Document:

Exhibit 4.01 Certificate of Preferences, Rights and Limitations of Series B
      Variable Dividend Convertible Preferred Stock

    Exhibit
      4.01

    Form
      8-K

    Viking
      Systems, Inc.

    File
      No.
      000-49636

    

    VIKING
      SYSTEMS, INC.

    

    CERTIFICATE
      OF DESIGNATION OF PREFERENCES, 

    RIGHTS
      AND LIMITATIONS

    OF

    SERIES
      B VARIABLE DIVIDEND CONVERTIBLE PREFERRED STOCK

    

    PURSUANT
      TO SECTION 78.1955 OF THE 

    NEVADA
      GENERAL CORPORATION LAW

    

    The
      undersigned, Nathan Harrison, MD and Joseph Warrino, do hereby certify
      that:

    

    1.
      They
      are the President and Secretary, respectively, of Viking Systems, Inc., a Nevada
      corporation (the “Corporation”).

    

    2.
      The
      Corporation is authorized to issue 25,000,000 shares of preferred stock, none
      of
      which have been issued.

    

    3.
      The
      following resolutions were duly adopted by the Board of Directors:

    

    WHEREAS,
      the Certificate of Incorporation of the Corporation provides for a class of
      its
      authorized stock known as preferred stock, comprised of 25,000,000 shares,
      $0.001 par value per share, issuable from time to time in one or more
      series;

    

    WHEREAS,
      the Board of Directors of the Corporation is authorized to fix the dividend
      rights, dividend rate, voting rights, conversion rights, rights and terms of
      redemption and liquidation preferences of any wholly unissued series of
      preferred stock and the number of shares constituting any series and the
      designation thereof, of any of them; and

    

    WHEREAS,
      it is the desire of the Board of Directors of the Corporation, pursuant to
      its
      authority as aforesaid, to fix the rights, preferences, restrictions and other
      matters relating to a series of the preferred stock, which shall consist of,
      except as otherwise set forth in the Purchase Agreement, up to 8,000 shares
      of
      the preferred stock which the Corporation has the authority to issue, as
      follows:

    

    NOW,
      THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide
      for
      the issuance of a series of preferred stock for cash or exchange of other
      securities, rights or property and does hereby fix and determine the rights,
      preferences, restrictions and other matters relating to such series of preferred
      stock as follows:

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

    

    TERMS
      OF PREFERRED STOCK

    

    Section
      1.
       Definitions.
      Capitalized terms used and not otherwise defined herein that are defined in
      the
      Purchase Agreement shall have the meanings given such terms in the Purchase
      Agreement. For the purposes hereof, the following terms shall have the following
      meanings:

    

    “Alternate
      Consideration”
shall
      have the meaning set forth in Section 7(e).

     

    “Bankruptcy
      Event”
means
      any of the following events: (a) the Corporation or any Significant Subsidiary
      (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences
      a
      case or other proceeding under any bankruptcy, reorganization, arrangement,
      adjustment of debt, relief of debtors, dissolution, insolvency or liquidation
      or
      similar law of any jurisdiction relating to the Corporation or any Significant
      Subsidiary thereof; (b) there is commenced against the Corporation or any
      Significant Subsidiary thereof any such case or proceeding that is not dismissed
      within 60 days after commencement; (c) the Corporation or any Significant
      Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief
      or other order approving any such case or proceeding is entered; (d) the
      Corporation or any Significant Subsidiary thereof suffers any appointment of
      any
      custodian or the like for it or any substantial part of its property that is
      not
      discharged or stayed within 60 calendar days after such appointment; (e) the
      Corporation or any Significant Subsidiary thereof makes a general assignment
      for
      the benefit of creditors; (f) the Corporation or any Significant Subsidiary
      thereof calls a meeting of its creditors with a view to arranging a composition,
      adjustment or restructuring of its debts; or (g) the Corporation or any
      Significant Subsidiary thereof, by any act or failure to act, expressly
      indicates its consent to, approval of or acquiescence in any of the foregoing
      or
      takes any corporate or other action for the purpose of effecting any of the
      foregoing.

    

    “Base
      Conversion Price”
shall
      have the meaning set forth in Section 7(b).

    

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

    

    “Buy-In”
shall
      have the meaning set forth in Section 6(e)(iii).

    

    
      
        
        

      

      
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    “Change
      of Control Transaction”
means
      the occurrence after the date hereof of any of (i) an acquisition after the
      date
      hereof by an individual, legal entity or “group” (as described in Rule
      13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether
      through legal or beneficial ownership of capital stock of the Corporation,
      by
      contract or otherwise) of in excess of 33% of the voting securities of the
      Corporation (other than by means of conversion or exercise of Preferred Stock
      and the Securities issued together with the Preferred Stock), or (ii) the
      Corporation merges into or consolidates with any other Person, or any Person
      merges into or consolidates with the Corporation and, after giving effect to
      such transaction, the stockholders of the Corporation immediately prior to
      such
      transaction own less than 66% of the aggregate voting power of the Corporation
      or the successor entity of such transaction, or (iii) the Corporation sells
      or
      transfers all or substantially all of its assets to another Person and the
      stockholders of the Corporation immediately prior to such transaction own less
      than 66% of the aggregate voting power of the acquiring entity immediately
      after
      the transaction, or (iv) a replacement at one time or within a one year period
      of more than one-half of the members of the Corporation’s board of directors
      which is not approved by a majority of those individuals who are members of
      the
      board of directors on the date hereof (or by those individuals who are serving
      as members of the board of directors on any date whose nomination to the board
      of directors was approved by a majority of the members of the board of directors
      who are members on the date hereof), or (v) the execution by the Corporation
      of
      an agreement to which the Corporation is a party or by which it is bound,
      providing for any of the events set forth in clauses (i) through (iv)
      above.

    

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

    

    “Commission”
means
      the Securities and Exchange Commission.

    

    “Common
      Stock”
means
      the Corporation’s common stock, par value $0.001 per share, and stock of any
      other class of securities into which such securities may hereafter be
      reclassified or changed into.

    

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

    

    “Conversion
      Amount”
means
      the sum of the Stated Value at issue.

    

    “Conversion
      Date”
shall
      have the meaning set forth in Section 6(a).

    

    “Conversion
      Price”
shall
      have the meaning set forth in Section 6(b). 

    
      
        
        

      

      
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    “Conversion
      Shares”
means,
      collectively, the shares of Common Stock issuable upon conversion of the shares
      of Preferred Stock in accordance with the terms hereof.

    

    “Conversion
      Shares Registration Statement”
means
      a
      registration statement that registers the resale of all Conversion Shares of
      the
      Holders, who shall be named as a “selling stockholder” therein and meets the
      requirements of the Registration Rights Agreement.

     

    “Dilutive
      Issuance”
shall
      have the meaning set forth in Section 7(b).

    

    “Dilutive
      Issuance Notice”
shall
      have the meaning set forth in Section 7(b).

    

    “Dividend
      Payment Date”
shall
      have the meaning set forth in Section 3(a).

     

    “Dividend
      Share Amount”
shall
      have the meaning set forth in Section 3(a).

    

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

    

    “Equity
      Conditions”
means,
      during the period in question, (i)
      the
      Corporation shall have duly honored all conversions scheduled to occur or
      occurring by virtue of one or more Notices of Conversion of the applicable
      Holder on or prior to the dates so requested or required, if any, (ii) the
      Corporation shall have paid all liquidated damages and other amounts owing
      to
      the applicable Holder in respect of the Preferred Stock, (iii)
      there is an effective Conversion Shares Registration Statement pursuant to
      which
      the Holders are permitted to utilize the prospectus thereunder to resell all
      of
      the shares of Common Stock issuable pursuant to the Transaction Documents (and
      the Corporation believes, in good faith, that such effectiveness will continue
      uninterrupted for the foreseeable future), (iv) the Common Stock is trading
      on a
      Trading Market and all of the shares issuable pursuant to the Transaction
      Documents are listed for trading on such Trading Market (and the Corporation
      believes, in good faith, that trading of the Common Stock on a Trading Market
      will continue uninterrupted for the foreseeable future), (v) there is a
      sufficient number of authorized, but unissued and otherwise unreserved, shares
      of Common Stock for the issuance of all of the shares of Common Stock issuable
      pursuant to the Transaction Documents, (vi) there is no existing Triggering
      Event or no existing event which, with the passage of time or the giving of
      notice, would constitute a Triggering Event, (vii) the issuance of the shares
      in
      question (or, in the case of a redemption, the shares issuable upon conversion
      in full of the redemption amount) to the applicable Holder would not violate
      the
      limitations set forth in Section 6(c) herein, (viii)
      there has been no public announcement of a pending or proposed Fundamental
      Transaction or Change of Control Transaction that has not been consummated,
      (ix)
      no Holder is in possession of any information that constitutes, or may
      constitute, material non-public information, and (x) the Corporation shall
      have
      timely complied with the covenants set forth in Section 4.19 of the Purchase
      Agreement.

    
      
        
        

      

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

    

    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers
      or
      directors of the Corporation pursuant to any stock or option plan duly adopted
      by a majority of the non-employee members of the Board of Directors of the
      Corporation or a majority of the members of a committee of non-employee
      directors established for such purpose, (b) securities upon the exercise 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 the Purchase Agreement, provided that
      such
      securities have not been amended since the date of the Purchase Agreement to
      increase the number of such securities or to decrease the exercise or conversion
      price of any such securities, and (c) securities issued pursuant to acquisitions
      or strategic transactions approved by a majority of the disinterested directors,
      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 Corporation and shall provide to the Corporation additional
      benefits in addition to the investment of funds, but shall not include a
      transaction in which the Corporation is issuing securities primarily for the
      purpose of raising capital or to an entity whose primary business is investing
      in securities.

     

    “Fundamental
      Transaction”
shall
      have the meaning set forth in Section 7(e).

    

    “Holder”
shall
      have the meaning given such term in Section 2.

    

    “Junior
      Securities”
means
      the Common Stock and all other Common Stock Equivalents of the Corporation
      other
      than those securities which are explicitly senior or pari passu
      to the
      Preferred Stock in dividend rights or liquidation preference.

    

    “Liquidation”
shall
      have the meaning set forth in Section 5.

    

    “New
      York Courts”
shall
      have the meaning set forth in Section 11(d).

    

    “Notice
      of Conversion”
shall
      have the meaning set forth in Section 6(a).

    

    “Optional
      Redemption”
shall
      have the meaning set forth in Section 8(b).

    

    “Optional
      Redemption Amount”
means
      the sum of (i) 100% of the aggregate Stated Value then outstanding, (ii) accrued
      but unpaid dividends and (iii) all liquidated damages and other amounts due
      in
      respect of the Preferred Stock.

    

    “Optional
      Redemption Date”
shall
      have the meaning set forth in Section 8(b).

    

    “Optional
      Redemption Notice”
shall
      have the meaning set forth in Section 8(b).

    
      
        
        

      

      
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    “Optional
      Redemption Notice Date”
shall
      have the meaning set forth in Section 8(b).

    

    “Original
      Issue Date”
means
      the date of the first issuance of any shares of the Preferred Stock regardless
      of the number of transfers of any particular shares of Preferred Stock and
      regardless of the number of certificates which may be issued to evidence such
      Preferred Stock.

    

    “Permitted
      Indebtedness”
      means (a) the
      Indebtedness existing on the Original Issue Date and set forth on Schedule
      3.1(aa)
      attached
      to the Purchase Agreement (other than the Convertible Debt) and (b) additional
      Indebtedness incurred by the Corporation that does not mature or require
      payments of principal prior to the 3 year anniversary of the Original Issue
      Date
      and is made expressly subordinate in right of payment to the Preferred Stock,
      as
      reflected in a written agreement acceptable to the Holders and approved by
      such
      Holders in writing.

    

    “Permitted
      Lien”
means
      the individual and collective reference to the following: (a) Liens for taxes,
      assessments and other governmental charges or levies not yet due or Liens for
      taxes, assessments and other governmental charges or levies being contested
      in
      good faith and by appropriate proceedings for which adequate reserves (in the
      good faith judgment of the management of the Corporation) have been established
      in accordance with GAAP; (b) Liens imposed by law which were incurred in the
      ordinary course of the Corporation’s business, such as carriers’, warehousemen’s
      and mechanics’ Liens, statutory landlords’ Liens, and other similar Liens
      arising in the ordinary course of the Corporation’s business, and which (x) do
      not individually or in the aggregate materially detract from the value of such
      property or assets or materially impair the use thereof in the operation of
      the
      business of the Corporation and its consolidated Subsidiaries or (y) which
      are
      being contested in good faith by appropriate proceedings, which proceedings
      have
      the effect of preventing for the foreseeable future the forfeiture or sale
      of
      the property or asset subject to such Lien and (c) Liens incurred in connection
      with Permitted Indebtedness under clause (b) thereunder, provided that such
      Liens are not secured by assets of the Corporation or its Subsidiaries other
      than the assets so acquired or leased.

     

    “Preferred
      Stock”
shall
      have the meaning set forth in Section 2.

    

    “Purchase
      Agreement”
means
      the Securities Purchase Agreement, dated as of the Original Issue Date, to
      which
      the Corporation and the original Holders are parties, as amended, modified
      or
      supplemented from time to time in accordance with its terms.

    

    “Registration
      Rights Agreement”
means
      the Registration Rights Agreement, dated as of the date of the Purchase
      Agreement, to which the Corporation and the original Holder are parties, as
      amended, modified or supplemented from time to time in accordance with its
      terms.

    
      
        
        

      

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

    

    “Share
      Delivery Date”
shall
      have the meaning set forth in Section 6(e).

    

    “Stated
      Value”
shall
      have the meaning set forth in Section 2, as the same may be increased pursuant
      to Section 3.

    

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

    

    “Subsidiary”
shall
      have the meaning set forth in the Purchase Agreement.

    

    “Trading
      Day”
means
      a
      day on which the principal Trading Market is open for business.

    

    “Trading
      Market”
means
      the following markets or exchanges on which the Common Stock is listed or quoted
      for trading on the date in question: the American Stock Exchange, the Nasdaq
      Capital Market, the Nasdaq National Market, the New York Stock Exchange or
      the
      OTC Bulletin Board.

    

    “Transaction
      Documents”
shall
      have the meaning set forth in the Purchase Agreement.

    

    “Triggering
      Event”
shall
      have the meaning set forth in Section 9(a).

    

    “Triggering
      Redemption Amount”
means,
      for each share of Preferred Stock, the sum of (i) the greater of (A) 130% of
      the
      Stated Value and (B) the product of (a) the VWAP on the Trading Day immediately
      preceding the date of the Triggering Event and (b) the Stated Value divided
      by
      the then Conversion Price, (ii) all accrued but unpaid dividends thereon and
      (iii) all liquidated damages and other costs, expenses or amounts due in respect
      of the Preferred Stock.

    

    “Triggering
      Redemption Payment Date”
shall
      have the meaning set forth in Section 9(b).

    

    
      
        
        

      

      
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    “VWAP”
means,
      for any date, the price determined by the first of the following clauses that
      applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
      the daily volume weighted average price of the Common Stock for such date (or
      the nearest preceding date) on the Trading Market on which the Common Stock
      is
      then listed or quoted for trading as reported by Bloomberg L.P. (based on a
      Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
      time)); (b) if the OTC Bulletin Board is not a Trading Market, the volume
      weighted average price of the Common Stock for such date (or the nearest
      preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
      quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
      are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
      similar organization or agency succeeding to its functions of reporting prices),
      the most recent bid price per share of the Common Stock so reported; or (d)
      in
      all other cases, the fair market value of a share of Common Stock as determined
      by an independent appraiser selected in good faith by the Holders and reasonably
      acceptable to the Corporation, the fees and expenses of which shall be paid
      by
      the Corporation. 

    

    Section
      2.
       Designation,
      Amount and Par Value.
      The
      series of preferred stock shall be designated as its Series B Variable Dividend
      Convertible Preferred Stock (the “Preferred
      Stock”)
      and
      the number of shares so designated shall be up to 8,000 (which shall not be
      subject to increase without the written consent of all of the Holders of the
      Preferred Stock (each, a “Holder”
and
      collectively, the “Holders”)).
      Each
      share of Preferred Stock shall have a par value of $0.001 per share and a stated
      value equal to $1,000, subject to increase set forth in Section 3(a) below
      (the
“Stated
      Value”).

     

    Section
      3.
       Dividends.

