account of the Escrow Agent;


 


(iii)                               the Escrow Agreement
duly executed by such Purchaser; and


 


(iv)                              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;


 


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


 


(iv)                              the Company shall have
received the Required Approval contemplated by Section 3.1(e)(iii) from
Nasdaq for the listing of the Underlying Shares; and


 


(v)                                 the Company shall have
received the Required Approval of the holders of the Existing Preferred Stock
contemplated by Section 3.1(e)(vi).


 


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


 


(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;


 


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(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 Preferred
Stock 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 delivered to the Purchasers concurrently herewith (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) or identified
in an Exhibit included or incorporated in the SEC Reports pursuant to Item
601(b)(21) of Regulation S-B.  The
Company owns, directly or indirectly, all of the capital stock or other equity
interests of each Subsidiary free and clear of any Liens other than Permitted
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.  The Company and each
of the Subsidiaries is an entity duly incorporated or otherwise organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization (as 


 


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applicable), with the requisite power and
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
(other than any of the following, either alone or in combination: (A) any
effect or change occurring as a result of (1) general economic or
financial conditions or (2) other developments which are not unique to the
Company but also affect other persons or entities in the Company’s industry; (B) any
change or effect resulting from a delay in the Closing not caused directly or
indirectly by the Company; or (C) failure of the Company’s results of
operations to meet any internal or external projections, predictions, estimates
or expectations, 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 power and authority or qualification.


 


(c)                                  Authorization;
Enforcement.  Subject to obtaining
the Required Approvals, the Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each
of the Transaction Documents and otherwise to carry out its obligations
thereunder.  Subject to obtaining the
Required Approvals, 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.  Subject to obtaining the Required Approvals,
each Transaction Documents 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) to
the extent the indemnification provisions of the Registration Rights Agreement
or this Agreement may be limited by federal or state securities laws.


 


(d)                                 No Conflicts.  Subject to obtaining the Required Approvals,
the execution, delivery and performance of the Transaction Documents by the
Company and the consummation by the Company of the other transactions
contemplated thereby do not and 


 


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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 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 and which is or is required to be filed or incorporated as an exhibit
to the SEC Reports, or (iii) 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 except to
the extent such laws may limit the indemnification provisions of the
Registration Rights Agreement or this Agreement), or by which any property or
asset of the Company or a 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.  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 4.6, (ii) the
filing with the Commission of the Registration Statement, (iii) the notice
and/or application(s) to each applicable Trading Market for the issuance and
sale of the Preferred Stock and Warrants and the listing of the Underlying
Shares for trading thereon in the time and manner required thereby, (iv) the
filing of Form D with the Commission and such filings as are required to
be made under applicable state securities laws, (v) the filing of the Certificate
of Designations with the Delaware Secretary of State, (vi) the consent of
the holders of at least a majority of the outstanding shares of the 5%
Convertible Preferred Stock and the affirmative vote of all of the holders of
the outstanding shares of the 5% Series 2 Convertible Preferred Stock, (vii) any
approval of the Company’s stockholders required under the rules and
regulations of the Nasdaq Stock Market prior to the conversion of the Preferred
Stock or exercise of the Warrants acquired by Purchasers who are also directors
or officers of the Company as of the date hereof, and (viii) the
Shareholder Approval (collectively, the “Required Approvals”).


 


(f)                                    Issuance of the
Securities.  Subject to obtaining the
Required Approvals, the Securities are duly authorized and, when issued and
paid for in accordance with the applicable 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 or under federal or state securities laws.  Subject to obtaining the Required Approvals,
the Underlying 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


 


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restrictions on transfer provided for in the
Transaction Documents or under federal or state securities laws.  The Company has reserved from its duly
authorized capital stock a number of shares of Common Stock for issuance of the
Underlying Shares at least equal to the Actual Minimum on the date hereof.


