Document:

Exhibit 10.45

 

MASTER ATM AGREEMENT

 

THIS AGREEMENT is entered into
on this 1st day of March 2008 in Clark County, State of Nevada, by and between
E-T-T, Inc., a Nevada corporation (Hereinafter “E-T-T”), and Terrible Herbst, Inc., a Nevada corporation (Hereinafter
“TH”), on the conditions set forth below.

 

WHEREAS, E-T-T is engaged in the business of
placing, operating and maintaining automated teller machines (“ATM”) in
businesses throughout Nevada;

 

WHEREAS, TH is engaged in the operation of
convenience stores in the State of Nevada;

 

WHEREAS E-T-T has operated ATM’s
in TH locations pursuant to verbal agreement for over 10 years on the same terms contained
herein; and

 

WHEREAS, E-T-T and TH desire to enter into an ATM
Agreement for all locations currently operated by TH and any and all future TH
locations;

 

THEREFORE, E-T-T  and TH hereby agree as follows:

 

I.                      EXCLUSIVITY:          E-T-T is hereby granted
the exclusive right during the term of this Agreement to install, operate, and
maintain ATM’s at the TH locations set forth in Exhibit “A” hereto, as well as, all additional
convenience store locations opened by TH during the term hereof, subject to the terms and conditions set forth
herein. This right is given for consideration herein set forth and is
coupled with an interest.

 

II.                     TERM:      The term
of this agreement shall be for a period of one (1) year, commencing on March 1,
2008. The opening of any additional convenience stores shall not effect the
initial term of the Agreement, nor any renewals terms.

 

1

 

III.                   INSTALLATION AND MAINTENANCE OF ATM’S:  E-T-T shall install one ATM at each TH
location. E-T-T agrees to be available 24-hours a day to provide service and
maintenance to the ATM’s installed at the TH locations. TH shall permit E-T-T
access to the gaming devices at all reasonable times for purposes of
maintenance or other inspection. E-T-T agrees to keep each ATM loaded with the
appropriate amount of currency to ensure customers of TH have access to use
cash at all time.

 

IV.                   LEASE PAYMENTS: E-T-T agrees to pay to TH fifty cents ($.50) for each cash withdrawal transaction processed by the installed ATM’s based on a
current transaction fee of $2.50 currently charged by E-T-T to its customers.
Should E-T-T increase
this amount, TH shall be entitled to 50% of any such increase.

 

V.                     TAXES AND LICENSE FEES:           E-T-T shall be responsible for the taxes and license fees directly
relating to the operation of the ATM’s at the TH locations.

 

VI.                   INSURANCE:       TH shall be
responsible for maintaining adequate property and liability insurance for the
location. E-T-T shall be listed as the sole loss payee for the ATM’s on the policy. A copy
of the certificate of insurance and/or policy shall be provided to E-T-T at the
commencement of this Agreement and upon an annual basis or upon request of
E-T-T.

 

VII.                  TERMINATION:          E-T-T may terminate and cancel this Agreement upon thirty (30) days
written notice to TH. In the event TH should cease operating its convenience
stores, a receiver is appointed to the business, an insolvency or bankruptcy 

 

2

 

proceeding is commenced, or the business is sold or
otherwise transferred, E-T-T shall have the sole option of immediately terminating
this Agreement. For purposes of termination, this Agreement is to be construed
as both a financial accommodation and a personal services contract.

 

VIII.                 RENEWAL: This Agreement shall automatically be renewed at
the end of the initial
term for consecutive and repetitive terms of one year, unless either party
shall notify the other, in writing, at
least thirty (30) days prior to the end of the term.

 

IX.                   ACCOUNTING & AUDIT RIGHTS:  HGI will provide TH with a
monthly accounting of all transactions
processed thru the ATM’s installed at the TH locations. TH has the right on a yearly basis, at its own expense, to
audit the books and records of HGI as they apply to the ATM transactions forth in this Agreement.
Should those books and records have a discrepancy of more than 5% from
the monthly accounting provided, HGI  shall repay that amount and
reimburse TH for the audit.

 

X.                    GOVERNING LAW:  This
Agreement shall be governed and construed pursuant to the laws of the State of Nevada.

 

XI.                   ENTIRE AGREEMENT:      This Agreement comprises the entire understanding between the parties
hereto concerning the operation of ATM’s at the locations and may not be
altered, modified or revised except in writing signed by both parties.

 

3

 

XII.                  NOTICE:          Any notice required pursuant to this
Agreement shall be deemed sufficiently given if sent by certified or registered
mail, return receipt requested, postage prepaid and addressed as follows:

 

	
   

  	
  TO: E-T-T, INC.

  
	
   

  	
   

  	
  3440 W. Russell Road

  
	
   

  	
   

  	
  Las Vegas, Nevada 8911

  Attn: Mr. Edward J. Herbst

  
	
   

  	
   

  	
   

  
	
   

  	
  With a copy to:

  
	
   

  	
   

  	
  Mr. Sean T. Higgins, Esq.

  General Counsel, E-T-T, Inc.

  5195 Las Vegas Blvd. S.

  
	
   

  	
   

  	
  Las Vegas, Nevada 89119

  
	
   

  	
   

  	
   

  
	
   

  	
  TO: TH

  
	
   

  	
   

  	
  c/o Jerry Herbst

  
	
   

  	
   

  	
  5195
  Las Vegas Blvd. S. Las

  
	
   

  	
   

  	
  Vegas, Nevada 89119

  

 

XIII.                SUCCESSORS AND ASSIGNS:        It is mutually agreed
upon by the parties that the terms, conditions and promises herein are mutually
binding, and shall extend and be binding and inure to the benefit of E-T-T and TH, and their
respective heirs, executors, administrators, successors, and assigns. It is agreed between the
parties that all ATM’s installed by E-T-T
at TH  are the sole property of E-T-T, and shall not by
act of law or other agreement become security for any obligation, subject to execution by creditor’s, or fixtures of any TH
location. In the event of a breach of this Agreement by TH, in addition
to any other remedy at law or equity, E-T-T may enter upon the premises of TH and take its equipment. The ATM’s
installed at the TH location shall remain personal property regardless
of any attachments or connections made to the realty.

 

4

 

IN WITNESS WHEREOF, the parties
hereto have set their hands as of the day, month and year first above written.

 

	
  E-T-T, INC.

  	
   

  	
  TERRIBLE HERBST, INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  /s/ Edward
  Herbst

  	
   

  	
  /s/ Jerry Herbst

  
	
  EDWARD HERBST

  	
   

  	
  JERRY HERBST

  
	
  Chief Executive Officer

  	
   

  	
  President

  
				

 

5Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

among

 

ASPYRA, INC.

as Issuer,

 

JAY WEIL

As Collateral Agent

 

and

 

THE PERSONS LISTED ON THE SIGNATURE PAGES HERETO

as Purchasers

 

March 26, 2008

 

 

EXHIBITS

 

	
  Exhibit A

  	
   

  	
  Form of Secured
  Convertible Note

  
	
  Exhibit B

  	
   

  	
  Form of
  Registration Rights Agreement

  
	
  Exhibit C-1

  	
   

  	
  Form of Security
  Agreement

  
	
  Exhibit C-2

  	
   

  	
  Form of Notice of
  Collateral Assignment of Security Interest in Patent Applications

  
	
  Exhibit C-3

  	
   

  	
  Form of Notice of
  Collateral Assignment of Security Interest in Trademarks

  
	
  Exhibit C-4

  	
   

  	
  Form of Notice of
  Collateral Assignment of Security Interest in Copyrights

  
	
  Exhibit D

  	
   

  	
  Form of Warrant

  
	
  Exhibit E

  	
   

  	
  Form of Escrow
  Agreement

  
	
  Exhibit F

  	
   

  	
  Form of Accredited
  Investor Questionnaire

  
	
  Exhibit G

  	
   

  	
  Form of Legal
  Opinion of Issuer’s Counsel

  

 

SCHEDULES

 

	
  Schedule 3.1.4

  	
   

  	
  Required Actions

  
	
  Schedule 3.1.6

  	
   

  	
  Capitalization

  
	
  Schedule 3.1.9

  	
   

  	
  Brokerage or Finder’s
  Fees

  
	
  Schedule 3.1.20

  	
   

  	
  Intellectual Property

  

 

 

SECURITIES PURCHASE AGREEMENT

 

THIS
AGREEMENT is made as of March 26, 2008 among ASPYRA, INC., a California corporation (“Issuer”), Jay Weil, as Collateral Agent (the “Collateral Agent”) and the persons listed on the signature pages hereto
(“Purchasers”).

 

For value received, the parties agree as follows:

 

1.                                      DEFINITIONS

 

1.1                               Definitions. 
In this Agreement:

 

“Affiliate” of a Person means
any other Person who directly or indirectly controls, is controlled by, or is
under common control with, such Person.

 

“Business Day” means any day other than a Saturday, a Sunday or a day
on which the Principal Market is closed or on which banks in the City of New
York are required or authorized by law to be closed

 

“Common Stock” means common
stock of Issuer, no par value, and any other class of securities into which
such securities may hereafter be reclassified or changed.

 

“Exchange Act” means the U.S.
Securities Exchange Act of 1934, any successor act of Congress, and the
regulations promulgated thereunder, as amended from time to time.

 

“Exempt Issuance” means the
issuance of (a) options to purchase Common Stock and/or Common Stock to
employees, officers, directors or consultants of the Issuer pursuant to any
plan duly adopted for such purpose by the Board of Directors of the Issuer;
provided that the total number of shares of Common Stock issued plus the total
number of shares of Common Stock issuable upon exercise of options shall not
exceed 1,500,000 shares of the Issuer’s Common Stock, (b)  securities
issuable 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, other than options referred to in clause (a), provided that
such Securities have not been amended since the date of this Agreement to
increase the number of such securities or to decrease the exercise, exchange or
conversion price of such securities (subject to adjustment for forward and
reverse stock splits, stock dividends, recapitalizations and the like that
occur after the date hereof), (c) securities issued pursuant to
acquisitions or strategic transactions approved by a majority of the
disinterested directors of the Issuer (i.e., directors that do not have an
interest in the counter-party in any such acquisition or strategic
transaction), provided that any such issuance shall only be to a Person which
is, itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Issuer and in which the Issuer receives
benefits in addition to the investment of funds, but shall not include a
transaction in which the Issuer is issuing securities primarily for the purpose
of raising capital or to an entity whose primary business is investing in
securities and provided, further, that the issuance of securities in one
transaction or a series of related transactions constituting or which are
convertible into or exchangeable for a number of shares  of Common Stock which is more than 19.9% of
the outstanding shares of

 

 

Common
Stock on the date a definitive  agreement
related to the issuance of such securities is entered into by the Issuer shall
also require the approval of the holders of 
a majority of the outstanding principal amount of the Notes (the “Required Holders”) if the outstanding principal amount of
the Notes then exceeds $500,000.

 

“Event of Default” has the
meaning specified in the Notes.

 

“Issuer’s Knowledge” means the
actual knowledge of the executive officers (as defined in Rule 405 under
the Securities Act) of the Issuer, after due inquiry.

 

“Material Adverse Effect” means
a material adverse effect on the results of operations, assets, business,
prospects or condition (financial or otherwise) of Issuer, or a material
adverse effect on Issuer’s ability to perform its obligations under the
Transaction Documents.