    

    a) Dividends
      in Cash or in Kind.
      Holders
      shall be entitled to receive, and the Corporation shall pay, cumulative
      dividends at the rate per share (as a percentage of the Stated Value per share)
      of, (i) up to and including May 22, 2009, 8% per annum, (ii) from
      May
      22, 2009 up to and including May 22, 2010, 11% per annum and (iii) after May
      22,
      2010, 14% per annum, payable quarterly on January 1, April 1, July 1 and October
      1, beginning on the Effective Date and on each Optional Redemption Date (with
      respect only to the Preferred Stock being redeemed) and Conversion Date (with
      respect only to the Preferred Stock being converted)(except that, if such date
      is not a Trading Day, the payment date shall be the next succeeding Trading
      Day)
      (each such date, a “Dividend
      Payment Date”)
      in
      cash or duly authorized, validly issued, fully paid and non-assessable shares
      of
      Common Stock as set forth in this Section 3(a), or a combination thereof (the
      amount to be paid in shares of Common Stock, the “Dividend
      Share Amount”).
      The
      form of dividend payments to each Holder shall be determined in the following
      order of priority: (i) if funds are legally available for the payment of
      dividends and the Equity Conditions have not been met during the 20 consecutive
      Trading Days immediately prior to the applicable Dividend Payment Date, in
      cash
      only; 

    
      
        
        

      

      
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    (ii)
      if
      funds are legally available for the payment of dividends and the Equity
      Conditions have been met during the 20 consecutive Trading Days immediately
      prior to the applicable Dividend Payment Date, at the sole election of the
      Corporation, in cash or shares of Common Stock which shall be valued solely
      for
      such purpose at 90% of the average of the VWAPs for the 20 consecutive Trading
      Days ending on the Trading Day that is immediately prior to the Dividend Payment
      Date; (iii) if funds are not legally available for the payment of dividends
      and
      the Equity Conditions have been met during the 20 consecutive Trading Days
      immediately prior to the applicable Dividend Payment Date, in shares of Common
      Stock which shall be valued solely for such purpose at 90% of the average of
      the
      VWAPs for the 20 consecutive Trading Days ending on the Trading Day that is
      immediately prior to the Dividend Payment Date; (iv) if funds are not legally
      available for the payment of dividends and the Equity Condition relating to
      an
      effective Conversion Shares Registration Statement has been waived by a Holder,
      as to such Holder only, in unregistered shares of Common Stock which shall
      be
      valued solely for such purpose at 90% of the average of the VWAPs for the 20
      consecutive Trading Days ending on the Trading Day that is immediately prior
      to
      the Dividend Payment Date; and (v) if funds are not legally available for the
      payment of dividends and the Equity Conditions have not been met during the
      20
      consecutive Trading Days immediately prior to the applicable Dividend Payment
      Date, then, at the election of each Holder, such dividends shall accrue to
      the
      next Dividend Payment Date or shall be accreted to, and increase, the
      outstanding Stated Value. The Holders shall have the same rights and remedies
      with respect to the delivery of any such shares as if such shares were being
      issued pursuant to Section 6. On the Closing Date, the Corporation shall have
      notified the Holders whether or not it may legally pay cash dividends as of
      the
      Closing Date. The Corporation shall promptly notify such Holders at any time
      the
      Corporation shall become able or unable, as the case may be, to legally pay
      cash
      dividends. If at any time the Corporation has the right to pay dividends in
      cash
      or Common Stock, the Corporation must provide the Holders with at least 20
      Trading Days’ notice of its election to pay a regularly scheduled dividend in
      Common Stock (the Corporation may indicate in such notice that the election
      contained in such notice shall continue for later periods until revised by
      a
      subsequent notice). Dividends on the Preferred Stock shall be calculated on
      the
      basis of a 360-day year, shall accrue daily commencing on the Original Issue
      Date, and shall be deemed to accrue from such date whether or not earned or
      declared and whether or not there are profits, surplus or other funds of the
      Corporation legally available for the payment of dividends. Except as otherwise
      provided herein, if at any time the Corporation pays dividends partially in
      cash
      and partially in shares, then such payment shall be distributed ratably among
      the Holders based upon the number of shares of Preferred Stock held by each
      Holder on such Dividend Payment Date. Any dividends, whether paid in cash or
      shares of Common Stock, that are not paid within three Trading Days following
      a
      Dividend Payment Date shall continue to accrue and shall entail a late fee,
      which must be paid in cash, at the rate of 18% per annum or the lesser rate
      permitted by applicable law (such fees to accrue daily, from the Dividend
      Payment Date through and including the date of payment). If at any time the
      Corporation delivers a notice to the Holders of its election to pay the
      dividends in shares of Common Stock, the Corporation shall timely file a
      prospectus supplement pursuant to Rule 424 disclosing such
      election.

    
      
        
        

      

      
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    b) So
      long
      as any Preferred Stock shall remain outstanding, neither the Corporation nor
      any
      Subsidiary thereof shall redeem, purchase or otherwise acquire directly or
      indirectly more than a de minimis
      number
      of Junior Securities except as expressly permitted hereunder. So long as any
      Preferred Stock shall remain outstanding, neither the Corporation nor any
      Subsidiary thereof shall directly or indirectly pay or declare any dividend
      or
      make any distribution upon (other than a dividend or distribution described
      in
      Section 6 or dividends due and paid in the ordinary course on preferred stock
      of
      the Corporation at such times when the Corporation is in compliance with its
      payment and other obligations hereunder), nor shall any distribution be made
      in
      respect of, any Junior Securities as long as any dividends due on the Preferred
      Stock remain unpaid, nor shall any monies be set aside for or applied to the
      purchase or redemption (through a sinking fund or otherwise) of any Junior
      Securities or shares pari passu
      with the
      Preferred Stock.

    

    Section
      4.
       Voting
      Rights.
      Except
      as otherwise provided herein or as otherwise required by law, the Preferred
      Stock shall have no voting rights. However, as long as any shares of Preferred
      Stock are outstanding, the Corporation shall not, without (i) if any shares
      of
      the Preferred Stock are held by any Qualified Investor, the affirmative vote
      of
      each Qualified Investor holding any shares of the Preferred Stock or (ii) if
      no
      shares of the Preferred Stock are held by any Qualified Investor, the
      affirmative vote of the Holders of a majority of the then outstanding shares
      of
      the Preferred Stock, (a) alter or change adversely the powers, preferences
      or
      rights given to the Preferred Stock or alter or amend this Certificate of
      Designation, (b) authorize or create any class of stock ranking as to dividends,
      redemption or distribution of assets upon a Liquidation (as defined in Section
      5) senior to or otherwise pari passu
      with the
      Preferred Stock, (c) amend its certificate of incorporation or other charter
      documents in any manner that adversely affects any rights of the Holders, (d)
      increase the authorized number of shares of Preferred Stock, or (e) enter into
      any agreement with respect to any of the foregoing.

     

    Section
      5.
       Liquidation.
      Upon
      any liquidation, dissolution or winding-up of the Corporation, whether voluntary
      or involuntary (a “Liquidation”),
      the
      Holders shall be entitled to receive out of the assets, whether capital or
      surplus, of the Corporation an amount equal to the Stated Value, plus any
      accrued and unpaid dividends thereon and any other fees or liquidated damages
      owing thereon, for each share of Preferred Stock before any distribution or
      payment shall be made to the Holders of any Junior Securities, and if the assets
      of the Corporation shall be insufficient to pay in full such amounts, then
      the
      entire assets to be distributed to the Holders shall be ratably distributed
      among the Holders in accordance with the respective amounts that would be
      payable on such shares if all amounts payable thereon were paid in full. A
      Fundamental Transaction or Change of Control Transaction shall not be deemed
      a
      Liquidation. The Corporation shall mail written notice of any such Liquidation,
      not less than 45 days prior to the payment date stated therein, to each
      Holder.

    

    
      
        
        

      

      
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    Section
      6.
       Conversion.

    

    a) Conversions
      at Option of Holder.
      Each
      share of Preferred Stock shall be convertible at the option of the Holder
      thereof, at any time and from time to time from and after the Original Issue
      Date into that number of shares of Common Stock (subject to the limitations
      set
      forth in Section 6(c)) determined by dividing the Stated Value of such share
      of
      Preferred Stock by the Conversion Price. Holders shall effect conversions by
      providing the Corporation with the form of conversion notice attached hereto
      as
Annex
      A
      (a
“Notice
      of Conversion”).
      Each
      Notice of Conversion shall specify the number of shares of Preferred Stock
      to be
      converted, the number of shares of Preferred Stock owned prior to the conversion
      at issue, the number of shares of Preferred Stock owned subsequent to the
      conversion at issue and the date on which such conversion is to be effected,
      which date may not be prior to the date the converting Holder delivers by
      facsimile such Notice of Conversion to the Corporation (the “Conversion
      Date”).
      If no
      Conversion Date is specified in a Notice of Conversion, the Conversion Date
      shall be the date that such Notice of Conversion to the Corporation is deemed
      delivered hereunder. The calculations and entries set forth in the Notice of
      Conversion shall control in the absence of manifest or mathematical error.
      To
      effect conversions of shares of Preferred Stock, a Holder shall not be required
      to surrender the certificate(s) representing such shares of Preferred Stock
      to
      the Corporation unless all of the shares of Preferred Stock represented thereby
      are so converted, in which case such Holder shall deliver the certificate
      representing such shares of Preferred Stock promptly following the Conversion
      Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed
      in accordance with the terms hereof shall be canceled and shall not be
      reissued.

    

    b) Conversion
      Price.
      The
      conversion price for the Preferred Stock shall equal $0.18,
      subject
      to adjustment herein (the “Conversion
      Price”).

    

    c) Beneficial
      Ownership Limitation. The
      Corporation shall not effect any conversion of the Preferred Stock, and a Holder
      shall not have the right to convert any portion of the Preferred Stock, to
      the
      extent that, after giving effect to the conversion set forth on the applicable
      Notice of Conversion, such Holder (together with such Holder’s Affiliates, and
      any other person or entity acting as a group together with such Holder or any
      of
      such Holder’s Affiliates) would beneficially own in excess of the Beneficial
      Ownership Limitation (as defined below).  For purposes of the foregoing
      sentence, the number of shares of Common Stock beneficially owned by a Holder
      and its Affiliates shall include the number of shares of Common Stock issuable
      upon conversion of the Preferred Stock with respect to which such determination
      is being made, but shall exclude the number of shares of Common Stock which
      are
      issuable upon (A) conversion of the remaining, unconverted Stated Value of
      Preferred Stock beneficially owned by such Holder or any of its Affiliates
      and

    
      
        
        

      

      
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      (B)
        exercise or conversion of the unexercised or unconverted portion of any other
        securities of the Corporation subject to a limitation on conversion or exercise
        analogous to the limitation contained herein (including the Warrants)
        beneficially owned by such Holder or any of its Affiliates.  Except as set
        forth in the preceding sentence, for purposes of this Section 6(c), beneficial
        ownership shall be calculated in accordance with Section 13(d) of the Exchange
        Act and the rules and regulations promulgated thereunder. To the extent that
        the
        limitation contained in this Section 6(c) applies, the determination of whether
        the Preferred Stock is convertible (in relation to other securities owned
        by a
        Holder together with any Affiliates) and of how many shares of Preferred
        Stock
        are convertible shall be in the sole discretion of such Holder, and the
        submission of a Notice of Conversion shall be deemed to be such Holder’s
        determination of whether the shares of Preferred Stock may be converted (in
        relation to other securities owned by such Holder together with any Affiliates)
        and how many shares of the Preferred Stock are convertible, in each case
        subject
        to such aggregate percentage limitations. To ensure compliance with this
        restriction, each Holder will be deemed to represent to the Corporation each
        time it delivers a Notice of Conversion that such Notice of Conversion has
        not
        violated the restrictions set forth in this paragraph and the Corporation
        shall
        have no obligation to verify or confirm the accuracy of such determination.
        In
        addition, a determination as to any group status as contemplated above shall
        be
        determined in accordance with Section 13(d) of the Exchange Act and
        the
        rules and regulations promulgated thereunder.
        For
        purposes of this Section 6(c), in determining the number of outstanding shares
        of Common Stock, a Holder may rely on the number of outstanding shares of
        Common
        Stock as stated in the most recent of the following: (A) the Corporation’s most
        recent Form 10-QSB or Form 10-KSB, as the case may be, (B) a more recent
        public
        announcement by the Corporation or (C) a more recent notice by the Corporation
        or the Corporation’s transfer agent setting forth the number of shares of Common
        Stock outstanding.  Upon the written or oral request of a Holder, the
        Corporation shall within two Trading Days confirm orally and in writing to
        such
        Holder the number of shares of Common Stock then outstanding.  In any case,
        the number of outstanding shares of Common Stock shall be determined after
        giving effect to the conversion or exercise of securities of the Corporation,
        including the Preferred Stock, by such Holder or its Affiliates since the
        date
        as of which such number of outstanding shares of Common Stock was reported.
        The
“Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the
        Common Stock outstanding immediately after giving effect to the issuance
        of
        shares of Common Stock issuable upon conversion of Preferred Stock held by
        the
        applicable Holder. The Beneficial Ownership Limitation provisions of this
        Section 6(c) may be waived by a Holder, at the election of such Holder, upon
        not
        less than 61 days’ prior notice to the Corporation, to change the Beneficial
        Ownership Limitation to 9.99% of the number of shares of the Common Stock
        outstanding immediately after giving effect to the issuance of shares of
        Common
        Stock upon conversion of Preferred Stock held by such Holder and the provisions
        of this Section 6(c) shall continue to apply. Upon such a change by a Holder
        of
        the Beneficial Ownership Limitation from such 4.99% limitation to such 9.99%
        limitation, the Beneficial Ownership Limitation shall not be further waived
        by
        the applicable Holder. 

    

    
      
        
        

      

      
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      The
        provisions of this paragraph shall be construed and implemented in a manner
        otherwise than in strict conformity with the terms of this Section 6(c) to
        correct this paragraph (or any portion hereof) which may be defective or
        inconsistent with the intended Beneficial Ownership Limitation herein contained
        or to make changes or supplements necessary or desirable to properly give
        effect
        to such limitation.
        The
        limitations contained in this paragraph shall apply to a successor holder
        of
        Preferred Stock.

    

    d) [INTENTIONALLY
      DELETED] 

     

    e) Mechanics
      of Conversion

    

    i. Delivery
      of Certificate Upon Conversion.
      Not
      later than three Trading Days after each Conversion Date (the “Share
      Delivery Date”),
      the
      Corporation shall deliver, or cause to be delivered, to the converting Holder
      (A) a certificate or certificates which, on or after the Effective Date, shall
      be free of restrictive legends and trading restrictions (other than those which
      may then be required by the Purchase Agreement) representing the number of
      shares of Common Stock being acquired upon the conversion of shares of Preferred
      Stock, and (B) a bank check in the amount of accrued and unpaid dividends (if
      the Corporation has elected or is required to pay accrued dividends in cash).
      On
      or after the Effective Date, the Corporation shall, upon request of a Holder,
      use its best efforts to deliver any certificate or certificates required to
      be
      delivered by the Corporation under this Section 6 electronically through the
      Depository Trust Company or another established clearing corporation performing
      similar functions. If in the case of any Notice of Conversion such certificate
      or certificates are not delivered to or as directed by the applicable Holder
      by
      the third Trading Day after the Conversion Date, such Holder shall be entitled
      to elect by written notice to the Corporation at any time on or before its
      receipt of such certificate or certificates, to rescind such Conversion Notice
      by written notice to the Corporation, in which event the Corporation shall
      promptly return to such Holder any original Preferred Stock certificate
      delivered to the Corporation and such Holder shall promptly return any Common
      Stock certificates representing the shares of Preferred Stock tendered for
      conversion to the Corporation.