 


(g)                                 Capitalization.  The capitalization of the Company as of November 15,
2005 is as set forth on Schedule 3.1(g).  The Company has not issued any capital stock
since its most recently filed periodic report under the Exchange Act, other
than pursuant to the exercise of employee stock options under the Company’s
stock option plans, the issuance of shares of Common Stock to employees
pursuant to the Company’s employee stock purchase plan and pursuant to the
conversion or exercise of outstanding Common Stock Equivalents.  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 other than the
Required Approvals which have not been exercised or waived as of the Closing
Date.  Except as a result of the purchase
and sale of the Securities or as otherwise provided in the Transaction
Documents or set forth on Schedule 3.1(g) or in the SEC
Reports, 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 Common Stock Equivalents.  The
issuance 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 of
Preferred Stock.  Except as set forth on Schedule 3.1(g) or
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, schedules, forms, statements and other documents 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
and documents incorporated by reference therein, 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, the SEC Reports complied 


 


12





















 


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, 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 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 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, (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 and (C) liabilities incurred in connection with
the negotiation, preparation, execution and delivery of the Transaction
Documents and the consummation of the transactions contemplated thereby, (iii) the
Company has not altered its method of accounting, except as required by GAAP,
the Securities Act, the Exchange Act or the Commission or as otherwise
disclosed in the SEC Reports, (iv) the Company has not declared or made
any dividend or distribution of cash or other property to its stockholders
(other than dividends payable to holders of Existing Preferred Stock) or
purchased, redeemed or made any agreements to purchase or redeem any shares of
its capital stock (other than as a result of the conversion of outstanding
shares of Existing Preferred 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 or the Transaction Documents.  The Company does not have pending before the
Commission any request for confidential treatment of information.


 


(j)                                     Litigation.  Except as set forth in the SEC Reports, 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 


 


13





















 


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.


 


(k)                                  Labor Relations.  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.  Subject to obtaining the Required Approvals and
except as otherwise set forth in the SEC Reports, 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) and which is or is required to be filed or incorporated as an exhibit
to the SEC Reports, (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 valid title to all real property owned by them that is material to the
business of the Company and the Subsidiaries and good and valid 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 for
Permitted Liens.  Any real property and
facilities held under lease by the Company and the Subsidiaries are held by
them under valid and subsisting and enforceable against the Company or the
Subsidiary party thereto, and the Company or such Subsidiary is in compliance
with the terms thereof, except for such noncompliance as could not have a
Material Adverse Effect.


 


14





















 


(o)                                 Patents and
Trademarks.  To the knowledge of the
Company (without any special investigation or patent search) 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 that used 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 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 (without any
special investigation or patent search), 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 extent conducted by
companies of similar size and financial condition, including, but not limited
to, directors and officers insurance coverage at least equal to the aggregate
Subscription Amount.  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.  Other than
the Transaction Documents and 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.  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 


 


15





















 


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, to the
Company’s knowledge, in other factors that could significantly affect the
Company’s internal controls.


 


(s)                                  Certain Fees.  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. Subject to obtaining the Required Approvals, 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 of Preferred Stock, 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.  Other than each of the Purchasers, no Person
has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.


 


16





















 


(w)                               Listing and
Maintenance Requirements.  The
Company’s Common Stock is registered pursuant to Section 12(g) 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.  Except as set forth in the
SEC Reports, 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 quoted to the effect that the Company is not in compliance with
the listing or maintenance requirements of such Trading Market. Subject to
obtaining the Required Approvals and consummation of the transactions
contemplated by the Transaction Documents, the Company is 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.  Except for the existence of the transactions
contemplated by the Transaction Documents, the Company confirms that neither it
nor any other Person acting on its behalf has provided any of the Purchasers or
their agents or counsel with any information that constitutes or might
constitute material, nonpublic information, except to the extent such
information was provided to a Purchaser who has executed a confidentiality or
non-disclosure agreement on or prior to the date hereof.  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 


 


17





















 


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 Trading Market on which any of the securities of the Company are listed
or designated. 


