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EXHIBIT 10.1




SECURITIES PURCHASE AGREEMENT




     This Securities Purchase Agreement (this “Agreement”) is dated as of September 21,
2007, among Xenonics Holdings, Inc., a Nevada corporation (the “Company”), and Gemini
Master Fund, Ltd. and any additional 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, for all purposes of this
Agreement, the following terms have the meanings set forth in this Section 1.1:




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




     “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.




     “Business Day” means any day except Saturday, Sunday, any day which shall be a
federal legal holiday in the United States or any day on which banking institutions in the
State of New York are authorized or required by law or other governmental action to close.




     “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.



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     “Common Stock” means the common stock of the Company, par value $0.001 per
share, and any other class of securities into which such securities may hereafter be
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 exercisable or exchangeable for, or
otherwise entitles the holder thereof to receive, Common Stock.




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




     “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.




     “Eligible Trading Market” means the following markets or exchanges: the
American Stock Exchange, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq
Global Select Market and the New York Stock Exchange.




     “Evaluation Date” shall have the meaning ascribed to such term in Section
3.1(r).




     “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 the Company pursuant to any stock or option plan duly
adopted for such purpose, by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of non-employee
directors established, (b) securities upon the exercise or exchange of or conversion of any
Securities issued hereunder and/or other securities exercisable or exchangeable for or
convertible into shares of Common Stock issued and outstanding on the date of this
Agreement, provided that such securities have not been amended since the date of this
Agreement to increase the number of such securities or to directly or indirectly effectively
decrease the exercise, exchange or conversion price of such securities, and (c) the
Placement Agent Warrant and the Placement Agent Shares.




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




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




     “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).




     “MFN Transaction” means a transaction in which the Company issues or sells any
securities to an investor (the “New Investor”) in a capital raising transaction or
series of related transactions (the “New Offering”) which grants to the New Investor
the right to receive additional securities based upon future capital raising transactions of
the Company on terms more favorable than those granted to the New Investor in the New
Offering.




     “Per Share Purchase Price” equals $2.00, subject to adjustment for reverse and
forward stock splits, stock dividends, stock combinations and other similar transactions of
the Common Stock that occur after the date of this Agreement.




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




     “Placement Agent” shall mean Granite Financial Group, Inc.




     “Placement Agent Shares” means such number of shares of Common Stock to be
issued to the Placement Agent hereunder equal to 16% of the aggregate number of Shares
purchased by the Purchasers pursuant to this Agreement (but not including any Additional
Shares issued to the Purchasers pursuant to Section 4.16 below).




     “Placement Agent Warrants” means Warrants registered in the name of the
Placement Agent, or its designees, to be issued to the Placement Agent hereunder, including
(a) A Warrants exercisable for up to such number of shares of Common Stock as is equal to
30% of the number of Placement Agent Shares issued to the Placement Agent hereunder, and (b)
B Warrants exercisable for up to such number of shares of Common Stock as is equal to 30% of
the number of Placement Agent Shares issued to the Placement Agent hereunder.




     “Placement Agent Warrant Shares” means the shares of Common Stock underlying
the Placement Agent Warrants.




     “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 4.9.



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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 A
attached hereto.




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




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




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




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




     “Securities” means the Shares, the Warrants, the Warrant Shares, the Placement
Agent Shares, the Placement Agent Warrant and the Placement Warrant Agent Shares.




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




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




     “Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO
under the Exchange Act (but shall not be deemed to include the location and/or reservation
of borrowable shares of Common Stock).




     “Subscription Amount” means, as to each Purchaser, the aggregate amount to be
paid for Shares and Warrants 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 Issuance Selling Price” shall include the amount actually paid by
third parties for each share of Common Stock in a sale or issuance by the Company. In the
event a fee is paid by the Company in connection with such transaction directly or
indirectly to such third party or its affiliates, any such fee shall be deducted from the
selling price pro rata to all shares sold in the transaction to arrive at the Subsequent
Issuance Selling Price. A sale of shares of Common Stock shall include the sale or issuance
of rights, options, warrants or convertible, exchangeable or exercisable securities under
which the Company is or may become obligated to issue shares of Common Stock, and in such
circumstances the Subsequent Issuance Selling Price of the Common Stock covered thereby
shall also include the exercise, exchange or conversion
price thereof (in addition to the consideration received by the Company upon such sale
or issuance less the fee amount as provided above). In case of any such security issued in a



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Variable Rate Transaction or an MFN Transaction, the Subsequent Issuance Selling Price
shall be deemed to be the lowest conversion or exercise price at which such securities are
converted or exercised or could be converted or exercised in the case of a Variable Rate
Transaction, or the lowest adjustment price in the case of an MFN Transaction, over the life
of such securities. If shares are issued for a consideration other than cash, the
Subsequent Issuance Selling Price shall be the fair value of such consideration as
determined in good faith by independent certified public accountants mutually acceptable to
the Company and the Purchaser. In the event the Company directly or indirectly effectively
reduces the conversion, exercise or exchange price for any Common Stock Equivalents which
are currently outstanding, then the Subsequent Issuance Selling Price shall equal such
effectively reduced conversion, exercise or exchange price.




     “Subsidiary” means Xenonics, Inc., a Delaware corporation.




     “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 American Stock Exchange,
the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the
New York Stock Exchange or the OTC Bulletin Board.




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




     “Transfer Agent” means the Person currently serving as the transfer agent for
the Company’s shares of Common Stock, and any successor transfer agent of the Company’s
Common Stock.




     “Variable Rate Transaction” shall mean a transaction in which the Company
issues or sells, or agrees to issue or sell (a) 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 (x) at a conversion, exercise or exchange rate or
other price that is based upon and/or varies with the trading prices of or quotations for
the Common Stock at any time after the initial issuance of such debt or equity securities,
(y) with a fixed 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 (but excluding standard stock split
anti-dilution provisions), or (z) under a warrant exercisable for a number of shares based
upon and/or varying with the trading prices of or quotations for the Common Stock at any
time after the initial issuance of such warrant, or (b) any securities of the Company
pursuant to an “equity line” structure which provides for the sale, from time to time, of
securities of the Company which are registered for sale or resale pursuant to the
Securities Act (which for the purpose of this definition shall include a sale of the



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Company’s securities “off the shelf” in a registered offering, whether or not such offering
is underwritten).