     

    
      
        
        

      

      
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    ii. Obligation
      Absolute; Partial Liquidated Damages.
      The
      Corporation’s obligation to issue and deliver the Conversion Shares upon
      conversion of Preferred Stock in accordance with the terms hereof are absolute
      and unconditional, irrespective of any action or inaction by the applicable
      Holder to enforce the same, any waiver or consent with respect to any provision
      hereof, the recovery of any judgment against any Person or any action to enforce
      the same, or any setoff, counterclaim, recoupment, limitation or termination,
      or
      any breach or alleged breach by the applicable Holder or any other Person of
      any
      obligation to the Corporation or any violation or alleged violation of law
      by
      the applicable Holder or any other person, and irrespective of any other
      circumstance which might otherwise limit such obligation of the Corporation
      to
      such Holder in connection with the issuance of such Conversion Shares;
provided,
      however,
      that
      such delivery shall not operate as a waiver by the Corporation of any such
      action that the Corporation may have against such Holder. In the event a Holder
      shall elect to convert any or all of the Stated Value of its Preferred Stock,
      the Corporation may not refuse conversion based on any claim that such Holder
      or
      any one associated or affiliated with such Holder has been engaged in any
      violation of law, agreement or for any other reason, unless an injunction from
      a
      court, on notice to such Holder, restraining and/or enjoining conversion of
      all
      or part of the Preferred Stock of such Holder shall have been sought and
      obtained, and the Corporation posts a surety bond for the benefit of such Holder
      in the amount of 150% of the Stated Value of Preferred Stock which is subject
      to
      the injunction, which bond shall remain in effect until the completion of
      arbitration/litigation of the underlying dispute and the proceeds of which
      shall
      be payable to such Holder to the extent it obtains judgment. In the absence
      of
      such injunction, the Corporation shall issue Conversion Shares and, if
      applicable, cash, upon a properly noticed conversion. If the Corporation fails
      to deliver to such Holder such certificate or certificates pursuant to Section
      6(e)(i) on the second Trading Day after the Share Delivery Date applicable
      to
      such conversion, the Corporation shall pay to such Holder, in cash, as
      liquidated damages and not as a penalty, for each $5,000 of Stated Value of
      Preferred Stock being converted, $50 per Trading Day (increasing to $100 per
      Trading Day on the third Trading Day and increasing to $200 per Trading Day
      on
      the sixth Trading Day after such damages begin to accrue) for each Trading
      Day
      after such second Trading Day after the Share Delivery Date until such
      certificates are delivered. Nothing herein shall limit a Holder’s right to
      pursue actual damages or declare a Triggering Event pursuant to Section 9 for
      the Corporation’s failure to deliver Conversion Shares within the period
      specified herein and such Holder shall have the right to pursue all remedies
      available to it hereunder, at law or in equity including, without limitation,
      a
      decree of specific performance and/or injunctive relief. The Exercise of any
      such rights shall not prohibit a Holder from seeking to enforce damages pursuant
      to any other Section hereof or under applicable law.

     

    
      
        
        

      

      
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    iii. Compensation
      for Buy-In on Failure to Timely Deliver Certificates Upon
      Conversion.
      If the
      Corporation fails to deliver to a Holder such certificate or certificates by
      the
      second Trading Day after the Share Delivery Date pursuant to Section 6(e)(i),
      and if after such second Trading Day after the Share Delivery Date such Holder
      is required by its brokerage firm to purchase (in an open market transaction
      or
      otherwise) shares of Common Stock to deliver in satisfaction of a sale by such
      Holder of the Conversion Shares which such Holder was entitled to receive upon
      the conversion relating to such Share Delivery Date (a “Buy-In”),
      then
      the Corporation shall (A) pay in cash to such Holder (in addition to any other
      remedies available to or elected by such Holder) the amount by which (x) such
      Holder’s total purchase price (including any brokerage commissions) for the
      shares of Common Stock so purchased exceeds (y) the product of (1) the aggregate
      number of shares of Common Stock that such Holder was entitled to receive from
      the conversion at issue multiplied by (2) the actual sale price at which the
      sell order giving rise to such purchase obligation was executed (including
      any
      brokerage commissions) and (B) at the option of such Holder, either reissue
      (if
      surrendered) the shares of Preferred Stock equal to the number of shares of
      Preferred Stock submitted for conversion or deliver to such Holder the number
      of
      shares of Common Stock that would have been issued if the Corporation had timely
      complied with its delivery requirements under Section 6(e)(i). For example,
      if a
      Holder purchases shares of Common Stock having a total purchase price of $11,000
      to cover a Buy-In with respect to an attempted conversion of shares of Preferred
      Stock with respect to which the actual sale price (including any brokerage
      commissions) giving rise to such purchase obligation was a total of $8,000
      under
      clause (A) of the immediately preceding sentence, the Corporation shall be
      required to pay such Holder $1,000. Such Holder shall provide the Corporation
      written notice indicating the amounts payable to such Holder in respect of
      the
      Buy-In and, upon request of the Corporation, evidence of the amount of such
      loss. Nothing herein shall limit a Holder’s right to pursue any other remedies
      available to it hereunder, at law or in equity including, without limitation,
      a
      decree of specific performance and/or injunctive relief with respect to the
      Corporation’s failure to timely deliver certificates representing shares of
      Common Stock upon conversion of the shares of Preferred Stock as required
      pursuant to the terms hereof.

    
      
        
        

      

      
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    iv. Reservation
      of Shares Issuable Upon Conversion.
      The
      Corporation covenants that it will at all times reserve and keep available
      out
      of its authorized and unissued shares of Common Stock for the sole purpose
      of
      issuance upon conversion of the Preferred Stock and payment of dividends on
      the
      Preferred Stock, each as herein provided, free from preemptive rights or any
      other actual contingent purchase rights of Persons other than such Holders
      of
      the Preferred Stock, not less than such aggregate number of shares of the Common
      Stock as shall (subject to the terms and conditions in the Purchase Agreement)
      be issuable (taking into account the adjustments and restrictions of Section
      7)
      upon the conversion of all outstanding shares of Preferred Stock and payment
      of
      dividends hereunder. The Corporation covenants that all shares of Common Stock
      that shall be so issuable shall, upon issue, be duly authorized, validly issued,
      fully paid and nonassessable and, if the Conversion Shares Registration
      Statement is then effective under the Securities Act, shall be registered for
      public sale in accordance with such Conversion Shares Registration
      Statement.

    

    v. Fractional
      Shares.
      Upon a
      conversion hereunder, the Corporation shall not be required to issue stock
      certificates representing fractions of shares of Common Stock, but may if
      otherwise permitted, make a cash payment in respect of any final fraction of
      a
      share based on the VWAP at such time. If the Corporation elects not, or is
      unable, to make such a cash payment, a Holder shall be entitled to receive,
      in
      lieu of the final fraction of a share, one whole share of Common
      Stock.

    

    vi. Transfer
      Taxes.
      The
      issuance of certificates for shares of the Common Stock on conversion of this
      Preferred Stock shall be made without charge to any Holder hereof for any
      documentary stamp or similar taxes that may be payable in respect of the issue
      or delivery of such certificates, provided that the Corporation shall not be
      required to pay any tax that may be payable in respect of any transfer involved
      in the issuance and delivery of any such certificate upon conversion in a name
      other than that of such Holder of such shares of Preferred Stock so converted
      and the Corporation shall not be required to issue or deliver such certificates
      unless or until the Person or Persons requesting the issuance thereof shall
      have
      paid to the Corporation the amount of such tax or shall have established to
      the
      satisfaction of the Corporation that such tax has been paid.

    

    Section
      7.
       Certain
      Adjustments.

    

    a) Stock
      Dividends and Stock Splits.
      If the
      Corporation, at any time while this Preferred Stock is outstanding: (A) pays
      a
      stock dividend or otherwise makes a distribution or distributions payable in
      shares of Common Stock on shares of Common Stock or any other Common Stock
      Equivalents (which, for avoidance of doubt, shall not include any shares of
      Common Stock issued by the Corporation upon conversion of, or payment of a
      dividend on, this Preferred Stock); 

    
      
        
        

      

      
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    (B)
      subdivides outstanding shares of Common Stock into a larger number of shares;
      (C) combines (including by way of a reverse stock split) outstanding shares
      of
      Common Stock into a smaller number of shares; or (D) issues, in the event of
      a
      reclassification of shares of the Common Stock, any shares of capital stock
      of
      the Corporation, then the Conversion Price shall be multiplied by a fraction
      of
      which the numerator shall be the number of shares of Common Stock (excluding
      any
      treasury shares of the Corporation) outstanding immediately before such event
      and of which the denominator shall be the number of shares of Common Stock
      outstanding immediately after such event. Any adjustment made pursuant to this
      Section 7(a) shall become effective immediately after the record date for the
      determination of stockholders entitled to receive such dividend or distribution
      and shall become effective immediately after the effective date in the case
      of a
      subdivision, combination or re-classification.

     

    b) Subsequent
      Equity Sales.
      If the
      Corporation or any Subsidiary thereof, at any time while this Preferred Stock
      is
      outstanding, sells or grants any option to purchase or sells or grants any
      right
      to reprice its securities, or otherwise disposes of or issues (or announces
      any
      sale, grant or any option to purchase or other disposition) any Common Stock
      or
      Common Stock Equivalents entitling any Person to acquire shares of Common Stock
      at an effective price per share that is lower than the then Conversion Price
      (such lower price, the “Base
      Conversion Price”
and
      such issuances collectively, a “Dilutive
      Issuance”)
      (if a
      holder of the Common Stock or Common Stock Equivalents so issued shall at any
      time, whether by operation of purchase price adjustments, reset provisions,
      floating conversion, exercise or exchange prices or otherwise, or due to
      warrants, options or rights per share which are issued in connection with such
      issuance, be entitled to receive shares of Common Stock at an effective price
      per share that is lower than the Conversion Price, such issuance shall be deemed
      to have occurred for less than the Conversion Price on such date of the Dilutive
      Issuance), then the Conversion Price shall be reduced, and only reduced, by
      multiplying the Conversion Price by a fraction, the numerator of which is the
      number of shares of Common Stock issued and outstanding immediately prior to
      the
      Dilutive Issuance plus the number of shares of Common Stock which the actual
      cash offering price for such Dilutive Issuance would purchase at the then
      Exercise Price, and the denominator of which shall be the sum of the number
      of
      shares of Common Stock issued and outstanding immediately prior to the Dilutive
      Issuance plus the number of shares of Common Stock so issued or issuable in
      connection with the Dilutive Issuance, but in no event shall such adjustment
      reduce the Conversion Price to less than $0.05. Notwithstanding
      the foregoing, no adjustment will be made under this Section 7(b) in respect
      of
      an Exempt Issuance.
      The
      Corporation shall notify each Holder in writing, no later than the Business
      Day
      following the issuance of any Common Stock or Common Stock Equivalents subject
      to this Section 7(b), indicating therein the applicable issuance price, or
      applicable reset price, exchange price, conversion price and other pricing
      terms
      (such notice, the “Dilutive
      Issuance Notice”).
      

    
      
        
        

      

      
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    For
      purposes of clarification, whether or not the Corporation provides a Dilutive
      Issuance Notice pursuant to this Section 7(b), upon the occurrence of any
      Dilutive Issuance, each Holder is entitled to receive a number of Conversion
      Shares based upon the Base Conversion Price on or after the date of such
      Dilutive Issuance, regardless of whether such Holder accurately refers to the
      Base Conversion Price in the Notice of Conversion.

     

    c) Subsequent
      Rights Offerings.
      If the
      Corporation, at any time while this Preferred Stock is outstanding, shall issue
      rights, options or warrants to all holders of Common Stock (and not to Holders)
      entitling them to subscribe for or purchase shares of Common Stock at a price
      per share that is lower than the VWAP on the record date referenced below,
      then
      the Conversion Price shall be multiplied by a fraction of which the denominator
      shall be the number of shares of the Common Stock outstanding on the date of
      issuance of such rights or warrants plus the number of additional shares of
      Common Stock offered for subscription or purchase, and of which the numerator
      shall be the number of shares of the Common Stock outstanding on the date of
      issuance of such rights or warrants plus the number of shares which the
      aggregate offering price of the total number of shares so offered (assuming
      delivery to the Corporation in full of all consideration payable upon exercise
      of such rights, options or warrants) would purchase at such VWAP. Such
      adjustment shall be made whenever such rights or warrants are issued, and shall
      become effective immediately after the record date for the determination of
      stockholders entitled to receive such rights, options or warrants.

     

    d) Pro
      Rata Distributions.
      If the
      Corporation, at any time while this Preferred Stock is outstanding, distributes
      to all holders of Common Stock (and not to Holders) evidences of its
      indebtedness or assets (including cash and cash dividends) or rights or warrants
      to subscribe for or purchase any security (other than Common Stock, which shall
      be subject to Section 7(b)), then in each such case the Conversion Price shall
      be adjusted by multiplying such Conversion Price in effect immediately prior
      to
      the record date fixed for determination of stockholders entitled to receive
      such
      distribution by a fraction of which the denominator shall be the VWAP determined
      as of the record date mentioned above, and of which the numerator shall be
      such
      VWAP on such record date less the then fair market value at such record date
      of
      the portion of such assets, evidence of indebtedness or rights or warrants
      so
      distributed applicable to one outstanding share of the Common Stock as
      determined by the Board of Directors of the Corporation in good faith. In either
      case the adjustments shall be described in a statement delivered to the Holders
      describing the portion of assets or evidences of indebtedness so distributed
      or
      such subscription rights applicable to one share of Common Stock. Such
      adjustment shall be made whenever any such distribution is made and shall become
      effective immediately after the record date mentioned above.

    

    
      
        
        

      

      
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    e) Fundamental
      Transaction.
      If, at
      any time while this Preferred Stock is outstanding, (A) the Corporation effects
      any merger or consolidation of the Corporation with or into another Person,
      (B)
      the Corporation effects any sale of all or substantially all of its assets
      in
      one transaction or a series of related transactions, (C) any tender offer or
      exchange offer (whether by the Corporation or another Person) is completed
      pursuant to which holders of Common Stock are permitted to tender or exchange
      their shares for other securities, cash or property, or (D) the Corporation
      effects any reclassification of the Common Stock or any compulsory share
      exchange pursuant to which the Common Stock is effectively converted into or
      exchanged for other securities, cash or property (in any such case, a
“Fundamental
      Transaction”),
      then,
      upon any subsequent conversion of this Preferred Stock, each Holder shall have
      the right to receive, for each Conversion Share that would have been issuable
      upon such conversion immediately prior to the occurrence of such Fundamental
      Transaction, the same kind and amount of securities, cash or property as it
      would have been entitled to receive upon the occurrence of such Fundamental
      Transaction if it had been, immediately prior to such Fundamental Transaction,
      a
      holder of one share of Common Stock (the “Alternate
      Consideration”).
      For
      purposes of any such conversion, the determination of the Conversion Price
      shall
      be appropriately adjusted to apply to such Alternate Consideration based on
      the
      amount of Alternate Consideration issuable in respect of one share of Common
      Stock in such Fundamental Transaction, and the Corporation shall apportion
      the
      Conversion Price among the Alternate Consideration in a reasonable manner
      reflecting the relative value of any different components of the Alternate
      Consideration. If holders of Common Stock are given any choice as to the
      securities, cash or property to be received in a Fundamental Transaction, then
      each Holder shall be given the same choice as to the Alternate Consideration
      it
      receives upon any conversion of this Preferred Stock following such Fundamental
      Transaction. To the extent necessary to effectuate the foregoing provisions,
      any
      successor to the Corporation or surviving entity in such Fundamental Transaction
      shall file a new Certificate of Designation with the same terms and conditions
      and issue to each Holder new preferred stock consistent with the foregoing
      provisions and evidencing such Holder’s right to convert such preferred stock
      into Alternate Consideration. The terms of any agreement pursuant to which
      a
      Fundamental Transaction is effected shall include terms requiring any such
      successor or surviving entity to comply with the provisions of this Section
      7(e)
      and insuring that this Preferred Stock (or any such replacement security) will
      be similarly adjusted upon any subsequent transaction analogous to a Fundamental
      Transaction.

     

    f) Calculations.
      All
      calculations under this Section 7 shall be made to the nearest cent or the
      nearest 1/100th of a share, as the case may be. For purposes of this Section
      7,
      the number of shares of Common Stock deemed to be issued and outstanding as
      of a
      given date shall be the sum of the number of shares of Common Stock (excluding
      any treasury shares of the Corporation) issued and outstanding.

    

    g) Notice
      to the Holders.

    
      
        
        

      

      
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    i. Adjustment
      to Conversion Price.
      Whenever the Conversion Price is adjusted pursuant to any provision of this
      Section 7, the Corporation shall promptly mail to each Holder a notice setting
      forth the Conversion Price after such adjustment and setting forth a brief
      statement of the facts requiring such adjustment. If the Corporation issues
      a
      variable rate security, despite the prohibition thereon in the Purchase
      Agreement, the Corporation shall be deemed to have issued Common Stock or Common
      Stock Equivalents at the lowest possible conversion or exercise price at which
      such securities may be converted or exercised in the case of a Variable Rate
      Transaction (as defined in the Purchase Agreement).