 


(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, the Company believes
its available cash, cash equivalents and short term investments are sufficient
to fund the operation of its business for the next twelve months.  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).  The Company has no knowledge of any facts or
circumstances which lead it to believe that it will file for reorganization or
liquidation under the bankruptcy or reorganization laws of any jurisdiction
within one year from the Closing Date. 
The SEC Reports set forth as of the dates thereof all outstanding secured
and unsecured Indebtedness of the Company or any Subsidiary, or for which the
Company or any Subsidiary has commitments. 
For the purposes of this Agreement, “Indebtedness” shall mean (a) any
liabilities for borrowed money or amounts owed in excess of $50,000 (other than
trade accounts payable incurred in the ordinary course of business), (b) all
guaranties, endorsements and other contingent obligations in respect of
Indebtedness of others, whether or not the same are or should be reflected in
the Company’s balance sheet (or the notes thereto), except guaranties by
endorsement of negotiable instruments for deposit or collection or similar
transactions in the ordinary course of business; and (c) the present value
of any lease payments in excess of $50,000 due under leases required to be capitalized
in accordance with GAAP.  Neither the
Company nor any Subsidiary is in default with respect to any Indebtedness.


 


(bb)                          Form S-3 Eligibility.  The
Company is eligible to register the resale of the Underlying Shares for resale
by the Purchaser on Form S-3 promulgated under the Securities Act pursuant
to General Instruction I.B.3 of Form S-3.


 


(cc)                            Tax Status.  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)                          No General Solicitation.  Neither the Company nor any person acting on
behalf of the Company has offered or sold any of the Securities by any form of
general solicitation or general advertising. 
The Company has offered the Securities for sale only to the Purchasers
and certain other “accredited investors” within the meaning of Rule 501
under the Securities Act.


 


18





















 


(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 the financial statements to be included in the
Company’s Annual Report on Form 10-K for the year ending December 31,
2005 are a registered public accounting firm as required by the Securities Act.


 


(gg)                          Seniority.  As of the Closing Date, no other equity of
the Company is senior to the Preferred Stock in right of payment, whether with
respect to interest or upon liquidation or dissolution, or otherwise.


 


(hh)                          No Disagreements with
Accountants and Lawyers.  There are
no disagreements of any kind presently existing, or reasonably anticipated by
the Company to arise, between the accountants and lawyers formerly or presently
employed by the Company and the Company is current with respect to any fees
owed to its accountants and lawyers.


 


(ii)                                  Acknowledgment
Regarding Purchasers’ Purchase of Securities.  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 Securities.  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.


 


(jj)                                  Acknowledgement
Regarding Purchasers’ Trading Activity. 
Anything in this Agreement or elsewhere herein to the contrary
notwithstanding (except for Section 4.16 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 


 


19





















 


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 or partnership
power and 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
Purchaser.  Each Transaction Documents 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 (this representation and warranty not limiting such Purchaser’s
right to sell the Securities pursuant to the Registration Statement or
otherwise in compliance with applicable federal and state securities
laws).  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, it will be either: (i) an “accredited investor” as
defined in Rule 501(a)(1), (a)(2), (a)(3), 


 


20





















 


(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.


 


(f)                                    Short Sales and
Confidentiality.  Other than the
transaction contemplated hereunder, 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 disposition, including Short
Sales (but not including the location and/or reservation of borrowable shares
of Common Stock), in the securities of the Company during the period
commencing from the time that such Purchaser first received a term sheet from
the Company or any other Person setting forth the material terms of the transactions
contemplated hereunder until the date hereof (“Discussion Time”).  Notwithstanding the foregoing, in the case of
a Purchaser that is a multi-managed investment vehicle whereby separate
portfolio managers manage separate portions of such Purchaser’s assets and the
portfolio managers have no direct knowledge of the investment decisions made by
the portfolio managers managing other portions of such Purchaser’s assets, the
representation set forth above shall only apply with respect to the portion of
assets managed by the portfolio manager that made the investment decision to
purchase the Securities covered by this Agreement.  Other than to other Persons party to this
Agreement, such Purchaser has maintained the confidentiality of all disclosures
made to it in connection with this transaction (including the existence and
terms of this transaction).


 


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


 


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.


 


21





















 


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 who agrees to be bound by the
provisions of this Agreement and the Registration Rights Agreement 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 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 the following form:


 


[NEITHER]
THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
[EXERCISABLE] [CONVERTIBLE]] HAVE 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 AND THE SECURITIES ISSUABLE UPON
EXERCISE OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE
MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.