 

“Note” means each secured,
convertible loan note issued by Issuer to a Purchaser pursuant to this
Agreement, and Notes means
some or all such Notes together, as the context requires.

 

“Person” means an individual,
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.

 

“Principal Market”
means the American Stock Exchange or the principal exchange, market or
quotation system on which the Common Stock is then listed, traded or quoted.

 

“Proceeding” means any action,
claim, suit, arbitration, inquiry, notice of violation, investigation or other proceeding.

 

“SEC” means the U.S. Securities
and Exchange Commission and any successor Person.

 

“Securities” means the Notes,
Warrants and other Registrable Securities.

 

“Securities Act” means the U.S.
Securities Act of 1933, any successor act of Congress, and the regulations
promulgated thereunder, as amended from time to time.

 

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

 

“Warrant” means each Common
Stock purchase warrant issued by Issuer to a Purchaser pursuant to this
Agreement, and Warrants
means some or all of such Warrants together, as the context requires.

 

2

 

2.                                      PURCHASE AND SALE OF NOTES AND
WARRANTS

 

2.1          Commitment. Upon and subject to the terms and
conditions set forth herein, each Purchaser hereby subscribes for and commits
to purchase from Issuer, and Issuer hereby reserves for issuance and commits to
issue and sell to each Purchaser, a Note in the face amount, and a Warrant
covering the number of shares of Common Stock, set forth on such Purchaser’s
signature page to this Agreement, for the subscription price set forth on
such signature page (the “Subscription Price”).

 

2.2          Minimum and Maximum Amounts. 
Each Note and Warrant will be issued as part of a series of issuances of
one or more Notes and Warrants for (a) a minimum cumulative Subscription
Price for all participating Purchasers of $2,000,000, and (b) a maximum
cumulative Subscription Price for all Purchasers of $3,000,000.

 

2.3                               Terms of Notes. 
Each Note will:

 

2.3.1                     be substantially in the form attached
hereto as Exhibit A;

 

2.3.2       be issued in a face amount equal to 100%
of the Subscription Price paid by the Purchaser;

 

2.3.3       mature, and be due and payable in full,
on the second anniversary of the Closing Date (the “Maturity Date”);

 

2.3.4       bear interest at the rate of 8% per annum
compounded on each July 15 and January 15 during which any portion of
principal of the Note shall remain outstanding and bear interest at the rate of
24% per annum upon the occurrence and during the continuance of any Event of
Default;

 

2.3.5       be convertible at any time and from time
to time prior to repayment, at the option of the holder or, under the
circumstances described therein, at the option of Issuer, into that number of
shares of Common Stock equal to quotient obtained by dividing (a) the
principal and interest of the Note being converted, by (b) the conversion
price of the Note, which will initially be $0.55 and be subject to adjustment
in certain circumstances as set forth in the Note;

 

2.3.6       entitle
the holder to have Issuer register the Common Stock issuable upon conversion of
the Note with the SEC under the Securities Act pursuant to the registration
rights agreement (the “Registration Rights
Agreement”) to be entered into among Issuer, the Purchasers and the
placement agent for the securities contemplated herein, in substantially the
form attached hereto as Exhibit B;

 

2.3.7       be
secured, pari passu with all other Notes, as to
repayment, by a  security interest in all
of Issuer’s assets, including its intellectual property rights, which security
interest shall be subordinate to the security interest in such assets held by
the Bank, but which security interest shall have priority with respect any
other person, firm or entity,  pursuant
to a security agreement, in substantially the form attached hereto as Exhibit C-1, to be given by
Issuer to the Collateral Agent in favor of the Purchasers (the “Security Agreement”) and Collateral Assignments of Patents,
Trademarks and Copyrights, in substantially the forms attached hereto as Exhibit C-2,  Exhibit C-3 and Exhibit C-4,
respectively (collectively, the “Collateral Assignments”);

 

3

 

2.3.8       not
be prepayable by Issuer without the written consent of the holder;

 

2.3.9       only
be repaid by Issuer, in whole or in part, pro rata, based
on relative outstanding amounts, with all other outstanding Notes at the time
of each such repayment; and

 

2.3.10     not
be transferable by the Purchaser or any subsequent holder, except in accordance
with Section 5.1 hereof..

 

2.4          Terms of Warrants.  Each Warrant
will:

 

2.4.1       be
in substantially the form attached hereto as Exhibit D;

 

2.4.2       entitle
the holder to purchase such number of shares of Common Stock as shall equal the
total number of shares of Common Stock which shall initially be issuable upon
conversion of the related Note  issued to
the Purchaser;

 

2.4.3       entitle
the holder to have Issuer register the Common Stock issuable upon exercise of
the Warrant with the SEC under the Securities Act pursuant to the Registration
Rights Agreement;

 

2.4.4       be
exercisable, in whole or in part, from time to time from the date of issuance
through the third anniversary of the Closing Date, in cash, at the price of
$0.55 per share, subject to adjustment in certain circumstances as set forth in
the Warrant;

 

2.4.5       entitle
the holder to cashless exercise, which will result in the holder receiving that
number of shares of Common Stock equal to (a) the excess of the fair
market value (as defined therein) per share over the exercise price per share
at the date of exercise, multiplied by (b) the total number of shares as
to which exercised, and then divided by (c) the fair market value per
share; and

 

2.4.6       not
be transferable by the Purchaser or any subsequent holder except in accordance
with Section 5.1 hereof.

 

2.5          Subscription Documents and Payments. 
Each Purchaser has delivered, or will deliver, the following
concurrently with such Purchaser’s execution and delivery of this Agreement:

 

2.5.1       a
counterpart, executed by such Purchaser, of the Registration Rights Agreement;

 

2.5.2       a
counterpart, executed by such Purchaser, of the escrow agreement (the “Escrow Agreement”) to be entered into among Issuer,
Purchasers, Great American Investors, Inc. (the “Placement Agent”) and
Signature Bank,  as escrow agent (“Escrow Agent”), in substantially the form attached hereto as
Exhibit E;

 

4

 

2.5.3       payment
to Escrow Agent of the Subscription Price for the Note and Warrant subscribed
for by such Purchaser; and

 

2.5.4       a
fully completed and signed accredited investor questionnaire (the “Investor
Questionnaire”) with respect to such Purchaser, in substantially the form
attached hereto as Exhibit F.

 

2.6          Purchaser Conditions Precedent. 
The obligations of each Purchaser to consummate the transactions
contemplated in Section 2.1 are subject to the satisfaction of the
following conditions precedent on or prior to the Closing Date (as defined in Section 2.8):

 

2.6.1       Issuer
and the Collateral Agent will have executed and delivered to the Purchaser this
Agreement, and Issuer will have countersigned such Purchaser’s signature page to
this Agreement;

 

2.6.2       Issuer
shall have executed and delivered to the Purchaser and the Placement Agent the
Registration Rights Agreement and Issuer shall have executed to the Purchasers
the Securities to which such Purchaser is entitles as of the Closing Date;

 

2.6.3       Issuer
and the Collateral Agent will have executed and delivered to the Purchaser the
Security Agreement and such additional financing statements, collateral
assignments and other instruments and documents as may be necessary or prudent,
in the reasonable discretion of the Purchaser and the Collateral Agent, to
perfect the security interests of the Purchasers under the Security Agreement;

 

2.6.4       Issuer,
the Placement Agent and the Escrow Agent will have executed and delivered to
the Purchaser the Escrow Agreement;

 

2.6.5       Issuer
shall have accepted subscriptions for and a cumulative Subscription Price of at
least $2,000,000 must be available for release by Escrow Agent to Issuer;

 

2.6.6       at the Closing, the Issuer shall have
delivered a bring-down certificate signed by the Chief Executive Officer of the
Issuer to the effect that, as of the Closing Date, (a) the Issuer has
performed all obligations required to be performed hereunder at or before the
Closing, (b) Issuer has not defaulted hereunder, and (c) all
representations and warranties of Issuer herein and in the other Transaction
Documents are true and correct as of the Closing Date;

 

2.6.7       Issuer’s counsel shall have delivered to
the Purchaser a legal opinion in substantially the form attached hereto as Exhibit G; and

 

2.6.8       Each director and officer shall have delivered to
the Purchaser a lock-up agreement in substantially the form attached hereto as Exhibit H.

 

2.6.9       There shall have
occurred no material adverse change in the Issuer’s consolidated business or
financial condition since the date of the Issuer’s most recent financial
statements filed with the SEC.

 

5

 

2.6.10     There shall be
no injunction, restraining order or decree of any nature of any court or
governmental authority of competent jurisdiction that is in effect that
restrains or prohibits the consummation of the transactions contemplated hereby
and by the other Transaction Documents.

 

2.6.11     The Issuer shall have obtained all
necessary waivers from Western Commercial Bank (the “Bank”) with respect to its
Senior Secured Loan permitting the Issuer to enter into the Transaction
Documents.

 

2.6.12     The Issuer shall have paid the expenses
described in 7.1 of this Agreement.

 

2.6.13     The Issuer  shall have entered into new agreements or amended its
existing agreements with the Bank regarding an accounts receivable line of
credit from the Bank on terms satisfactory to the Purchasers.

 

2.7          Issuer’s Conditions Precedent. 
The obligations of the Issuer to consummate the transactions
contemplated in Section 2.1 are subject to the satisfaction of the
following conditions precedent on or prior to the Closing Date with respect to
the relevant Purchaser:

 

2.7.1       such
Purchaser must have executed and delivered to the Issuer a fully completed
signature page to this Agreement for such Purchaser;

 

2.7.2       such
Purchaser must have executed and delivered to the Issuer a counterpart of the
Registration Rights Agreement;

 

2.7.3       the
Collateral Agent must have executed and delivered to the Issuer this Agreement
and the Security Agreement;

 

2.7.4       such
Purchaser and the Escrow Agent must have executed and delivered to the Issuer
the Escrow Agreement;

 

2.7.5       Issuer
must have received from such Purchaser a fully completed Investor
Questionnaire, and must have found the contents of such questionnaire to be
satisfactory in the Issuer’s sole discretion;

 

2.7.6       The
Issuer must have received confirmation from the Escrow Agent that it has
received the Subscription Price payable by such Purchaser; and

 

2.7.7       a
cumulative Subscription Price of at least $2,000,000 must be available for
release by Escrow Agent to Issuer.

 

2.7.8       There shall be no injunction, restraining order or decree of any nature
of any court or governmental authority of competent jurisdiction that is in
effect that restrains or prohibits the consummation of the transactions
contemplated hereby and by the other Transaction Documents.

 

6

 

2.7.9       The Issuer shall have obtained all
necessary waivers from Western Commercial Bank with respect to its Senior
Secured Loan permitting the Issuer to enter into the Transaction Documents.

 

2.8          Closing. The transactions contemplated in Section 2.1
will be consummated in one closing (the “Closing”),
which will be held on the date(s) designated by Purchaser that occur (a) on
or after the date hereof and (b) on or before March 31, 2008 (the “Closing Date”).  At
the Closing:

 

2.8.1       Issuer
will execute and deliver to each Purchaser a signature page to this
Agreement with respect to each Purchaser participating in such Closing;

 

2.8.2       Issuer
will issue the relevant Note(s) and Warrant(s) to each such
Purchaser;

 

2.8.3       commencing
with the Closing, Collateral Agent may take all actions reasonably necessary or
appropriate perfect the security interests under the Security Agreement; and

 

2.8.4       the
Issuer and the Collateral Agent will jointly instruct the Escrow Agent to
release the Subscription Price paid by the relevant Purchaser(s) to the
Issuer and/or to make such other permitted payment(s) as the Issuer may
instruct.