     “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 an Eligible
Trading Market, the daily volume weighted average price of the Common Stock for such date
(or the nearest preceding date) on the Eligible Trading Market on which the Common Stock is
then listed or quoted for trading as reported by Bloomberg L.P. (based on a Trading Day from
9:30 a.m. (New York City time) to 4:02 p.m. (New York City time); (b) if the Common Stock
is then listed or 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 quoted for trading on the OTC Bulletin Board and if prices for
the Common Stock are then reported in the “Pink Sheets” published by 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 (d) 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 applicable Purchaser or Warrant holder, as the case may be,
and reasonably acceptable to the Company, the fees and expenses of which shall be paid by
the Company.




     “Warrants” means, collectively, the 5-year Common Stock purchase warrants
delivered to the Purchasers at the Closing in accordance with Section 2.2(a) hereof in the
form of Exhibit B attached hereto.




     “A Warrants” means, collectively, the Warrants delivered to each Purchaser and
Placement Agent at the Closing in accordance with Section 2.2 hereof (or following
adjustment in accordance with Section 4.16 hereof), which A Warrants shall have an initial
exercise price equal to $2.75 (subject to adjustment) and be subject to forced conversion on
the terms and conditions set forth therein.




     “B Warrants” means, collectively, the Warrants delivered to each Purchaser and
Placement Agent at the Closing in accordance with Section 2.2 hereof (or following
adjustment in accordance with Section 4.16 hereof), which B Warrants shall have an initial
exercise price equal to $3.25 (subject to adjustment) and be exercisable following exercise
in full of the A Warrant held by such Purchaser or the Placement Agent, as the case may be.




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



ARTICLE II.

PURCHASE AND SALE




     2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set
forth herein, substantially concurrent with the execution and delivery of this Agreement by the
parties hereto, the Company agrees to sell, and each Purchaser, severally and not jointly,
agrees



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to purchase, Shares and Warrants, as determined pursuant to Section 2.2(a), for an aggregate
Subscription Amount of up to $3,000,000. Upon satisfaction of the conditions set forth in Sections
2.2 and 2.3, the Closing shall occur at the offices of Peter J. Weisman, P.C. or such other
location as the parties shall mutually agree.



     2.2 Deliveries.




     (a) At the Closing the Company shall:




     (i) issue to each Purchaser such number of Shares as is equal to such
Purchaser’s Subscription Amount divided by the Per Share Purchase Price;




     (ii) issue an A Warrant to such Purchaser to purchase up to a number of shares
of Common Stock equal to 30% of such Purchaser’s Shares;




     (iii) issue a B Warrant to such Purchaser to purchase up to a number of shares
of Common Stock equal to 30% of such Purchaser’s Shares; and




     (iv) deliver to each Purchaser the Registration Rights Agreement duly executed
by the Company.




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




     (i) such Purchaser’s Subscription Amount in immediately available funds by
certified check or wire transfer (any expense amount due such Purchaser hereunder
may be offset from such payment by such Purchaser); and




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




     (c) On or promptly following the Closing Date, the Company shall deliver or cause to be
delivered to each Purchaser (i) one or more certificates evidencing the Shares purchased by
such Purchaser, and (ii) the original Warrants purchased by such Purchaser, in each case
registered in the name of such Purchaser and in such denominations as may be reasonably
requested by such Purchaser.




     (d) On or promptly following the Closing Date, the Company shall deliver or cause to be
delivered to the Placement Agent the Placement Agent Shares and the Placement Agent
Warrants.



     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;



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




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




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




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




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




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




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




     (v) from the date hereof to the Closing Date, trading in the Common Stock on
the Company’s principal Eligible Trading Market shall not have been suspended by the
Commission or such Eligible Trading Market, and, at any time prior to the Closing
Date, trading in securities generally as reported by Bloomberg L.P. 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 Eligible Trading
Market, nor shall a banking moratorium have been declared either by the United
States or New York State authorities nor shall there have occurred any material
outbreak or escalation of hostilities or other national or international calamity of
such magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of each Purchaser, makes it
impracticable or inadvisable to purchase the Shares at the Closing.



ARTICLE III.

REPRESENTATIONS AND WARRANTIES




     3.1
Representations and Warranties of the Company. Except as set forth in the Disclosure Schedules, which Disclosure
Schedules shall be deemed a part hereof and shall qualify any representation or warranty made
herein to the extent of the disclosure contained in the corresponding section of the Disclosure
Schedules, the Company hereby makes the following representations and warranties to each Purchaser:




     (a) Subsidiaries. The only direct or indirect subsidiary of the Company is
Xenonics, Inc., a Delaware corporation in which the Company owns 98.6% of the issued and
outstanding capital stock. The Company owns such capital stock of such Subsidiary



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free and
clear of any Liens, and all of the issued and outstanding shares of capital stock of such
Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and
similar rights to subscribe for or purchase securities.




     (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 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 condition (financial or otherwise) of the
Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the
Company’s ability to perform in any material respect on a timely basis its obligations under
any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”)
and no Proceeding has been instituted in any such jurisdiction revoking, limiting or
curtailing or seeking to revoke, limit or curtail such power and authority or qualification.




     (c) Authorization; Enforcement. 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 hereunder and thereunder.
The execution and delivery of each of the Transaction Documents by the Company and the
consummation by it of the transactions contemplated hereby and thereby have been duly
authorized by all necessary action on the part of the Company and no further action is
required by the Company, its board of directors or its stockholders in connection therewith
other than in connection with the Required Approvals. Each Transaction Document has been
(or upon delivery will have been) duly executed by the Company and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and binding
obligation of the Company enforceable against the Company 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.




     (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company, the issuance and sale of the Shares and Warrants and the
consummation by the Company of the other transactions contemplated hereby and thereby do not
and will not (i) conflict with or violate any provision of the Company’s or



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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, 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), 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.
The Company has furnished to the Purchasers true, complete and accurate copies of the
Articles of Incorporation and By Laws of the Company, as amended to date.




     (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 4.4 of this
Agreement, (ii) the filing with the Commission of the Registration Statement, (iii)
application(s) to each applicable Trading Market for the listing of the Securities for
trading thereon in the time and manner required thereby and (iv) the filing of Form D with
the Commission and such filings as are required to be made under applicable state securities
laws (collectively, the “Required Approvals”).