 


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


 


22





















 


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 Underlying Shares shall not contain any legend (including the
legend set forth in Section 4.1(b) hereof): (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 Underlying Shares pursuant to Rule 144, or (iii) if
such Underlying 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 shares of Preferred Stock or any portion of a Warrant is
converted or exercised (as applicable) at a time when there is an effective
registration statement to cover the resale of the Underlying Shares, or if such
Underlying Shares may be sold under Rule 144(k) or if such legend is not
otherwise required under applicable requirements of the Securities Act
(including judicial interpretations thereof) then such Underlying Shares 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), 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 Underlying Shares, as
applicable, issued with a restrictive legend (such third Trading Day, the “Legend
Removal Date”), deliver or cause to be delivered to such Purchaser a
certificate representing such shares 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.  If requested by the applicable
Purchaser, 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
Underlying Shares (based on the VWAP of the Common Stock on the date such
Securities are submitted to the Company’s transfer agent) delivered for removal
of the restrictive legend and subject to this Section 4.1(c), $10 per
Trading Day (increasing to $20 per Trading Day five Trading Days after such
damages have begun to accrue) for each Trading Day after the Legend Removal
Date until such certificate is 


 


23





















 


delivered without a legend. 
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, 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 and the Company’s
counsel’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.  The Company’s counsel, from time to time, is
expressly authorized to rely upon this covenant of Section 4.1(e).


 


(f)                                    Until the one year
anniversary of the Effective Date, the Company shall not undertake a reverse or
forward stock split or reclassification of the Common Stock without the prior
written consent of the Purchasers holding a majority in interest of the shares
of Preferred Stock.


 


4.2                                 Acknowledgment
of Dilution.  The Company
acknowledges that the issuance of the Securities may result in dilution of the
outstanding shares of Common Stock, which dilution may be substantial under
certain market conditions.  The Company
further acknowledges that its obligations under the Transaction Documents,
including without limitation its obligation to issue the Underlying Shares
pursuant to the Transaction Documents, are unconditional and absolute and not
subject to any right of set off, counterclaim, delay or reduction, regardless
of the effect of any such dilution or any claim the Company may have against
any Purchaser and regardless of the dilutive effect that such issuance may have
on the ownership of the other stockholders of the Company.


 


4.3                                 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; provided, however,
that the Company shall not be required to disclose to such Person any material
non-public information regarding the Company.


 


4.4                                 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 


 


24





















 


be integrated
with the offer or sale of the Securities for purposes of the rules and
regulations of any Trading Market.


 


4.5                                 Conversion
and Exercise Procedures.  Except for
delivery of the Preferred Stock certificate and/or the Warrant certificate to
the Company upon the final conversion of the Preferred Stock or exercise of the
Warrants, as applicable, the form of Notice of Exercise included in the
Warrants and the Notice of Conversion included in the Certificate of
Designations set forth the totality of the procedures required of the
Purchasers in order to exercise the Warrants or convert the Preferred
Stock.  No additional legal opinion or
other information or instructions shall be required of the Purchasers to
exercise their Warrants or convert their Preferred Stock.  The Company shall honor exercises of the
Warrants and conversions of the Preferred Stock and shall deliver Underlying
Shares in accordance with the terms, conditions and time periods set forth in
the Transaction Documents.


 


4.6                                 Securities
Laws Disclosure; Publicity. 
The Company shall, (a) by 8:30 a.m. Eastern time on the
Trading Day following the Closing Date, issue a press release, reasonably
acceptable to the Purchasers acquiring a majority of the shares of Preferred
Stock at the Closing disclosing the material terms of the transactions
contemplated hereby and (b) by 8:30 a.m. Eastern time on the second
Trading Day following the Closing Date, issue 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
as exhibits.  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 the Purchasers
acquiring a majority of the shares of Preferred Stock at the Closing, 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).


 


4.7                                 Shareholder
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 shareholder 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 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.