 

2.9          Cancellation and Refund. 
If the Closing of any Purchaser’s subscription has not occurred prior to
March 31, 2008, or if, at any earlier date, events occur that preclude the
conditions precedent to Closing such Purchaser’s subscription from occurring,
and such Purchaser has not consented to otherwise extend the Closing Date, then
the Escrow Agent will refund such Purchaser’s Subscription Price and the
subscription by such Purchaser to purchase the Notes and Warrants will
automatically be cancelled.

 

3.                                      REPRESENTATIONS, WARRANTIES AND
COVENANTS

 

3.1          Representations, Warranties and Covenants
of Issuer.  Issuer
represents, warrants and covenants to Collateral Agent and Purchasers that:

 

3.1.1       Organization and Qualification. Issuer is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of California, with the requisite power and authority, subject to the Issuer’s
obtaining the Shareholder Approval (as such term is defined in Section 4.2.6),  to enter into the Transaction Documents and
to own, lease and use its properties and assets and to carry on its business as
currently conducted.  Issuer is duly
qualified to conduct business and is in good standing as a foreign corporation
in each jurisdiction in which it conducts business as necessary, except where
the failure to be so qualified would not have 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.

 

7

 

3.1.2       Authorization; Enforcement. Subject to Issuer’s performing the
Required Actions (as such term is defined in Section 3.1.4), the Issuer has the requisite corporate
power and authority to enter into and perform all of the Transaction Documents. The
execution, delivery and performance of the Transaction Documents by Issuer have
been duly authorized by all necessary corporate action by Issuer and no further
consent or action is required by Issuer, its board of directors or its
shareholders (other than the Issuer’s obtaining Shareholder Approval) in
connection therewith, other than actions necessary to satisfy Issuer’s
post-Closing obligations under the Transaction Documents, which actions could
not be authorized in advance. Subject to the Issuer’s performing the Required
Actions, each Transaction Document, when duly executed by the Issuer and, when
delivered in accordance with the terms hereof and thereof, will constitute the
valid and legally binding obligation of the Issuer enforceable against the
Issuer in accordance with its terms, except (a) as limited by general
equitable principles and applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors’ rights generally, (b) as limited by laws relating to the
availability of specific performance, injunctive relief or other equitable
remedies, and (c) insofar as indemnification and contribution provisions
may be limited by applicable law.

 

3.1.3       No Conflicts. Subject to the Issuer’s performing the Required
Actions, the execution, delivery and performance of the Transaction Documents
by the Issuer do not and will not: (a) conflict with or violate Issuer’s
articles of incorporation or bylaws, as amended to date, (b) conflict
with, 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 on any
asset of the Issuer pursuant to, or give others any right to terminate, amend,
accelerate or cancel (with or without notice, lapse of time or both), any
agreement, credit facility, debt or other instrument (evidencing any Issuer
debt or otherwise) or other understanding to which the Issuer is a party or by
which any asset of Issuer is bound or affected, or (c) subject to any
Required Actions (as such term is hereinafter defined), 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
Issuer is subject (including U.S. federal and state securities laws and
regulations), or by which any asset of the Issuer is bound or affected, except,
in the case of each of clauses (b) and (c), such as could not have or
reasonably be expected to result in a Material Adverse Effect.  There is no Proceeding pending or, to the knowledge of
the Issuer, threatened against or affecting the Issuer or its assets before or
by any court, arbitrator, governmental or administrative agency or regulatory
authority (federal, state, county, local or foreign) which adversely affects or
challenges the legality, validity or enforceability of any Transaction
Document.

 

3.1.4       Required Actions. Except for (a) filings required
pursuant to the Registration Rights Agreement, (b) any filings required
under applicable federal and/or state securities laws, (c) the making of
any filings, or the obtaining of any approvals required by the American Stock
Exchange, including obtaining Shareholder Approval, (d) the making of the
Amendment Filing (collectively, the “Required Actions”) and (e)  as disclosed on Schedule 3.1.4 attached hereto,
Issuer is not required to take any action or 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 its
execution, delivery and performance of the Transaction Documents.

 

8

 

 

 

3.1.5       Issuance of the Securities. Subject to the Issuer’s performing the
Required Actions, the Notes, Warrants and shares of Common Stock issuable upon
conversion of the Notes and/or exercise of the Warrants (collectively, the “Registrable Securities”) are duly authorized and, when
issued and paid for in accordance with this Agreement, the Notes and the
Warrants, will be duly and validly issued, free and clear of all liens, claims
and encumbrances imposed by Issuer other than those provided for in the Transaction
Documents, and will be issued in compliance
with an exemption from registration under all applicable U.S. federal
securities laws. The Issuer has reserved from the Issuer’s authorized
but unissued Common Stock the maximum number of shares it may currently reserve
in connection with the issuance of such Common Stock upon the conversion of the
Notes and exercise of the Warrants. Within four Business Days after the  Shareholder Approval is obtained the Issuer
shall make the Amendment Filing and within four Business Days after the
Amendment Filing is made the Issuer shall reserve from its duly authorized, but
unissued Common Stock such additional number of shares as required so that
there shall then be reserved for issuance an aggregate of 125% of the Common
Stock then issuable upon the conversion of the Notes and exercise of the
Warrants.

 

3.1.6       Capitalization. Schedule 3.1.6
sets forth the capitalization of Issuer as of the date hereof, before giving
effect to the issuance of the Securities pursuant hereto, including the amount
and kind of authorized shares, the number of each kind of shares issued and
outstanding, the number of shares issued and held as treasury stock, and the
number of shares reserved for issuance pursuant to Issuer’s stock option plans
and all outstanding securities convertible into or exchangeable for any shares
of Issuer, including a description of the relevant options, convertible
securities and exchangeable securities. 
Except as set forth in Schedule 3.1.6,
no Person has any right of first refusal, preemptive right, right of
participation, anti-dilution right or any similar right to participate in, or
that is triggered by, the transactions contemplated by the Transaction
Documents.

 

3.1.7       SEC Reports.  Issuer is
currently required to file information, documents and reports with the SEC
pursuant to Section 13(a) of the Exchange Act, and Issuer has filed
all such reports and schedules, forms, statements and other documents required
to be filed by Issuer under the Securities Act and the Exchange Act, including
pursuant to Section 13(a) or 15(d) thereof, for the two year
period preceding the date hereof (or such shorter period as Issuer 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
of filing with the SEC, the SEC Reports, together with any amendments thereto,
complied in all material respects with all applicable requirements of the
Securities Act and the Exchange Act.  No
SEC Report, 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 materially misleading.  There is nothing that would be deemed to be
of a materially negative nature to a potential investor in the Common Stock
that has not been disclosed in the SEC Reports.

 

 

9

 

 

3.1.8       Financial Statements.  The financial
statements of Issuer included in the SEC Reports comply in all material
respects with applicable accounting requirements and the SEC’s rules and
regulations with respect thereto as in effect at the time of filing.  Such financial statements have been prepared
in accordance with U.S. generally accepted accounting principles consistently
applied, except as may be otherwise specified therein or the notes thereto and
except that un-audited financial statements may not contain all required notes
and are subject to routine year-end adjustments that are not material in the
aggregate.  Such financial statements
fairly present in all material respects the financial position of Issuer 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 un-audited statements, to normal,
year-end audit adjustments as referred to above.

 

3.1.9       Brokerage or Finder’s Fees. 
Other than as set forth on Schedule 3.1.9,
no brokerage, success or finder’s fee or commission is or will be payable by
Issuer to any broker, financial adviser or consultant, finder, placement agent,
investment banker, bank or other Person with respect to the transactions
contemplated by the Transaction Documents.

 

3.1.10     Private Placement. Assuming the accuracy of each Purchaser’s
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 Issuer to Purchaser as contemplated hereby.

 

3.1.11     Investment Company. Issuer 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.  Issuer
will conduct its business in a manner so that it will not become subject to the
Investment Company Act of 1940, as amended.

 

3.1.12     Absence of Certain Changes.  Other than as
disclosed on exhibit 3.1.12, since September 30, 2007, there has been no
material adverse change and no material adverse development in the business,
properties, operations, financial condition, results of operations or prospects
of the Issuer, or clearly evident to a sophisticated institutional investor
from the  SEC Documents, including,
without limitation:

 

a. any change in
the consolidated assets, liabilities, financial condition or operating results
of the Issuer from that reflected in the financial statements included in the
Issuer’s Quarterly Report on Form 10-QSB for the quarter ended September 30,
2007, except for changes in the ordinary course of business which have not and
could not reasonably be expected to have a Material Adverse Effect,
individually or in the aggregate;

 

b. any declaration
or payment of any dividend, or any authorization or payment of any
distribution, on any of the capital stock of the Issuer, or any redemption or
repurchase of any securities of the Issuer;

 

c. any material
damage, destruction or loss, whether or not covered by insurance to any assets
or properties of the Issuer or its subsidiaries;

 

d. any waiver, not
in the ordinary course of business, by the Issuer or     any subsidiary of a material right or of a material debt owed to
it;

 

 

10

 

 

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

 

f.  any change or amendment to the Issuer’s
Articles of Incorporation or By-laws, or material change to any material
contract or arrangement by which the Issuer or any subsidiary is bound or to
which any of their respective assets or properties is subject;

 

g. any material
labor difficulties or labor union organizing activities with respect to
employees of the Issuer or any subsidiary;

 

h.  any material transaction entered into by the
Issuer or a subsidiary other than in the ordinary course of business;

 

i.  the loss of the services of any key employee,
or material change in the composition or duties of the senior management of the
Issuer or any subsidiary;

 

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

 

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

 

3.1.13     Absence of Litigation.  There is no
action, suit, proceeding, inquiry or investigation before or by any court,
public board, government agency, or self-regulatory organization or body pending
or, to the Issuer’s Knowledge or any of its subsidiaries, threatened against or
affecting the Issuer, any of its subsidiaries, or any of their respective
directors or officers in their capacities as such.  There are no facts known to the Issuer which,
if known by a potential claimant or governmental authority, could reasonably be
expected to give rise to a claim or proceeding which, if asserted or conducted
with results unfavorable to the Issuer or any of its subsidiaries, could
reasonably be expected to have a Material Adverse Effect.

 

3.1.14     Tax Matters.  The Issuer
and each of its subsidiaries has timely prepared and filed all tax returns
required to have been filed by the Issuer or such subsidiary with all
appropriate governmental agencies and timely paid all taxes shown thereon or
otherwise owed by it.  The charges,
accruals and reserves on the books of the Issuer in respect of taxes for all
fiscal periods are adequate in all material respects, and there are no material
unpaid assessments against the Issuer or any subsidiary nor, to the Issuer’s
Knowledge, any basis for the assessment of any additional taxes, penalties or
interest for any fiscal period or audits by any federal, state or local taxing
authority except for any assessment which is not material to the Issuer and its
subsidiaries, taken as a whole.  All
taxes and other assessments and levies that the Issuer or any subsidiary is
required to withhold or to collect for payment have been duly withheld and
collected and paid to the proper governmental entity or third party when due.

 

 

11

 

 

There are no tax liens or claims pending or, to the
Issuer’s Knowledge, threatened, against the Issuer or any subsidiary or any of
their respective assets or property. 
There are no outstanding tax sharing agreements or other such
arrangements between the Issuer and any subsidiary or other corporation or
entity. No transfer or other taxes are required to be paid in connection with
the issuance and sale of any of the Securities.