     (f) Issuance of the Securities. The 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. The
Warrant 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. The Company has reserved from its duly authorized capital stock the maximum number
of shares of Common Stock issuable pursuant to this Agreement and the Warrants and Placement
Agent Warrants.




     (g) Capitalization. The capitalization of the Company 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 Common Stock Equivalents outstanding as of the
date of the most recently filed periodic report under the Exchange Act. No Person has any
right of first refusal, preemptive right, right of participation, or



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any similar right to
participate in the transactions contemplated by the Transaction Documents. Except as a
result of the purchase and sale of the Securities and except as disclosed 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 exercisable 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. 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 Securities. 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 the Company 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 or regulation 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 in all
material respects with the requirements of the Securities Act and the Exchange Act, as
applicable, 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 the 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; Undisclosed Events, Liabilities or Developments. Since
the date of the latest audited financial statements included within the SEC Reports, except
as specifically disclosed in a subsequent SEC Report filed at least five Trading



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Days prior
to the date hereof, (i) there has been no event, occurrence or development that has had or
that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company
has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and
accrued expenses incurred in the ordinary course of business consistent with past practice
and (B) liabilities not required to be reflected in the Company’s financial statements
pursuant to GAAP or disclosed in filings made with the Commission, (iii) the Company has not
altered its method of accounting, (iv) the Company has not declared or made any dividend or
distribution of cash or other property to its stockholders or purchased, redeemed or made
any agreements to purchase or redeem any shares of its capital stock, and (v) the Company
has not issued any Common Stock or Common Stock Equivalents to any officer, director or
Affiliate, except pursuant to existing Company stock option plans. The Company does not
have pending before the Commission any request for confidential treatment of information.
Except for the issuance of the Securities contemplated by this Agreement or as set forth on
Schedule 3.1(i), no event, liability or development has occurred or exists with
respect to the Company or its Subsidiaries or their respective business, properties,
operations or financial condition, that would be required to be disclosed by the Company
under applicable securities laws at the time this representation is made that has not been
publicly disclosed at least 5 Trading Days prior to the date that this representation is
made.




     (j) Litigation. Except as disclosed in the Company’s most recent Annual Report
filed on Form 10-KSB, there is no action, suit, inquiry, notice of violation, proceeding or
investigation pending or, to the knowledge of the Company, threatened against or affecting
the Company, any Subsidiary or any of their respective properties before or by any court,
arbitrator, governmental or administrative agency or regulatory authority (federal, state,
county, local or foreign) (collectively, an “Action”) which (i) adversely affects or
challenges the legality, validity or enforceability of any of the Transaction Documents or
the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be
expected to result in a Material Adverse Effect. To the Company’s knowledge, 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. None of the Company’s or its
Subsidiaries’ employees is a member of a union that relates to such employee’s relationship
with the Company, and neither the Company or any of its Subsidiaries is a party to a
collective bargaining agreement, and the Company and its Subsidiaries believe that their
relationships with their employees are good. No executive officer, to the knowledge of the
Company, is, or is now expected to be, in violation of



12









 







any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement or
non-competition agreement, or any other contract or agreement or any restrictive covenant,
and the continued employment of each such executive officer does not subject the Company or
any of its Subsidiaries to any liability with respect to any of the foregoing matters. The
Company and its Subsidiaries are in compliance with all U.S. federal, state, local and
foreign laws and regulations relating to employment and employment practices, terms and
conditions of employment and wages and hours, except where the failure to be in compliance
could not, individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.




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




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




     (n) Title to Assets. The Company and the Subsidiaries have good and marketable
title in fee simple to all real property owned by them that is material to the business of
the Company and the Subsidiaries and good and marketable title in all personal property
owned by them that is material to the business of the Company and the Subsidiaries, in each
case free and clear of all Liens, except for Liens as do not materially affect the value of
such property and do not materially interfere with the use made and
proposed to be made of such property by the Company and the Subsidiaries, Liens for the
payment of federal, state or other taxes, the payment of which is neither delinquent nor
subject to penalties, and UCC-1 Financing Statements filed by the Company’s factor of
accounts receivable in connection with factoring thereof. Any real property and facilities
held under lease by the Company and the Subsidiaries are held by them under valid,
subsisting and enforceable leases with which the Company and the Subsidiaries are in
compliance.



13









 






     (o) Patents and Trademarks. To the Company’s knowledge, the Company and the
Subsidiaries have, or have rights to use, all patents, patent applications, trademarks,
trademark applications, service marks, trade names, trade secrets, inventions, copyrights,
licenses and other intellectual property rights and similar rights necessary or material for
use in connection with their respective businesses as described in the SEC Reports and which
the failure to so have could have a Material Adverse Effect (collectively, the
“Intellectual Property Rights”). To the Company’s knowledge, neither the Company
nor any Subsidiary has received a notice (written or otherwise) that the Intellectual
Property Rights used by the Company or any Subsidiary violates or infringes upon the rights
of any Person. To the knowledge of the Company, all such Intellectual Property Rights are
enforceable and there is no existing infringement by another Person of any of the
Intellectual Property Rights. To the Company’s knowledge, the Company and its Subsidiaries
have taken reasonable security measures to protect the secrecy, confidentiality and value of
all of their intellectual properties, except where failure to do so could not, individually
or in the aggregate, reasonably be expected to have a Material Adverse Effect.




     (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, including, but not limited to, directors and officers insurance coverage at least
equal to the aggregate Subscription Amount. Neither the Company nor any Subsidiary has any
reason to believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business without a significant increase in cost.




     (q) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports, none of the officers or directors of the Company and, to the knowledge of the
Company, none of the employees of the Company is presently a party to any transaction with
the Company or any Subsidiary (other than for services as employees, officers and
directors), including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal property to or
from, or otherwise requiring payments to or from any officer, director or such employee or,
to the knowledge of the Company, any entity in which any officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or partner, in each
case in excess of $25,000 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



14









 







financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to assets is
permitted only in accordance with management’s general or specific authorization, and (iv)
the recorded accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences. The Company has
established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) for the Company and designed such disclosure controls and procedures to
ensure that information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commission’s rules and forms. The Company’s certifying
officers have evaluated the effectiveness of the Company’s disclosure controls and
procedures as of the end of the period covered by the Company’s most recently filed periodic
report under the Exchange Act (such date, the “Evaluation Date”). The Company
presented in its most recently filed periodic report under the Exchange Act the conclusions
of the certifying officers about the effectiveness of the disclosure controls and procedures
based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have
been no changes in the Company’s internal control over financial reporting (as such term is
defined in the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, the Company’s internal control over financial reporting.