 


25





















 


4.8                                 Non-Public
Information.  Except to the extent
providing such information is required pursuant to the terms of this Agreement
(including, without limitation, information regarding a Subsequent Financing
provided pursuant to Section 4.13), 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.  Notwithstanding the foregoing, each Purchaser
(i) acknowledges that (A) until the Company’s compliance with Section 4.6,
the terms of the Transaction Documents and the consummation of the transactions
contemplated hereby and (B) any information provided to such Purchaser
pursuant to Section 4.13 (other than a Pre-Notice), may constitute
material non-public information as defined by U.S. securities law Regulation
FD; and (ii) agrees (A) to keep such information confidential (B) not
to disclose such information to any third-party unless and until such
information is made publicly available by the Company, (C) to otherwise
comply with Regulation FD and (D) to refrain from trading in the Company’s
Common Stock until such information is made publicly available (other than as a
result of a breach of this Section 4.8).


 


4.9                                 Use
of Proceeds.  Except as set forth on Schedule 4.9
attached hereto, the Company shall use the net proceeds from the sale of the
Securities hereunder for 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
Common Stock or Common Stock Equivalents or to settle any outstanding
litigation.  Prior to the receipt of
Shareholder Approval, the Company shall not declare or pay any cash dividend on
its shares of Common Stock while any shares of Preferred Stock remain
outstanding


 


4.10                           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), 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, unless such action is based upon a breach of
such Purchaser’s representations, warranties or covenants under the Transaction
Documents.


 


26





















 


4.11                           Indemnification
of Purchasers.   Subject to the
provisions of this Section 4.11, 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 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 a
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.


 


4.12                           Reservation
and Listing of Securities.


 


(a)                                  The Company shall
maintain a reserve from its duly authorized shares of Common Stock for issuance
pursuant to the Transaction Documents in such amount as may be required to
fulfill its obligations in full under the Transaction Documents.


 


(b)                                 RESERVED.


 


(c)                                  The Company shall, if
applicable: (i) in the time and manner required by the Trading Market,
prepare and file with such Trading Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the Actual
Minimum on the date of such application, (ii) take all steps necessary to
cause such shares of Common Stock to be approved for listing on the Trading
Market as soon as possible thereafter, (iii) provide to the Purchasers
evidence of such listing, and (iv) 


 


27





















 


maintain the listing of such Common Stock on
any date at least equal to the Actual Minimum on such date on such Trading
Market or another Trading Market. In addition, the Company shall present to its
next annual meeting of shareholders a proposal to obtain Shareholder Approval,
with the recommendation of the Company’s Board of Directors that such proposal
be approved, and the Company shall solicit proxies from its shareholders in
connection therewith in the same manner as all other management proposals in
such proxy statement and all management-appointed proxyholders shall vote their
proxies in favor of such proposal. If the Company does not obtain Shareholder
Approval at the first meeting, the Company shall call a meeting every four
months thereafter to seek Shareholder Approval until the earlier of the date
Shareholder Approval is obtained or the Preferred Stock is no longer
outstanding.


 


4.13                           Participation
in Future Financing.


 


(a)  From
the date hereof until the date that is the 180 days after the Effective Date,
upon any financing by the Company or any of its Subsidiaries of Common Stock or
Common Stock Equivalents (a “Subsequent Financing”), each Purchaser that
(A) still owns shares of Preferred immediately prior to date of the
Pre-Notice, (B) purchased shares of Preferred stock on the Closing Date,
and (C) was not an officer or director of the Company as of the Closing
Date (any such Purchaser, for such purpose, an “Eligible Purchaser”)
shall have the right to participate in up to an amount of the Subsequent
Financing equal to 100% of the Subsequent Financing (the “Participation
Maximum”).


 


(b)  At
least five Trading Days prior to the closing of the Subsequent Financing, the
Company shall deliver to each Eligible 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 an Eligible Purchaser,
and only upon a request by such Eligible Purchaser, for a Subsequent Financing
Notice, the Company shall promptly, but no later than one Trading Day after
such request, deliver a Subsequent Financing Notice to such Eligible
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.


 


(c)  Any
Eligible Purchaser desiring to participate in such Subsequent Financing must
provide written notice to the Company by not later than 5:30 p.m. (New
York City time) on the fifth Trading Day after all of the Eligible Purchasers
have received the Pre-Notice that the Eligible Purchaser is willing to
participate in the Subsequent Financing, the amount of the Eligible Purchaser’s
participation, and that the Eligible Purchaser has such funds ready, willing,
and available for investment on the terms set forth in the Subsequent Financing
Notice.  If the Company receives no
notice from an Eligible Purchaser as of such fifth Trading Day, such Eligible Purchaser
shall be deemed to have notified the Company that it does not elect to
participate.