     

      ii. Notice
        to Allow Conversion by Holder.
        If (A)
        the Corporation shall declare a dividend (or any other distribution in whatever
        form) on the Common Stock, (B) the Corporation shall declare a special
        nonrecurring cash dividend on or a redemption of the Common Stock, (C) the
        Corporation shall authorize the granting to all holders of the Common Stock
        of
        rights or warrants to subscribe for or purchase any shares of capital stock
        of
        any class or of any rights, (D) the approval of any stockholders of the
        Corporation shall be required in connection with any reclassification of
        the
        Common Stock, any consolidation or merger to which the Corporation is a party,
        any sale or transfer of all or substantially all of the assets of the
        Corporation, of any compulsory share exchange whereby the Common Stock is
        converted into other securities, cash or property or (E) the
        Corporation shall authorize the voluntary or involuntary dissolution,
        liquidation or winding up of the affairs of the Corporation, then, in each
        case,
        the Corporation shall cause to be filed at each office or agency maintained
        for
        the purpose of conversion of this Preferred Stock, and shall cause to be
        delivered
        to each Holder at its last address as it shall appear upon the stock
        books of
        the
        Corporation, at least 20 calendar days prior to the applicable record or
        effective date hereinafter specified, a notice stating (x)
        the
        date on which a record is to be taken for the purpose of such dividend,
        distribution, redemption, rights or warrants, or if a record is not to be
        taken,
        the date as of which such Holders of the Common Stock of record to be entitled
        to such dividend, distributions, redemption, rights or warrants are to be
        determined or (y) the date on which such reclassification, consolidation,
        merger, sale, transfer or share exchange is expected to become effective
        or
        close, and the date as of which it is expected that holders of the Common
        Stock
        of record shall be entitled to exchange their shares of the Common Stock
        for
        securities, cash or other property deliverable upon such reclassification,
        consolidation, merger, sale, transfer or share exchange, provided that the
        failure to deliver such notice or any defect therein or in the delivery thereof
        shall not affect the validity of the corporate action required to be specified
        in such notice. Each Holder is entitled to convert the Conversion Amount
        of this
        Preferred Stock (or any part hereof) during the 20-day period commencing
        on the
        date of such notice through the effective date of the event triggering such
        notice. 

    

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

    

    Section
      8.
       Optional
      Redemption.

    

    a) [INTENTIONALLY
      DELETED]

     

    b) Optional
      Redemption at Election of Corporation.
      Subject
      to the provisions of this Section 8, at any time after the 4 year anniversary
      of
      the Effective Date, the Corporation
      may
      deliver a notice to the Holders (an “Optional
      Redemption Notice”
and
      the
      date such notice is deemed delivered hereunder, the “Optional
      Redemption Notice Date”)
      of its
      irrevocable election to redeem some or all of the then outstanding Preferred
      Stock, for cash in an amount equal to the Optional Redemption Amount on the
      20th
      Trading
      Day following the Optional Redemption Notice Date (such date, the “Optional
      Redemption Date”
and
      such redemption, the “Optional
      Redemption”).
      The
      Optional Redemption Amount is payable in full on the Optional Redemption Date.
      The Corporation
      may only
      effect an Optional Redemption if on each Trading Day occurring during the period
      commencing on the Optional Redemption Notice Date through to the Optional
      Redemption Date and
      through and including the date payment of the Optional Redemption Amount is
      actually made,
      each of
      the Equity Conditions shall have been met. If any of the Equity Conditions
      shall
      cease to be satisfied at any time during the 20 Trading Day period, then a
      Holder may elect to nullify the Optional Redemption Notice by notice to the
      Corporation
      within 3
      Trading Days after the first day on which any such Equity Condition has not
      been
      met (provided that if, by a provision of the Transaction Documents, the
Corporation
      is
      obligated to notify such Holders of the non-existence of an Equity Condition,
      such notice period shall be extended to the third Trading Day after proper
      notice from the Corporation)
      in
      which case the Optional Redemption Notice shall be null and void, ab initio.
      Each
      Holder may elect to convert the Preferred Stock subject to this Section 8(b)
      pursuant to Section 6 prior to actual payment in cash for any redemption under
      this Section 8(b) by the delivery of a Notice of Conversion to the Corporation
      prior to the date of actual cash payment. The Corporation
      covenants and agrees that it will honor all Notices of Conversion tendered
      from
      the time of delivery of the Optional Redemption Notice through the date the
      Optional Redemption Amount is paid in full.

    

    c) Redemption
      Procedure.
      The
      payment of cash shall be made on the Optional Redemption Date. If any portion
      of
      the payment pursuant to an Optional Redemption shall not be paid by the
      Corporation by the applicable due date, interest shall accrue thereon until
      such
      amount is paid in full at an interest rate equal to the lesser of 18% per annum
      or the maximum rate permitted by applicable law. Notwithstanding anything herein
      contained to the contrary, if any portion of the Optional Redemption Amount
      remains unpaid after such date, a Holder may elect, by written notice to the
      Corporation given at any time thereafter, to invalidate ab initio
      such
      redemption and the Corporation shall have no further right to exercise such
      Optional Redemption. Notwithstanding anything to the contrary in this Section
      8,
      the Corporation’s determination to redeem in cash or its elections under Section
      8(b) shall be applied ratably among the Holders of the Preferred
      Stock.

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

    

    Section
      9.  Redemption
      Upon Triggering Events.

     

    a) “Triggering
      Event”
means
      any one or more of the following events (whatever the reason and whether it
      shall be voluntary or involuntary or effected by operation of law or pursuant
      to
      any judgment, decree or order of any court, or any order, rule or regulation
      of
      any administrative or governmental body):

    

    i. the
      failure of a Conversion Shares Registration Statement to be declared effective
      by the Commission on or prior to the 180th
      day
      after the Original Issue Date;

     

    ii. if,
      during the Effectiveness Period, the effectiveness of the Conversion Shares
      Registration Statement lapses for more than an aggregate of 60 calendar days
      (which need not be consecutive calendar days) during any 12 month period, or
      the
      Holders shall not otherwise be permitted to resell Registrable Securities under
      the Conversion Shares Registration Statement for more than an aggregate of
      60
      calendar days (which need not be consecutive calendar days) during any 12 month
      period;

    

    iii. the
      Corporation shall fail to deliver certificates representing Conversion Shares
      issuable upon a conversion hereunder that comply with the provisions hereof
      prior to the seventh Trading Day after such shares are required to be delivered
      hereunder, or the Corporation shall provide written notice to any Holder,
      including by way of public announcement, at any time, of its intention not
      to
      comply with requests for conversion of any shares of Preferred Stock in
      accordance with the terms hereof;

    

    iv. one
      of
      the Events (as defined in the Registration Rights Agreement) described in
      subsections (i), (ii) or (iii) of Section 2(b) of the Registration Rights
      Agreement shall not have been cured to the satisfaction of the Holders prior
      to
      the expiration of 30 calendar days from the Event Date (as defined in the
      Registration Rights Agreement) relating thereto (other than an Event resulting
      from a failure of a Conversion Shares Registration Statement to be declared
      effective by the Commission on or prior to the 180th day after the Original
      Issue Date, which shall be covered by Section 9(a)(i));

    

    v. the
      Corporation shall fail for any reason to pay in full the amount of cash due
      pursuant to a Buy-In within five calendar days after notice therefor is
      delivered hereunder or shall fail to pay all amounts owed on account of any
      Event (as defined in the Registration Rights Agreement) within five days of
      the
      date due;

    

    vi. the
      Corporation shall fail to have available a sufficient number of authorized
      and
      unreserved shares of Common Stock to issue to the Holder upon a conversion
      hereunder;

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

    

    vii. unless
      specifically addressed elsewhere in this Certificate of Designation as a
      Triggering Event, the Corporation shall fail to observe or perform any other
      covenant, agreement or warranty contained in, or otherwise commit any breach
      of
      the Transaction Documents, and such failure or breach shall not, if subject
      to
      the possibility of a cure by the Corporation, have been cured within 30 calendar
      days after the date on which written notice of such failure or breach shall
      have
      been delivered (other than Section 4.19 of the Purchase Agreement which shall
      have no cure period);

    

    viii. the
      Corporation shall redeem more than a de minimis
      number
      of Junior Securities other than as to repurchases of Common Stock or Common
      Stock Equivalents from departing officers and directors of the Corporation,
      provided that, while any of the Preferred Stock remains outstanding, such
      repurchases shall not exceed an aggregate of $100,000 from all officers and
      directors;

    

    ix. the
      Corporation shall be party to a Change of Control Transaction; 

    

    x. there
      shall have occurred a Bankruptcy Event; 

    

    xi. the
      Common Stock shall fail to be listed or quoted for trading on a Trading Market
      for more than five Trading Days, which need not be consecutive Trading Days;
      or

    

    xii. any
      monetary judgment, writ or similar final process shall be entered or filed
      against the Corporation, any Subsidiary or any of their respective property
      or
      other assets for greater than $50,000, and such judgment, writ or similar final
      process shall remain unvacated, unbonded or unstayed for a period of 45 calendar
      days.

    

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    

    b) Upon
      the
      occurrence of a Triggering Event, each Holder shall (in addition to all other
      rights it may have hereunder or under applicable law) have the right,
      exercisable at the sole option of such Holder, to require the Corporation to,
      (A) with respect to the Triggering Events set forth in Sections 9(a)(iii),
      (v),
      (vi), (vii), (viii), (ix) (as to Changes of Control approved by the Board of
      Directors of the Corporation) and (x) (as to voluntary filings only), redeem
      all
      of the Preferred Stock then held by such Holder for a redemption price, in
      cash,
      equal to the Triggering Redemption Amount or (B) at the option of such Holder
      and with respect to the Triggering Events set forth in Sections 9(a)(i), (ii),
      (iv), (ix) (as to Changes of Control not approved by the Board of Directors
      of
      the Corporation), (x) (as to involuntary filings only), (xi) and (xii), either
      (a) redeem all of the Preferred Stock then held by such Holder for a redemption
      price, in shares of Common Stock, equal to a number of shares of Common Stock
      equal to the Triggering Redemption Amount divided by 75% of the average of
      the
      10 VWAPs immediately prior to the date of election hereunder or (b) increase
      the
      dividend rate on all of the outstanding Preferred Stock held by such Holder
      to
      18% per annum thereafter. The Triggering Redemption Amount, in cash or in
      shares, shall be due and payable or issuable, as the case may be, within five
      Trading Days of the date on which the notice for the payment therefor is
      provided by a Holder (the “Triggering
      Redemption Payment Date”).
      If
      the Corporation fails to pay in full the Triggering Redemption Amount hereunder
      on the date such amount is due in accordance with this Section (whether in
      cash
      or shares of Common Stock), the Corporation will pay interest thereon at a
      rate
      equal to the lesser of 18% per annum or the maximum rate permitted by applicable
      law, accruing daily from such date until the Triggering Redemption Amount,
      plus
      all such interest thereon, is paid in full. For purposes of this Section, a
      share of Preferred Stock is outstanding until such date as the applicable Holder
      shall have received Conversion Shares upon a conversion (or attempted
      conversion) thereof that meets the requirements hereof or has been paid the
      Triggering Redemption Amount in cash.

    

    Section
      10.
       Negative
      Covenants.
      So long
      as any shares of Preferred Stock are outstanding, the Corporation shall not,
      and
      shall not permit any of its Subsidiaries to, directly or
      indirectly:

    

    a) other
      than Permitted Indebtedness, enter into, create, incur, assume, guarantee or
      suffer to exist any indebtedness for borrowed money of any kind, including
      but
      not limited to, a guarantee, on or with respect to any of its property or assets
      now owned or hereafter acquired or any interest therein or any income or profits
      therefrom;

     

    b) other
      than Permitted Liens, enter into, create, incur, assume or suffer to exist
      any
      Liens of any kind, on or with respect to any of its property or assets now
      owned
      or hereafter acquired or any interest therein or any income or profits
      therefrom;

    

    c) amend
      its
      certificate of incorporation, bylaws or other charter documents so as to
      materially and adversely affect any rights of any Holder;

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

    d) repay,
      repurchase or offer to repay, repurchase or otherwise acquire more than a
de minimis
      number
      of shares of its Common Stock, Common Stock Equivalents or Junior Securities,
      except for the Conversion Shares to the extent permitted or required under
      the
      Transaction Documents or as otherwise permitted by the Transaction Documents;
      

    

    e) enter
      into any agreement or understanding with respect to any of the
      foregoing;
      or

    

    f) pay
      cash
      dividends or distributions on Junior Securities of the Corporation. 

    

    Section
      11. Miscellaneous.
      

    

    a) Notices.
      Any and
      all notices or other communications or deliveries to be provided by a Holder
      hereunder including, without limitation, any Notice of Conversion, shall be
      in
      writing and delivered personally, by facsimile, or sent by a nationally
      recognized overnight courier service, addressed to the Corporation, at the
      address set forth above, facsimile number (508)
      366-3816, Attn: Joseph Warrino, CFO or
      such
      other facsimile number or address as the Corporation may specify for such
      purposes by notice to the Holders delivered in accordance with this Section
      11.
      Any and all notices or other communications or deliveries to be provided by
      the
      Corporation hereunder shall be in writing and delivered personally, by
      facsimile, or sent by a nationally recognized overnight courier service
      addressed to each Holder at the facsimile number or address of such Holder
      appearing on the books of the Corporation, or if no such facsimile number or
      address appears on the books of the Corporation, at the principal place of
      business of such Holder. Any notice or other communication or deliveries
      hereunder shall be deemed given and effective on the earliest of (i) the date
      of
      transmission, if such notice or communication is delivered via facsimile at
      the
      facsimile number specified in this Section 11 prior to 5:30 p.m. (New York
      City
      time) on any date, (ii) the date immediately following the date of transmission,
      if such notice or communication is delivered via facsimile at the facsimile
      number specified in this Section 11 between 5:30 p.m. and 11:59 p.m. (New York
      City time) on any date, (iii) the second Business Day following the date of
      mailing, if sent by nationally recognized overnight courier service, or (iv)
      upon actual receipt by the party to whom such notice is required to be
      given.

     

    b) Absolute
      Obligation.
      Except
      as expressly provided herein, no provision of this Certificate of Designation
      shall alter or impair the obligation of the Corporation, which is absolute
      and
      unconditional, to pay liquidated damages, accrued dividends and accrued
      interest, as applicable, on the shares of Preferred Stock at the time, place,
      and rate, and in the coin or currency, herein prescribed. 

     

    
      
        
        

      

      
        25

        
          

        

      

      
        
        

      

    

    c) Lost
      or Mutilated Preferred Stock Certificate.
      If a
      Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or
      destroyed, the Corporation shall execute and deliver, in exchange and
      substitution for and upon cancellation of a mutilated certificate, or in lieu
      of
      or in substitution for a lost, stolen or destroyed certificate, a new
      certificate for the shares of Preferred Stock so mutilated, lost, stolen or
      destroyed, but only upon receipt of evidence of such loss, theft or destruction
      of such certificate, and of the ownership hereof reasonably satisfactory to
      the
      Corporation.

    

    d) Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of this Certificate of Designation shall be governed by and construed and
      enforced in accordance with the internal laws of the State of Nevada, without
      regard to the principles of conflict of laws thereof. Each party agrees that
      all
      legal proceedings concerning the interpretation, enforcement and defense of
      the
      transactions contemplated by any of the Transaction Documents (whether brought
      against a party hereto or its respective Affiliates, directors, officers,
      shareholders, employees or agents) shall be commenced in the state and federal
      courts sitting in the City of New York, Borough of Manhattan (the “New
      York Courts”).
      Each
      party hereto hereby irrevocably submits to the exclusive jurisdiction of the
      New
      York Courts for the adjudication of any dispute hereunder or in connection
      herewith or with any transaction contemplated hereby or discussed herein
      (including with respect to the enforcement of any of the Transaction Documents),
      and hereby irrevocably waives, and agrees not to assert in any suit, action
      or
      proceeding, any claim that it is not personally subject to the jurisdiction
      of
      such New York Courts, or such New York Courts are improper or inconvenient
      venue
      for such proceeding. Each party hereby irrevocably waives personal service
      of
      process and consents to process being served in any such suit, action or
      proceeding by mailing a copy thereof via registered or certified mail or
      overnight delivery (with evidence of delivery) to such party at the address
      in
      effect for notices to it under this Certificate of Designation and agrees that
      such service shall constitute good and sufficient service of process and notice
      thereof. Nothing contained herein shall be deemed to limit in any way any right
      to serve process in any other manner permitted by applicable law. Each party
      hereto hereby irrevocably waives, to the fullest extent permitted by applicable
      law, any and all right to trial by jury in any legal proceeding arising out
      of
      or relating to this Certificate of Designation or the transactions contemplated
      hereby. If either party shall commence an action or proceeding to enforce any
      provisions of this Certificate of Designation, then the prevailing party in
      such
      action or proceeding shall be reimbursed by the other party for its attorneys’
fees and other costs and expenses incurred in the investigation, preparation
      and
      prosecution of such action or proceeding.