     (s) Certain Fees. Other than the Placement Agent Shares and Placement Agent
Warrants as set forth herein, 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 the Transaction Documents. 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 the Transaction Documents.




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




     (u) Investment Company. The Company is not, and is not an Affiliate of, and
immediately after receipt of payment for the Securities, 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 of 1940, as amended.




     (v) Registration Rights. The Company has disclosed to the Purchasers each
Person who has any right to cause the Company to effect the registration under the
Securities Act of any securities of the Company.



15









 






     (w) Listing and Maintenance Requirements. The Company’s Common Stock is
registered pursuant to Section 12(b) or 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. 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. The Company is, and has no reason to believe that it
will not in the foreseeable future continue to be, in compliance with all such listing and
maintenance requirements.




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




     (y) Disclosure. Except with respect to the material terms and conditions 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 it believes constitutes or might
constitute material, non-public information. The Company understands and confirms that the
Purchasers will rely on the foregoing representation in effecting transactions in securities
of the Company. All disclosure furnished by or on behalf of the Company to the Purchasers
regarding the Company, its business and the transactions contemplated hereby, including the
Disclosure Schedules to this Agreement, is true and correct and does 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 press releases disseminated by the Company during the twelve months
preceding the date of this Agreement taken as a whole do not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements, in light of the circumstances under which they were made
and when made, not misleading. The Company acknowledges and agrees that no Purchaser makes
or has made any
representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 3.2 hereof.




     (z) No Integrated Offering. Assuming the accuracy of the Purchasers’
representations and warranties set forth in Section 3.2, neither the Company, nor any of its
Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made
any offers or sales of any security or solicited any offers to buy any security, under
circumstances that would cause this offering of the Securities to be integrated with prior



16









 







offerings by the Company for purposes of the Securities Act or any applicable shareholder
approval provisions 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, (i) the fair saleable value of the Company’s assets
exceeds the amount that will be required to be paid on or in respect of the Company’s
existing debts and other liabilities (including known contingent liabilities) as they
mature; (ii) the Company’s assets do not constitute unreasonably small capital to carry on
its business as now conducted and as proposed to be conducted including its capital needs
taking into account the particular capital requirements of the business conducted by the
Company, and projected capital requirements and capital availability thereof; and (iii) the
current cash flow of the Company, together with the proceeds the Company would receive, were
it to liquidate all of its assets, after taking into account all anticipated uses of the
cash, would be sufficient to pay all amounts on or in respect of its liabilities when such
amounts are required to be paid. The Company does not intend to incur debts beyond its
ability to pay such debts as they mature (taking into account the timing and amounts of cash
to be payable on or in respect of its debt). 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. Schedule 3.1(aa) sets 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) 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.




     (cc) 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.



17









 






     (dd) 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.




     (ee) Accountants. The Company’s accounting firm is Eisner LLP. To the
knowledge and belief of the Company, such accounting firm is a registered public accounting
firm as required by the Exchange Act.




     (ee) 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 Company and the accountants and lawyers formerly or presently employed by the Company.




     (ff) 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 thereby. 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
the Transaction Documents and the transactions contemplated thereby and any advice given by
any Purchaser or any of their respective representatives or agents in connection with the
Transaction Documents and the transactions contemplated thereby 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 and the other Transaction Documents
has been based solely on the independent evaluation of the transactions contemplated hereby
by the Company and its representatives.




     (gg) Regulation M Compliance. The Company has not, and to its knowledge no one
acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or
to result in the stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased,
or, paid any compensation for soliciting purchases of, any of the Securities, or
(iii) paid or agreed to pay to any Person any compensation for soliciting another to
purchase any other securities of the Company, other than, in the case of clauses (ii) and
(iii), compensation paid to the Placement Agent in connection with the placement of the
Securities.



     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:



18









 






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




     (b) Own Account. Such Purchaser understands that the Securities are
“restricted securities” and have not been registered under the Securities Act or any
applicable state securities law and is acquiring the Securities as principal for its own
account and not with a view to or for distributing or reselling such Securities or any part
thereof in violation of the Securities Act or any applicable state securities law, has no
present intention of distributing any of such Securities in violation of the Securities Act
or any applicable state securities law and has no direct or indirect arrangement or
understandings with any other persons to distribute or 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) in violation of the Securities Act or any applicable
state securities law. Such Purchaser is acquiring the Securities hereunder in the ordinary
course of its business.




     (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), (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



19









 







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 Prior To The Date Hereof. Other than the
transaction contemplated hereunder, such Purchaser has not, nor has any Person acting on
behalf of or pursuant to any understanding with such Purchaser, directly or indirectly
executed any transaction, including Short Sales, in the securities of the Company during the
period commencing from the time that such Purchaser first received a term sheet (written or
oral) 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).



ARTICLE IV.

OTHER AGREEMENTS OF THE PARTIES




     4.1 Transfer Restrictions.




     (a) The Securities may only be disposed of in compliance with state and federal
securities laws. In connection with any transfer of Securities other than pursuant to an
effective registration statement or Rule 144, to the Company or to an Affiliate of a
Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company may
require the transferor thereof to provide to the Company an opinion of counsel selected by
the transferor and reasonably acceptable to the Company, the form and substance of which
opinion 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,
of a legend on any of the Securities in the following form:




THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”),
AND, ACCORDINGLY, MAY NOT BE



20









 







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. THIS SECURITY MAY
BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED
BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED
INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT 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 transfer would not be
subject to approval of the Company and no legal opinion of legal counsel of the pledgee,
secured party or pledgor shall be required in connection therewith. Further, no notice
shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will
execute and deliver such reasonable documentation as a pledgee or secured party of
Securities may reasonably request in connection with a pledge or transfer of the Securities,
including, if the Securities are subject to registration pursuant to the Registration Rights
Agreement, the preparation and filing of any required prospectus supplement under Rule
424(b)(3) under the Securities Act or other applicable provision of the Securities Act to
appropriately amend the list of Selling Stockholders thereunder.