 


28





















 


(d)  If
by 5:30 p.m. (New York City time) on the fifth  Trading Day
after all of the Eligible Purchasers have received the Pre-Notice,
notifications by the Eligible 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 Subsequent Financing, 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.


 


(e)  If
by 5:30 p.m. (New York City time) on the fifth Trading Day after all of
the Eligible Purchasers have received the Pre-Notice, the Company receives
responses to a Subsequent Financing Notice from Eligible Purchasers seeking to
purchase more than the aggregate amount of the Participation Maximum, each such
Eligible 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 Eligible Purchasers.  “Pro Rata Portion”
is the ratio of (x) the Subscription Amount of Securities purchased on the
Closing Date by an Eligible Purchaser participating under this Section 4.13
and (y) the sum of the aggregate Subscription Amounts of Securities purchased
on the Closing Date by all Eligible Purchasers participating under this Section 4.13.


 


(f)  The
Company must provide the Eligible Purchasers with a second Subsequent Financing
Notice, and the Eligible 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.


 


(g)  Notwithstanding
the foregoing, this Section 4.13 shall not apply in respect of an Exempt
Issuance.


 


4.14                           Subsequent
Equity Sales.


 


(a)                                  From
the date hereof until 180 days after the Effective Date, neither the Company
nor any Subsidiary shall issue shares of Common Stock or Common Stock
Equivalents; provided, however, the 180 day period set forth in this Section 4.14
shall be extended for the number of Trading Days during such period in which (i) trading
in the Common Stock is suspended by any Trading Market, or (ii) 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 Underlying Shares.


 


(b)                                 From the date hereof
until such time as no Purchaser holds any of the Preferred Stock and Warrants,
the Company shall be prohibited from effecting or entering into an agreement to
effect any Subsequent Financing involving a “Variable Rate Transaction”.  The term “Variable Rate Transaction”
shall mean a transaction in which the Company issues or sells (i) any debt
or equity securities that are convertible into, exchangeable or exercisable
for, or include the right to receive additional shares of Common Stock either (A) at
a conversion, exercise or exchange rate or other price that is 


 


29





















 


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 or (ii) enters into any agreement,
including, but not limited to, an equity line of credit, whereby the Company
may sell securities at a future determined price.


 


(c)                                  Notwithstanding the
foregoing, this Section 4.14 shall not apply in respect of an Exempt
Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance.


 


4.15                           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.  Further, the rights of Eligible Purchasers
under Section 4.13 or a waiver of the terms thereof shall not be deemed to
be unequal treatment of any non-Eligible Purchasers


 


4.16                           Short
Sales and Confidentiality.  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 after the Discussion Time until prior to the time that the transactions
contemplated by this Agreement are first publicly announced as described in Section 4.6.  Each Purchaser, severally and not jointly
with the other Purchasers, covenants that until such time as the transactions
contemplated by this Agreement are publicly disclosed by the Company as
described in Section 4.6, such Purchaser will maintain, the
confidentiality of all disclosures made to it in connection with this
transaction (including the existence and terms of this transaction).  Each Purchaser understands and acknowledges,
severally and not jointly with any other Purchaser, that the Commission
currently takes the position that coverage of short sales of shares of the
Common Stock “against the box” prior to the Effective Date of the Registration
Statement with the Securities 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 Corporation Finance.  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 4.6. 
Notwithstanding the foregoing, in the case of a Purchaser that is a
multi-managed investment vehicle whereby separate portfolio managers manage
separate portions of such Purchaser’s assets and the portfolio managers have no
direct knowledge of the investment decisions made by the portfolio managers
managing other portions of such Purchaser’s assets, the covenant set forth
above shall only apply with respect to the portion of assets managed by the 


 


30





















 


portfolio
manager that made the investment decision to purchase the Securities covered by
this Agreement.