 

3.1.15     Transactions with Affiliates. 
Except as disclosed in the SEC Documents, and except for a (ii) bridge
loan in the amount of $200,000, made to the Issuer by TITAB LLC, whose managing
member is Brad Peters, a former director of the Issuer, on January 28,
2008, and (ii) bridge loan in the amount of $100,000, made to the Issuer
by C. Ian Sym-Smith, a director of the Issuer, on January 28, 2008, which
loans are being automatically converted to notes with the same terms and
conditions as the Notes issued pursuant to this Agreement on the Closing Date,
none of the officers or directors of the Issuer and, to the Issuer’s Knowledge,
none of the employees of the Issuer, is presently a party to any transaction
with the Issuer or any subsidiary (other than as holders of stock options
and/or warrants, and for services as employees, officers and directors),
including any contract, agreement or other arrangement providing for the
furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer,
director or such employee or, to the Issuer’s Knowledge, any entity in which
any officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.

 

3.1.16     Internal Controls.  The Issuer
and the subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are
executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance
with management’s general or specific authorization, and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any difference.  The Issuer maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles in the United States
and the applicable requirements of the Exchange Act. The Issuer’s officers
certified to the Issuer’s internal controls as of the filing of the Issuer’s Form 10-QSB
for the quarter ended September 30, 2007 and since that date, that there
have been no significant changes in the Issuer’s internal controls (as such
term is defined in Section 307(b) of Regulation S-K) or, to the
Issuer’s Knowledge, any other facts that would significantly affect the Issuer’s
internal controls.  The Issuer is not
required at this date to certify its internal controls under Section 404
of the Sarbanes-Oxley Act of 2002 and has not taken any steps necessary to
evaluate its internal controls to determine whether it will be able to take
such a certification.

 

3.1.17     Acknowledgment Regarding Purchaser’s Purchase of the
Securities.  The Issuer acknowledges and agrees that
Purchaser is not acting as a financial advisor or fiduciary of the Issuer (or
in any similar capacity) with respect to this Agreement or the transactions
contemplated hereby, that this Agreement and the transaction contemplated
hereby, and the relationship between each Purchaser and the Issuer, are “arms-length,”
and that any statement made by Purchaser (except as set forth in Section 3.2), or any of its
representatives or agents, in connection with this Agreement and the
transactions contemplated hereby is not

 

 

12

 

 

advice or a
recommendation, is merely incidental to Purchaser’s purchase of the Securities
and has not been relied upon as such in any way by the Issuer, its officers or
directors.  The Issuer further represents
to Purchaser that the Issuer’s decision to enter into this Agreement and the
transactions contemplated hereby has been based solely on an independent
evaluation by the Issuer and its representatives.

 

3.1.18     No General Solicitation.  To the best
of the Issuer’s knowledge, neither the Placement Agent nor any distributor
participating on the Issuer’s behalf in the transactions contemplated hereby
(if any) nor any person acting for the Issuer, or any such distributor, has
conducted any “general solicitation,” as described in Rule 502(c) under
Regulation D, with respect to any of the Securities being offered hereby.

 

3.1.19     No Integrated Offering.  Neither the
Issuer, 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 prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from the registration under the Securities Act
pursuant to the provisions of Regulation D.  The transactions contemplated hereby are
exempt from the registration requirements of the Securities Act, assuming the
accuracy of the representations and warranties herein contained of each
Purchaser.

 

3.1.20     Intellectual Property.

 

(a)           To
the Issuer’s Knowledge, all Intellectual Property of the Issuer and its
subsidiaries is currently in compliance with all legal requirements (including
timely filings, proofs and payments of fees) and is valid and enforceable,
except where the failure to be in compliance or to be valid and enforceable has
not and could not reasonably be expected to have a Material Adverse Effect on
the Issuer and its subsidiaries taken as a whole.  No Intellectual Property of the Issuer or its
subsidiaries which is necessary for the conduct of Issuer’s and each of its
subsidiaries’ respective businesses as currently conducted or as currently
proposed to be conducted has been or is now involved in any cancellation,
dispute or litigation, and, to the Issuer’s Knowledge, no such action is
threatened.  No patent of the Issuer or
its subsidiaries has been or is now involved in any interference, reissue,
re-examination or opposition proceeding. 
“Intellectual Property” means all of the following: (i) patents,
patent applications, patent disclosures and inventions (whether or not
patentable and whether or not reduced to practice); (ii) trademarks,
service marks, trade dress, trade names, corporate names, logos, slogans and
Internet domain names, together with all goodwill associated with each of the
foregoing; (iii) copyrights and copyrightable works; (iv) registrations,
applications and renewals for any of the foregoing; and (v) proprietary
computer software (including but not limited to data, data bases and
documentation).

 

(b)           All
of the licenses and sublicenses and consent, royalty or other agreements
concerning Intellectual Property which are necessary for the conduct of the
Issuer’s and each of its subsidiaries’ respective businesses as currently
conducted or as currently proposed to be conducted to which the Issuer or any
subsidiary is a party or by which any of their assets are bound (other
than  generally commercially available,
non custom, off the shelf software application programs having a retail
acquisition price of less than $10,000 per license)

 

 

13

 

 

(collectively, “License
Agreements”) are valid and binding obligations of the Issuer or its
subsidiaries that are parties thereto and, to the Issuer’s Knowledge, the other
parties thereto, enforceable in accordance with their terms, except to the
extent that enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
affecting the enforcement of creditors’ rights generally, and there exists no
event or condition which will result in a material violation or breach of or
constitute (with or without due notice or lapse of time or both) a default by
the Issuer or any of its subsidiaries under any such License Agreement.

 

(c)           Other
than as set forth on Schedule 3.1.20,
the Issuer and its subsidiaries own or have the valid right to use all of the
Intellectual Property that is necessary for the conduct of the Issuer’s and
each of its subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted and for the ownership, maintenance and
operation of the Issuer’s and its subsidiaries’ properties and assets, free and
clear of all liens, encumbrances, adverse claims or obligations to license all
such owned Intellectual Property, other than licenses entered into in the
ordinary course of the Issuer’s and its subsidiaries’ businesses.  The Issuer and its subsidiaries have a valid
and enforceable right to use all third party Intellectual Property and
confidential information used or held for use in the respective businesses of
the Issuer and its subsidiaries.

 

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

 

(e)           The
consummation of the transactions contemplated hereby will not result in the
alteration, loss, impairment of or restriction on the Issuer’s or any of its
subsidiaries’ ownership or right to use any of the Intellectual Property or
confidential information which is necessary for the conduct of Issuer’s and
each of its subsidiaries’ respective businesses as currently conducted or as
currently proposed to be conducted.

 

(f)            The
Issuer and its subsidiaries have taken reasonable steps to protect the Issuer’s
and its subsidiaries’ rights in their Intellectual Property.  Each employee, consultant and contractor who
has had access to confidential information which is necessary for the conduct
of Issuer’s and each of its subsidiaries’ respective businesses as currently
conducted or as currently proposed to be conducted has executed an agreement to
maintain the confidentiality of such confidential information and has executed
appropriate agreements that are substantially consistent with the Issuer’s
standard forms thereof.  Except under
confidentiality obligations, there has been no material disclosure of any of
the Issuer’s or its subsidiaries’ confidential information to any third party.

 

 

14

 

 

3.1.21     Environmental Matters.  Neither the
Issuer nor any subsidiary is in violation of any statute, rule, regulation,
decision or order of any governmental agency or body or any court, domestic or
foreign, relating to the use, disposal or release of hazardous or toxic
substances or relating to the protection or restoration of the environment or
human exposure to hazardous or toxic substances (collectively, “Environmental
Laws”), owns or operates any real property contaminated with any substance
that is subject to any Environmental Laws, is liable for any off-site disposal
or contamination pursuant to any Environmental Laws, or is subject to any claim
relating to any Environmental Laws; and there is no pending or, to the Issuer’s
Knowledge, threatened investigation that might lead to such a claim.

 

3.1.22     Certificates, Authorities and Permits. 
The Issuer and each subsidiary possess adequate certificates,
authorities or permits issued by appropriate governmental agencies or bodies
necessary to conduct the business now operated by it, and neither the Issuer
nor any subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit that,
if determined adversely to the Issuer or such subsidiary, could reasonably be
expected to have a Material Adverse Effect, individually or in the aggregate.

 

3.1.23     Key Employees.  No Key
Employee, to the Issuer’s Knowledge, is, or is now expected to be, in violation
of any material term of any employment contract, confidentiality, disclosure or
proprietary information agreement, non-competition agreement, or any other
contract or agreement or any restrictive covenant, and the continued employment
of each Key Employee does not subject the Issuer or any of its subsidiaries to
any liability with respect to any of the foregoing matters.  No Key Employee has, to the Issuer’s
Knowledge, any intention to terminate his employment with, or services to, the
Issuer or any of its subsidiaries. “Key Employee” means any executive
officer of the Issuer or any of its subsidiaries, as applicable.

 

3.1.24     Labor Matters.

 

(a) The Issuer is
not a party to or bound by any collective bargaining agreements or other
agreements with labor organizations.  The
Issuer has not violated in any material respect any laws, regulations, orders
or contract terms, affecting the collective bargaining rights of employees,
labor organizations or any laws, regulations or orders affecting employment
discrimination, equal opportunity employment, or employees’ health, safety,
welfare, wages and hours.

 

(b)  There are no
labor disputes existing, or to the Issuer’s Knowledge, threatened, involving
strikes, slow-downs, work stoppages, job actions, disputes, lockouts or any
other disruptions of or by the Issuer’s employees, (B) there are no unfair
labor practices or petitions for election pending or, to the Issuer’s
Knowledge, threatened before the National Labor Relations Board or any other
federal, state or local labor commission relating to the Issuer’s employees, (C) no
demand for recognition or certification heretofore made by any labor
organization or group of employees is pending with respect to the Issuer and (D) to
the Issuer’s Knowledge, the Issuer enjoys good labor and employee relations
with its employees and labor organizations.

 

 

15

 

 

(c)  To the Issuer’s
Knowledge, the Issuer is, and at all times has been, in full compliance in all
material respects with all applicable laws respecting employment (including
laws relating to classification of employees and independent contractors) and
employment practices, terms and conditions of employment, wages and hours, and
immigration and naturalization.  There
are no claims pending against the Issuer before the Equal Employment
Opportunity Commission or any other administrative body or in any court
asserting any violation of Title VII of the Civil Rights Act of 1964, the Age
Discrimination Act of 1967, 42 U.S.C. §§ 1981 or 1983 or any other federal,
state or local law, statute or ordinance barring discrimination in employment.

 

(d)  The Issuer is
not a party to, or bound by, any employment or other contract or agreement that
contains any severance, termination pay or change of control liability or
obligation, including, without limitation, any “excess parachute payment,” as
defined in Section 2806(b) of the Internal Revenue Code.

 

3.1.25     ERISA.  The Issuer
does not maintain or contribute to, or have any obligation under, any an
employee pension benefit plan (as defined in the Employee Retirement Income
Security Act of 1978, as amended (“ERISA”)) maintained by the Issuer for
employees of the Issuer or any of its Affiliates.  The Issuer is in compliance in all material
respects with the presently applicable provisions of ERISA and the United
States Internal Revenue Code of 1986, as amended, with respect to each employee
pension benefit plan, except in any such case for any such matters that,
individually or in the aggregate, have not had, and would not reasonably be
expected to have, a Material Adverse Effect.