     (c) Certificates evidencing the Shares and Warrant Shares shall not contain any legend
(including the legend set forth in Section 4.1(b)), (i) while a registration statement
(including the Registration Statement) covering the resale of such security is effective
under the Securities Act, or (ii) following any sale of such Shares or Warrant Shares
pursuant to Rule 144, or (iii) if such Shares or Warrant 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). If all or any portion of a Warrant is exercised at a time when there is an
effective registration statement to cover the resale of the Warrant Shares, such Warrant
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 seven Trading Days following the delivery by a Purchaser to the Company
or the Transfer Agent of a certificate representing Shares or Warrant Shares, as the case
may be, issued with a restrictive legend (such seventh Trading Day,



21









 







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. 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) 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 reliance that the Purchaser will sell
any Securities pursuant to either the registration requirements of the Securities Act,
including any applicable prospectus delivery requirements, or an exemption therefrom, and
that if Securities are sold pursuant to a Registration Statement, they will be sold in
compliance with the plan of distribution set forth therein.



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



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



     4.4 Securities Laws Disclosure; Publicity. The Company shall, by 8:30 a.m. New York
City time on the third Trading Day immediately following the Closing Date, file a Current Report on
Form 8-K, disclosing the material terms of the transactions contemplated hereby, and filing the
Transaction Documents as exhibits thereto. The Company and each Purchaser shall consult with each
other in issuing any press release (if any) with respect to the transactions contemplated hereby.
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 (A) any registration statement contemplated by the
Registration Rights Agreement and (B) the filing of



22









 







final Transaction Documents (including
signature pages thereto) with the Commission 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 this subclause (ii).



     4.5 Shareholder Rights Plan. No claim will be made or enforced by the Company or,
with the consent of the Company, any other Person, that any Purchaser is an “Acquiring Person”
under any control share acquisition, business combination, poison pill (including any distribution
under a rights agreement) or similar anti-takeover 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.



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



     4.7 Use of Proceeds. Except as may otherwise be set forth on Schedule 4.7
attached hereto, the Company shall use the net proceeds from the sale of the Securities hereunder
for working capital purposes and shall not use such proceeds 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), or to redeem any Common Stock, or Common Stock Equivalents or to
settle any outstanding litigation.



     4.8 Reimbursement. If any Purchaser becomes involved in any capacity in any
Proceeding by or against any Person who is a stockholder of the Company (except as a result of
sales, pledges, margin sales and similar transactions by such Purchaser to or with any other
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, except if such claim arises primarily from a breach of such
Purchaser’s representations, warranties or covenants under the



23









 







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.



     4.9 Indemnification of Purchasers. Subject to the provisions of this Section 4.9,
the Company will indemnify and hold each Purchaser and its directors, officers, shareholders,
members, partners, employees and agents (and any other Persons with a functionally equivalent role
of a Person holding such titles notwithstanding a lack of such title or any other title), each
Person who controls such Purchaser (within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members,
partners or employees (and any other Persons with a functionally equivalent role of a Person
holding such titles notwithstanding a lack of such title or any other title) of such controlling
persons (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 representations, warranties or
covenants under the Transaction Documents or any agreements or understandings such Purchaser may
have with any such stockholder or any violations by 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 reasonably acceptable to the Purchaser Party. 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, in which case
the Company shall be responsible for the reasonable fees and expenses of no more than one such
separate counsel. 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 such Purchaser Party in this Agreement
or in the other Transaction Documents.



     4.10 Reservation of Common Stock. As of the date hereof, the Company has reserved and
the Company shall continue to reserve and keep available at all times, free of preemptive rights, a
sufficient number of shares of Common Stock for the purpose of enabling the Company



24









 







to issue Shares
pursuant to this Agreement and Warrant Shares pursuant to any exercise of the Warrants and the
Placement Agent Shares and Placement Agent Warrant Shares to any exercise of the Placement Agent
Warrants.



     4.11 Listing of Common Stock. The Company will take all action reasonably necessary to maintain and continue the listing
and trading of its Common Stock on an Eligible Trading Market and will comply in all respects with
the Company’s reporting, filing and other obligations under the bylaws or rules of such Eligible
Trading Market. As soon as reasonably practicable following the Closing (but not later than the
earlier of the Effective Date and the first anniversary of the Closing Date) the Company shall
cause all of the Shares and Warrant Shares to be listed on such Eligible Trading Market. The
Company further agrees, if the Company applies to have the Common Stock traded on any other Trading
Market, it will include in such application all of the Shares and Warrant Shares, and will take
such other action as is necessary to cause all of the Shares and Warrant Shares to be listed on
such other Trading Market as promptly as possible.



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



     4.13 Short Sales and Confidentiality After The Date Hereof. Each Purchaser severally
and not jointly with the other Purchasers covenants that neither it nor any Affiliate acting on its
behalf or pursuant to any understanding with it will execute any Short Sales during the period
commencing at the Discussion Time and ending at the time that the transactions contemplated by this
Agreement are first publicly announced as described in Section 4.4. 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 4.4, 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 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 4.4, except that so long as any
Purchaser owns any Shares such Purchaser agrees that it will not be in a “net short position” with
respect to the Common Stock, where “net short position” means having a contractual obligation to
deliver a greater number of shares of Common Stock than such Purchaser beneficially owns long,
which includes without limitation shares of Common Stock



25









 







held long and shares of Common Stock
issuable upon exercise, conversion or exchange of Company securities held by such Purchaser
(whether or not then convertible, exercisable or exchangeable), including the Warrants.
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 portfolio manager that made the
investment decision to purchase the Securities covered by this Agreement.



     4.14 Delivery of Securities After Closing. The Company shall deliver, or cause to be
delivered, the respective Securities purchased by each Purchaser to such Purchaser within 5 Trading
Days of the Closing Date.



     4.15 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with
respect to the Securities as required under Regulation D and to provide a copy thereof, promptly
upon request of any Purchaser. The Company shall take such action as the Company shall reasonably
determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale
to the Purchasers at the Closing under applicable securities or “Blue Sky” laws of the states of
the United States, and shall provide evidence of such actions promptly upon request of any
Purchaser.