 


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 December 7,
2005; provided, however, 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.  Except as expressly
set forth in the Transaction Documents to the contrary, each party shall pay
the fees and expenses of its advisers, counsel, accountants and other experts,
if any, and all other expenses incurred by such party incident to the
negotiation, preparation, execution, delivery and performance of this
Agreement.  The Company shall pay all
transfer agent fees, stamp taxes and other taxes and duties levied in
connection with the delivery of any 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 5:30 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 5:30 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.  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 the Purchasers holding at least
75% of the outstanding Underlying Shares (assuming the conversion of all
outstanding Preferred Stock and the exercise of all outstanding Warrants) 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 subsequent default or a waiver of any other provision, condition or
requirement hereof, nor shall any delay or omission 


 


31





















 


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.


 


5.7                                 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”.


 


5.8                                 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 4.1(e), Section 4.10 and Section 4.11.


 


5.9                                 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
agrees that all legal proceedings concerning the interpretations, enforcement
and defense of the transactions contemplated by this Agreement and any other
Transaction Documents (whether brought against a party hereto or its respective
affiliates, directors, officers, shareholders, employees or agents) shall be
commenced exclusively in the state and federal courts sitting in the City of
New York.  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.


 


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5.10                           Survival.  The representations and warranties contained
herein shall survive the Closing and the delivery, exercise and/or conversion
of the Securities, as applicable for the applicable statue of limitations.


 


5.11                           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.


 


5.12                           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.


 


5.13                           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 Documents
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; provided, however, in the case of
a rescission of a conversion of the Preferred Stock or exercise of a Warrant,
the Purchaser shall be required to return any shares of Common Stock subject to
any such rescinded conversion or exercise notice.


 


5.14                           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.


 


5.15                           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.


 


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5.16                           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.


 


5.17                           Usury.  To the extent it may lawfully do so, the
Company hereby agrees not to insist upon or plead or in any manner whatsoever
claim, and will resist any and all efforts to be compelled to take the benefit
or advantage of, usury laws wherever enacted, now or at any time hereafter in
force, in connection with any claim, action or proceeding that may be brought
by any Purchaser in order to enforce any right or remedy under any Transaction
Document.  Notwithstanding any provision
to the contrary contained in any Transaction Document, it is expressly agreed
and provided that the total liability of the Company under the Transaction
Documents for payments in the nature of interest shall not exceed the maximum
lawful rate authorized under applicable law (the “Maximum Rate”), and,
without limiting the foregoing, in no event shall any rate of interest or
default interest, or both of them, when aggregated with any other sums in the
nature of interest that the Company may be obligated to pay under the
Transaction Documents exceed such Maximum Rate. 
It is agreed that if the maximum contract rate of interest allowed by
law and applicable to the Transaction Documents is increased or decreased by
statute or any official governmental action subsequent to the date hereof, the
new maximum contract rate of interest allowed by law will be the Maximum Rate
applicable to the Transaction Documents from the effective date forward, unless
such application is precluded by applicable law.  If under any circumstances whatsoever,
interest in excess of the Maximum Rate is paid by the Company to any Purchaser
with respect to indebtedness evidenced by the Transaction Documents, such
excess shall be applied by such Purchaser to the unpaid principal balance of
any such indebtedness or be refunded to the Company, the manner of handling
such excess to be at such Purchaser’s election.


 


5.18                           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 Documents.  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


 


34





















 


reasons of
administrative convenience only, Purchasers and their respective counsel have
chosen to communicate with the Company through FW.  FW does not represent any of the Purchasers
but only Stonegate Securities, Inc., 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.


 


5.19                           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.


 


5.20                           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]


 


35





















 


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.


 


 


	
  INTRUSION INC.

  	
  Address for Notice:

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ G. Ward Paxton

  	
   

  	
  1101
  E. Arapaho Road

  
	
  Name: G. Ward Paxton

  	
  Richardson,
  TX 75081

  
	
  Title: President

  	
  Fax:
  972.301.3892

  
	
   

  	
  ATTN:
  Chief Financial Officer

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

  	
   

  
					



 


 


[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK


SIGNATURE PAGE FOR PURCHASER FOLLOWS]


 


36





















 


[PURCHASER SIGNATURE PAGES TO INTZ 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 of Preferred Stock:


Warrant Shares:


EIN Number:  [PROVIDE
THIS UNDER SEPARATE COVER]


 


[SIGNATURE PAGES CONTINUE]


 


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