 

3.2          Representations,
Warranties and Covenants of Purchasers.  Each
Purchaser represents, warrants and covenants to Issuer, with respect to itself
only and not the other Purchasers, as follows:

 

3.2.1       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 the requisite power and authority to enter into and perform
the Transaction Documents. The execution, delivery and performance of the
Transaction Documents by such Purchaser have been duly authorized by all
necessary action by such Purchaser. Each Transaction Document to which such
Purchaser is a party has been duly executed by it and, when delivered in
accordance with the terms hereof and thereof, will constitute the valid and
legally binding obligation of such Purchaser, enforceable against it in
accordance with its terms, except (a) as limited by general equitable
principles and applicable bankruptcy, insolvency, reorganization, moratorium
and other laws of general application affecting enforcement of creditors’
rights generally, (b) as limited by laws relating to the availability of
specific performance, injunctive relief or other equitable remedies and (c) insofar
as indemnification and contribution provisions may be limited by applicable
law.

 

 

16

 

 

3.2.2       Own Account. Such Purchaser understands that the Securities are “restricted
securities” and have not been registered under the Securities Act or any
applicable state or foreign securities law. 
Such Purchaser is acquiring the Securities as principal for its own
account and not with a view to or for distributing or reselling such Securities
or any part thereof, has no present intention of distributing any such
Securities in violation of the Securities Act, any applicable state securities
law and/or any foreign laws and has no direct or indirect arrangement or
understandings with any other Person to distribute or regarding the
distribution of such Securities (this representation and warranty not limiting
such Purchaser’s right to sell the Securities in compliance with applicable
U.S. federal and state and foreign 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.

 

3.2.3       Purchaser Status. At the time such Purchaser was offered the
Securities and as of the date hereof, either (a) it was and is an “accredited
investor” as that term is defined under Regulation D, or (b) it was not
and is not a “U.S. Person” as that term is defined in Rule 902(o) of
Regulation S and the sale of the Securities constituted an “offshore transaction”
as that term is defined in Rule 902(i) of Regulation S, and that all
statements and answers provided to Issuer by such Purchaser in its Investor
Questionnaire are true and accurate as of the date given and as of the date of
the  Closing.

 

3.2.4       Experience of Purchaser. Such Purchaser has such knowledge, sophistication
and experience in business and financial matters so as to be capable of
evaluating the merits and risks of the 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.

 

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

 

3.2.6       Available Information.  Such
Purchaser acknowledges that, prior to executing this Agreement, it has been
given an opportunity to ask questions of and receive answers from, Issuer
concerning the terms and conditions of the offering of the Securities and to
obtain any other information that it has requested with respect to Issuer’s
operations and its proposed investment in Issuer in order to evaluate the
investment and verify the accuracy of all information furnished to it regarding
Issuer; and access to all of the SEC Reports that have been filed on Issuer’s
behalf with the SEC.

 

3.2.7       Acknowledgment Regarding Investment by Placement Agent and
Affiliates. Such
Purchaser acknowledges that officers, directors, employees and agents of the
Placement Agent may also purchase the Securities on the same terms as the
Purchaser and without the investment by such persons, the minimum cumulative
Subscription Price under Section 2.2 of this Agreement necessary to
satisfy a condition for closing of the sale of any Notes and Warrants hereunder
may not have otherwise occurred.

 

 

17

 

 

4.                                      ISSUER COVENANTS

 

4.1.         Use
of Proceeds.  Issuer may use the proceeds from the issuance
of the Notes and Warrants only for working capital purposes, including the
payment of current liabilities existing at Closing.

 

4.2.         Affirmative Covenants.

 

4.2.1       Board Matters.  Until such time as all Notes
have been either fully repaid or fully converted into Common Stock, Issuer will
maintain a board comprised of 7 (seven) directors and will use all reasonable
efforts to keep all board positions continuously filled with suitably qualified
individuals, and to keep vacancies to a minimum, so as to provide Issuer with
adequate corporate governance resources. 
During such period, Issuer will also procure and maintain directors and
officer’s liability insurance with customary liability limits and coverage
terms.  For purposes of this Section 4.2.1,
a suitably qualified director candidate will be someone (1) with
qualifications and strengths that balance and complement the qualifications and
strengths of other board members, (2) who possesses independence,
knowledge, judgment, character, leadership skills, requisite education and relevant
experience, and (3) who has a high moral standing and is not currently and
has not previously been the subject of any Proceedings, whether or not
convicted of any wrongdoing, that call into question such person’s character,
judgment or integrity.     Notwithstanding
the foregoing, so long as any principal or interest on any of the Notes is
outstanding, the holders of the Notes shall have the right to appoint a
non-voting representative (the “Observer”) to
attend meetings of the board of directors of the Issuer, to change the
representative so appointed at any time and, upon the resignation of such
representative for any reason, to reappoint such a representative.  Issuer shall provide the Observer with a copy
of any materials to be distributed or discussed at such meetings at the same
time as provided to members of the Board. 
Nothing herein shall require Issuer to change the place or time of any
meeting for which notice has been provided by Issuer to the Observer simultaneously
with that provided to Issuer’s directors. 
Observer will be expected to conduct himself or herself in accordance
with those reasonable rules of order applicable to members of Issuer’s
board of directors and not otherwise to interfere with or disrupt the conduct
of business by Issuer’s board of directors, and will be subject to dismissal
(and subsequently replacement by his or her appointers) for failure to comply
therewith.  Upon presentation of
reasonable documentation therefore, Issuer shall promptly reimburse the
Observer for all reasonable and necessary out of pocket expenses actually
incurred by the Observer in attending any meeting of the board of directors,
but Observer will not otherwise be compensated for attending and observing
meetings of Issuer’s board of directors. 
As a condition precedent to attending meetings of Issuer’s board of
directors and receiving materials distributed or discussed at such meetings,
Observer must execute and deliver a non-disclosure agreement in favor of Issuer
pursuant to which Observer undertakes contractual duties respecting his or her
use and disclosure of all confidential and proprietary information of Issuer
contained therein of similar scope to those duties by which members of  Issuer’s board of directors are bound.

 

4.2.2       Reservation of Shares. Until such
time as all Notes have been either fully repaid or fully converted into Common
Stock, Issuer will maintain a reserve from its duly authorized shares of Common
Stock for issuance pursuant to the Transaction Documents in such amount as may
be required to fulfill its obligations in full under the Transaction Documents.

 

 

18

 

 

 

4.2.3       Filing of SEC Reports. Until such
time as all Notes have been either fully repaid or fully converted into Common
Stock, Issuer will timely file with the SEC all periodic reports (including
exhibits thereto) required under the Exchange Act, including, without
limitation, all such current reports on Form 8-K that are necessary to
describe the terms of the transactions contemplated by the Transaction
Documents. Without limiting the generality of the foregoing, the Issuer agrees
that it will:

 

(a)           on or prior to 8:30 a.m.
(eastern time) on the second Business Day following the date of
this Agreement, if required, issue a press
release disclosing the material terms of this Agreement and the other
Transaction Documents and the transactions contemplated hereby and thereby, and

 

(b)           if required, on or prior to 5:00 p.m.
(Eastern Standard Time) on the fourth Business Day following the date of
this Agreement, file with the SEC a Current
Report on Form 8-K disclosing the material terms of and including as
exhibits this Agreement and the other Transaction Documents and the
transactions contemplated hereby and thereby; provided,
however, that each Purchaser shall have a reasonable opportunity
to review and comment on any such press release, if required, or Form 8-K
prior to the issuance or filing thereof; and provided,
further, that if the Issuer fails to issue a press release
disclosing the material terms of this Agreement and the other Transaction
Documents within the time frames described herein, if required to be filed, any
Purchaser or the Placement Agent may issue a press release disclosing such
information subject to notice to, and consent by, the Issuer, which consent
shall not be unreasonably withheld. 
Thereafter, the Issuer shall timely file all filings and notices
required by the SEC or applicable law with respect to the transactions
contemplated hereby.

 

4.2.4       Existence
and Compliance.  Until such time
as all Notes have been either fully repaid or fully converted into Common
Stock, the Issuer agrees that it will, and
will cause each of its subsidiaries to,:

 

(a)           maintain its corporate existence in
good standing;

 

(b)           comply with all governmental
requirements applicable to the operation of its business, except for instances
of noncompliance that are immaterial;

 

(c)           comply with all agreements, documents and instruments
binding on it or affecting its properties or business, except for instances of
noncompliance that are immaterial; and

 

(d)           ensure that the Common Stock is at
all times listed and quoted on the Principal Market.

 

4.2.5       Notice of Event of Default.  Upon the occurrence of an Event of Default,
the Issuer shall (i) notify the Purchasers of the nature of such Event of
Default as soon as practicable (but in no event later than one Business Day
after the Issuer becomes aware of such Event of Default), and (ii) not
later than two Business Days after delivering such notice to the Purchasers,
issue a press release disclosing such Event of Default and take such other
actions as may be necessary to ensure that none of the Purchasers are in the
possession of material, nonpublic information as a result of receiving such
notice from the Issuer.

 

 

19

 

 

4.2.6       Shareholder Approval.   Within 120 days after the Closing Date,
at a  meeting of its shareholders held
upon requisite notice and pursuant to the rules and regulations of
American Stock Exchange, the Issuer shall obtain the approval of its
shareholders (i) for the issuance and/or potential issuance of all shares
of Common Stock which may be issued pursuant to the conversion of the Notes and
the exercise of the Warrants equal to 19.99 percent or more of Common Stock in
connection with this Agreement that and (ii) to amend its Certificate of
Incorporation to increase the number of shares of its Common Stock that it is
authorized to issue to 40,000,000 shares  
(collectively,  “Shareholder
Approval”).

 

4.2.7       Amendment of Certificate of
Incorporation.   Promptly
following the Issuer’s Obtaining Shareholder Approval, it shall file a
Certificate of Amendment to its Certificate of Incorporation with the State of
California to increase the number of shares of Common Stock that it is
authorized to issue to 40,000,000 shares of Common Stock (the “Amendment Filing”).

 

4.2.8       American Stock Exchange
Additional Shares Listing. 
Within 21 days after the Issuer’s obtaining Shareholder Approval, the
American Stock Exchange shall have approved for listing upon issuance all
shares of the Issuer’s Common Stock issuable upon conversion of the Notes and
Warrants to be sold pursuant to this Agreement.

 

4.3.         Negative Covenants.  Until each Note has been fully repaid and/or
fully converted into Common Stock, the Issuer covenants with the holder thereof
that the Issuer will not:

 

4.3.1    without the prior approval (not to be unreasonably
withheld or delayed), of the Required Holders, create, incur, assume or
guarantee any indebtedness or contractual or other non-cancelable commitment
requiring Issuer to make cash payments, individually or in the aggregate with
respect to the same obligee, of $10,000 or more (other than success fees or
other similar contingent commitments relating to future financings by the
Issuer provided such payments in excess of $10,000 are due and payable only out
of the proceeds of the funds raised);

 

4.3.2       without
the prior written consent of the Required Holders, create any security interest
or other lien for funded indebtedness on any asset subject to the Security
Agreement other than (a) security interests and liens that are subordinate
to those created under the Security Agreement on terms reasonably acceptable to
the Required Holders (such approval not to be unreasonably withheld or delayed)
or (b) purchase money security interests incurred in connection with the acquisition
of assets in a transaction otherwise not prohibited hereunder.