     

    
      
        
        

      

      
        26

        
          

        

      

      
        
        

      

    

    e) Waiver.
      Any
      waiver by the Corporation or a Holder of a breach of any provision of this
      Certificate of Designation shall not operate as or be construed to be a waiver
      of any other breach of such provision or of any breach of any other provision
      of
      this Certificate of Designation or a waiver by any other Holder. The failure
      of
      the Corporation or a Holder to insist upon strict adherence to any term of
      this
      Certificate of Designation on one or more occasions shall not be considered
      a
      waiver or deprive that party (or any other Holders) of the right thereafter
      to
      insist upon strict adherence to that term or any other term of this Certificate
      of Designation. Any waiver by the Corporation or a Holder must be in
      writing.

     

    f) Severability.
      If any
      provision of this Certificate of Designation is invalid, illegal or
      unenforceable, the balance of this Certificate of Designation shall remain
      in
      effect, and if any provision is inapplicable to any Person or circumstance,
      it
      shall nevertheless remain applicable to all other Persons and circumstances.
      If
      it shall be found that any interest or other amount deemed interest due
      hereunder violates the applicable law governing usury, the applicable rate
      of
      interest due hereunder shall automatically be lowered to equal the maximum
      rate
      of interest permitted under applicable law. 

    

    g) Next
      Business Day.
      Whenever any payment or other obligation hereunder shall be due on a day other
      than a Business Day, such payment shall be made on the next succeeding Business
      Day.

    

    h) Headings.
      The
      headings contained herein are for convenience only, do not constitute a part
      of
      this Certificate of Designation and shall not be deemed to limit or affect
      any
      of the provisions hereof.

    

    i) Status
      of Converted or Redeemed Preferred Stock.
      Shares
      of Preferred Stock may only be issued pursuant to the Purchase Agreement. If
      any
      shares of Preferred Stock shall be converted, redeemed or reacquired by the
      Corporation, such shares shall resume the status of authorized but unissued
      shares of preferred stock and shall no longer be designated as Series B Variable
      Dividend Convertible Preferred Stock

    

    

    *********************

     

    
      
         

      

      
        27

        
          

        

      

      
         

      

    

    RESOLVED,
      FURTHER, that the Chairman, the president or any vice-president, and the
      secretary or any assistant secretary, of the Corporation be and they hereby
      are
      authorized and directed to prepare and file a Certificate of Designation of
      Preferences, Rights and Limitations in accordance with the foregoing resolution
      and the provisions of Nevada law.

    

    IN
      WITNESS WHEREOF, the undersigned have executed this Certificate this 22nd day
      of
      May 2006.

    

    
      	
               

              /s/
                Nathan Harrison, MD

              Name:
                Nathan Harrison, MD

              Title:
                Acting CEO

            	
               

              /s/
                Joseph Warrino

              Name:
                Joseph Warrino

              Title:
                Chief Financial Officer

            

    

    

    
      
        
        

      

      
        28

        
          

        

      

      
        
        

      

    

    

    ANNEX
      A

    

    NOTICE
      OF
      CONVERSION

    

    (TO
      BE
      EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED
      STOCK)

    

    The
      undersigned hereby elects to convert the number of shares of Series B Variable
      Dividend Convertible Preferred Stock indicated below into shares of common
      stock, par value $0.001 per share (the “Common
      Stock”),
      of
      Viking Systems, Inc., a Nevada corporation (the “Corporation”),
      according to the conditions hereof, as of the date written below. If shares
      are
      to be issued in the name of a Person other than the undersigned, the undersigned
      will pay all transfer taxes payable with respect thereto and is delivering
      herewith such certificates and opinions as may be required by the Corporation
      in
      accordance with the Purchase Agreement. No fee will be charged to a Holder
      for
      any conversion, except for any such transfer taxes.

    

    Conversion
      calculations:

    

    
      	
              Date
                to Effect Conversion:
                _____________________________________________

            
	
              Number
                of shares of Preferred Stock owned prior to Conversion:
                ________________

            
	
              Number
                of shares of Preferred Stock to be Converted:
                ________________________

            
	
              Stated
                Value of shares of Preferred Stock to be Converted:
                ____________________

            
	
              Number
                of shares of Common Stock to be Issued:
                ___________________________

            
	
              Applicable
                Conversion
                Price:___________________________________________

            
	
              Number
                of shares of Preferred Stock subsequent to Conversion:
                ________________

            
	
               

              [HOLDER]

               

              By:___________________________________

              Name:

              Title:

            

    

    

     

     

    
      
        
        

      

      
        29Exhibit 10.01 Securities Purchase Agreement

    Exhibit
      10.01

    Form
      8-K

    Viking
      Systems, Inc.

    File
      No.
      000-49636

    

    

    SECURITIES
      PURCHASE AGREEMENT

    

    This
      Securities Purchase Agreement (this “Agreement”)
      is
      dated as of May 22, 2006, among Viking Systems, Inc., a Nevada corporation
      (the
“Company”),
      and
      each purchaser identified on the signature pages hereto (each, including its
      successors and assigns, a “Purchaser”
and
      collectively the “Purchasers”).

    

    WHEREAS,
      subject to the terms and conditions set forth in this Agreement and pursuant
      to
      Section 4(2) of the Securities Act of 1933, as amended (the “Securities
      Act”)
      and
      Rule 506 promulgated thereunder, the Company desires to issue and sell to each
      Purchaser, and each Purchaser, severally and not jointly, desires to purchase
      from the Company, securities of the Company as more fully described in this
      Agreement.

    

    WHEREAS,
      the Company has authorized a new series of convertible preferred stock of the
      Company designated as Series B Variable Dividend Preferred Stock, which is
      convertible into the Company’s Common Stock (as defined herein);

    

    WHEREAS,
      pursuant to the terms of this Agreement, each Purchaser (as defined herein)
      wishes to purchase, severally and not jointly with the other Purchasers, and
      the
      Company wishes to sell, up to 8,000 shares of the Series B Variable Dividend
      Preferred Stock and Warrants (as defined herein); and

    

    WHEREAS,
      contemporaneously with the execution and delivery of this Agreement, the parties
      hereto are executing and delivering a Registration Rights Agreement (as defined
      herein) pursuant to which the Company has agreed to provide certain registration
      rights with respect to the Registrable Securities (as defined in the
      Registration Rights Agreement) under the 1933 Act, the rules and regulations
      promulgated thereunder, and applicable state securities laws.

    

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

    

    ARTICLE
      I

    DEFINITIONS

    

    1.1 Definitions.
      In
      addition to the terms defined elsewhere in this Agreement: (a) capitalized
      terms
      that are not otherwise defined herein have the meanings given to such terms
      in
      the Certificate of Designation (as defined herein), and (b) the following terms
      have the meanings indicated in this Section 1.1:

    
      
         

      

      
         

        
          

        

      

      
         

      

    

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

    

    “Actual
      Minimum”
means,
      as of any date, the maximum aggregate number of shares of Common Stock then
      issued or potentially issuable in the future pursuant to the Transaction
      Documents, including any Underlying Shares issuable upon exercise or conversion
      in full of all Warrants and shares of Preferred Stock, ignoring any conversion
      or exercise limits set forth therein, and assuming that any previously
      unconverted shares of Preferred Stock are held until the third anniversary
      of
      the Closing Date and all dividends are paid in shares of Common Stock until
      such
      third anniversary.

    

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

    

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

    

    “Certificate
      of Designation”
means
      the Certificate of Designation to be filed prior to the Closing by the Company
      with the Secretary of State of Nevada, in the form of Exhibit
      A
      attached
      hereto.

    

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

    

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

    

    “Commission”
means
      the Securities and Exchange Commission.

    

    “Common
      Stock”
means
      the common stock of the Company, par value $0.001 per share, and any other
      class
      of securities into which such securities may hereafter be reclassified or
      changed into.

    

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

    
      
         

      

      
        2

        
          

        

      

      
         

      

    

    “Company
      Counsel”
means
      Cohne, Rappaport & Segal with offices located at 257 East 200 South, Suite
      700, Salt Lake City, UT 84111.

    

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

    

    “Convertible
      Debt”
means,
      collectively, the 10% Secured Convertible Promissory Note of the Company, issued
      on March 22, 2005 pursuant to the Securities Purchase Agreement, dated March
      22,
      2005, between the Company and St. Cloud Capital LLC, Donald E. Tucker, Brian
      Miller, Pacific Asset Partners, Sandor Capital Management, John Lemak, Fred
      B.
      Tartar, Aspen Ventures LLC, Bedford Oak Partners, LP, Prairie Fire Capital,
      LLC,
      Bella Capital, Michael Stone, and Larry Haimovitch (the “March
      2005 Convertible Debt”)
      and
      the 10% Secured Convertible Promissory Note of the Company, issued on August
      12,
      2005 pursuant to the Securities Purchase Agreement, dated August 12, 2005,
      between the Company and St. Cloud Capital LLC, Donald E. Tucker, Herbert Trust
      Agreement, John D. Rollins, Michael and Karen Stone Family Fund, Golden Den
      Corp., Brian Miller, Glengar International Investments Ltd., Crestview Capital
      Funds, Vision Opportunity Fund Ltd. and Commonwealth Associates LP (the
“August
      2005 Convertible Debt”),
      in
      such amounts and to such holders as are set forth on Schedule
      3.1(aa)
      hereto.

    

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

    

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

    

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

    

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

    

    
      
         

      

      
        3

        
          

        

      

      
         

      

    

    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers
      or
      directors of the Company pursuant to any stock or option plan duly adopted
      by a
      majority of the non-employee members of the Board of Directors of the Company
      or
      a majority of the members of a committee of non-employee directors established
      for such purpose, (b) securities upon the exercise or exchange of or conversion
      of any Securities issued hereunder and/or other securities exercisable or
      exchangeable for or convertible into shares of Common Stock issued and
      outstanding on the date of this Agreement, provided that such securities have
      not been amended since the date of this Agreement to increase the number of
      such
      securities or to decrease the exercise, exchange or conversion price of any
      such
      securities, (c) securities issued upon the conversion of the Convertible Debt,
      provided that the terms of such Convertible Debt shall not have been amended
      since the date of this Agreement to reduce the conversion price below $0.18
      (subject to adjustment for forward and reverse stock splits, recapitalizations
      and the like) and (d) securities issued pursuant to acquisitions or strategic
      transactions approved by a majority of the disinterested directors, provided
      that (i) any such issuance shall only be to a Person which is, itself or through
      its subsidiaries, an operating company in a business synergistic with the
      business of the Company and in which the Company receives benefits in addition
      to the investment of funds, but shall not include a transaction in which the
      Company is issuing securities primarily for the purpose of raising capital
      or to
      an entity whose primary business is investing in securities and (ii) no
      registration rights shall be granted in connection with such
      issuance.

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    

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

    
      
         

      

      
        4

        
          

        

      

      
         

      

    

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

    

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

    

    “Preferred
      Stock”
means
      the up to 8,000 shares of the Company’s Series B Variable Dividend Convertible
      Preferred Stock issued hereunder having the rights, preferences and privileges
      set forth in the Certificate of Designation, in the form of Exhibit
      A
      hereto.

    

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

    

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

    

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

    

    “Qualified
      Investor”
means
      a
      Purchaser with a Subscription Amount on the Closing Date that (i) equals or
      exceeds $1,500,000 and (ii) is in the form of new cash
      consideration.

    

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

    

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

    

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

    

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

    

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

    

    “Securities”
means
      the Preferred Stock, the Warrants, the Warrant Shares and the Underlying
      Shares.

    
      
         

      

      
        5

        
          

        

      

      
         

      

    

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

    

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

    

    “Stated
      Value”
means
      $1,000 per share of Preferred Stock.

    

    “Subscription
      Amount”
shall
      mean, as to each Purchaser, the aggregate amount to be paid for the Preferred
      Stock purchased hereunder as specified below such Purchaser’s name on the
      signature page of this Agreement and next to the heading “Subscription Amount”,
      in United States Dollars and in immediately available funds, except that,
      provided a holder of Convertible Debt has purchased, for new cash consideration,
      at least $500,000 principal amount of Preferred Stock and Warrants hereunder,
      such holder shall be permitted to surrender a face amount of Convertible Debt
      on
      a $1 for $1 basis in lieu of cash consideration for the purchase of its
      Preferred Stock and Warrants under this Agreement to the extent such holder’s
      Subscription Amount is over $500,000.

    

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

    

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

    

    “Subsidiary”
means
      any subsidiary of the Company as set forth on Schedule
      3.1(a).

    

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

    

    “Trading
      Market”
means
      the following markets or exchanges on which the Common Stock is listed or quoted
      for trading on the date in question: the Nasdaq Capital Market, the American
      Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or
      the
      OTC Bulletin Board.

    

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

    

    “Underlying
      Shares”
means
      the shares of Common Stock issued and issuable upon conversion or redemption
      of
      the Preferred Stock, upon exercise of the Warrants and issued and issuable
      in
      lieu of the cash payment of dividends on the Preferred Stock in accordance
      with
      the terms of the Certificate of Designation.

    
      
         

      

      
        6

        
          

        

      

      
         

      

    

    “VWAP”
means,
      for any date, the price determined by the first of the following clauses that
      applies: (a) if the Common Stock is then listed or quoted on a Trading Market,
      the daily volume weighted average price of the Common Stock for such date (or
      the nearest preceding date) on the Trading Market on which the Common Stock
      is
      then listed or quoted for trading as reported by Bloomberg L.P. (based on a
      Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City
      time); (b)  if the OTC Bulletin Board is not a Trading Market, the volume
      weighted average price of the Common Stock for such date (or the nearest
      preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then
      quoted for trading on the OTC Bulletin Board and if prices for the Common Stock
      are then reported in the “Pink Sheets” published by Pink Sheets, LLC (or a
      similar organization or agency succeeding to its functions of reporting prices),
      the most recent bid price per share of the Common Stock so reported; or
      (d) in all other cases, the fair market value of a share of Common Stock as
      determined by an independent appraiser selected in good faith by the Holder
      and
      reasonably acceptable to the Company, the fees and expenses of which shall
      be
      paid by the Company.

    

    “Warrants”
means
      collectively the Common Stock purchase warrants, in the form of Exhibit C
      delivered to the Purchasers at the Closing in accordance with Section 2.2(a)
      hereof, which warrants shall be exercisable immediately.

     

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

    

    ARTICLE
      II

    PURCHASE
      AND SALE

    

    2.1 Closing.
      On the
      Closing Date, upon the terms and subject to the conditions set forth herein,
      substantially concurrent with the execution and delivery of this Agreement
      by
      the parties hereto, the Company agrees to sell, and each Purchaser agrees to
      purchase in the aggregate, severally and not jointly, up to $8,000,000 of shares
      of Preferred Stock with an aggregated Stated Value equal to such Purchaser’s
      Subscription Amount and a Warrant as determined by pursuant to Section 2.2(a).
      The aggregate number of shares of Preferred Stock sold hereunder shall be up
      to
      8,000. Each Purchaser shall deliver to the Company via wire transfer or a
      certified check of immediately available funds equal to such Purchaser’s
      Subscription Amount (except as otherwise set forth in the definition of
      Subscription Amount) and the Company shall deliver to each Purchaser their
      respective shares of Preferred Stock and Warrants as determined pursuant to
      Section 2.2(a) and the other items set forth in Section 2.2 issuable at the
      Closing. Upon satisfaction of the conditions set forth in Sections 2.2 and
      2.3,
      the Closing shall occur at the offices of FW, or such other location as the
      parties shall mutually agree.

    
      

      2.2 Deliveries.
        

       

    

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

    
      
         

      

      
        7

        
          

        

      

      
         

      

    

    (i) this
      Agreement duly executed by the Company;

    

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

    

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

    

    (iv) a
      Warrant
      registered in the name of such Purchaser to purchase up to a number of shares
      of
      Common Stock equal to 50% of such Purchaser’s Subscription Amount divided by the
      initial Conversion Price, with an exercise price equal to $0.35,
      subject
      to adjustment therein, and a term of exercise of 5 years;

    

    (v) a
      Lock-Up
      Agreement, in the form of Exhibit
      E
      attached
      hereto, duly executed by Donald Tucker, Chief Executive Officer of the Company,
      with respect all shares of Common Stock and other securities owned by Mr.
      Tucker; and

    

    (vi) the
      Registration Rights Agreement duly executed by the Company.