     4.16 Purchase Price Adjustments.



          (a) Required Adjustments. If prior to the Effective Date the Company issues or sells
any shares of its Common Stock or Common Stock Equivalents (other than Exempt Issuances) at a
Subsequent Issuance Selling Price lower than the Per Share Purchase Price, then, in each case, the
Per Share Purchase Price hereunder shall be adjusted downward to equal such lower Subsequent
Issuance Selling Price and the Purchasers shall be entitled to receive additional shares of Common
Stock (“Additional Shares”) and warrants (“Additional Warrants”) to
purchase shares of Common Stock (“Additional Warrant Shares”) as set forth in Section 4.16(b)
below, subject to Section 4.16(c) below. The Company shall furnish to the Purchasers written
notice of, and issue a press release announcing, any such sale within 24 hours of the closing of
any such issuance or sale. The term “Shares”, “Warrants” and “Warrant Shares” as used in this
Agreement shall include the Additional Shares, Additional Warrants and Additional Warrant Shares
issued to the Purchasers pursuant to this Section 4.16.



          (b) Adjustment Procedures. Subject to Section 4.16(c) below, if an adjustment of the
Per Share Purchase Price is required pursuant to Section 4.16(a), then the Company shall deliver to
each Purchaser, within ten (10) Trading Day following the consummation of the transaction giving
rise to the adjustment (as may be adjusted pursuant to Section 4.16(c) below, “Delivery Date”):




          (i) such number of Additional Shares equal to (1) the aggregate Subscription Amount
paid by such Purchaser divided by the adjusted Per Share Purchase Price as required under
Section 4.16(a), minus (2) the total number of Shares previously



26









 







delivered to such Purchaser
under this Agreement, provided that the Company shall effect such adjustment in cash to the
extent required by Section 4.16(c);




          (ii) an additional A Warrant registered in the name of such Purchaser to purchase up to
a number of shares of Common Stock equal to 30% of such number of Additional Shares,
provided that the exercise price therein shall be equal to 137.5% of such Subsequent
Issuance Selling Price; and




          (iii) an additional B Warrant registered in the name of such Purchaser to purchase up
to a number of shares of Common Stock equal to 30% of such number of Additional Shares,
provided that the exercise price therein shall be equal to 162.5% of such Subsequent
Issuance Selling Price.


In the event the Company fails to deliver to any Purchaser such Additional Shares or Additional
Warrants (or cash, if applicable) by the Delivery Date, in addition to such Purchaser’s other
available remedies, the Company shall pay to such Purchaser, in cash, as partial liquidated damages
and not as a penalty, an amount equal to 2% of such Purchaser’s Adjustment Amount per month,
payable in cash, where the “Adjustment Amount” equals the difference between the most recent Per
Share Purchase Price and such Subsequent Issuance Selling Price multiplied by the number of Shares
previously issued to such Purchaser.





     (c) Limitation on Number of Shares.




          (i) Notwithstanding anything herein to the contrary, except as provided otherwise in
this Section 4.16, the number of Additional Shares that may be issued to any Purchaser under
this Section 4.16 shall be limited to the extent necessary to insure that, following such
issuance, the number of shares of Common Stock then beneficially owned by such Purchaser and
its Affiliates and any other persons or entities whose beneficial ownership of Common Stock
would be aggregated with such Purchaser’s for purposes of Section 13(d) of the Exchange Act
(including shares held by any “group” of which the holder is a member, but excluding shares
beneficially owned by virtue of the
ownership of securities or rights to acquire securities that have limitations on the
right to convert, exercise or purchase similar to the limitation set forth herein (including
the Warrants)), does not exceed 9.9% of the total number of shares of Common Stock of the
Company then issued and outstanding (the “Beneficial Ownership Limitation”). For purposes
hereof, “group” has the meaning set forth in Section 13(d) of the Exchange Act and applicable
regulations of the Securities and Exchange Commission, and the percentage held by the holder
shall be determined in a manner consistent with the provisions of Section 13(d) of the
Exchange Act. If by way of any adjustment required by this Section 4.16 any Purchaser would
otherwise be entitled to receive a number of shares of Common Stock such that the total
number of such shares held by such Purchaser as of the date of such adjustment would equal or
exceed the Beneficial Ownership Limitation, then the Company shall not issue Additional
Shares as required by this Section 4.16 only to the extent necessary to avoid causing the
aforesaid limitation to be exceeded. With respect to such Additional Shares which may not be
issued to such Purchaser on the Delivery Date due to the limitation contained in this
paragraph (“Excess Shares”), the Delivery Date for such Excess Shares, or any portion thereof
from time to time as



27









 







specified by such Purchaser, shall be extended to such date which is ten
(10) days following delivery of written notice to the Company from such Purchaser stating
that the Excess Shares (or such portion thereof), are no longer subject to the limitation
contained in this paragraph since such Excess Shares (or portion thereof) may be issued
without violating the Beneficial Ownership Limitation.




          (ii) In the event that the Company would be obligated to issue an amount of Additional
Shares and Additional Warrants which, when aggregated with all Shares and Warrants issued,
would constitute a breach of the Company’s obligations under the rules or regulations of the
Company’s Trading Market as they apply to the Company, or any other principal securities
exchange or market upon which the Common Stock is or becomes traded (the “Cap Regulations”),
the Company shall not be obligated to issue any such Additional Shares or Additional
Warrants. Instead, the Company shall immediately seek shareholder approval of this
transaction (with voting in accordance with the Cap Regulations and other applicable law) if
such approval would, under the Cap Regulations, permit the Company to issue such Additional
Shares and Additional Warrants without violation of the Cap Regulations. If such shareholder
approval will not afford a cure of the breach of the Cap Regulations, or if such shareholder
approval is not obtained within eighty (80) days, then the Company shall promptly pay cash to
each Purchaser cash equal to such Purchaser’s Adjustment Amount which cannot be satisfied
with Additional Shares and Additional Warrants.



          (d) Additional Provisions. In case of any stock split or reverse stock split, stock
dividend, reclassification of the common stock, recapitalization, merger or consolidation, or like
capital adjustment affecting the Common Stock of the Company, the provisions of this Section 4.16
shall be applied in a fair, equitable and reasonable manner so as to give effect, as nearly as may
be, to the purposes hereof. The Company agrees to take the position that, for purposes of
determining the holding period under Rule 144 for shares of Common Stock issued pursuant to this
Section 4.16, the holding period of such shares shall be tacked to the holding period of the
Shares.