 

4.3.3       redeem
or re-purchase for cash any Common Stock or other equity security or security
(other than convertible debt) exercisable to purchase any equity security of
Issuer, or pay or declare any cash dividend or other cash distribution in
respect thereof.

 

20

 

4.3.4       without
the prior written consent of the Required Holders, amend the Issuer’s line of
credit agreement with the Bank, as in effect immediately after the Closing or
enter into any new agreement with Bank or any other  lender.

 

4.4          Dilutive Issuances.  Other than in connection with Exempt
Issuances,  prior to the first
anniversary of the date of this Agreement, without the prior written consent of
the Required Holders, Issuer shall not (a) issue Common Stock (other than
pursuant to the exercise of rights by holders of the Notes or Warrants or
securities convertible into or exercisable to purchase Common Stock that are
already outstanding on the date hereof) at a price per share that is less than
the initial conversion price of the Notes, (b) issue securities
convertible into or exercisable to purchase Common Stock, at a price per share
of Common Stock to be issued that is less than the initial conversion price of
the Notes or (c) distribute to holders of Common Stock (i) any
dividend or other distribution of cash, evidences of its indebtedness, shares
of its capital stock or any other properties or securities or (ii) any options,
warrants or other rights to subscribe for or purchase any of the foregoing
(each of the issuances described in clauses (a) through (c) is
hereinafter referred to as a “Dilutive Issuance”).

 

4.5          Preemptive Right on
Certain Issuances.

 

 

(a) Grant of Rights.  For a period of one year after the Closing
Date, the Company hereby grants to each Purchaser the right to purchase, pro
rata, all (or any part) of any New Securities (as defined in Section 4.5(f) below)
that the Company may, from time to time during such period, propose to sell or
issue.  The Purchaser’s pro rata share of
the New Securities (its “Pro Rata Amount”) for purposes of this Section 4.5,
is equal to the ratio of (i) the sum of the number of shares of Common
Stock then held by the Purchasers plus the number of shares issuable to the
Purchaser assuming the entire principal amount of all of the Notes held by the
Purchaser are converted into Common Stock and all of the Warrants held by the
Purchaser are exercised in accordance with their respective terms (the “Purchaser
Shares”) to (ii) the sum of (A) the total number of shares of the
Common Stock held all Purchasers as of the date of such determination, plus (B) the
total number of  Purchaser Shares held by
all Purchasers.

 

(b) Notice. The Company shall not issue,
sell or exchange, agree to issue, sell or exchange, or reserve or set aside for
issuance, sale or exchange any New Securities unless the Company shall deliver
to each Purchaser a written notice of any proposed or intended issuance, sale
or exchange of New Securities (the “Preemptive Offer”), which Preemptive Offer
shall (i) identify and describe the New Securities, (ii) describe the
price and other terms upon which they are to be issued, sold or exchanged, and
the number or amount of the New Securities to be issued, sold or exchanged, (iii) identify
the persons or entities, if known, to which or with which the New Securities
are to be offered, issued, sold or exchanged and (iv) offer to issue and
sell to or exchange with such Purchaser such Purchaser’s Pro Rata Amount. The
Purchaser shall have the right, for a period of 15 days following delivery of
the Preemptive Offer, to purchase or acquire, at a price and upon the other
terms specified in the Preemptive Offer, the number or amount of New Securities
described above. The Preemptive Offer by its terms shall remain open and
irrevocable for such 15-day period.

 

(c)  Acceptance of Preemptive Offer.  To accept a Preemptive Offer, in whole or in
part, a Purchaser must deliver a written notice to the Company prior to the end
of the 15-day Preemptive Offer period, setting forth the portion of the
Purchaser’s Pro Rata Amount that such Purchaser elects to purchase (the “Notice
of Acceptance”).

 

21

 

(d)  Company Sales of Refused Securities.  The Company shall have 180 days from the
expiration of the period set forth in Section 4.5(c) above to issue,
sell or exchange all or any part of such New Securities as to which a Notice of
Acceptance has not been given by the Purchaser (the “Refused Securities”), but
only upon terms and conditions that are not materially more favorable to the
purchaser of such New Securities as described in the Preemptive Offer.  Notwithstanding anything contained in this Section 4.5
to the contrary, the Preemptive Offer need not be given prior to the purchase
by the party intending to purchase the New Securities described in the
Preemptive Offer; provided that (i) such Preemptive Offer is sent within
five (5) days after the sale to such party is consummated and remains open
for a fifteen (15) day period from the receipt thereof, (ii) the Company
has set aside a number of shares sufficient to satisfy the obligations of the
Company pursuant to this Section 4.5, and (iii) such New Securities
purchased by the party intending to purchase the New Securities described in
the Preemptive Offer are not considered for purposes of determining each
Purchaser’s Pro Rata Amount pursuant to Section 4.5(a) hereof.

 

(e)  Completion of Purchase.  Upon the closing of the issuance, sale or
exchange of all or less than all the Refused Securities, the Purchaser shall
acquire from the Company, and the Company shall issue to the Purchaser, the
number or amount of New Securities specified in the Notices of Acceptance upon
the terms and conditions specified in the Preemptive Offer.  The purchase by the Purchaser of any New
Securities is subject in all cases to the preparation, execution and delivery
by the Company and the Purchaser or like investors of a purchase agreement
relating to such New Securities reasonably satisfactory in form and substance
to the Purchaser and the Company.

 

(f) “New Securities” Defined.  “New Securities” means (a) any shares of
Common Stock, preferred stock or other equity securities of the Company,
whether now authorized or not issued after the date hereof; and (b) any
options, warrants, convertible notes, or similar rights issued after the date
hereof that are or may become convertible into or exercisable or exchangeable
for, or that carry rights to subscribe for, any equity securities of the
Company; provided, however, that the term “New Securities” does not include any
securities issued in connection with an Exempt Issuance.

 

4.6.         Limitation
on Issuing Shares.  Unless and until Shareholder Approval has
been obtained and deemed effective, the Company shall not upon the conversion
of any Note or the exercise of any Warrants issued pursuant to this Agreement
issue shares of Common Stock to the extent that such issuance, together with
all previous issuances of Common Stock pursuant to the exercise of all Warrants
and the conversion of all Notes issued pursuant to this Agreement, would in the
aggregate exceed a number of shares of Common Stock equal to more than 19.99%
of its issued and outstanding Common Stock on the Closing Date. Until
Shareholder Approval has been obtained and deemed effective, each Purchaser
shall be entitled to exercise its Warrants and convert its Notes only to the
extent the total number of shares of Common Stock issuable to the Purchaser
upon exercise of such Warrants and conversion of such Note does not exceed the
Purchaser’s pro rata share of 19.99% of the number of issued and outstanding
shares of Common Stock on the Closing Date. Such Purchaser’s pro rata share
shall be the quotient

 

 

22

 

 

obtained by
dividing the Subscription Price paid by the Purchaser for the Securities, by
the total of all Subscription Prices paid by all Purchaser’s for the Securities
purchased by the Purchasers.

 

5.                                      TRANSFER RESTRICTIONS

 

5.1          Securities Law Compliance. 
Each Purchaser acknowledges that the Securities may only be disposed of
in compliance with applicable U.S. federal and state securities laws and
foreign laws.  In connection with any
transfer of the Securities other than (a) pursuant to an effective
registration statement or SEC Rule 144, (b) to Issuer, or (c) to
an Affiliate of a Purchaser, Issuer may require the transferor thereof to
provide to Issuer an opinion of counsel selected by the transferor and
reasonably acceptable to Issuer, the form and substance of which opinion will
be reasonably satisfactory to Issuer, to the effect that such transfer does not
require registration of such transferred Securities under the Securities Act.  In the case of (c) above, as a condition
of transfer, any such transferee will agree in writing to be bound by the terms
of this Agreement.

 

5.2          Legend.  So long as is
required by applicable U.S. federal and state and/or foreign securities laws,
all documents evidencing any of the Securities must contain the following
legend:

 

NEITHER THIS SECURITY NOR
ANY SECURITIES INTO WHICH THIS SECURITY IS EXERCISABLE HAS BEEN REGISTERED WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY
U.S. STATE OR OTHER JURISDICTION OR ANY EXCHANGE OR SELF-REGULATORY
ORGANIZATION, IN RELIANCE UPON EXEMPTIONS FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED, AND SUCH OTHER LAWS AND REQUIREMENTS, AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR LISTING OR PURSUANT TO AN AVAILABLE EXEMPTION FROM,
OR IN A TRANSACTION NOT SUBJECT TO, SUCH REGISTRATION AND/OR LISTING
REQUIREMENTS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO
SUCH EFFECT, THE SUBSTANCE OF WHICH WILL BE REASONABLY ACCEPTABLE TO THE
COMPANY.

 

5.3          Acknowledgement. Each Purchaser acknowledges that the removal of the
restrictive legend from certificates representing Securities as set forth in Section 5.2
is predicated upon Issuer’s reliance that Purchaser will sell any Securities
pursuant either to applicable registration and/or listing requirements,
including any applicable prospectus delivery requirements, or an exemption
therefrom, and that if Securities are sold pursuant to a registration statement
or listing, they will be sold in compliance with the plan of distribution set
forth therein and upon compliance with the prospectus delivery requirement.

 

 

23

 

 

6.             COLLATERAL
AGENT

 

6.1          Appointment of Collateral Agent. 
Each Purchaser hereby appoints and designates Collateral Agent as its
agent to act as herein specified.  Each
Purchaser irrevocably authorizes Collateral Agent to take such action on its
behalf under the provisions of the Security Agreement, the Collateral
Assignments and the other Transaction Documents and to exercise such powers and
to perform such duties hereunder and thereunder as are specifically delegated
to or required of Collateral Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto.  Collateral Agent may perform any of its
duties hereunder by or through its agents or employees, and may appoint
sub-agents to perform any or all of its duties as Collateral Agent hereunder
without the prior consent of Issuer and Purchasers.

 

6.2          Nature of Duties of Collateral Agent.  Collateral Agent will have no duties or
responsibilities, except those expressly set forth in the Transaction
Documents.  Neither Collateral Agent nor,
if Collateral Agent is an entity,  any of
its officers, directors, members, managers, partners, employees or agents, will
be liable for any action taken or omitted by it as such hereunder or in connection
herewith, unless caused by or resulting from its or their gross negligence,
willful misconduct or fraudulent act. 
The duties of Collateral Agent will be mechanical and ministerial in
nature.  Collateral Agent will not have,
by reason of this Agreement, a fiduciary relationship in respect of any
Purchaser. Nothing in this Agreement, express or implied, is intended to or
will be so construed as to impose upon Collateral Agent any obligations in
respect of this Agreement and the Security Agreement, except as expressly set
forth herein and therein.

 

6.3          Lack of Reliance on Collateral Agent.

 

6.3.1       Independently
and without reliance on Collateral Agent, each Purchaser, to the extent it
deems appropriate, has made and will continue to make (i) its own
independent investigation of the financial condition and affairs of Issuer in
connection with the taking or not taking of any action in connection herewith
and with the other Transaction Documents, and (ii) its own appraisal of
the creditworthiness of Issuer, and, except as expressly provided in this
Agreement and the Security Agreement, Collateral Agent will have no duty or
responsibility, either initially or on a continuing basis, to provide any
Purchaser with any credit or other information with respect thereto, whether
coming into its possession before or after the delivery of the Notes and
Warrants.