    

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

     

    
      (i) this
        Agreement duly executed by such Purchaser;

    

    (ii) such
      Purchaser’s Subscription Amount as to the applicable Closing by wire transfer to
      Company Counsel; and

    

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

    
      

      2.3 Closing
        Conditions.
        

    

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

    

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

    

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

    

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

    
      
         

      

      
        8

        
          

        

      

      
         

      

    

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

    

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

    

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

    

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

    

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

    

    (v) unless
      the surrender of Convertible Debt is applied against a Purchasers Subscription
      Amount as provided for under the definition of “Subscription Amount”, all
      Convertible Debt shall have been converted into Common Stock pursuant to the
      conversion terms of the Convertible Debt as they exist to date;

    

    (vi) the
      Company shall have received Subscription Amounts from Purchasers of, in the
      aggregate, at least $5,000,000; and

    

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

    

    
      
         

      

      
        9

        
          

        

      

      
         

      

    

    ARTICLE
      III

    REPRESENTATIONS
      AND WARRANTIES

    

    3.1Representations
      and Warranties of the Company.
      Except
      as set forth under the corresponding section of the disclosure schedules
      delivered to the Purchasers concurrently herewith (the “Disclosure
      Schedules”)
      which
      Disclosure Schedules shall be deemed a part hereof and to qualify any
      representation or warranty otherwise made herein to the extent of such
      disclosure, the Company hereby makes the representations and warranties set
      forth below to each Purchaser.

    

     

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

    

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

    
      
         

      

      
        10

        
          

        

      

      
         

      

    

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

    

    (d) No
      Conflicts.
      The
      execution, delivery and performance of the Transaction Documents by the Company
      and the consummation by the Company of the other transactions contemplated
      hereby and thereby do not and will not: (i) conflict with or violate any
      provision of the Company’s or any Subsidiary’s certificate or articles of
      incorporation, bylaws or other organizational or charter documents, or (ii)
      conflict with, or constitute a default (or an event that with notice or lapse
      of
      time or both would become a default) under, result in the creation of any Lien
      upon any of the properties or assets of the Company or any Subsidiary, or give
      to others any rights of termination, amendment, acceleration or cancellation
      (with or without notice, lapse of time or both) of, any agreement, credit
      facility, debt or other instrument (evidencing a Company or Subsidiary debt
      or
      otherwise) or other understanding to which the Company or any Subsidiary is
      a
      party or by which any property or asset of the Company or any Subsidiary is
      bound or affected, or (iii) subject to the Required Approvals, conflict with
      or
      result in a violation of any law, rule, regulation, order, judgment, injunction,
      decree or other restriction of any court or governmental authority to which
      the
      Company or a Subsidiary is subject (including federal and state securities
      laws
      and regulations), or by which any property or asset of the Company or a
      Subsidiary is bound or affected; except in the case of each of clauses (ii)
      and
      (iii), such as could not have or reasonably be expected to result in a Material
      Adverse Effect.

    

    
      
         

      

      
        11

        
          

        

      

      
         

      

    

    (e) Filings,
      Consents and Approvals.
      The
      Company is not required to obtain any consent, waiver, authorization or order
      of, give any notice to, or make any filing or registration with, any court
      or
      other federal, state, local or other governmental authority or other Person
      in
      connection with the execution, delivery and performance by the Company of the
      Transaction Documents, other than (i) filings required pursuant to Section
      4.6,
      (ii) the filing with the Commission of the Registration Statement, (iii) the
      notice and/or application(s) to each applicable Trading Market for the issuance
      and sale of the Securities and the listing of the Underlying Shares for trading
      thereon in the time and manner required thereby and (iv) the filing of Form
      D
      with the Commission and such filings as are required to be made under applicable
      state securities laws (collectively, the “Required
      Approvals”).

    

    (f) Issuance
      of the Securities.
      The
      Securities are duly authorized and, when issued and paid for in accordance
      with
      the applicable Transaction Documents, will be duly and validly issued, fully
      paid and nonassessable, free and clear of all Liens imposed by the Company
      other
      than restrictions on transfer provided for in the Transaction Documents. The
      Underlying Shares, when issued in accordance with the terms of the Transaction
      Documents, will be validly issued, fully paid and nonassessable, free and clear
      of all Liens imposed by the Company. The Company has reserved from its duly
      authorized capital stock a number of shares of Common Stock for issuance of
      the
      Underlying Shares at least equal to the Actual Minimum on the date hereof.
      

    

    
      
         

      

      
        12

        
          

        

      

      
         

      

    

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

    

    
      
         

      

      
        13

        
          

        

      

      
         

      

    

    (h) SEC
      Reports; Financial Statements.
      The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by it under the Securities Act and the Exchange Act,
      including pursuant to Section 13(a) or 15(d) thereof, for the two years
      preceding the date hereof (or such shorter period as the Company was required
      by
      law or regulation to file such material) (the foregoing materials, including
      the
      exhibits thereto, documents incorporated by reference therein and amendments
      thereof being collectively referred to herein as the “SEC
      Reports”)
      on a
      timely basis or has received a valid extension of such time of filing and has
      filed any such SEC Reports prior to the expiration of any such extension. As
      of
      their respective dates, the SEC Reports complied in all material respects with
      the requirements of the Securities Act and the Exchange Act and the rules and
      regulations of the Commission promulgated thereunder, as applicable, and none
      of
      the SEC Reports, when filed, contained any untrue statement of a material fact
      or omitted to state a material fact required to be stated therein or necessary
      in order to make the statements therein, in the light of the circumstances
      under
      which they were made, not misleading. The financial statements of the Company
      included in the SEC Reports comply in all material respects with applicable
      accounting requirements and the rules and regulations of the Commission with
      respect thereto as in effect at the time of filing. Such financial statements
      have been prepared in accordance with United States generally accepted
      accounting principles applied on a consistent basis during the periods involved
      (“GAAP”),
      except as may be otherwise specified in such financial statements or the notes
      thereto and except that unaudited financial statements may not contain all
      footnotes required by GAAP, and fairly present in all material respects the
      financial position of the Company and its consolidated subsidiaries as of and
      for the dates thereof and the results of operations and cash flows for the
      periods then ended, subject, in the case of unaudited statements, to normal,
      immaterial, year-end audit adjustments. 

    

    
      
         

      

      
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    (i) Material
      Changes; Undisclosed Events, Liabilities or Developments.
      Since
      the date of the latest audited financial statements included within the SEC
      Reports, except as set forth on Schedule
      3.1(i)
      or
      specifically disclosed in a subsequent SEC Report filed prior to the date
      hereof, (i) there has been no event, occurrence or development that has had
      or
      that could reasonably be expected to result in a Material Adverse Effect, (ii)
      the Company has not incurred any liabilities (contingent or otherwise) other
      than (A) trade payables and accrued expenses incurred in the ordinary course
      of
      business consistent with past practice and (B) liabilities not required to
      be
      reflected in the Company’s financial statements pursuant to GAAP or disclosed in
      filings made with the Commission, (iii) the Company has not altered its method
      of accounting, (iv) the Company has not declared or made any dividend or
      distribution of cash or other property to its stockholders or purchased,
      redeemed or made any agreements to purchase or redeem any shares of its capital
      stock and (v) the Company has not issued any equity securities to any officer,
      director or Affiliate, except pursuant to existing Company stock option plans.
      The Company does not have pending before the Commission any request for
      confidential treatment of information. Except for the issuance of the Securities
      contemplated by this Agreement or as set forth on Schedule
      3.1(i),
      no
      event, liability or development has occurred or exists with respect to the
      Company or its Subsidiaries or their respective business, properties, operations
      or financial condition, that would be required to be disclosed by the Company
      under applicable securities laws at the time this representation is made that
      has not been publicly disclosed at least 1 Trading Day prior to the date that
      this representation is made. 

    

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

    

    
      
         

      

      
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    (k) Labor
      Relations.
      No
      material labor dispute exists or, to the knowledge of the Company, is imminent
      with respect to any of the employees of the Company which could reasonably
      be
      expected to result in a Material Adverse Effect. None of the Company’s or its
      Subsidiaries’ employees is a member of a union that relates to such employee’s
      relationship with the Company, and neither the Company or any of its
      Subsidiaries is a party to a collective bargaining agreement, and the Company
      and its Subsidiaries believe that their relationships with their employees
      are
      good. No executive officer, to the knowledge of the Company, is, or is now
      expected to be, in violation of any material term of any employment contract,
      confidentiality, disclosure or proprietary information agreement or
      non-competition agreement, or any other contract or agreement or any restrictive
      covenant, and the continued employment of each such executive officer does
      not
      subject the Company or any of its Subsidiaries to any liability with respect
      to
      any of the foregoing matters. The Company and its Subsidiaries are in compliance
      with all U.S. federal, state, local and foreign laws and regulations relating
      to
      employment and employment practices, terms and conditions of employment and
      wages and hours, except where the failure to be in compliance could not,
      individually or in the aggregate, reasonably be expected to have a Material
      Adverse Effect.

    

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

    

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

    

    
      
         

      

      
        16

        
          

        

      

      
         

      

    

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

    

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

    

    (p) Insurance.
      The
      Company and the Subsidiaries are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are prudent
      and customary in the businesses in which the Company and the Subsidiaries are
      engaged, including, but not limited to, directors and officers insurance
      coverage at least equal to the aggregate Subscription Amount. Neither the
      Company nor any Subsidiary has any reason to believe that it will not be able
      to
      renew its existing insurance coverage as and when such coverage expires or
      to
      obtain similar coverage from similar insurers as may be necessary to continue
      its business without a significant increase in cost.

    

    
      
         

      

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

    

    (r) Sarbanes-Oxley;
      Internal Accounting Controls.
      The
      Company is in material compliance with all provisions of the Sarbanes-Oxley
      Act
      of 2002 which are applicable to it as of the Closing Date. The
      Company and the Subsidiaries maintain a system of internal accounting controls
      sufficient to provide reasonable assurance that (i) transactions are executed
      in
      accordance with management’s general or specific authorizations, (ii)
      transactions are recorded as necessary to permit preparation of financial
      statements in conformity with GAAP and to maintain asset accountability, (iii)
      access to assets is permitted only in accordance with management’s general or
      specific authorization, and (iv) the recorded accountability for assets is
      compared with the existing assets at reasonable intervals and appropriate action
      is taken with respect to any differences. The Company has established disclosure
      controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
      15d-15(e)) for the Company and designed such disclosure controls and procedures
      to ensure that information required to be disclosed by the Company in the
      reports it files or submits under the Exchange Act is recorded, processed,
      summarized and reported, within the time periods specified in the Commission’s
      rules and forms. The Company’s certifying officers have evaluated the
      effectiveness of the Company’s disclosure controls and procedures as of the end
      of the period covered by the Company’s most recently filed periodic report under
      the Exchange Act (such date, the “Evaluation
      Date”).
      The
      Company presented in its most recently filed periodic report under the Exchange
      Act the conclusions of the certifying officers about the effectiveness of the
      disclosure controls and procedures based on their evaluations as of the
      Evaluation Date. Since the Evaluation Date, there have been no changes in the
      Company’s internal control over financial reporting (as such term is defined in
      the Exchange Act) that has materially affected, or is reasonably likely to
      materially affect, the Company’s internal control over financial
      reporting.

    
      
         

      

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

    

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

    

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

    

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

    

    (w)
      Listing
      and Maintenance Requirements.
      The
      Company’s Common Stock is registered pursuant to Section 12(b) or 12(g) of the
      Exchange Act, and the Company has taken no action designed to, or which to
      its
      knowledge is likely to have the effect of, terminating the registration of
      the
      Common Stock under the Exchange Act nor has the Company received any
      notification that the Commission is contemplating terminating such registration.
      The Company has not, in the 12 months preceding the date hereof, received notice
      from any Trading Market on which the Common Stock is or has been listed or
      quoted to the effect that the Company is not in compliance with the listing
      or
      maintenance requirements of such Trading Market. The Company is, and has no
      reason to believe that it will not in the foreseeable future continue to be,
      in
      compliance with all such listing and maintenance requirements.

    

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

    
      
         

      

      
        19

        
          

        

      

      
         

      

    

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

    

    (z)
      No
      Integrated Offering.
      Assuming
      the accuracy of the Purchasers’ representations and warranties set forth in
      Section 3.2, neither the Company, nor any of its Affiliates, nor any Person
      acting on its or their behalf has, directly or indirectly, made any offers
      or
      sales of any security or solicited any offers to buy any security, under
      circumstances that would cause this offering of the Securities to be integrated
      with prior offerings by the Company for purposes of the Securities Act or any
      applicable shareholder approval provisions of any Trading Market on which any
      of
      the securities of the Company are listed or designated. 

    

    
      
         

      

      
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    (aa)
      Solvency.
      Based
      on the financial condition of the Company as of the Closing Date after giving
      effect to (a) the receipt by the Company of the proceeds from the sale of the
      Securities hereunder and (b) the conversion of all of the outstanding
      Convertible Debt into shares of Common Stock, (i) the fair saleable value of
      the
      Company’s assets exceeds the amount that will be required to be paid on or in
      respect of the Company’s existing debts and other liabilities (including known
      contingent liabilities) as they mature; (ii) the Company’s assets do not
      constitute unreasonably small capital to carry on its business as now conducted
      and as proposed to be conducted including its capital needs taking into account
      the particular capital requirements of the business conducted by the Company,
      and projected capital requirements and capital availability thereof; and (iii)
      the current cash flow of the Company, together with the proceeds the Company
      would receive, were it to liquidate all of its assets, after taking into account
      all anticipated uses of the cash, would be sufficient to pay all amounts on
      or
      in respect of its liabilities when such amounts are required to be paid. The
      Company does not intend to incur debts beyond its ability to pay such debts
      as
      they mature (taking into account the timing and amounts of cash to be payable
      on
      or in respect of its debt). The Company has no knowledge of any facts or
      circumstances which lead it to believe that it will file for reorganization
      or
      liquidation under the bankruptcy or reorganization laws of any jurisdiction
      within one year from the Closing Date. Schedule
      3.1(aa)
      sets
      forth as of the dates thereof all outstanding secured and unsecured Indebtedness
      of the Company or any Subsidiary, or for which the Company or any Subsidiary
      has
      commitments. For the purposes of this Agreement, “Indebtedness”
shall
      mean (a) any liabilities for borrowed money or amounts owed in excess of $50,000
      (other than trade accounts payable incurred in the ordinary course of business),
      (b) all guaranties, endorsements and other contingent obligations in respect
      of
      Indebtedness of others, whether or not the same are or should be reflected
      in
      the Company’s balance sheet (or the notes thereto), except guaranties by
      endorsement of negotiable instruments for deposit or collection or similar
      transactions in the ordinary course of business; and (c) the present value
      of
      any lease payments
      in excess of $50,000 due under leases required to be capitalized in accordance
      with GAAP. Neither
      the Company nor any Subsidiary is in default with respect to any
      Indebtedness.

    

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

    

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

    
      
         

      

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

    

    (ee)
      Accountants.
      The
      Company’s accountants are set forth on Schedule
      3.1(ee)
      of the
      Disclosure Schedule. To the knowledge of the Company, such accountants, who
      the
      Company expects will express their opinion with respect to the financial
      statements to be included in the Company’s Annual Report on Form 10-KSB for the
      year ending December 31, 2006, are a registered public accounting firm as
      required by the Securities Act.

    

    (ff)
      Seniority.
      Except
      as set forth on Schedule
      3.1(ff),
      as of
      the Closing Date, no Indebtedness or other equity of the Company is senior
      to
      the Preferred Stock in right of payment, whether with respect to interest or
      upon liquidation or dissolution, or otherwise, other than indebtedness secured
      by purchase money security interests (which is senior only as to underlying
      assets covered thereby) and capital lease obligations (which is senior only
      as
      to the property covered thereby).

    

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

    

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

    
      
         

      

      
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    (ii)
      Acknowledgement
      Regarding Purchasers’ Trading Activity.
      Anything in this Agreement or elsewhere herein to the contrary notwithstanding
      (except for Sections 3.2(f) and 4.16 hereof), it is understood and acknowledged
      by the Company (i) that none of the Purchasers have been asked to agree, nor
      has
      any Purchaser agreed, to desist from purchasing or selling, long and/or short,
      securities of the Company, or “derivative” securities based on securities issued
      by the Company or to hold the Securities for any specified term; (ii) that
      past
      or future open market or other transactions by any Purchaser, including Short
      Sales, and specifically including, without limitation, Short Sales or
“derivative” transactions, before or after the closing of this or future private
      placement transactions, may negatively impact the market price of the Company’s
      publicly-traded securities; (iii) that any Purchaser, and counter-parties in
      “derivative” transactions to which any such Purchaser is a party, directly or
      indirectly, presently may have a “short” position in the Common Stock, and (iv)
      that each Purchaser shall not be deemed to have any affiliation with or control
      over any arm’s length counter-party in any “derivative” transaction.
The
      Company further understands and acknowledges that (a) one or more Purchasers
      may
      engage in hedging activities at various times during the period that the
      Securities are outstanding, including, without limitation, during the periods
      that the value of the Underlying Shares deliverable with respect to Securities
      are being determined and (b) such hedging activities (if any) could reduce
      the
      value of the existing stockholders' equity interests in the Company at and
      after
      the time that the hedging activities are being conducted.  The Company
      acknowledges that such aforementioned hedging activities do not constitute
      a
      breach of any of the Transaction Documents.