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 February 9, 2007; 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. At the Closing, the Company has agreed to reimburse Gemini
Master Fund, Ltd. and/or the other Purchasers up to an aggregate amount of $15,000 for legal fees
and expenses of the Purchasers in connection with the transactions contemplated hereby. 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,



28









 







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 to the Purchasers.



     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 2nd 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 Purchasers
holding at least 67% of the then outstanding Securities or, in the case of a waiver, by the party
against whom enforcement of any such waived provision is sought; provided, however, that no such
amendment or waiver that adversely changes the specifically enumerated rights hereunder of a
Purchaser in a manner adversely different (other than differences that are de minimus or
inconsequential) from the manner in which such specifically enumerated rights of any other
Purchaser are being adversely changed by such amendment or waiver may be effected without the
consent of such Purchaser. Any amendment or waiver approved as set forth above shall be
binding upon each Purchaser, whether or not such holder shall have approved such amendment or
waiver. 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 of any 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.



     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 (other than by merger). 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



29









 







provisions of the Transaction Documents that apply to the “Purchasers” (which, for purposes of
clarity, includes the representations and warranties in Section 3.2 herein as to such transferee).



     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 4.9.



     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) may be commenced in the state and federal
courts sitting in the City of New York or in California. Each party hereby irrevocably submits to
the non-exclusive jurisdiction of the state and federal courts sitting in the City of New York,
borough of Manhattan, and California 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 is an
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 other 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 reasonable attorneys’ fees and other costs and
expenses incurred with the investigation, preparation and prosecution of such action or proceeding.



     5.10 Survival. The representations and warranties contained herein shall survive the
Closing and the delivery of the Shares and Warrant Shares.



     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 or by e-mail delivery of a “.pdf” format data file, 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 or “.pdf” signature
page were an original thereof.



30









 





     5.12 Severability. If any term, provision, covenant or restriction of this Agreement
is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in
full force and effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such term, provision,
covenant or restriction. It is hereby stipulated and declared to be the intention of the parties
that they would have executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or unenforceable.



     5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary
contained in (and without limiting any similar provisions of) any of the other Transaction
Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction
Document and the Company does not timely perform its related obligations within the periods therein
provided, then such Purchaser may rescind or withdraw, in its sole discretion from time to time
upon written notice to the Company, any relevant notice, demand or election in whole or in part
without prejudice to its future actions and rights; provided, however, in the case
of a rescission of an exercise of a Warrant, the Purchaser shall be required to return any shares
of Common Stock delivered in connection with any such rescinded 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 (in the case of mutilation), 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. The applicant
for a new certificate or instrument under such circumstances shall also pay any reasonable
third-party costs (and provide customary indemnity) 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 contained in the Transaction Documents and hereby agrees to waive and not to assert in
any action for specific performance of any such obligation the defense that a remedy at law would
be adequate.



     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.



31









 





     5.17 Independent Nature of Purchasers’ Obligations and Rights. If there exists more
than one Purchaser hereunder, 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 or non-performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any other 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 reasons of administrative convenience
only, Purchasers and their respective counsel have chosen to communicate with the Company through
Peter J. Weisman, P.C. Peter J. Weisman, P.C. represents only Gemini Master Fund, Ltd. 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.



     5.18 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, converted,
transferred or for any other reason are no longer outstanding.



     5.19 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 Pages Follow)





32










 





          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.



	 	 	 
	COMPANY:
	 	 
	 
	 	 
	XENONICS HOLDINGS, INC.

	 	Address for Notices:
	 
	 	 
	 

	 	2236 Rutherford Road
	 

	 	Suite 123
	By: /s/ RICHARD S. KAY

	 	Carlsbad, CA 92008-7297
	Print Name: RICHARD S. KAY

	 	Fax: 760-438-1184
	Print Title: CHIEF FINANCIAL OFFICER
	 	 






[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]




33









 





PURCHASER:




	 	 	 
	TAPESTRY INVESTMENT PARTNERS, LP

	 	Address for Notices:
	 
	 	 
	 

	 	Tapestry Investment Partners, LP
	By: /s/ GARY S. SIPERSTEIN

	 	10 Wegbosset Street 401
	Name: GARY S. SIPERSTEIN

	 	Providence, RI 02903
	Title: GP

	 	Attn: Gary Sipperstein
	 
	 	 
	Subscription Amount: $800,000

	 	Address for Delivery of Securities (if not
	Shares: 400,000 shares

	 	same as above):
	A Warrants: 120,000 shares
	 	 
	B Warrants: 120,000 shares
	 	 






[PURCHASER SIGNATURE PAGE TO XXN SECURITIES PURCHASE AGREEMENT]




 









 





PURCHASER:




	 	 	 
	CALM WATERS PARTNERSHIP

	 	Address for Notices:
	 
	 	 
	 

	 	Calm Waters Partnership
	By: /s/ RICHARD S. STRONG

	 	115 S 84th Street Suite 200
	Name: RICHARD S. STRONG

	 	Milwaukee, WI 53214
	Title: MANAGING PARTNERSHIP

	 	Attn: Richard S. Strong
	 
	 	 
	Subscription Amount: $400,000

	 	Address for Delivery of Securities (if
	Shares: 200,000 shares

	 	not same as above):
	A Warrants: 60,000 shares
	 	 
	B Warrants: 60,000 shares
	 	 






 









 





	 	 	 
	PURCHASER:
	 	 
	 
	 	 
	MEADOWBROOK OPPORTUNITY FUND, LLC

	 	Address for Notices:
	 
	 	 
	 

	 	c/o Meadowbrook Capital Management, LLC
	By: /s/ MICHAEL RAGINS

	 	520 Lake Cook Road, Suite 690
	Name: Michael Ragins

	 	Deerfield, IL 60015
	Title: Manager

	 	Attn: Daniel Elekman, Executive Officer,
	 

	 	and Michael Ragins, Manager
	 
	 	 
	Subscription Amount: $250,000

	 	Address for Delivery of Securities (if not
	Shares: 125,000 shares

	 	same as above):
	A Warrants: 37,500 shares
	 	 
	B Warrants: 37,500 shares
	 	 






 