 

6.3.2       Collateral
Agent will not be responsible to any Purchaser for any recitals, statements,
information, representations or warranties herein or in any document,
certificate or other writing delivered in connection herewith or in connection
with the Security Agreement or Collateral Assignments or for the execution,
effectiveness, genuineness, validity, enforceability, collectability, priority
or sufficiency of this Agreement or the other Transaction Documents, or the
financial condition of Issuer, or be required to make any inquiry concerning
either the performance or observance of any of the terms, provisions or
conditions of this Agreement or the other Transaction Documents, or the
financial condition of Issuer, or the existence or possible existence of any or
Event of Default or other breach or default by Issuer.

 

6.4          Certain Rights of Collateral Agent. 
If Collateral Agent requests instructions from Purchasers with respect
to any act or action (including forbearance from taking action) in connection
with this Agreement or the Security Agreement, then Collateral Agent will be
entitled to act or refrain from such act or taking such action unless and until
Collateral Agent has received instructions from Purchasers, and Collateral
Agent will not incur liability to any Person

 

 

24

 

 

by reason of so refraining.  Without limiting the foregoing, no Purchaser
will have any right of action whatsoever against Collateral Agent as a result
of Collateral Agent’s acting or refraining from acting hereunder in accordance
with the instructions of Purchasers.

 

6.5          Reliance by Collateral Agent. 
Collateral Agent will be entitled to rely, and will be fully protected
in relying, upon any note, writing, resolution, notice, statement, certificate,
email, fax, telex, teletype, message, cablegram, radiogram, order or other
documentary, teletransmission or telephone message believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person.  Collateral Agent may consult with legal
counsel (including Issuer’s counsel), independent public accountants and other
experts selected by it and will not be liable for any action taken or omitted
by it in good faith in accordance with the advice of such counsel, accountants
or experts.

 

6.6          Collateral Agent in Its Individual Capacity. 
If Collateral Agent is also a Purchaser, then with respect to its Note
and Warrant, Collateral Agent will have the same rights and powers hereunder as
any other Purchaser and may exercise the same as though it were not performing
the duties specified herein, and the terms “Purchaser” and “Purchasers” or any
similar terms will, unless the context clearly otherwise indicates, include Collateral
Agent in its individual capacity. 
Collateral Agent may accept deposits from, lend money to, and generally
engage in any kind of securities purchase, trust, financial advisory or other
business with Issuer or any subsidiary as if it were not performing the duties
specified herein, and may accept fees and other consideration from Issuer or
any subsidiary for such services without having to account for the same to
Purchasers.

 

6.7          Successor Collateral Agent.

 

6.7.1       Collateral
Agent may resign at any time by giving written notice thereof to Purchasers and
Issuer, and Collateral Agent may be removed at any time with or without cause
by the decision of Purchasers holding a majority in face amount of the
Notes.  Upon any such resignation or
removal, Purchasers will have the right, with the prior written consent of
Issuer, which consent will not be unreasonably withheld or delayed, to appoint
a successor agent to serve as Collateral Agent hereunder and under the Security
Agreement.  If no successor Collateral
Agent has been so appointed by the Purchasers and has accepted such appointment
within 30 days after retiring Collateral Agent’s giving of notice of
resignation or Purchasers’ removal of retiring Collateral Agent, then, upon the
prior written consent of Issuer, which consent will not be unreasonably
withheld or delayed, retiring Collateral Agent may, on behalf of Purchasers,
appoint a successor Collateral Agent, which must be acceptable to the holders
of a majority of the outstanding indebtedness under the Notes.

 

6.7.2       Upon
the acceptance by a successor person meeting such qualifications of any
appointment as Collateral Agent hereunder, such successor will thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of retiring Collateral Agent, and retiring Collateral Agent will be discharged
from its duties and obligations under this Agreement. After any retiring
Collateral Agent’s resignation or removal hereunder as Collateral Agent, the
provisions hereof will survive as to any actions taken or omitted by it while
it was Collateral Agent under this Agreement.

 

 

25

 

 

6.8          Transaction Documents.

 

6.8.1       Each Purchaser hereby authorizes Collateral Agent to enter
into each of the Transaction Documents in the respective forms of the Exhibits
hereto and to take all action contemplated thereby.  All rights and remedies under the Transaction
Documents may be exercised by Collateral Agent for the benefit of Purchasers
upon the terms hereof and thereof.

 

6.8.2       Whenever
under any provision of any Transaction Document Collateral Agent has the right
to grant or withhold any consent, exercise any remedy, make any determination
or direct any action by Issuer under such Transaction Document, Collateral
Agent will act in respect of such consent, exercise of remedies, determination
or action, as the case may be, with the consent of and at the direction of
Purchasers holding Notes representing in the aggregate a majority of the
outstanding principal amount of the Notes; however, no such consent of the
Purchasers will be required with respect to any consent, determination or other
matter that is ministerial or administrative in nature.  Whenever any consent of or direction from the
Purchasers is required, Collateral Agent will send to Purchasers a notice
setting forth a description in reasonable detail of the matter as to which
consent or direction is requested and Collateral Agent’s proposed course of
action with respect thereto.  If
Collateral Agent has not received a response from any Purchaser within three
business days after giving such notice, then such Purchaser will be deemed to
have agreed to the course of action proposed by Collateral Agent.

 

6.9          Indemnification of Collateral Agent. 
Purchasers will indemnify and hold Collateral Agent harmless from and
against any and all claims, liabilities, losses, costs and expenses (including,
without limitation, reasonable attorneys’ fees and expenses actually incurred)
that Collateral Agent may incur as a consequence, directly or indirectly, of
its services as Collateral Agent for Purchasers, other than such items arising
out of Collateral Agent’s gross negligence, willful misconduct or fraudulent
act.  Any amounts due Collateral Agent
from Purchasers pursuant to this Section 6.9 will be paid to Collateral
Agent by Purchasers promptly upon request therefor in accordance with their pro
rata ownership of the face amount of the Notes.

 

7.             MISCELLANEOUS

 

7.1          Fees
and Expenses.  Except as otherwise set forth in the
Transaction Documents and any engagement letter or agreement between Issuer and
the Placement Agent, each party will pay its own fees and expenses incident to
the negotiation, preparation, execution and delivery of this Agreement.

 

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

 

 

26

 

 

7.3          Notices.  Any and all
notices or other communications or deliveries required or permitted to be
provided hereunder will be in writing and will be deemed given and effective on
the earliest of (a) the date of transmission if such notice or communication
is delivered by fax prior to 5:30 p.m. (Pacific time) on a business day, (b) the
next business day after the date of transmission if such notice or
communication is delivered via fax on a day that is not a business day or later
than 5:30 p.m. (Pacific time) on a business day, (c) the 2nd
business day after 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 facsimile number and address for such
notices and communications are as set forth on the signature pages hereto
or as otherwise notified by any party to the others in accordance herewith from
time to time.

 

7.4          Amendments; Waivers.  No waiver or
any right under this Agreement will be effective unless set forth in a writing
signed by the party waiving such right. No waiver of any default under this
Agreement will be deemed to be a continuing waiver or a waiver of any
subsequent default or a waiver of any other provision, condition or requirement
hereof, nor will any delay or omission of any party to exercise any right
hereunder in any manner impair the exercise of any such right.

 

7.5          Headings.  The headings
herein are for convenience only, do not constitute a part of this Agreement and
do not limit, expand or modify the meaning hereof.

 

7.6          Successors and Assigns. 
This Agreement binds and benefits the parties and their successors and
permitted assigns.  Issuer may not
transfer or assign its rights or obligations hereunder, but each Purchaser,
subject to Section 5.1, may assign its rights and obligations under this
Agreement to any Person.

 

7.7          No Third-Party Beneficiaries. 
This Agreement is intended for the benefit of the parties hereto and
their respective successors and permitted assigns and is not for the benefit
of, nor may any provision hereof be enforced by, any other Person.

 

7.8          Governing Law; Forum; Jury Trial Waiver. (a) This Agreement shall be
governed by and construed under the laws of the State of New York applicable to
contracts made and to be performed entirely within the State of New York. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City and County of New York for the adjudication
of any dispute hereunder or any other Transaction Document or in connection
herewith or therewith or with any transaction contemplated hereby or thereby,
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 brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. 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 to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.

 

 

27

 

 

(b) EACH PARTY HEREBY IRREVOCABLY WAIVES ALL
RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED IN CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THE TRANSACTION DOCUMENTS.

 

7.9          Survival. 
The representations, warranties and covenants contained herein will
survive the Closing and the delivery of the Securities.

 

7.10        Execution. 
The parties contemplate that each Purchaser will sign a separate
signature page to this Agreement and deliver the same to Issuer as part of
its subscription documents, and which signature pages will collectively be
appended to a single copy of this Agreement by Issuer for all Purchasers whose
investor questionnaires are approved and who otherwise become subscribers for a
Note and Warrant, and when so appended will collectively constitute a single
original.  If desired, the parties may
execute additional counterparts of this Agreement, each of which when executed
will be an original, and all such counterparts will together constitute one and
the same agreement.  This Agreement will
become effective with respect to each Purchaser when at least one counterpart
has been executed and delivered by such Purchaser, Issuer and Collateral Agent,
and counter-signed by Issuer on the original or a counterpart of the signature page for
such Purchaser. If any signature is delivered by facsimile transmission or by
e-mail delivery of a “.pdf” format data file, then such signature will 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.

 

7.11        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, then the remainder of the terms,
provisions, covenants and restrictions set forth herein will remain in full
force and effect and will in no way be affected, impaired or invalidated, and
the parties will 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.

 

7.12        Replacement
of Securities.  If any certificate or instrument evidencing
any Securities is mutilated, lost, stolen or destroyed, Issuer will 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 Issuer of such loss, theft or destruction and upon provision of
an indemnity reasonably acceptable to Issuer. The applicant for a new
certificate or instrument under such circumstances will also pay any reasonable
third-party costs (including customary indemnity) associated with the issuance
of such replacement Securities.

 

7.13        Remedies. 
In addition to being entitled to exercise all rights provided herein or
granted by law, including recovery of damages, each Purchaser and Issuer will
be entitled to specific performance under the Transaction Documents. The
parties acknowledge 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 waive and covenant not to assert in any
Proceeding for specific performance of any such obligation the defense that a
remedy at law would be adequate.

 

 

28

 

 

7.14        Usury.  Notwithstanding
any provision to the contrary contained in any Transaction Document, the total
liability of Issuer under the Transaction Documents for payments in the nature
of interest will not exceed the maximum lawful rate, and, without limiting the
foregoing, in no event will any rate of interest or default interest, or both
of them, when aggregated with any other sums in the nature of interest that
Issuer may be obligated to pay under the Transaction Documents exceed such maximum
rate. If the maximum contract rate of interest allowed by law and applicable to
the Transaction Documents is increased or decreased by statute or any official
governmental action subsequent to the date hereof, then the new maximum
contract rate of interest allowed by law will be the maximum rate applicable to
the Transaction Documents from the effective date forward, unless such
application is precluded by applicable law. If under any circumstances
whatsoever, interest in excess of the maximum rate is paid by Issuer to any
Purchaser with respect to indebtedness evidenced by the Transaction Documents,
then such excess will be applied by such Purchaser to the unpaid principal
balance of any such indebtedness or be refunded to Issuer, the manner of handling
such excess to be at such Purchaser’s election.