    

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

    

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

    
      
         

      

      
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    (a) Organization;
      Authority.
      Such
      Purchaser is an entity duly organized, validly existing and in good standing
      under the laws of the jurisdiction of its organization with full right,
      corporate or partnership power and authority to enter into and to consummate
      the
      transactions contemplated by the Transaction Documents and otherwise to carry
      out its obligations hereunder and thereunder. The execution, delivery and
      performance by such Purchaser of the transactions contemplated by this Agreement
      have been duly authorized by all necessary corporate or similar action on the
      part of such Purchaser. Each Transaction Document to which it is a party has
      been duly executed by such Purchaser, and when delivered by such Purchaser
      in
      accordance with the terms hereof, will constitute the valid and legally binding
      obligation of such Purchaser, enforceable against it in accordance with its
      terms, except (i) as limited by general equitable principles and applicable
      bankruptcy, insolvency, reorganization, moratorium and other laws of general
      application affecting enforcement of creditors’ rights generally, (ii) as
      limited by laws relating to the availability of specific performance, injunctive
      relief or other equitable remedies and (iii) insofar as indemnification and
      contribution provisions may be limited by applicable law.

    

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

    

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

    

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

    
      
         

      

      
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    (e) Information.
      Such
      Purchaser and its advisors, if any, have been furnished with all materials
      relating to the business, finances and operations of the Company and materials
      relating to the offer and sale of the Securities which have been requested
      by
      such Purchaser. Such Purchaser and its advisors, if any, have been afforded
      the
      opportunity to ask questions of the Company. Neither such inquiries nor any
      other due diligence investigations conducted by such Purchaser or its advisors,
      if any, or its representatives shall modify, amend or affect such Purchaser’s
      right to rely on the Company’s representatives and warranties contained
      herein.

    

    (f) 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.

    

      (g) Private
        Placement.
        Such
        Purchaser understands that the Securities are being offered and sold to the
        Purchaser in reliance on specific exemptions from the registration requirements
        of United States federal and state securities laws and that the Company is
        relying in part upon the truth and accuracy of, and such Purchaser’s compliance
        with, the representations, warranties, agreements, acknowledgements and
        understandings of such Purchaser set forth herein in order to determine the
        availability of such exemptions and the eligibility of such Purchaser to
        acquire
        the Securities. Such Purchaser understands that no United States federal
        or
        state agency or any other government or governmental agency has passed on
        or
        made any recommendation or endorsement of the Securities or the fairness
        or
        suitability of the investment in the Securities nor have such authorities
        passed
        upon or endorsed the merits of the offering of the
        Securities.

    

    (h) No
      Conflicts.
      The
      execution, delivery and performance by such Purchaser of this Agreement and
      the
      Registration Rights Agreement and the consummation by such Purchaser of the
      transactions contemplated hereby and thereby will not (i) result in a violation
      of the organizational documents of such Purchaser or (ii) conflict with, or
      constitute a default (or an event which with notice or lapse of time or both
      would become a default) under, or give to others any rights of termination,
      amendment, acceleration or cancellation of, any agreement, indenture or
      instrument to which such Purchaser is a party, or (iii) result in a violation
      of
      any law, rule, regulation, order, judgment or decree (including federal and
      state securities laws) applicable to such Purchaser except, in the case of
      clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations
      which would not, individually or in the aggregate, reasonably be expected to
      have a material adverse effect on the ability of such Purchaser to perform
      its
      obligations hereunder.

    

    (i) Residency.
      Such
      Purchaser is a resident of that jurisdiction that is set forth below such
      Purchaser’s signature on the signature page hereto.

    
      
         

      

      
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    (j) Short
      Sales and Confidentiality Prior To The Date Hereof.
      Other
      than the transaction contemplated hereunder, such Purchaser has not directly
      or
      indirectly, nor has any Person acting on behalf of or pursuant to any
      understanding with such Purchaser, executed any disposition, including Short
      Sales, in the securities of the Company during the period commencing
      from
      the time
      that such Purchaser first received a term sheet (written or oral) from the
      Company or any other Person setting forth the material terms of the transactions
      contemplated hereunder until the date hereof (“Discussion
      Time”).
      Notwithstanding the foregoing, in the case of a Purchaser that is a
      multi-managed investment vehicle whereby separate portfolio managers manage
      separate portions of such Purchaser's assets and the portfolio managers have
      no
      direct knowledge of the investment decisions made by the portfolio managers
      managing other portions of such Purchaser's assets, the representation set
      forth
      above shall only apply with respect to the portion of assets managed by the
      portfolio manager that made the investment decision to purchase the Securities
      covered by this Agreement. Other than to other Persons party to this Agreement,
      such Purchaser has maintained the confidentiality of all disclosures made to
      it
      in connection with this transaction (including the existence and terms of this
      transaction).

    

    ARTICLE
      IV.

    OTHER
      AGREEMENTS OF THE PARTIES

    

    4.1 Transfer
      Restrictions.

    

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

    

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

    

    
      
         

      

      
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    [NEITHER]
      THESE SECURITIES [NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
      [EXERCISABLE] [CONVERTIBLE]] HAVE BEEN REGISTERED WITH THE SECURITIES AND
      EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON
      AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
      (THE
“SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT
      TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT
      TO
      AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
      REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH
      APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL
      TO
      THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY
      ACCEPTABLE TO THE COMPANY. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON
      [EXERCISE] [CONVERSION] OF THESE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
      A
      BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

    

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

    

    
      
         

      

      
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    (c) Certificates
      evidencing the Underlying Shares shall not contain any legend (including the
      legend set forth in Section 4.1(b) hereof): (i) while a registration statement
      (including the Registration Statement) covering the resale of such security
      is
      effective under the Securities Act, or (ii) following any sale of such
      Underlying Shares pursuant to Rule 144, or (iii) if such Underlying Shares
      are
      eligible for sale under Rule 144(k), or (iv) if such legend is not required
      under applicable requirements of the Securities Act (including judicial
      interpretations and pronouncements issued by the staff of the Commission).
      The
      Company shall cause its counsel to issue a legal opinion to the Company’s
      transfer agent promptly after the Effective Date if required by the Company’s
      transfer agent to effect the removal of the legend hereunder. If all or any
      shares of Preferred Stock or any portion of a Warrant is converted or exercised
      (as applicable) at a time when there is an effective registration statement
      to
      cover the resale of the Underlying Shares, or if such Underlying Shares may
      be
      sold under Rule 144(k) or if such legend is not otherwise required under
      applicable requirements of the Securities Act (including judicial
      interpretations and pronouncements issued by the staff of the Commission) then
      such Underlying Shares shall be issued free of all legends. The Company agrees
      that following the Effective Date or at such time as such legend is no longer
      required under this Section 4.1(c), it will, no later than three Trading Days
      following the delivery by a Purchaser to the Company or the Company’s transfer
      agent of a certificate representing Underlying Shares, as applicable, issued
      with a restrictive legend (such third Trading Day, the “Legend
      Removal Date”),
      deliver or cause to be delivered to such Purchaser a certificate representing
      such shares that is free from all restrictive and other legends. The Company
      may
      not make any notation on its records or give instructions to any transfer agent
      of the Company that enlarge the restrictions on transfer set forth in this
      Section. Certificates for Underlying Shares subject to legend removal hereunder
      shall be transmitted by the transfer agent of the Company to the Purchasers
      by
      crediting the account of the Purchaser’s prime broker with the Depository Trust
      Company System.

    

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

    

    
      
         

      

      
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    (e) 
      Each
      Purchaser, severally and not jointly with the other Purchasers, agrees that
      the
      removal of the restrictive legend from certificates representing Securities
      as
      set forth in this Section 4.1 is predicated upon the Company’s reliance that the
      Purchaser will sell any Securities pursuant to either the registration
      requirements of the Securities Act, including any applicable prospectus delivery
      requirements, or an exemption therefrom, and that if Securities are sold
      pursuant to a Registration Statement, they will be sold in compliance with
      the
      plan of distribution set forth therein.

    

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

    

    4.3
      Furnishing
      of Information.
      As long
      as any Purchaser owns Securities, the Company covenants to timely file (or
      obtain extensions in respect thereof and file within the applicable grace
      period) all reports required to be filed by the Company after the date hereof
      pursuant to the Exchange Act. As long as any Purchaser owns Securities, if
      the
      Company is not required to file reports pursuant to the Exchange Act, it will
      prepare and furnish to the Purchasers and make publicly available in accordance
      with Rule 144(c) such information as is required for the Purchasers to sell
      the
      Securities under Rule 144. The Company further covenants that it will take
      such
      further action as any holder of Securities may reasonably request, to the extent
      required from time to time to enable such Person to sell such Securities without
      registration under the Securities Act within the requirements of the exemption
      provided by Rule 144.

    

    4.4
      Integration.
      The
      Company shall not sell, offer for sale or solicit offers to buy or otherwise
      negotiate in respect of any security (as defined in Section 2 of the Securities
      Act) that would be integrated with the offer or sale of the Securities in a
      manner that would require the registration under the Securities Act of the
      sale
      of the Securities to the Purchasers or that would be integrated with the offer
      or sale of the Securities for purposes of the rules and regulations of any
      Trading Market.

    

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

    
      
         

      

      
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    4.6
      Securities
      Laws Disclosure; Publicity.
      The
      Company shall, by 8:30 a.m. New York City time on the Trading Day immediately
      following the date hereof, issue a Current Report on Form 8-K, disclosing the
      material terms of the transactions contemplated hereby, and shall attach the
      Transaction Documents thereto. The Company and each Purchaser shall consult
      with
      each other in issuing any other press releases with respect to the transactions
      contemplated hereby, and neither the Company nor any Purchaser shall issue
      any
      such press release or otherwise make any such public statement without the
      prior
      consent of the Company, with respect to any press release of any Purchaser,
      or
      without the prior consent of each Purchaser, with respect to any press release
      of the Company, which consent shall not unreasonably be withheld or delayed,
      except if such disclosure is required by law, in which case the disclosing
      party
      shall promptly provide the other party with prior notice of such public
      statement or communication. Notwithstanding the foregoing, the Company shall
      not
      publicly disclose the name of any Purchaser, or include the name of any
      Purchaser in any filing with the Commission or any regulatory agency or Trading
      Market, without the prior written consent of such Purchaser, except (i) as
      required by federal securities law in connection with (A) any registration
      statement contemplated by the Registration Rights Agreement and (B) the filing
      of final Transaction Documents (including signature pages thereto) with the
      Commission and (ii) to the extent such disclosure is required by law or Trading
      Market regulations, in which case the Company shall provide the Purchasers
      with
      prior notice of such disclosure permitted under this subclause
      (ii).

    

    4.7 Shareholder
      Rights Plan.
      No
      claim will be made or enforced by the Company or, with the consent of the
      Company, any other Person, that any Purchaser is an “Acquiring Person” under any
      control share acquisition, business combination, poison pill (including any
      distribution under a rights agreement) or similar anti-takeover plan or
      arrangement in effect or hereafter adopted by the Company, or that any Purchaser
      could be deemed to trigger the provisions of any such plan or arrangement,
      by
      virtue of receiving Securities under the Transaction Documents or under any
      other agreement between the Company and the Purchasers.

    

    4.8
       Non-Public
      Information.
      Except
      with respect to the material terms and conditions of the transactions
      contemplated by the Transaction Documents, the Company covenants and agrees
      that
      neither it nor any other Person acting on its behalf will provide any Purchaser
      or its agents or counsel with any information that the Company believes
      constitutes material non-public information, unless prior thereto such Purchaser
      shall have executed a written agreement regarding the confidentiality and use
      of
      such information. The Company understands and confirms that each Purchaser
      shall
      be relying on the foregoing representations in effecting transactions in
      securities of the Company.

    

    
      
         

      

      
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    4.9 Use
      of
      Proceeds.
      Except
      as set forth on Schedule
      4.9
      attached
      hereto, the Company shall use the net proceeds from the sale of the Securities
      hereunder for the Company’s sales and marketing efforts, investing in clinical
      market development programs and selected studies, funding continued product
      development and technology improvements, funding the creation of new
      intellectual property and protecting existing intellectual property and working
      capital purposes and not for the satisfaction of any portion of the Company’s
      debt (other than payment of trade payables in the ordinary course of the
      Company’s business and prior practices), to redeem Common Stock or Common Stock
      Equivalents or to settle any outstanding litigation. 

    

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

    

    
      
         

      

      
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    4.11 Indemnification
      of Purchasers.
      Subject
      to the provisions of this Section 4.11, the Company will indemnify and hold
      each
      Purchaser and its directors, officers, shareholders, members, partners,
      employees and agents (and any other Persons with a functionally equivalent
      role
      of a Person holding such titles notwithstanding a lack of such title or any
      other title), each Person who controls such Purchaser (within the meaning of
      Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
      directors, officers, agents, members, shareholders, partners or employees (and
      any other Persons with a functionally equivalent role of a Person holding such
      titles notwithstanding a lack of such title or any other title) of such
      controlling persons (each, a “Purchaser
      Party”)
      harmless from any and all losses, liabilities, obligations, claims,
      contingencies, damages, costs and expenses, including all judgments, amounts
      paid in settlements, court costs and reasonable attorneys’ fees and costs of
      investigation that any such Purchaser Party may suffer or incur as a result
      of
      or relating to (a) any breach of any of the representations, warranties,
      covenants or agreements made by the Company in this Agreement or in the other
      Transaction Documents or (b) any action instituted against a Purchaser, or
      any
      of them or their respective Affiliates, by any stockholder of the Company who
      is
      not an Affiliate of such Purchaser, with respect to any of the transactions
      contemplated by the Transaction Documents (unless such action is based upon
      a
      breach of such Purchaser’s representations, warranties or covenants under the
      Transaction Documents or any agreements or understandings such Purchaser may
      have with any such stockholder or any violations by the Purchaser of state
      or
      federal securities laws or any conduct by such Purchaser which constitutes
      fraud, gross negligence, willful misconduct or malfeasance). If any action
      shall
      be brought against any Purchaser Party in respect of which indemnity may be
      sought pursuant to this Agreement, such Purchaser Party shall promptly notify
      the Company in writing, and the Company shall have the right to assume the
      defense thereof with counsel of its own choosing reasonably acceptable to the
      Purchaser Party. Any Purchaser Party shall have the right to employ separate
      counsel in any such action and participate in the defense thereof, but the
      fees
      and expenses of such counsel shall be at the expense of such Purchaser Party
      except to the extent that (i) the employment thereof has been specifically
      authorized by the Company in writing, (ii) the Company has failed after a
      reasonable period of time to assume such defense and to employ counsel or (iii)
      in such action there is, in the reasonable opinion of such separate counsel,
      a
      material conflict on any material issue between the position of the Company
      and
      the position of such Purchaser Party, in which case the Company shall be
      responsible for the reasonable fees and expenses of no more than on such
      separate counsel. The Company will not be liable to any Purchaser Party under
      this Agreement (i) for any settlement by a Purchaser Party effected without
      the
      Company’s prior written consent, which shall not be unreasonably withheld or
      delayed; or (ii) to the extent, but only to the extent that a loss, claim,
      damage or liability is attributable to any Purchaser Party’s breach of any of
      the representations, warranties, covenants or agreements made by such Purchaser
      in this Agreement or in the other Transaction Documents.

    

    4.12 Reservation
      and Listing of Securities.

    

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

    
      
         

      

      
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    (b) If,
      on
      any date, the number of authorized but unissued (and otherwise unreserved)
      shares of Common Stock is less than 130% of (i) the Actual Minimum on such
      date, minus (ii) the number of shares of Common Stock previously issued pursuant
      to the Transaction Documents, then the Board of Directors of the Company shall
      use commercially reasonable efforts to amend the Company’s certificate or
      articles of incorporation to increase the number of authorized but unissued
      shares of Common Stock to at least the Actual Minimum at such time (minus the
      number of shares of Common Stock previously issued pursuant to the Transaction
      Documents), as soon as possible and in any event not later than the 75th day
      after such date; provided that the Company will not be required at any time
      to
      authorize a number of shares of Common Stock greater than the maximum remaining
      number of shares of Common Stock that could possibly be issued after such time
      pursuant to the Transaction Documents.