 





	 	 	 
	PURCHASER:
	 	 
	 

	 	Address for Notices:
	 
	 	 
	 

	 	James Schoenike
	/s/ JAMES SCHOENIKE

	 	9022 West County Line Road
	James Schoenike

	 	Mequon, WI 53097
	 
	 	 
	Subscription Amount: $20,000

	 	Address for Delivery of Securities (if not
	Shares: 10,000 shares

	 	same as above):
	A Warrants: 3,000 shares
	 	 
	B Warrants: 3,000 shares
	 	 






 









 





	 	 	 
	PURCHASER:
	 	 
	 

	 	Address for Notices:
	 
	 	 
	 

	 	Mark D. Westman
	/s/ MARK D. WESTMAN

	 	PO Box 4195
	Mark D. Westman

	 	Telluride, CO 81435-4195
	 
	 	 
	Subscription Amount: $30,000

	 	Address for Delivery of Securities (if not
	Shares: 15,000 shares

	 	same as above):
	A Warrants: 4,500 shares
	 	 
	B Warrants: 4,500 shares
	 	 






 









 





	 	 	 
	PURCHASER:
	 	 
	 

	 	Address for Notices:
	 
	 	 
	 

	 	Harvey Blitz
	/s/ HARVEY BLITZ

	 	72-19 137th St.
	Harvey Blitz

	 	Flushing, NY 11367
	 
	 	 
	Subscription Amount: $150,000

	 	Address for Delivery of Securities (if not
	Shares: 75,000 shares

	 	same as above):
	A Warrants: 22,500 shares
	 	 
	B Warrants: 22,500 shares
	 	 






 









 





	 	 	 
	PURCHASER:
	 	 
	 

	 	Address for Notices:
	 
	 	 
	 

	 	Stephen J. Posner
	/s/ STEPHEN J. POSNER

	 	218 Augusta Ct.
	Stephen J. Posner

	 	Roslyn, NY 11576
	 
	 	 
	Subscription Amount: $150,000

	 	Address for Delivery of Securities (if not
	Shares: 75,000 shares

	 	same as above):
	A Warrants: 22,500 shares
	 	 
	B Warrants: 22,500 shares
	 	 






 









 





	 	 	 	 	 
	PURCHASER:	 	 
	 
	 	 	 	 
	GEMINI MASTER FUND, LTD.	 	Address for Notices:
	 
	 	 	 	 
	By:

	 	GEMINI STRATEGIES, LLC, its investment	 	 
	 

	 	manager
	 	c/o Gemini Strategies, LLC
	 

	 	 	 	12220 El Camino Real, Ste. 400
	 

	 	 	 	San Diego, CA 92130
	 

	 	By: /s/ STEVEN WINTERS
	 	Attn: Steven Winters
	 

	 	Name: Steven Winters
	 	Fax: (858) 509-8808
	 

	 	Title: President	 	 
	 
	 	 	 	 
	 

	 	 	 	with a copy to:
	 
	 	 	 	 
	 

	 	 	 	Peter J. Weisman, P.C.
	 

	 	 	 	52 Vanderbilt Avenue, 17th Fl.
	 

	 	 	 	New York, NY 10017
	 

	 	 	 	Fax: (212) 317-8855
	 
	 	 	 	 
	Subscription Amount: $250,000	 	Address for Delivery of Securities (if not
	Shares: 125,000 shares	 	same as above):
	A Warrants: 37,500 shares	 	 
	B Warrants: 37,500 shares	 	 






 









 





Disclosure Schedules

Schedule 3.1(g)




Summary of Stock Options Outstanding




8/29/2007




	 	 	 	 	 	 	 	 	 
	 	 	Option	 	 	No. of	 
	Grant Date	 	Price	 	 	Options	 
	7/23/03
	 	$	0.250	 	 	 	145,000	 
	7/29/03
	 	$	0.875	 	 	 	400,000	 
	12/5/03
	 	$	6.000	 	 	 	25,000	 
	8/9/04
	 	$	3.500	 	 	 	25,000	 
	5/21/04
	 	$	5.750	 	 	 	15,000	 
	10/11/04
	 	$	3.750	 	 	 	154,000	 
	4/15/05
	 	$	3.800	 	 	 	590,000	 
	12/9/05
	 	$	1.830	 	 	 	34,000	 
	10/30/06
	 	$	1.610	 	 	 	100,000	 
	1/16/07
	 	$	1.980	 	 	 	25,000	 
	4/12/07
	 	$	2.350	 	 	 	25,000	 
	5/31/07
	 	$	2.580	 	 	 	100,000	 
	8/29/07
	 	$	—	 	 	 	450,000	 
	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	2,088,000	 
	 
	 	 	 	 	 	 	 






Summary of Warrants Outstanding




	 	 	 	 	 	 	 	 	 
	 	 	Warrant	 	 	No. of	 
	Grant Date	 	Price	 	 	Warrants	 
	 
	 	 	 	 	 	 	 	 
	7/15/03
	 	$	0.600	 	 	 	672,500	 
	7/15/03
	 	$	0.825	 	 	 	422,500	 
	7/31/03
	 	$	0.875	 	 	 	50,000	 
	7/31/03
	 	$	1.050	 	 	 	97,168	 
	4/26/04
	 	$	8.000	 	 	 	50,000	 
	7/1/04
	 	$	5.050	 	 	 	25,000	 
	1/28/05
	 	$	5.500	 	 	 	50,000	 
	4/13/06
	 	$	2.200	 	 	 	250,000	 
	4/13/06
	 	$	3.200	 	 	 	250,000	 
	9/5/06
	 	$	1.600	 	 	 	500,000	 
	11/6/06
	 	$	1.620	 	 	 	50,000	 
	2/2/07
	 	$	2.750	 	 	 	300,000	 
	2/2/07
	 	$	3.250	 	 	 	300,000	 
	2/2/07
	 	$	2.750	 	 	 	30,000	 
	2/2/07
	 	$	3.250	 	 	 	30,000	 
	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	3,077,168	 
	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Shares Outstanding - 8-27-07
	 	 	 	 	 	 	18,549,839	 
	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 	 	 
	Price of Common Stock - 8-27-07
	 	 	 	 	 	$	2.51