 

7.15        Indemnification.  (a) In
consideration of each Purchaser’s execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Issuer’s other obligations under the Transaction Documents, the Issuer shall
defend, protect, indemnify and hold harmless each Purchaser and each other
holder of the Securities and all of their stockholders, partners, members,
officers, directors, employees and direct or indirect investors and any of the
foregoing Persons’ agents or other representatives (including, without
limitation, those retained in connection with the transactions contemplated by
this Agreement) (collectively, the “Indemnitees”)
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys’ fees and disbursements (the “Indemnified Liabilities”),
incurred by any Indemnitee as a result of, or arising out of, or relating to (i) any
misrepresentation or breach of any representation or warranty made by the Issuer
in any Transaction Document or any other certificate, instrument or document
contemplated hereby or thereby, (ii) any breach of any covenant, agreement
or obligation of the Issuer contained in any Transaction Document or any other
certificate, instrument or document contemplated hereby or thereby or (iii) any
cause of action, suit or claim brought or made against such Indemnitee by a
third party (including for these purposes a derivative action brought on behalf
of the Issuer) and arising out of or resulting from (1) the execution,
delivery, performance or enforcement of any Transaction Document or any other
certificate, instrument or document contemplated hereby or thereby, (2) any
transaction financed or to be financed in whole or in part, directly or indirectly,
with the proceeds of the issuance of the Securities, or (3) the status of
such Purchaser or holder of the Securities as an investor in the Issuer
pursuant to the transactions contemplated by the Transaction Documents. To the
extent that the foregoing undertaking by the Issuer may be unenforceable for
any reason, the Issuer shall make the maximum contribution to the payment and
satisfaction of each of the Indemnified Liabilities which is permissible under
applicable law provided that the Issuer shall not be obligated to indemnify a
Purchaser or Collateral Agent for any Indemnified Liabilities caused by

 

 

29

 

 

the gross negligence or willful misconduct of that Purchaser and the
Issuer shall not be obligated to indemnify the Collateral Agent for any
Indemnified Liabilities caused by the gross negligence or willful misconduct of
the  Collateral Agent.

 

(b) Promptly after receipt by Indemnitee under
this Section 7.15 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving an
Indemnified Liability, such Indemnitee shall, if a claim in respect thereof is
to be made against any indemnifying party under this Section 7.15, deliver
to the indemnifying party a written notice of the commencement thereof, and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnitee, as the case
may be; provided, however, that an Indemnitee shall have the
right to retain its own counsel with the fees and expenses of not more than one
counsel for such Indemnitee to be paid by the indemnifying party, if, in the
reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnitee and the indemnifying party
would be inappropriate due to actual or potential differing interests between
such Indemnitee and any other party represented by such counsel in such
proceeding.  In the case of an
Indemnitee, legal counsel referred to in the immediately preceding sentence
shall be selected by the holders of a majority in outstanding principal amount
of the Notes held by such holders to which the claim relates.  The Indemnitee shall cooperate fully with the
indemnifying party in connection with any negotiation or defense of any such
action or claim by the indemnifying party and shall furnish to the indemnifying
party all information reasonably available to the Indemnitee which relates to
such action or claim.  The indemnifying
party shall keep the Indemnitee reasonably apprised at all times as to the
status of the defense or any settlement negotiations in respect thereof. No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its prior written consent; provided, however,
that the indemnifying party shall not unreasonably withhold, delay or condition
its consent.  No indemnifying party
shall, without the prior written consent of the Indemnitee, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnitee of a release from all liability in respect to such
claim or litigation, and such settlement shall not include any admission as to
fault on the part of the Indemnitee. Following indemnification as provided for
hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnitee in respect of all third parties, firms or corporations relating to
the matter for which indemnification has been made.  The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of
any liability to the Indemnitee under this Section 7.15, except to the
extent that the indemnifying party is materially prejudiced in its ability to
defend such action.

 

(c) The indemnification required by this Section 7.15
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as and when bills are received or Indemnified
Liabilities are incurred.

 

(d)  The indemnity agreements contained herein
shall be in addition to (i) any cause of action or similar right of the
Indemnitee against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.

 

 

30

 

 

[counter-part
signature page for Securities Purchase Agreement]

 

SIGNED
AND DELIVERED as of the date first indicated above.

 

	
  ASPYRA, INC.

  
	
  as Issuer

  
	
   

  
	
  By:

  	
      /s/ James Zierick

  	
   

  
	
  Name:

  	
     James Zierick

  	
   

  
	
  Title:

  	
        Chief Executive Officer

  	
   

  
	
   

  
	
    /s/ Jay Weil

  	
   

  
	
  Jay Weil, Collateral Agent

  
	
   

  
						

 

 

 

 

31

 

	
   

  
	
  [additional counter-part signature page for Securities Purchase
  Agreement]

  
	
   

  	
   

  
	
  Name of Purchaser:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Subscription Price:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Face Amount of Note:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  No. of Warrant Shares:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  Notice Address:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
  SIGNED AND DELIVERED as of the
  dates indicated below.

  
	
   

  	
   

  
	
   

  	
   

  	
  ASPYRA, INC.

  
	
  as Purchaser

  	
   

  	
  as Issuer

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
  Date:

  	
   

  	
   

  	
  Date:

  	
   

  	
   

  
												

 

 

32

 

 

EXHIBIT A

 

Form of Note

 

 

 

 

EXHIBIT B

 

Form of Registration Rights Agreement

 

 

 

 

EXHIBIT C-1

 

Form of Security Agreement

 

 

 

 

EXHIBIT C-2

 

Form of Notice of Collateral Assignment of
Security Interest

 

in Patent Applications

 

 

 

 

EXHIBIT C-3

 

Form of Notice of Collateral Assignment of
Security Interest

 

in Trademarks

 

 

 

 

EXHIBIT C-4

 

Form of Notice of Collateral Assignment of
Security Interest

 

in Copyrights

 

 

 

 

EXHIBIT D

 

Form of Warrant

 

 

 

 

EXHIBIT E

 

Form of Escrow Agreement

 

 

 

 

EXHIBIT F

 

Form of Accredited Investor Questionnaire

 

 

 

 

EXHIBIT G

 

Form of Legal Opinion of Issuer’s Counsel

 

 

 

 

EXHIBIT H

 

Form of Lock-Up Agreement

 

 

 

 

SCHEDULE 3.1.4

 

Required Actions

 

 

 

 

SCHEDULE 3.1.6

 

Capitalization of Issuer

 

The Issuer is authorized to issue two classes of shares designated as
“Common Stock” and “Preferred Stock”. 
The number of shares of Common Stock authorized to be issued is
20,000,000, no par value.  The number of
shares of Preferred Stock authorized to be issued is 500,000, no par
value.  There are currently 12,437,150
shares of common stock issued and outstanding and no shares of preferred stock
issued and outstanding. There are no shares issued and held as treasury stock.

 

Pursuant to the Issuer’s Equity Incentive Plan, the Issuer is
authorized to issue 1,290.875 shares. 
The Issuer currently has 641,765 options outstanding under the plan with
649,110 reserved for issuance.

 

The Issuer currently has the following individuals with the right of
first refusal, preemptive right, right of participation, anti-dilution right or
any similar right to participate in, or that is triggered by, the transactions
contemplated by the Transaction Documents:

 

·                  Ann
Krueger & Kyle Krueger

·                  Tebo
Partners II, LLC

·                  Gregory H.
Ekizian Revocable Trust

·                  J. Shawn
Chalmers Revocable Trust

·                  Ronald R. Comer
Trust

·                  Al Des Marteau

·                  Denise Des
Marteau

·                  Scott J. and
Cathy H. Duncan

·                  The Robert K.
Green Trust

·                  Martin Gregory
Haake Trust

·                  James G.
Hammond and Katherine L. Hammond

·                  Francis M.
Hanna and Joanne L. Hanna

·                  Daniel R. Henry

·                  Joe C. Higday
Trust

·                  Ron Loew

·                  Cynthia M.
Mason

·                  James H. McCroy

·                  James H. McCroy
IRA of James H. McCroy

·                  Orion Capital
Investment, LLC

·                  David G.
Orschein

·                  Pleiades
Investment Partners RLP

·                  Potomac Capital
Partners LP

·                  Potomac Capital
International Ltd.

·                  Prime Petroleum
Profit Sharing Trust

·                  Sands
Partnership No. 1 Money Purchase Pension Plan and Trust

·                  Slater FF&E
Fund LLC

·                  Tebo Capital
LLC

·                  Tebo Capital
SEP IRA

·                  Leon B. Wright
and Delores J. Wright

·                  Philip C. Young

·                  MV Advisors II,
LLC

·                  TITAB, LLC

·                  C. Ian
Sym-Smith

·                  J. Shawn
Chalmers

 

 

 

 

SCHEDULE 3.1.9

 

Brokerage or Finder’s Fee

 

The Issuer has agreed to pay Great American Advisors, Inc. (GAI)
the following with respect to the transactions contemplated by the Transaction
Documents:

 

·                  An amount of secured
convertible notes and share purchase warrants (or any other securities issued
to purchasers at closing) having an aggregate value (based on the purchase
price paid for such securities by the purchasers) equal to (a) 8% of the
gross purchase price for securities purchased in the transactions contemplated
by the Transaction Documents by all purchasers who have been introduced to the
Issuer by GAI and (b) 4% of the gross purchase price for securities
purchased in the transactions contemplated by the Transaction Documents by any
other person.

·                  Non-refundable due diligence
fee of $5,000.

·                  Warrants (which shall
contain the same exercise price , term and other provisions as the warrants
issued to purchasers in the transactions contemplated in the Transaction
Documents) to purchase the number of shares of the Issuer’s common stock equal
to the sum of (a) 50,000 plus (b) the product obtained by multiplying
25,000 times, a fraction the numerator of which is the difference between the
gross purchase price for all securities sold in the transactions contemplated
by the Transaction Documents and $2,000,000 and the denominator of $1,000,000.

·                  Reimbursement of expenses
not to exceed $20,000.

 

 

 

 

SCHEDULE 3.1.12

 

On November 15, 2007, the Issuer
announced the retirement of its President and Chief Executive Officer, Steven
M. Besbeck which was effective as of November 30, 2007.  On February 28, 2008, the Issuer
announced the appointment of James Zierick as interim Chief Executive Officer.

 

 

 

 

SCHEDULE 3.1.20

 

Intellectual Property

 

Pursuant to the terms of the Issuer’s
revolving line of credit, Western Commercial Bank has a security interest in
the Issuer’s Intellectual Property.  The
revolving line of credit has a one year term and will mature on February 27,
2009.

 

Pursuant to a note purchase agreement and
security agreement dated January 28, 2008, TITAB, LLC, and C.I. Sym-Smith,
have a security interest in the Issuer’s Intellectual Property. Pursuant to the
note purchase agreement, the notes under the note purchase agreement will
automatically convert to notes with the same terms and conditions as the Notes
issued pursuant to this Agreement.

 

Pursuant to a note purchase agreement and
security agreement dated March 13, 2008, J. Shawn Chalmers has a security
interest in the Issuer’s Intellectual Property. Pursuant to the note purchase
agreement, Mr. Chalmers will have the option to convert his note to notes
with the same terms and conditions as the Notes issued pursuant to this
Agreement.

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