    

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

    

    4.13 Participation
      in Future Financing.
      

    

    (a) Until
      the
      date that is the later of (i) the one year anniversary of the Effective Date
      and
      (ii) the date that the applicable Purchaser no longer holds any Preferred Stock,
      upon any issuance by the Company or any of its Subsidiaries of Common Stock
      or
      Common Stock Equivalents (a “Subsequent
      Financing”),
      each
      Purchaser shall have the right to participate in up to an amount of the
      Subsequent Financing equal to the lesser of (a) the aggregate amount of the
      Subsequent Financing and (b) the aggregate Stated Value of all shares of
      Preferred Stock issued pursuant to this Agreement at the Closing (the
“Participation
      Maximum”)
      on the
      same terms, conditions and price as provided for in the Subsequent
      Financing.

    

    
      
         

      

      
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    (b) At
      least
      5 Trading Days prior to the closing of the Subsequent Financing, the Company
      shall deliver to each Purchaser a written notice of its intention to effect
      a
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask such Purchaser if it wants to review the details of such
      financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of a Purchaser, and only upon a request by such Purchaser, for
      a
      Subsequent Financing Notice, the Company shall promptly, but no later than
      1
      Trading Day after such request, deliver a Subsequent Financing Notice to such
      Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
      the proposed terms of such Subsequent Financing, the amount of proceeds intended
      to be raised thereunder, the Person or Persons through or with whom such
      Subsequent Financing is proposed to be effected, and attached to which shall
      be
      a term sheet or similar document relating thereto. 

    

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

    

    (d) If
      by
      5:30 p.m. (New York City time) on the 5th
      Trading
      Day after all of the Purchasers have received the Pre-Notice, notifications
      by
      the Purchasers of their willingness to participate in the Subsequent Financing
      (or to cause their designees to participate) is, in the aggregate, less than
      the
      total amount of the Subsequent Financing, then the Company may effect the
      remaining portion of such Subsequent Financing on the terms and with the Persons
      set forth in the Subsequent Financing Notice. 

    

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

    

    
      
         

      

      
        34

        
          

        

      

      
         

      

    

    (f) The
      Company must provide the Purchasers with a second Subsequent Financing Notice,
      and the Purchasers will again have the right of participation set forth above
      in
      this Section 4.13, if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on the terms set forth in
      such Subsequent Financing Notice within 60 Trading Days after the date of the
      initial Subsequent Financing Notice.

    

    (g) Notwithstanding
      the foregoing, this Section 4.13 shall not apply in respect of (i) an Exempt
      Issuance or (ii) an underwritten public offering of Common Stock. 

    

    4.14 Subsequent
      Equity Sales.
      

    

    (a) From
      the
      date hereof until the later of (i) 90 days after the Effective Date and (ii)
      December 31, 2006, neither the Company nor any Subsidiary shall issue shares
      of
      Common Stock or Common Stock Equivalents; provided, however, the 90 day period
      set forth in this Section 4.14(a)(i) shall be extended for the number of Trading
      Days during such period in which (i) trading in the Common Stock is suspended
      by
      any Trading Market, or (ii) following the Effective Date, the Registration
      Statement is not effective or the prospectus included in the Registration
      Statement may not be used by the Purchasers for the resale of the Underlying
      Shares.

    

    (b) From
      the
      date hereof until such time as no Purchaser holds any of the Securities, the
      Company shall be prohibited from effecting or entering into an agreement to
      effect any Subsequent Financing involving a “Variable Rate Transaction”. The
      term “Variable
      Rate Transaction”
shall
      mean a transaction in which the Company issues or sells (i) any debt or equity
      securities that are convertible into, exchangeable or exercisable for, or
      include the right to receive additional shares of Common Stock either (A) at
      a
      conversion, exercise or exchange rate or other price that is based upon and/or
      varies with the trading prices of or quotations for the shares of Common Stock
      at any time after the initial issuance of such debt or equity securities, or
      (B)
      with a conversion, exercise or exchange price that is subject to being reset
      at
      some future date after the initial issuance of such debt or equity security
      or
      upon the occurrence of specified or contingent events directly or indirectly
      related to the business of the Company or the market for the Common Stock or
      (ii) enters into any agreement, including, but not limited to, an equity line
      of
      credit, whereby the Company may sell securities at a future determined price.
      

    

    
      
         

      

      
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    (c) Notwithstanding
      the foregoing, this Section 4.14 shall not apply (i) in respect to an Exempt
      Issuance, except that no Variable Rate Transaction shall be an Exempt Issuance,
      or (ii) after the 90th
      day
      following the Effective Date, (A) the issuance of additional shares of preferred
      stock and warrants or (B) an issuance of Common Stock only (the “Additional
      Issuance”),
      provided that in calendar year 2006, (1) the Company receives confirmed orders
      for 45 3D System Placements, (2) has generated gross cash revenues of not less
      than $7,000,000 from such orders and (3) the achievement of such orders and
      revenues has been widely disseminated to the public in a press release. The
      Additional Issuance, if preferred stock and warrants, shall include preferred
      stock and warrants with terms, prices and conditions that are the same, or
      less
      favorable to the Company (except that they shall be junior in rights and
      preferences to the Preferred Stock) than, terms, prices and conditions as the
      issuance of the Preferred Stock and Warrants pursuant to this Agreement. The
      Company and the Purchasers of such Additional Issuance shall enter into (x)
      a
      securities purchase agreement identical to this Agreement, mutatis
      mutandis
      and
      shall include updated disclosure schedules and (y) a registration rights
      agreement identical to the Registration Rights Agreement, mutatis
      mutandis
      and
      shall include updated disclosure schedules.

    

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

    

    
      
         

      

      
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    4.16 Short
      Sales and Confidentiality After The Date Hereof.
      Each
      Purchaser severally and not jointly with the other Purchasers covenants that
      neither it nor any Affiliate acting on its behalf or pursuant to any
      understanding with it will execute any Short Sales during the period commencing
      at the Discussion Time and ending at the time that the transactions contemplated
      by this Agreement are first publicly announced as described in Section
      4.6. Each
      Purchaser, severally and not jointly with the other Purchasers, covenants that
      until such time as the transactions contemplated by this Agreement are publicly
      disclosed by the Company as described in Section 4.6, such Purchaser will
      maintain the confidentiality of all disclosures made to it in connection with
      this transaction (including the existence and terms of this transaction). Each
      Purchaser understands and acknowledges, severally and not jointly with any
      other
      Purchaser, that the Commission currently takes the position that coverage of
      short sales of shares of the Common Stock “against the box” prior to the
      Effective Date of the Registration Statement with the Securities is a violation
      of Section 5 of the Securities Act, as set forth in Item 65, Section A, of
      the
      Manual of Publicly Available Telephone Interpretations, dated July 1997,
      compiled by the Office of Chief Counsel, Division of Corporation Finance.
Notwithstanding
      the foregoing, no Purchaser makes any representation, warranty or covenant
      hereby that it will not engage in Short Sales in the securities of the Company
      after the time that the transactions contemplated by this Agreement are first
      publicly announced as described in Section 4.6. Notwithstanding
      the foregoing, in the case of a Purchaser that is a multi-managed investment
      vehicle whereby separate portfolio managers manage separate portions of such
      Purchaser's assets and the portfolio managers have no direct knowledge of the
      investment decisions made by the portfolio managers managing other portions
      of
      such Purchaser's assets, the covenant set forth above shall only apply with
      respect to the portion of assets managed by the portfolio manager that made
      the
      investment decision to purchase the Securities covered by this
      Agreement.

    

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

    

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

    

    4.19 Additional
      Covenants of the Company.
      

    

    
      
         

      

      
        37

        
          

        

      

      
         

      

    

    (a)
       Within
      30
      days of the Closing Date, the Company shall have formally engaged a reputable
      and nationally recognized investor relations firm and shall have established
      a
      corporate communications plan reasonably satisfactory to the Purchasers holding
      a majority in interest of the shares of Preferred Stock. The Company shall
      use
      commercially reasonable efforts to undertake such other actions as such investor
      relations firm deems advisable to properly expose the Company to the capital
      markets.

    

    (b) Within
      45
      days of the Closing Date, the Company shall have reincorporated in the state
      of
      Delaware.

    

    (c) As
      of
      June 1, 2006, Donald E. Tucker shall be party to an agreement whereby he is
      required to devote substantially all of his attention to the matters of the
      Company as Chairman, President and Chief Executive Officer.

    

    ARTICLE
      V

    MISCELLANEOUS

    

    5.1
      Termination. 
      This Agreement may be terminated by any Purchaser, as to such Purchaser’s
      obligations hereunder only and without any effect whatsoever on the obligations
      between the Company and the other Purchasers, by written notice to the other
      parties, if the Closing has not been consummated on or before May __, 2006;
      provided,
      however,
      that no
      such termination will affect the right of any party to sue for any breach by
      the
      other party (or parties).

    

    5.2
      Fees
      and Expenses.
      At the
      Closing, the Company has agreed to reimburse Bushido Capital Master Fund L.P.
      (“Bushido”)
      the
      non-accountable sum of $50,000, for its legal, administrative and due diligence
      fees and expenses. Accordingly, in lieu of the foregoing payments, the aggregate
      amount that Bushido is to pay for the Securities at the Closing shall be reduced
      by $50,000 in lieu thereof. The Company shall deliver to each of the Purchasers,
      prior to the Closing, a completed and executed copy of the Closing Statement,
      attached hereto as Annex
      A.
      Except
      as expressly set forth in the Transaction Documents to the contrary, each party
      shall pay the fees and expenses of its advisers, counsel, accountants and other
      experts, if any, and all other expenses incurred by such party incident to
      the
      negotiation, preparation, execution, delivery and performance of this Agreement.
      The Company shall pay all transfer agent fees, stamp taxes and other taxes
      and
      duties levied in connection with the delivery of any Securities to the
      Purchasers.

    

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

    
      
         

      

      
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    5.4 Notices.
      Any and
      all notices or other communications or deliveries required or permitted to
      be
      provided hereunder shall be in writing and shall be deemed given and effective
      on the earliest of (a) the date of transmission, if such notice or communication
      is delivered via facsimile at the facsimile number set forth on the signature
      pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading
      Day,
      (b) the next Trading Day after the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto on a day that is not a Trading Day or later
      than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd
      Trading
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

    

    5.5 Amendments;
      Waivers.
      No
      provision of this Agreement may be waived, modified, supplemented or amended
      except in a written instrument (a) if any Securities are held by one or more
      Qualified Investors, signed by each Qualified Investor holding Securities and
      the Company or (b) if no Securities are held by any Qualified Investor, signed
      by each Purchaser holding Securities and the Company, provided that, in the
      case
      of clause (b) only, a waiver is effective if contained in a written instrument
      signed by the party against whom enforcement of such waived provision is sought.
      No waiver of any default with respect to any provision, condition or requirement
      of this Agreement shall be deemed to be a continuing waiver in the future or
      a
      waiver of any subsequent default or a waiver of any other provision, condition
      or requirement hereof, nor shall any delay or omission of any party to exercise
      any right hereunder in any manner impair the exercise of any such
      right.

    

    5.6 Headings.
      The
      headings herein are for convenience only, do not constitute a part of this
      Agreement and shall not be deemed to limit or affect any of the provisions
      hereof.

    

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

    

    5.8 No
      Third-Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      successors and permitted assigns and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person, except as otherwise set
      forth
      in Section 4.11.

    

    
      
         

      

      
        39

        
          

        

      

      
         

      

    

    5.9 Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of the Transaction Documents shall be governed by and construed and enforced
      in
      accordance with the internal laws of the State of New York, without regard
      to
      the principles of conflicts of law thereof. Each party agrees that all legal
      proceedings concerning the interpretations, enforcement and defense of the
      transactions contemplated by this Agreement and any other Transaction Documents
      (whether brought against a party hereto or its respective affiliates, directors,
      officers, shareholders, employees or agents) shall be commenced exclusively
      in
      the state and federal courts sitting in the City of New York. Each party hereby
      irrevocably submits to the exclusive jurisdiction of the state and federal
      courts sitting in the City of New York, borough of Manhattan for the
      adjudication of any dispute hereunder or in connection herewith or with any
      transaction contemplated hereby or discussed herein (including with respect
      to
      the enforcement of any of the Transaction Documents), and hereby irrevocably
      waives, and agrees not to assert in any suit, action or proceeding, any claim
      that it is not personally subject to the jurisdiction of any such court, that
      such suit, action or proceeding is improper or is an inconvenient venue for
      such
      proceeding. Each party hereby irrevocably waives personal service of process
      and
      consents to process being served in any such suit, action or proceeding by
      mailing a copy thereof via registered or certified mail or overnight delivery
      (with evidence of delivery) to such party at the address in effect for notices
      to it under this Agreement and agrees that such service shall constitute good
      and sufficient service of process and notice thereof. Nothing contained herein
      shall be deemed to limit in any way any right to serve process in any other
      manner permitted by law. The parties hereby waive all rights to a trial by
      jury.
      If either party shall commence an action or proceeding to enforce any provisions
      of the Transaction Documents, then the prevailing party in such action or
      proceeding shall be reimbursed by the other party for its reasonable attorneys’
fees and other costs and expenses incurred with the investigation, preparation
      and prosecution of such action or proceeding.

    

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

    

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

    

    
      
         

      

      
        40

        
          

        

      

      
         

      

    

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

    

    5.13 Rescission
      and Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) any of the other Transaction Documents, whenever any
      Purchaser exercises a right, election, demand or option under a Transaction
      Document and the Company does not timely perform its related obligations within
      the periods therein provided, then such Purchaser may rescind or withdraw,
      in
      its sole discretion from time to time upon written notice to the Company, any
      relevant notice, demand or election in whole or in part without prejudice to
      its
      future actions and rights; provided,
      however,
      in the
      case of a rescission of a conversion of the Preferred Stock or exercise of
      a
      Warrant, the Purchaser shall be required to return any shares of Common Stock
      subject to any such rescinded conversion or exercise notice.

    

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

    

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

     

    
      
         

      

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

    

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

    
      
         

      

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

    

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

    

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

    

    [SIGNATURE
      PAGE FOLLOWS]

    
      
         

      

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

    

    
      	
              VIKING
                SYSTEMS, INC.

               

            	
              Address
                for Notice:

              4350
                La Jolla Drive, Suite 900

              San
                Diego, CA 92122

            
	
              By:
                /s/ Nathan Harrison, MD

              Name:
                Nathan Harrison, MD

              Title:
                Acting CEO

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

               

              A.O.
                Headman, Jr.

              Cohne,
                Rappaport & Segal

              257
                East 200 South, Suite 900

              Salt
                Lake City, UT 84111

            	 

    

    

    

    

    

    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR PURCHASER FOLLOWS]

    
      
         

      

      
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    [PURCHASER
      SIGNATURE PAGES TO VKSY SECURITIES PURCHASE AGREEMENT]

    

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

     

    Name
      of
      Purchaser: __________________________

    Signature
      of Authorized Signatory of Purchaser:
      __________________________

    Name
      of
      Authorized Signatory: _________________________

    Title
      of
      Authorized Signatory: __________________________

    Email
      Address of Purchaser: ________________________________

    Fax
      Number of Purchaser: ______________________________

    Jurisdiction
      of Organization of Purchaser: ________________________

    

    Address
      for Notice of Purchaser:

    

    

    

    

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

    

    

    

    

    

    Subscription
      Amount:

    Shares
      of
      Preferred Stock:

    Warrant
      Shares (aggregate):

    

    

    

    [SIGNATURE
      PAGES CONTINUE]

     

    
      
         

      

      
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    Annex
      A 

    

    CLOSING
      STATEMENT

    

    Pursuant
      to the attached Securities Purchase Agreement, dated as of the date hereto,
      the
      purchasers shall purchase up to $8,000,000 of Preferred Stock and Warrants
      from
      Viking Systems, Inc., a Nevada corporation (the “Company”).
      All
      funds will be wired into a trust account maintained by Cohne, Rappaport &
Segal, counsel to the Company. All funds will be disbursed in accordance with
      this Closing Statement. 

    

    Disbursement
      Date: May
      __, 2006

    

    
      	
              I.
                PURCHASE
                PRICE

            	 
	
              Gross
                Proceeds to be Received in Trust

            	
              $

            
	 	 
	
              II. DISBURSEMENTS

            	 
	
               

            	
              $

            
	
               

            	
              $

            
	 	
              $

            
	 	
              $

            
	 	
              $

            
	 	 
	
              Total
                Amount Disbursed:

            	
              $

            
	 	 
	 	 
	 	 
	
              WIRE
                INSTRUCTIONS:

            	 
	
               

              To:
                _____________________________________

               

               

               

               

            	 
	
              To:
                _____________________________________

               

               

               

               

            	 

    

    
 

     

    
      
         

      

      
        46

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